Economic Growth

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Economic Growth New England

• Lynn E. Browne
• Chief Economist, Federal Reserve Bank of Boston
• Open Classroom Policy Series
• Northeastern University
• January 2009

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New England Economic Adventure

• Comments based on research for Boston Fed
  economic education program
• Exhibits, theatrical experience, investment game,
  web site (www.economicadventure.org)
• Engines of Enterprise An Economic History of New
  England, Peter Temin editor

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Rising living standards

• For past 200 years, most countries enjoyed rising
  living standards
• More material possessions
• Greater leisure
• Greater comfort
• Swifter communications transportation
• Longer lives (since 1900s)
• Not necessarily happier

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Growth in productivity

• Higher living standards due to higher
  productivity
• Produce more and more valuable output per
  hour of work
• Higher productivity due to
• Improvements in technology
• Investments in physical capital (plant,
  equipment, infrastructure)
• Investments in human capital (education)
• Growth of markets (specialization, economies of
  scale)
• Human endeavor

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Growth is disruptive

• Growth means change
• Change is disruptive
• Technological progress means producing more with
  fewer inputs
• Workers are displaced specialized capital
  other inputs decline in value
• Technological progress means new products
• Old products become obsolete

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Growth is disruptive

• Expanding markets create new opportunities and
  exposure to new competitors
• Growth can be risky
• Many innovations fail
• Many investments do not payoff
• Not innovating/investing/growing is very risky
• Rest of the country/world moves on

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New England has re-invented its economy repeatedly

• Peter Temin
• The economic history of New England is as
  dramatic as the transformation of any region on
  earth....New England came to lead the United
  States from an agricultural to an industrial
  nation...(And) when the rest of the country
  caught up ...New England reinvented itself as a
  leader in ..the information economy.

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But growth is not inevitable

• New England experienced a long stagnation in the
  20th century
• Some New England cities have not shared in
  regions recent prosperity
• Globally, some countries have failed to prosper.
• Much of Africa has seen little improvement in
  past 200 years

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Why was New England successful?

• High value on education and industry
• Supportive institutions
• Networks that crossed industry and business lines
• Good fortune

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Early days

• Puritans established the pattern
• Hardworking
• Valued education
• Family-oriented
• Participatory government
• Independent
• Ready to vote with their feet

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New Englands challenge

• New England needed manufactured goods from
  Britain
• Britain wanted sugar tobacco not New England
  products
• Answer
• Sell fish to feed slaves on sugar plantations
• Generate money to buy British goods

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Economy built on maritime trade

• Trade fostered other activities
• Whaling
• Shipbuilding
• Shipping goods for other colonies
• Warehousing insurance
• Developed complex diverse economy

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Revolution brought new challenges

• Trade with Britain disrupted
• But new markets in China
• Neutral in Napoleonic Wars
• Until embargo of 1807
• New England merchants sought other opportunities
• Cotton textiles

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Francis Cabot Lowell

• Visited mills in Britain
• Memorized technology for power loom
• Built state-of-the-art mill in Waltham
• Followed by larger operation in Lowell
• Abundant water power
• New technology
• New financing vehicle
• New labor force (young women)
• Tariff
• Mills spread throughout New England

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American System of Manufacturers

• Interchangeable parts machine tools
• U.S. Armory in Springfield, MA fostered
  development of new metal working technologies
• Arms manufacturers machine tool makers
  clustered along Connecticut River
• Range of products watches, sewing machines,
  bicycles, later cars aircraft engines

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Manufacturing made New England prosperous

• Wages much higher in manufacturing than
  agriculture
• So incomes in industrial New England much higher
  than elsewhere in late 19th century
• Despite difficult factory conditions

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Rest of the country catches up

• Textiles began to struggle after 1900
• Production standardized
• Southern states had lower cost unskilled labor
• Prolonged decline
• Abandoned textile mills throughout region
• Shoes other older industries also faced
  competitive pressure
• Despite being a pioneer, missed out on autos
• A mature, possibly declining region

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From mills to high tech to life sciences finance

• New England re-invents itself
• High tech in 60s, 70s, 80s
• Information professional services in 80s 90s
• Life sciences asset management
• Inevitable or lucky?

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Modern era

• New industries build on historic strengths
• Industrial base
• Elite research institutions
• Jump start from defense research expenditures
  in WWII and Cold War
• Influx of baby boomer students

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High tech manufacturing

• Grew out of defense research procurement but
  widespread commercial applications
• Characterized by high RD and highly educated
  workforce
• Mini-computer most important
• Rapid high tech growth boosted incomes
• 5 percent above national average in 1975
• 20 percent above in 1990

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Roller-coaster since 1990

• Mini-computer loses to PC
• Software and telecommunications experience boom
  bust
• Are life sciences and investment activities the
  future?

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What is different about New England today?

• New England industry mix no longer strikingly
  different
• But educational level is substantially higher
• More college degrees
• Reflected in high productivity and high incomes
• Is secret of success, smart people figuring out
  new things to do that pay well?

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A concern

• Is New Englands brain power leaving?
• Supply of young college graduates is growing
  slowly
• Alicia Sasser of Boston Fed slow growth is due
  to low birth rates 25-30 years ago
• Offset by high rates of education
• Offset by in-migration of college students
• But many in-migrants subsequently leave

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Can New England do more to retain young adults?

• New England retains 90 percent of native college
  graduates
• But only 20 percent of non-natives
• Jobs are 1 reason why college grads move
• Many out-migrants go to high cost areas (NY, CA)
• Could we do more to keep them?

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The issue

• New Englands prosperity depends upon the
  ingenuity skills of its people, not specific
  industries
• Do a highly educated, productive workforce and a
  history of re-invention ensure future innovation
  and prosperity?

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