Summary of Results

The two states that are farthest along the path to the New Economy are Massachusetts and California. Both are quintessential high-tech states. Massachusetts boasts a concentration of software, hardware, and biotech firms supported by world class universities such as MIT and Harvard in the Route 128 region around Boston. California’s Silicon Valley has become synonymous with innovation and technology, while for sheer number of technology companies, Southern California is a force to be reckoned with. But they and the other top ten New Economy states (Colorado, Washington, Connecticut, Utah, New Hampshire, New Jersey, Delaware, and Arizona) have more in common than just high-tech firms. They tend to have a high concentration of managers, professionals, and college-educated residents working in “knowledge jobs” (jobs that require at least a two-year degree). With one or two exceptions, their manufacturers tend to be more geared toward global markets, both in terms of export orientation and the amount of foreign direct investment. Most are at the forefront of the IT and Internet revolutions, with a large share of their institutions and residents embracing the digital economy. Most have a solid “innovation infrastructure” that fosters and supports technological innovation. Many have experienced high levels of domestic in-migration of highly mobile, highly skilled knowledge workers seeking good employment opportunities coupled with a good quality of life. Moreover, while they tend to be richer states (there is a positive correlation of 0.71 between their rankings and their per capita income), wealth is not a simple proxy for advancement toward the New Economy. Some states with higher incomes lag behind in their scores (for example, New York, Illinois, Michigan), while other states with lower incomes do relatively well (such as New Mexico, Utah, and Arizona).

Finally, the top-ranked economies don’t score well simply because they have found ways to get the right mix of companies, individuals, and institutions. They also score well because they tend to adapt quickly. A high rate of “creative destruction”—the shedding of old practices while embracing the new—is the key to economic transformation in the private, public, and non-profit sectors. In fact, the degree to which businesses close in a state is positively correlated with total New Economy scores and employment growth from 1986 to 1996 (0.35 and 0.30, respectively).

The two states that are still most firmly rooted in the old economy are Mississippi and Arkansas. Other states with low scores include West Virginia, Louisiana, Montana, North Dakota, Alabama, South Dakota, Iowa, and Wyoming. Historically, these and other Southern and Plains states lagged behind in industrialization, and many have made limited investments in education and R&D. Their economies have often depended on natural resources or on mass production manufacturing, and have tended to rely on low costs rather than innovative capacity to gain advantage. But innovative capacity (derived through universities, R&D investments, scientists and engineers, and entrepreneurial drive) is increasingly what drives competitive success in the New Economy.

While lower-ranking states face challenges, they can also take advantage of new opportunities. The IT revolution gives companies and individuals more geographical freedom, making it easier for businesses to relocate, or start up and grow, in less densely populated states, farther away from existing agglomerations of industry and commerce. But a key policy challenge will be to find a way to extend advanced telecommunications infrastructure to these places.
Regionally, the New Economy has taken hold most strongly in the Northeast, the mid-Atlantic, the Mountain West, and the Pacific regions; 17 of the top 20 states are in these four regions. (The three exceptions are Minnesota, Texas, and Florida.) In contrast, 17 of the 20 lowest-ranking states are in the Midwest, Great Plains, and the South.

Given some states’ reputations as technology-based, New Economy states, their scores seem surprising at first. For example, Georgia and North Carolina rank 25th and 30th, respectively, in spite of the fact that the regions around Research Triangle Park and Atlanta boast top universities, a highly educated workforce, cutting-edge technology companies, and global connections. In both cases, however, the parts of the state outside these metropolitan regions are more rooted in the old economy—with more jobs in traditional manufacturing, agriculture, and lower-skilled services; a less educated workforce; and a less developed innovation infrastructure. As these examples reveal, most state economies are in fact a composite of many regional economies that differ in the degree to which they have adapted to the New Economy.

How closely do high scores correlate with economic growth? States that score higher appear to create jobs no faster than states that score lower. Between 1991 and 1996, there was in fact a slightly negative correlation (-0.04) between employment growth and New Economy score.

However, its not clear that job growth is the true measure of a state’s economic well-being. (Rapidly growing states are likely to experience rising home prices, traffic congestion, declining open space, and increasing environmental pollution, among other negative impacts.) Change in per-capita income is a more accurate measure of the economic well-being of the residents of a state. Higher New Economy scores were positively (though weakly) correlated with growth in state per-capita incomes between 1992 and 1997 (0.13). It is possible that this relationship would be even stronger if inflation-adjusted per-capita income growth data were available, since nominal measures may overstate income growth in some faster growing states with lower overall scores, particularly those in the South. In addition, many high scoring states, such as California, Massachusetts, Washington, Colorado, and Connecticut, suffered economic slowdowns in the early 1990s due to defense downsizing. As the New Economy continues to take hold over the next decade, higher scoring states can be expected to experience faster per-capita economic income growth than lower scoring states.

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The Progressive Policy Institute (PPI)
Technology, Innovation, and New Economy Project
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Phone: (202) 546-0007
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