Growing-Economy

BY NATHAN NEWMAN

State Job Creation Strategies Part I: Finding the Money and Investing in Human Capital and Physical Infrastructure

The fundamental challenge in this recession is that the growth that preceded it was a mirage. Bubble era borrowing created a network of financial jobs, real estate jobs and contruction jobs that collapsed with the end of the bubble. Many of those jobs will never return.

An extremely high proportion (75%) of job losses in this recession are permanent rather than temporary.  States will need to nurture completely new industry sectors and the infrastructure to support those jobs, while the jobless will need retraining in new skills to participate in those sectors.   

The Private Sector Can't Do it Alone:  As the Economic Policy Institute wrote recently, "it is likely that unemployment will remain above 8% even two years from now in the absence of bold and decisive action to create jobs."  With the credit crunch and the reduction in consumer demand, small businesses are experiencing tough times.  In 2008, for example, 43,500 businesses filed for bankruptcy, up from 28,300 businesses in 2007 and more than double the 19,700 filings in 2006. 

What's needed:  As this Dispatch will highlight, the first step is to fund jobs that support long-term economic competitiveness, notably by investing in people and physical infrastructure.  While the economic climate for profit-making business opportunities is more limited, investments in education, health care, transit and energy efficiency can create immediate jobs while strengthening building blocks for long-term growth.

Next week's Dispatch will be a second part of this series on how states can nurture startups, strengthen existing industry sectors, and promote green jobs in their states.

Mobilizing for a Federal Support for Jobs and State Fiscal Relief:  As we highlighted two weeks ago, a critical part of job creation will be a new round of federal job creation and state fiscal relief.   We are asking state legislators to sign onto a letter to promote this job creation plan at www.progressivestates.org/jobcreation or by emailing jobcreation@progressivestates.org.  Advocates can sign onto a similar letter for organizations or use our handy online tool to contact their state legislators to let them know about the job creation letter and to encourage them to sign. 

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Direct Public Money to Investments in Economic Growth

In the current economic and fiscal crisis, finding the funds for long-term investments is a challenge, but those investments will deliver both short-term jobs and long-term economic growth to turn state economies around.  States need a balanced approach of revenue increases, bonds for long-term investments and tapping existing sources of state capital like state pension funds to marshal the capital needed for economic recovery.

Raise Revenues, Don't Cut Public Investments:  The recession has made clear the hollowness of the bubble economy in many states, especially in some of the low-tax, low-investment Sunbelt states touted by anti-tax forces as exemplars of economic growth. 

When measuring long-term economic competitiveness, states with some of the highest marginal tax rates on individuals -- from New York to Maryland -- were supporting some of the most innovative "new economy" industries in the country, according to a 2008 analysis by the Information Technology & Innovation Foundation.  As we detailed last year, progressive tax increases to fund economic recovery are the better alternative to budget cuts.  Many needed investments are in the fundamentals of education and infrastructure as well as in the nurturing of new sectors where private capital is unlikely to effectively step in.  Increased tax revenue to fill in government and private sector gaps in investment is clearly needed.

Use State Bonding Authority:  One obvious source for funding long-term growth projects are new bonds that can be paid back with the tax revenue yielded by greater economic growth. Especially where tolls or energy savings will directly return revenue to the state from bonded investments, legislative leaders are aggressively pursuing new bond investments.

The federal ARRA recovery plan provides a two-year 35% tax credit for state Build America Bonds, which is yielding record low interest rates for states that are issuing bonds.  For example, Washington state received an interest rate equivalent to 3.52 percent on $500 million in bonds issued in October.  To help municipal governments take advantage of lower interest rates and lower issuance costs, nearly a dozen states have created "state bond banks" to pool the loans of local governments.

A few examples of recent state bond discussions around the country include:

• The Ohio House of Representatives has approved placing a $950 million bond issue on the May 4th ballot to renew for another five years the state’s largest economic development project, the Third Frontier, which invests in research and commercialization of technology in five industries sectors and created 41,300 jobs from 2003-2008.
• Last week, the Washington State House Capital Budget Committee approved sending $861 million Jobs Act Bonds to voters in November to fund schools and colleges to fund energy upgrades.  The sponsor, Rep. Hans Dunshee, estimates it would create 38,000 jobs and generate energy savings that will cover much of the interest costs.
• Minnesota legislative leaders are proposing $1 billion in bonds to build and repair facilities around the state.

Use Pensions Funds for In-State Investments:  Unwilling to rely on uncertain global investment markets to fuel economic growth, states are increasingly choosing to directly invest in local state businesses.  Instead of giving away corporate welfare and subsidies, states can offer needed capital to create a financial stake in firms.  If these businesses are successful, they return equity to taxpayers that can be reinvested in other projects.

