Yankee Ingenuity - New England Cut Taxes, Controlled Costs, and Used High Tech to Diversify Its Economy

By Tuerck, David G. | The World and I, August 2001 | Go to article overview

Yankee Ingenuity - New England Cut Taxes, Controlled Costs, and Used High Tech to Diversify Its Economy


Tuerck, David G., The World and I


While it's true that New England's rich history and natural beauty draw thousands of visitors each year, it's also true that the six-state region has often weathered economic crags rivaling its rocky coasts. New England suffered one of its most severe recessions over the period 1989--1991. That it rebounded fully is evidence of the region's economic resiliency.

Why was New England hit so hard?

For the country as a whole, the recession ended in 1991. What followed was an economic boom fueled largely by the spread of personal computers and networks and by the expansion of the Internet. Initially, New England (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont) failed to benefit from this boom. At the start of the decade, New England's computer minititans--firms like Wang and Data General--were unable to make the transition to personal computers.

In addition, the end of the arms race meant that defense giants like Massachusetts-based missile producer Raytheon and aerospace leader General Electric were no longer receiving government contracts. Connecticut could no longer depend on Electric Boat in Groton and Colt in Hartford to spur economic growth through the production of submarines and guns.

The New England financial sector also suffered. The decline in employment in finance, insurance, and real estate was 2.0 percent for New England, compared to the national average of 0.3 percent. Forty- eight commercial banks in New England failed between 1989 and 1992, 23 of them in Connecticut.

As a result, the recession's effects were deeper and lasted longer for New England (see fig. 1). The growth of gross state product (GSP) for the six states lagged behind the growth of U.S. gross domestic product (GDP) until 1995. Manufacturing was particularly slow to recover. From 1989 to 1992, New England manufacturing saw an average decline in employment of 4.2 percent, nearly three times the national decline of 1.7 percent.

But the laggardly recovery helped in one way. Notorious for its high costs and high taxes, the region used the recession as a reality check, getting costs and taxes under control and finding a way to diversify and strengthen its economy.

The nation recovers--and New England follows

The key to the recovery was Yankee ingenuity. Knowledge-based industries--such as biotechnology, information technology, and mutual funds--led the way. As the PC revolution took off, the regional focus shifted toward high-value-added manufacturing, software technology, and Internet development. During the period 1993--98, employment in the services sector also expanded, driven in part by a 3.1 percent growth in the health-care industry. And financial services rebounded as entrepreneurs and investors reaped the rewards of their new economy ventures and began to pump up the investment market.

Within five years, New England had abandoned its dependence on the old boom-and-bust defense industry and outdated-computer technologies and had emerged as a center for a diverse array of high-tech industries and financial services that were undreamed of a few years earlier. In the 1990s, Route 128, winding around Boston and north toward New Hampshire, became synonymous with this transformation. Leading companies in electronics, computer instrumentation, communications, semiconductors, and software development located themselves in this high-tech corridor, capitalizing on the new vibrancy and synergy.

Says Professor Robert Nakosteen of the University of Massachusetts at Amherst, "The 'dot.com' phenomenon ... led to a growing workload for [Massachusetts'] large business-services sector, as established firms tried to find their way in the new technology."

New England has long been a center for knowledge and learning. The region is home to nearly 10 percent of the nation's colleges and universities, including 8 of the top 50 private research universities in the country. …

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