Advice to the Governor: Think smart
The best economic development strategy is to cultivate smart people and get out of their way
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During a painful recession, gubernatorial candidates make too many promises about fixing our near-term problems and too few commitments about the investments needed for enduring economic prosperity. In truth, the governor of Massachusetts can do little to impact next year’s state unemployment rate, which is determined by great economic whirlwinds, but can do much to position the Commonwealth for longer-term success. Likewise, the governor lacks the market-beating insight needed to wisely subsidize particular firms and industries, but has the power to make the state more attractive to the entrepreneurs who generate economic growth. The best economic development strategy for the long term, therefore, is to cultivate smart people and get out of their way, and the next governor should maintain that mantra with laser-like focus.
One of the many lessons taught by the Great Recession that started in 2006 is that education continues to be the linchpin of local economic success. The share of adults with college degrees can explain most of the variation in unemployment rates across Massachusetts’ mainland counties today, and why Boston has a significantly lower unemployment rate than the nation as a whole (see graph). Massachusetts’s greatest economic asset is its human capital, exemplified by the nation-leading 37.9 percent of its adults with college degrees and the 16 percent with advanced degrees.
Massachusetts has done well by investing in education ever since 1636 when the Great and General Court voted to spend 400 pounds to found a college, and the next governor must renew this commitment with a willingness to spend and, even more importantly, a willingness to innovate. For centuries, skilled inhabitants have enabled the Commonwealth to survive despite a dearth of easily exportable natural resources. Globalization and technological change have only increased the returns to being smart, and humans get smart by being around other smart people in creative clusters like Greater Boston. Boston was able to reinvent itself after many decades of industrial decline because the same density that once helped put hogsheads onto clipper ships sped the flow of ideas across the area’s many smart entrepreneurs.
Now green technology seems to have replaced biotech as the fashionable industry to subsidize, but that doesn’t mean that state-supported green tech is likely to be a success, either. I’m sure that there will be terrific environmentally-helpful breakthroughs that will generate jobs and make people rich, but those breakthroughs are far more likely to come from a world of far-flung private innovators than any state-led effort.
One of the problems with large-scale public industrial initiatives is that the public sector is inherently better at evaluating and interacting with large, already successful entities, such as Woods Hole and Genzyme, than with small start-ups. Yet local employment growth was three times as fast between 1977 and 2007 in counties with small average firm sizes than in counties with large average firm sizes. The state should worry about the fact that Suffolk County has the largest average firm size of any county with more than 100,000 people in the US. Whoever sits in the governor’s office next year should make it clear that the government can’t do everything well, and that he is pulling back from public attempts to subsidize particular firms or industries.
Public grants or loan guarantees don’t create a culture of entrepreneurship, but the governor can help make the environment more small-firm friendly. The lowest hanging fruit may be to substantially reduce the enforcement of non-compete clauses. Non-compete clauses make it difficult for employees to leave one firm and start another one. In principle, they can serve a useful role by enabling entrepreneurs to trust their employees, but as long as some states, like California, don’t regularly enforce non-compete clauses, then Massachusetts’s enforcement manages mainly to push start-ups to another state. The state Legislature came close to non-compete clause reform over the summer, and the governor should prod them to get this done when they reconvene in January.
More importantly, but more intractably, Massachusetts routinely ranks among the least business friendly states, in part, because of its tough regulatory environment. For example, a poll of CEOs by Chief Executive magazine gave the Commonwealth a D- for taxation and regulation. The Code of Massachusetts Regulations is amazingly long. The chapter on “The manufacture, collection, and bottling of water and carbonated non-alcoholic beverages” alone runs for 27 pages. Whoever wins the race for governor should charge a blue ribbon panel with going through those rules and finding those that are well past their prime.
In many cases, the problem is often not the severity of the regulatory process, but its unpredictability and opaqueness. The state should embrace the principle of one stop, speedy permitting and prod localities to simplify their processes. The governor should propose that some portion of state aid be tied to better, faster business permitting.