One study found that the California Public Employees' Retirement System's in-state investments fed an estimated $15.1 billion into in-state economic activity in 2006 and created 124,000 jobs-- more jobs than the construction or motion picture industries.  Other examples of in-state pension investments include:

• Florida Governor Charlie Crist recently signed an economic stimulus plan for the state that redirects $1.95 billion of the state's pension fund into direct investments in Florida's economy.
• Washington state held $1.4 billion in Washington-based investments at the end of 2008, using the money to leverage additional capital from other sources to invest in the state.
• New York held $403.6 million as of March 2009 through its Common Retirement Fund with another $500 million available to invest in New York-based businesses.
• The Invest Michigan! Fund features The Michigan Opportunities Fund and the Growth Capital Fund and is capitalized with $300 million from the state's pension fund.  
• In Indiana, the public pension funds collaborated with state universities and various health-based companies to launch the Indiana Future Fund, an investment fund designed to benefit Indiana companies, especially in the life sciences and high technology arena. 

Avoid Privatization as a Funding Source:  Given budget deficits, some states are being lured by the supposed "free lunch" offered by selling or leasing public assets to private firms with the promise of upfront private investment. Unfortunately, as we have detailed repeatedly (see here and here and here), privatization of public assets are inherently likely to ripoff the public to the benefit of private interests.

As detailed in a U.S. PIRG report last year, since governments can issue tax-free bonds at lower rates than private investors, "deals based on private capital are inherently more expensive than public financing."  In 2008, Missouri was planning to use some form of privatization with investors to fund an ambitious plan to repair or replace 802 bridges.  Now, the Missouri DOT is funding the entire project through the sale of government bonds.

Don't Waste Money on Direct Subsidies to Businesses:  One general caution for states is to limit grants, tax credits and other giveaways to business.  Instead use either direct equity investments or loans that are repaid in order to replenish the supply of public capital over the long-term. 

States waste money competing for firms to cross the border from another state, rather than on fostering entrepreneurship and new jobs.  A recent Good Jobs First report on high-tech deals by states notes that many are extremely costly.  The poster children for bad deals are North Carolina's large subsidies to Dell Corporation, who took the money, but then sent the 900 jobs off-shore four years later and New York giving microchip maker AMD (later Global Foundries) $1 million in taxpayer funds for each job being created by the firm upstate.  As the report states:

Tax reductions, exemption or credits “exert a very small marginal influence on corporate investment decisions because other cost factors such as labor, occupancy and other key inputs are far larger than taxes (or tax breaks)”¦  For the vast majority of companies, tax breaks are windfalls, not determinants, and are therefore wasted.

Redeploy Wasted Corporate Giveaways to Real Public Investments:  If states do a thorough review of ineffectual subsidies, costly contracting out, and tax credits, they can generate additional revenue that can be used for more effective job creation efforts.  Progressive States Network has worked with allies to outline model Corporate Transparency in the State Budget legislation and set up a supporting campaign webpage to help achieve that goal. 

As the rest of this Dispatch emphasizes, states can better invest scarce public dollars in upgrading the quality of the workforce and infrastructure, rather than engaging in costly bidding wars with other states for jobs.

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Invest in People- the Key Engine of Growth

In a global economy where the quality of the workforce increasingly determines the standard of living, investing in an educated and healthy population is key to promoting state economic growth.

Invest in Education:  One of the largest successes of the recovery plan has been preventing massive teacher layoffs and creating or preserving 250,000 education positions.  Additional federal help will be needed to stave off reductions in the coming years, but it is a marked success that despite the largest downturn in post-war history, the core educational infrastructure of our nation has been preserved.

Why this is so important is highlighted by a number of recent studies that emphasize that investments in education have clear dollar returns to state governments.

• Each new high school graduate yields a net public benefit of $127,000 or 2.5 times the cost of needed public investments, according to a Columbia Teachers College report.  In fact, cutting in half the number of high school dropouts would yield $45 billion in extra tax revenues.  High school graduates themselves will earn $117,000-$322,000 more in their lifetimes than dropouts, with female college graduates, for example, earning $800,000 more than dropouts.
• As we detailed last spring, early education investments in particular show long-term economic payoffs.  A recent Cornell University study found that funds spent in the early education sector have more stimulative effect on the economy than most other spending.  Early education programs help parents take advantage of opportunities in the workforce and child care improves parents' productivity at work.  One study by the business-backed Committee for Economic Development, estimated that for every dollar invested in preschool, there was an expected return of $2 to $4 in future societal benefits.  

