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As published as an opinion in The Hartford Courant, March 28, 2010.

What It Will Take to Turn State Around

Connecticut Must Reverse Deteriorating Economic Conditions

By Fred Carstensen

History casts a long shadow. Connecticut has a remarkable history in innovation, manufacturing and insurance. It has added new dimensions in financial services and biomedical research, and in the past 20 years saw remarkable productivity growth, well above the national average.

But this veneer of good news masks a hard reality: Connecticut the Hartford region in particular has been living primarily off its pre-1990 history. The history of the past 20 years casts a very different shadow the worst jobs record in the nation, out-migration of its population, a steady deterioration in the quality of its jobs.

The urgent challenge is whether this region, and the state, will articulate and implement the policies and strategic investments needed to escape the future to which recent history points.

Losing Good Jobs

The trends are profoundly worrisome. After peaking in February 1989, employment in Connecticut did not recover until December 1999, more than 10 years later. After just seven months, Connecticut again began losing jobs and did not recover its previous high until November 2007. Employment grew for just four months more, peaking in March 2008.

Since then, Connecticut has lost more than 100,000 jobs. In 20 years, the state has had only 11 months of net job creation! Worse, the broad pattern has been one of losing high-skill, high-wage jobs, particularly in manufacturing and financial services, while gaining lower-skill, lower-wage jobs, in health services, leisure services and accommodations, and casinos.

Connecticut has maintained its population only through the in-migration of the foreign-born and women over 85; all other age groups have net out-migration. At the same time, Connecticut saw its poorest fifth of households suffer a double-digit decline in real income only two other states suffered a single-digit decline, and 47 saw the poorest households enjoy rising real income.

This probably results in Connecticut having the worst income inequality in the nation. Finally, Connecticut now has the largest disparity in educational outcomes in the nation.

In sum, Connecticut has a shrinking working-age population whose formal skills are declining.

Compounding the challenge, Connecticut faces the historical pattern of having an economy that has been among the slowest in the nation to recover from contractions. Job loss and slow job creation fuels the fiscal crisis at the state level annual deficits may explode to $4 billion or more from fiscal 2012 onward putting pressure on municipalities to sustain government services.

Where We're Headed

If these trends continue, Connecticut will become a very different state. Its population will be, on average, old; its workforce largely unqualified to compete in the global economy; companies long resident in Connecticut will not expand here; new companies will not locate here.

State and municipal governments will confront vastly expanded demand for public services but see an eroding economic base progressively unable to generate the revenue needed to provide those services. There will still be pockets of wealth in the state; there will still be million-dollar homes on the shore and in the Litchfield area, and perhaps two thriving economic regions in Stamford and New Haven, which financial services and Yale's biomedical complex will sustain. But the state as a whole will be rapidly sliding down national rankings in household income and competitiveness and up the rankings in poverty.

Hartford's Challenge

The Hartford Labor Market Area has charted a course similar to that of the state. Though the total number of jobs compared to 1990 is modestly higher for this region, manufacturing has contracted sharply, from more than 95,000 jobs in 1990 to about 76,000 in 1999, to fewer than 60,000 now. Financial services has fallen from 86,700 in 1990 to about 69,000 in 1999, then continued falling, reaching about 58,000. Even employment in retail has shrunk, from nearly 63,000 in 1990 to about 51,000.

Only professional and business services added well-paid jobs, growing a meager 6,600, from 55,600 to 62,200, and state and local government employment grew modestly. The largest growth came in education and health services primarily in lower-paid social and health care services growing from 65,700 to 96,600 jobs from 1990 to 2009. Leisure and hospitality among the lowest-paid sectors expanded by nearly a quarter, adding 8,000 jobs.

Consider the broad picture: from 1990 to 2009, the Hartford region suffered a net loss of 56,000 high-skill, high-wage jobs; it gained 40,000 largely low-skill, low-wage private-sector jobs, and some government employment. If this history foretells the future of the region, it bodes ill.

Focus On Life Sciences

Connecticut is still a rich state the Boston Federal Reserve has rated it first in the nation in fiscal capacity and still has remarkable assets that provide the foundation on which to build a far different future. But the need to begin that redevelopment is urgent.

The most dynamic arena right now is in the life sciences, driven by the remarkably successful state-funded research on stem cells. That investment has animated significant new activities, drawn leading researchers to the state, and put Connecticut at the cutting edge internationally in a technology that is at the core of the rapidly growing life sciences and biomedical sector. The stem-cell initiative may already have generated so much ancillary activity that it is self-funding the related investments and initiatives generate state revenue that covers the annual funding of $10 million.

Unfortunately, the Hartford region has yet to capture its share of this activity; much of it has flowed to the New Haven region, where Yale has provided aggressive, imaginative leadership, has its own investment fund, and offers expansive infrastructure in which to locate new activities.

Critically, the state has not built a broad policy initiative to grow life sciences in Connecticut, and has let the University of Connecticut School of Medicine and Dempsey Hospital languish. Besides sustaining the funding for stem-cell research, Connecticut should be pursuing a multi-pronged strategy to retain and expand current activities and attract new ones.

The initiatives range from elevating the School of Medicine (it is critical that it gain the stature to manage Stage III clinical trials) to strengthening the education-workforce pipeline, adopting coherent tax policies and launching aggressive marketing initiatives. Gov. M. Jodi Rell has now taken the first step on this path with her initiative to renovate and expand Dempsey Hospital and create a strong regional health collaborative.

Connecticut and the Hartford region still have an important, globally competitive advanced manufacturing sector, with a skilled and highly productive workforce. But questions about the future of this workforce and the failure to address the inadequacies in the transportation infrastructure work against the long-term health of the sector.

More critically, the inability of the state to develop a credible plan to reduce energy costs perhaps the single largest handicap for energy-intensive manufacturing burdens this sector with heavy expense. Finally, the state's constant manipulation of caps on tax credits, particularly for research and development, undermine the credibility of the state's commitment to creation of a stable business environment.

The Hartford region is of course still an important center for financial services, particularly insurance. The region and the state need to develop a deeper understanding of what drives success in this sector and build mechanisms to abet it. It is powerful reminder of the crucial role an institution like the Competitiveness Council abolished in February 2009 should play.

A Way Forward

The past few months have seen a beginning of an appreciation of the seriousness of the challenge that the region and the state face. There is little prospect that Connecticut can simply wait out the effects of the Great Recession. Indeed, after unemployment peaks at perhaps 110,000 in mid-2010, the consensus forecast does not see regaining the jobs lost for three to five years if ever.

There is now plenty of talk about the state's economic health. What we need is action. We need credible, sustained commitments to research and development, expeditious and consistent permitting and regulation, and stronger ties between our educational institutions and the needs of the state.

Or the shadows our recent history will become the harsh light of the future.

Fred Carstensen is a professor of economics at the University of Connecticut and director of UConn's Connecticut Center of Economic Analysis. This article first appeared in "The Prospect: The Hartford Club's magazine of ideas and opportunities," and is reprinted with permission.