Massachusetts has managed to survive economically, despite being widely seen as hostile to business, because of our people. Yet our human capital advantage is far from guaranteed. Research by Federal Reserve Bank of Boston economist Alicia Sasser reminds us that 29.5 percent of New England’s college graduates leave the region immediately after graduation, more than any other region in the country. In contrast, only 20.1 percent of college graduates leave mid-Atlantic states and only 12.5 percent of graduates on the West Coast leave after graduation. While New England’s high figure is due in part to the fact that New England’s colleges and universities attract an unusually high share of students from outside the region, the state retains only 22.7 percent of those outsiders after they graduate, which is a far lower number than in the middle or south Atlantic states or on the west coast. Massachusetts must focus on public policies that will keep our educational edge. The governor might propose expanding the state’s Adams Scholarship program along the lines of Georgia’s Hope Scholarship initiative, by waiving not only in-state tuition charges at state colleges and universities, but also all mandatory fees, for any high-performing, in-state high school graduate.
Our schools are the most important element in educating our state, because they both create skilled students and attract skilled parents. Our public schools need to display the same degree of innovation and initiative that we see in most entrepreneurial industries. At the same time, they must do a better job of educating disadvantaged, often inner city, children who don’t have access to superb suburban schools.
At the national level, the Race to the Top program has had a galvanizing impact on many school districts, even with a modest amount of money. The state is responsible for a large share of public school funding, but it does relatively little to push for innovation and accountability. The governor should propose that state aid be more closely tied to good school practices. Good teachers are the most important ingredient in academic success, which means that we need to do more to reward the good ones, provide professional development support to those in the mid-range, and ensure that weak teachers are prodded into other occupations.
Building human capital isn’t just about schools. It is also about providing a good quality of life that will attract skilled workers and entrepreneurs from other regions. Massachusetts’s most conspicuous failure in this area is its inability to provide high-quality, low-cost housing. According to the Case-Shiller repeat sales price index, Greater Boston housing prices have only dropped by 14 percent since the boom’s height, and the most recent National Association Realtors’ data shows that Greater Boston is the most expensive metropolitan area outside of California and the metropolitan areas surrounding New York City.
Those high prices reflect the continuing economic vitality of the region, but they also reflect a failure to build new homes. Massachusetts has only permitted 173,000 new homes between 2000 and 2006 (only 6.6 percent of its housing stock), less than Florida did in 2006 alone. With so little building, it is no wonder that the state’s population grew by only 3.9 percent between 2000 and 2009, less than half the national average.
Massachusetts’s low levels of new construction, and resulting high prices, reflect public policies made at the local level. We have a dizzying array of local regulations that make it enormously difficult for any large-scale construction to take place. While NIMBYist restrictions appeal to each individual town, they cost the state by forcing firms to pay more for their workers and by preventing skilled migrants from coming to Massachusetts.
The governor should take the lead in pressing for housing market reforms that will make the state more affordable and dynamic. The state must provide a counter-weight against local regulations and prod localities to take into account the fact that their policies hurt people outside of their border. Chapter 40B is a much needed override of local land use restrictions, and it is important to keep that law, which is being challenged in a statewide referendum in November. The gubernatorial candidates all deserve credit for opposing its repeal. But Chapters 40R and 40S, which provide financial incentives to towns that build, point the way forward. The governor should propose tying more state aid to the issuance of building permits, so that localities would be prodded to lower their regulatory barriers and permit more housing.
Job creation is not done by public fiat. It is a hard-to-predict and harder-to-manage process that reflects the dispersed genius of interconnected entrepreneurs. For that process to work, the Commonwealth must attract those people and avoid getting in their way. That means a robust commitment by the state’s governor to schooling and to eliminating the barriers to new building, and an abandonment of attempts to micro-manage entrepreneurship either through regulation or direct public funding. Like any business, the public sector needs to focus on its core competencies and those are providing a decent quality of life to people throughout the state.
Edward Glaeser is a professor of economics at Harvard and director of the Taubman Center for State and Local Government and the Rappaport Institute for Greater Boston, both at Harvard’s Kennedy School of Government.