Part of youth education is giving them entry-level job training.  The federal recovery plan helped revive summer youth job programs across the country, offsetting massive youth unemployment in the private sector.  The Idaho Labor Department sponsored its first youth employment program in over a decade.

Support Worker Retraining:  While training can't create jobs, it can ensure that workers who are unlikely to be reemployed in their old industry sectors have a chance to be reemployed somewhere else -- and that vibrant industries have the skilled workforce needed to expand in a state. 

A Michigan Council for Labor and Economic Growth study found that a five percent increase in college-educated adults would boost economic growth by 2.5% over ten years and real wages by 5.5%.  Similarly, studies show that just helping workers get their GED significantly boosts their employment in the long-term.  Notably, a study by the National Skills Coalition (formerly the Workforce Alliance) found that even as unemployment mounted in summer 2009, 60% of employers still had trouble finding qualified applicants for the vacancies they did have -- emphasizing the lack of fit in skills between those laid off and the sectors where growth is likely to occur.

In our Dispatch Averting Layoffs and Revitalizing the Manufacturing Economy, we highlighted a range of best practices through which states can both work to avert impending layoffs and use rapid-response to help employees get new jobs or enter retraining programs as quickly as possible.  These include Rapid Response programs used by some states to on-site contact with employees before layoffs, accessing training programs like Trade Adjustment Aid, working with communities to tailor training and placement programs, as well as promoting Peer Networks to train groups of workers during layoffs to collect information from fellow workers, help connect them with community services, promote job referrals, and work with community leaders.

Fund Health Care and Support the Safety Net:  Health care and other safety net spending is not just a public expense; it is also itself an investment in economic growth.  A healthier workforce means greater economic productivity and more years of productive labor.  And the health care industry is itself a source of good quality jobs. 

A few years ago, a Commonwealth Fund study estimated that labor time lost due to health reasons totalled $260 billion per year.  And unhealthy workers often have lower productivity at work.  In fact, because people are living and working longer, long-term economic growth is likely to be far higher than many current government projections, according to a recent study by North Carolina State University.  "Spending on health care productivity, biomedical research and universal health care should be considered an investment that will eventually lead to increased economic growth," argues co-author Dr. Al Headen.  The payoffs are likely to be more taxes paid, more consumer spending and far lower public expenditures on programs like Medicare than currently assumed.

Another remarkable accomplishment of the federal-state partnership in the last year has been not only preservation of basic health care spending for low-income families, but the expansion of SCHIP programs for children and COBRA subsidies for the unemployed.  This is in sharp contrast to the recession in the early part of this decade when literally millions of people lost publicly funded health coverage.  Maintaining health programs will continue to be a challenge for states -- and new federal funds are a key part of that solution -- but it should be considered a key part of long-term investments in a healthy workforce.

Integrate New Immigrants into the Economy:  As we emphasized last week, keeping an estimated 12 million people in the shadows of the economy is bad for them, bad for native workers and bad for the U.S. economy.  A recent report estimated that immigration reform that integrates new immigrants into the U.S. economy would create $1.5 trillion in added GDP over ten years and newly legalized workers would increase tax revenues by up to $5.4 billion in the first three years.  Another study by the CATO Institute found that legalization would boost the incomes of U.S. households by $180 billion annually by 2019.

Across the board, the goal should be to maximize the productivity of all workers in our economy and produce the most economically competitive workforce in the world.

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Creating a 21st Century Infrastructure in the States

“As a country, we’re deluding ourselves if we think we have put enough into infrastructure," notes the Urban Land Institute.  "We’ve been under-investing for 30 years.”  As a percentage of gross domestic product, infrastructure spending actually has been declining since 1959.  A 2009 American Society of Civil Engineers (ASCE) assessment calculates that $2.2 trillion is needed for infrastructure repairs and upgrades just in the next five years.  In contrast, China has committed $259 billion to its plans for building the world's largest high-speed rail system -- with trains going up to 218mph -- and plans to add another half trillion dollars in the next few years for a total investment to $730 billion by 2012. That's more than the entire 2009 federal recovery plan. 

The federal recovery plan had $132 billion for infrastructure of all kinds, from roads to transit to smart energy grids, but that's a tiny part of what is needed for the U.S. to retain global competitiveness.

More and Better State Transit:  Focus on repairing existing infrastructure, strengthen gateway infrastructure in ports and cities which are the focus of global shipping and travel, and reconfigure suburbs to better integrate regional economies.  

