Overview and Methodology

Measuring the New Economy is not an easy task. The federal statistical system, which was founded largely on the notion of a stable economy with most of the output in agricultural and manufactured goods, still tends to focus on monetary measures related to managing somewhat predictable business cycles. But the New Economy is neither stable nor predictable, and business cycles appear to have changed in the wake of the IT revolution.

We attempted to illustrate what is actually new about this so-called New Economy in The New Economy Index: Understanding America’s Economic Transformation.6 In that report, we used indicators gathered from disparate public and private data sources to track the structural transformation of the U.S. economy along four main lines: the industrial and occupational mix, globalization, entrepreneurial dynamism and competition, and the IT revolution.

The State New Economy Index builds on this work, applying key measurers of the New Economy to the state economies. But measuring the New Economy at the state level is even more difficult than it is at the national level because many of the most useful data tend to be nationally oriented. Given that regional clusters of innovation play a more important role in the New Economy, this gap makes a detailed examination of the New Economy all the more difficult.

Due to data limitations, there are a number of New Economy factors that should be included but are not. For example, while data are available on high-tech industries, recent data are not available on the degree to which a state’s industries are using advanced technologies.7 Similarly, while data measuring the educational attainment of a state’s workforce are available, there are no data measuring the degree to which a state’s industries are training their workforce or reorganizing work to become high-performance organizations. Data on exports are only available for manufacturing, not services. Similarly, accurate data are largely unavailable to measure how advanced state telecommunications infrastructures are, or the degree to which residents and businesses are using “broadband” telecommunications technologies.8

Moreover, not all indicators in this report are perfect measures of New Economy characteristics. For example, the indicator of export orientation of manufacturing favors states whose manufacturing sectors have become global—a basic New Economy trait—but states like Alaska, which export a large share of processed natural resources, also get high marks based on old economy strengths. Likewise, the measure of office jobs not only tracks New Economy occupations such as product designers, sales and marketing managers, and financial analysts, it also includes many government jobs. However, despite these limitations, a number of factors can still be measured which, we believe, collectively paint a robust picture comparing state economies.

The 17 indicators in this report are divided into 5 categories that best capture what is new about the New Economy:

“Knowledge jobs.” Separate indicators measure jobs in offices; jobs held by managers, professionals, and technicians; and the educational attainment of the workforce.
Globalization. Indicators measure the export orientation of manufacturing and foreign direct investment.
Economic dynamism and competition. Indicators measure the number of jobs in fast-growing “gazelle” companies (companies with sales growth of 20 percent or more for four straight years); the rate of economic “churn” (a product of new business start-ups and existing business failures); and the value of initial public stock offerings (IPOs) by companies.
The transformation to a digital economy. Indicators measure the percentage of adults online; the number of “.com” domain name registrations; technology in schools; and the degree to which state and local governments use information technologies to deliver services.
Technological innovation capacity. Indicators measure
the number of high-tech jobs; the number of scientists and
engineers in the workforce; the number of patents issued;
industry investment in research and development; and venture capital activity.

In all cases, the report relies on the most recently published data available, but because of the delays in publishing federal statistics, the data may in some cases be several years old. In addition, in all cases, data are reported to control for the size of the state, using factors such as the number of workers or the gross state product as the denominator.

Scores in each indicator are calculated as follows: In order to measure the magnitude of the differences between the states instead of just their rank from one to 50, raw scores are based on standard deviations from the mean. Therefore, on most indicators, approximately half the states have negative scores (below the national mean) and approximately half have positive scores. The scores are equally adjusted (six is added to every score) to ensure that all are positive.

In three of the five indicator categories, and in the calculation of the overall New Economy scores, the indicators are weighted so that closely correlated ones (for example, patents, R&D spending, and high-tech workers) don’t bias the results. (See Appendix A.)
The overall scores are calculated by adding the states’ adjusted scores in each of the five indicator categories and then dividing that total by the sum of the highest score achieved by any state in each category. Thus, each state’s final score is a percentage of the total score a state would have achieved if it had finished first in every category.

The maps were coded using the following methodology: The range between the highest and lowest scores was calculated and divided by four. That product was subtracted from the top score to calculate the range for the top quartile, and likewise for the other three quartile ranges. In other words, the four quartiles do not necessarily divide into an equal number of states, but rather indicate which states' scores fall into a particular range.

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The Progressive Policy Institute (PPI)
Technology, Innovation, and New Economy Project
600 Pennsylvania Ave., S.E., Suite 400, Washington DC 20003
Phone: (202) 546-0007
www.ppionline.org

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