Economic Growth &
New England
Lynn E. Browne
Chief Economist, Federal Reserve Bank of Boston
Open Classroom Policy Series
Northeastern University
January 2009
New England Economic Adventure
• Comments based on research for Boston
Fed economic education program
– Exhibits, theatrical experience, investment
game, web site
(www.economicadventure.org)
• Engines of Enterprise: An Economic
History of New England, Peter Temin
editor
Rising living standards
• For past 200 years, most countries
enjoyed rising living standards
– More material possessions
– Greater leisure
– Greater comfort
– Swifter communications & transportation
– Longer lives (since 1900s)
– Not necessarily happier
Growth in productivity
• Higher living standards due to higher
productivity
• Produce more – and more valuable – output per
hour of work
• Higher productivity due to
– Improvements in technology
– Investments in physical capital (plant, equipment,
infrastructure)
– Investments in human capital (education)
– Growth of markets (specialization, economies of
scale)
– Human endeavor
Growth is disruptive
• Growth means change
• Change is disruptive
• Technological progress means producing
more with fewer inputs
– Workers are displaced; specialized capital &
other inputs decline in value
• Technological progress means new
products
– Old products become obsolete
Growth is disruptive
• Expanding markets create new
opportunities – and exposure to new
competitors
• Growth can be risky
– Many innovations fail
– Many investments do not payoff
• Not innovating/investing/growing is very
risky
– Rest of the country/world moves on
New England has re-invented its
economy repeatedly
• Peter Temin
– “The economic history of New England is as
dramatic as the transformation of any region
on earth....New England came to lead the
United States from an agricultural to an
industrial nation...(And) when the rest of the
country caught up ...New England reinvented
itself as a leader in ..the “information
economy.””
But growth is not inevitable
• New England experienced a long
stagnation in the 20th century
– Some New England cities have not shared in
region’s recent prosperity
• Globally, some countries have failed to
prosper.
– Much of Africa has seen little improvement in
past 200 years
Why was New England successful?
• High value on education and industry
• Supportive institutions
– Networks that crossed industry and business
lines
• Good fortune
Early days
• Puritans established the pattern
– Hardworking
– Valued education
– Family-oriented
– Participatory government
– Independent
• Ready to vote with their feet
New England’s challenge
• New England needed manufactured goods
from Britain
• Britain wanted sugar & tobacco; not New
England products
• Answer:
– Sell fish to feed slaves on sugar plantations
– Generate money to buy British goods
Economy built on maritime trade
• Trade fostered other activities
– Whaling
– Shipbuilding
– Shipping goods for other colonies
– Warehousing & insurance
• Developed complex diverse economy
Revolution brought new challenges
• Trade with Britain disrupted
– But new markets in China
– “Neutral” in Napoleonic Wars
• Until embargo of 1807
• New England merchants sought other
opportunities
– Cotton textiles
Francis Cabot Lowell
• Visited mills in Britain
– Memorized technology for power loom
• Built state-of-the-art mill in Waltham
• Followed by larger operation in Lowell
–
–
–
–
–
Abundant water power
New technology
New financing vehicle
New labor force (young women)
Tariff
• Mills spread throughout New England
American System of Manufacturers
• Interchangeable parts & machine tools
• U.S. Armory in Springfield, MA fostered
development of new metal working
technologies
• Arms manufacturers & machine tool
makers clustered along Connecticut River
• Range of products – watches, sewing
machines, bicycles, later cars & aircraft
engines
Manufacturing made New England
prosperous
• Wages much higher in manufacturing than
agriculture
• So incomes in industrial New England
much higher than elsewhere in late 19th
century
– Despite difficult factory conditions
Rest of the country catches up
• Textiles began to struggle after 1900
– Production standardized
– Southern states had lower cost unskilled labor
– Prolonged decline
• Abandoned textile mills throughout region
• Shoes & other older industries also faced
competitive pressure
• Despite being a pioneer, missed out on autos
• A mature, possibly declining region
From mills to high tech to life
sciences & finance
• New England re-invents itself
– High tech in 60s, 70s, & 80s
– Information & professional services in 80s &
90s
– Life sciences & asset management
• Inevitable or lucky?
Modern era
• New industries build on historic strengths
– Industrial base
– Elite research institutions
• Jump start from defense research &
expenditures in WWII and Cold War
• Influx of baby boomer students
High tech manufacturing
• Grew out of defense research &
procurement but widespread commercial
applications
• Characterized by high R&D and highly
educated workforce
• Mini-computer most important
• Rapid high tech growth boosted incomes
– 5 percent above national average in 1975
– 20 percent above in 1990
Roller-coaster since 1990
• Mini-computer loses to PC
• Software and telecommunications
experience boom & bust
• Are life sciences and investment activities
the future?
What is different about New
England today?
• New England industry mix no longer
strikingly different
• But educational level is substantially
higher
– More college degrees
– Reflected in high productivity and high
incomes
• Is secret of success, smart people figuring
out new things to do that pay well?
A concern
• Is New England’s brain power leaving?
• Supply of young college graduates is
growing slowly
• Alicia Sasser of Boston Fed: slow growth
is due to low birth rates 25-30 years ago
– Offset by high rates of education
– Offset by in-migration of college students
– But many in-migrants subsequently leave
Can New England do more to
retain young adults?
• New England retains 90 percent of native
college graduates
– But only 20 percent of non-natives
• Jobs are #1 reason why college grads
move
• Many out-migrants go to high cost areas
(NY, CA)
• Could we do more to keep them?
The issue
• New England’s prosperity depends upon
the ingenuity & skills of its people, not
specific industries
• Do a highly educated, productive
workforce and a history of re-invention
ensure future innovation and prosperity?