• Public Transit Investments are a Key Job Creator: One clear lesson from the recovery plan, according to a recent report, is that money spent on public transit yields nearly twice the jobs compared to similar amounts spent on highway projects.  This result is due to the fact that public transit spends less money on real land costs and supports vehicle manufacturing and maintenance jobs.  It also especially helps low-income workers save money in getting access to jobs where transit integrates communities.  One innovative, lower-cost transit approach is bus rapid transit (BRT), which builds separated lanes for larger buses that can move at speeds approaching subway lines.  Pioneered in Ottawa, Canada and Adelaide, Australia, similar systems are spreading to Latin America, China, India and Mexico.  In the U.S., Los Angeles and Boston have adopted BRT principles and Chicago will be inaugurating BRT service in 2010.
• Integrate transit with land use planning:  Building transit in the middle of sprawl does little to ease congestion; instead transit funding needs to be linked to development planning that integrates transit with access to jobs and retail.  The Denver region is a notable success story in using transit and land use zoning to reclaim its urban downtown, adding a 122-mile light rail system, instituting a Bus Rapid Transit system to link to nearby Boulder, and linking the urban core to multiple town centers in the surrounding suburbs.
• Strategically Apply User Fees to Fund Infrastructure:  The Urban Land Institute emphasizes that more of the costs of transit infrastructure will inevitably need to be borne by consumers in the form of higher gas taxes, tolls and congestion pricing in urban areas.  This needs to be combined with targeted tax relief to ease the burden on low-income families.  The reality is that gas taxes in the U.S. are far smaller than European economic competitors, who use those revenues to fund far more robust transit upgrades across their continent.

Broadband and Smart Grid Investments:  Despite the U.S. playing a key role in creation of the Internet, a study by the International Telecommunications Union found that the United States now ranks 17th in global broadband penetration.  Lack of affordable broadband access undermines the international competitiveness of our communities and workforce.  The $7.2 billion of direct broadband funding in the federal recovery plan and pockets of other funding for digital infrastructure throughout the ARRA also emphasized broadband as a catalyst for spurring job creation and economic growth.

A number of state legislators have created Broadband Strategy Councils to focus on using those and internal state funds to increase access to and adoption of affordable broadband.  Beyond investing in physical infrastructure, increasing digital literacy is a key investment as well.  During the 2008 legislative session Washington state passed  SB 6438, which created a statewide high-speed Internet development process and established the Community Technology Opportunity Program (CTOP) that will provide resources for capacity-building and grant-giving to Community Technology programs that provide hands-on technology access and training to residents.

Water Systems:  Many cities and regions are using old water systems desperately in need of repairs and upgrading.  Nationwide, the U.S. Environmental Protection Agency (EPA) projects a $224 billion funding gap between 2000 and 2019 between what states are spending and federal requirements for water quality.  Part of the solution are new policies to reduce wasteful water use, since per capita domestic water consumption in the U.S. is more than twice as much as most global competitors-- and more than four times the use by citizens of Great Britain and China.

In California, where some water bills can approach $500 a month, jurisdictions began to require retrofitting homes on resale.  Development needs to be restricted in areas lacking water systems, since such growth just dumps costs on government and leads to underfunding water systems in established areas.

Infrastructure Projects already approved:  Some notable examples of integrated infrastructure investment programs around the country include:

• Illinois Department of Transportation has $3.1 billion in committed projects in 2009.  In addition, Illinois is creating a major “inland port” with the development of Union Pacific's new intermodal facility in Joliet that will create an estimated 7,000 jobs.
• Iowa's I-Jobs program approved last year has created a three-year, $830 million investment in Iowa’s infrastructure using existing gaming revenue including public improvements, community colleges, veterans homes ($285 million), disaster recovery and prevention ($165 million), improving transportation infrastructure ($115 million), rebuilding universities ($115 million), improving environment and water quality ($80 million), and enhancing telecommunications and renewable energy ($35 million).
• Oregon's Job and Transportation Act invests more than $1 billion to address all sectors of Oregon's transportation system, including roads, bridges, bike and pedestrian facilities, mass transit, railroads, ports and airports.  Green aspects of the bill included multi-modal transportation, increased transit funding, planning for greenhouse gas reduction scenarios, a congestion pricing pilot project, and an urban trail fund for non-motorized vehicles and pedestrians.

The key to long-term growth is moving infrastructure investments from one-off projects towards integrated investments that connect them into a holistic plan for growth.  As Robert Puentes of the Brookings Institution said this past year at a Congressional hearing, "the problem is that there is too little integrated decision making that crosses disciplines and joins-up solutions in infrastructure investments."  To achieve maximum effectiveness, transit and other infrastructure investments need to be coordinated not only with each other, but also with land use and housing decisions.

Next Week: State Job Creation Strategies Part II: Supporting Innovation, Industrial Clusters & Green Job Creation

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