Corrections or additions?

This article by Michele Alperin was prepared for the April 12, 2006

issue of U.S. 1 Newspaper. All rights reserved.

New Jersey Economy: Half Full or . . . ?

It’s hard to imagine anyone who has studied New Jersey economic trends

longer or more thoroughly than James Hughes, dean of the Edward J.

Bloustein School of Planning and Public Policy at Rutgers University

and a man whose planning career began at Rutgers as a graduate student

nearly 40 years ago.

"A good part of planning," Hughes says, "involves looking into the

future." For years Hughes has analyzed potential land uses, looking at

what types of structures are feasible to build where. He has drawn on

demographic data to figure out what type of housing a community would

need in the future. And over the years he has unrelentingly tracked

employment data – if you’re trying to figure out where to build more

office buildings, you have to know whether there will be jobs and what

the shape of the future economy will be.

To paraphrase the old stockbroker commercial, when Hughes speaks,

people listen. These days he portrays the national economic picture as

a "goldilocks economy, not too strong, not too weak, just right."

But in New Jersey, Hughes says, the economic cup can be viewed as

either half full or half empty. On the one hand, he says, the state

"has an enormously potent, leading edge, core economy – and an

employment base that is the envy of most states."

New Jersey, Hughes reminds us, enjoyed a spectacular reinvention

between 1980 and 2000, when it "was transformed from a fading

manufacturing dynamo into a leading edge, post-industrial,

knowledge-dependent economy – with Mercer County a major participant."

Job gains were in high-paying sophisticated services in the financial

activities, information, and professional and business services

sectors – the core of the new "information age economy." This growth

counterbalanced the state’s loss of manufacturing jobs, cut in half

between 1970 and 2002.

More recently, however, employment growth has slowed significantly in

the state, newly created jobs are generally lower paying than those

lost, and some of New Jersey’s core economic assets have eroded.

Although the state’s reinvention of itself as a knowledge-driven

economy in the 1980s and 1990s resulted in a per capita income that

was 29 percent higher than that of the nation as a whole, that edge

had worn down by 2004, from 29 to 26 percent.

With the new millennium, total employment in New Jersey also started

to change. Between December, 2000, and July, 2002, New Jersey lost

62,200 jobs. As the national economy resumed its growth in 2004 and

2005, New Jersey’s employment growth has been lagging badly. Job

growth in 2004 and 2005 averaged 40,000 jobs per year as compared to

77,000 jobs per year in the last two expansions. And now in January

and February of this year the state has added only 2,200 jobs total,

which translates into an annual growth of just 13,000 jobs. In 2005

New Jersey ranked 35th among the 50 states in the rate of growth of

total employment.

To make matters worse, all of the state’s employment gains so far in

this decade have been in low paying sectors like leisure and

hospitality, and education and health services, with no growth in

high-paying office jobs. Between 2000 and 2005, New Jersey has lost

118,000 high-paying jobs, replacing them with 115,000 low paying jobs.

As Hughes describes it, offices are "the factory floors of the new

economy." A total nonplayer in 1980, the 11-county northern and

central New Jersey office market, which includes Mercer, emerged as

the fifth largest metropolitan office market in the country by 1990.

Much of this growth was in sprawling suburban growth corridors, like

the Princeton-Route 1 corridor, which by 1990 was a world center for

the activities of the new economy.

It’s not a surprise then, that while the nation’s Class A office

vacancy rate now stands at 15 percent, New Jersey’s is 21 percent.

So why is New Jersey being left in the dust? "It appears that we have

been maintaining our standard of living the old fashioned way," says

Hughes, "by borrowing and living off of our core set of economic and

income assets." Although New Jersey still has a high relative income

position, a very powerful core economy, and a vast repository of

wealth, the state’s economic realities have changed.

"For more than two decades, New Jersey had been the economic

locomotive of a lagging region," says Hughes, "but now it is a

caboose, a full participant in the Northeast regional lag. Our current

prosperity has been obscuring the start of a long-term erosion of our

once unique and powerful economic assets." One contributor to the

state’s loss of high-paying jobs is the loss of employment in the

science and technology sector. Between 1990 and 2004, New Jersey’s

share of the nation’s high-technology employment has declined from 5.2

to 4.1 percent. During that period, New Jersey lost 9,800 high-tech

jobs, while the nation gained 1.3 million: 150,000 in Texas, 115,000

in Virginia, 73,000 in Georgia, and 47,000 in North Carolina.

One example is the high technology wired telecommunications sector,

which cut its employment in half between 1995 and 2004, from 50,000 to

25,000 jobs – led by the falls of AT&T and Lucent. In 1990 NJ had 7.8

percent of the nation’s wired telecommunications jobs, but by 2004 it

had only 4.7 percent.

Although one of the replacement sectors, wireless telecommunications,

has been growing in New Jersey, its share of this sector nationally

has declined from 4.2 percent in 1990 to 2.8 percent in 2004. And for

every eight wired telecommunications jobs lost since 1990, New Jersey

gained only one wireless job. "New Jersey is losing its national role

as ‘telecommunications central,’" says Hughes, especially with Fort

Monmouth due to close, SBC’s purchase of AT&T, and the Lucent-Alcatel

merger.

Another hard-hit area is the pharmaceutical industry. For a state that

has often been called the nation’s "medicine chest," New Jersey’s

share of total national pharmaceutical employment declined from 20.2

percent in 1990 to 13.8 percent in 2004, with the state losing 4.1

percent of its pharma jobs in that period. During the same period,

national growth in pharma employment was 40.4 percent. California,

which in 1990 had barely half the number of pharmaceutical jobs in New

Jersey, replaced New Jersey in 2004 as the state with the highest

number of pharma jobs.

And Princeton, Mercer County, and central New Jersey cannot forever

count on being exceptions to the state’s circumstances, argues Hughes.

"It has done a little better the last three or four years. Mercer has

one of the lowest office vacancy rates of any of the submarkets in New

Jersey."

Hughes also cited as positive Merrill Lynch’s decision to consolidate

many of its New Jersey facilities in Hopewell in the late 1990s. "We

have a pretty strong diversified economy, and in the current decade

have done better than the state. Ultimately Mercer will track the

state as a whole; it is pretty hard to deviate too far for too long."

The big picture, statewide changes "should serve as a wake up call

that we can no longer take our economic and technological well-being

for granted," says Hughes. If New Jersey is to escape, Hughes believes

that the government will have to step in with changes in public policy

– "because every other state is doing it."

As a first step, New Jersey needs to regain the confidence of

corporate America. Last month, the Tax Foundation in Washington

released its 2006 State Business Tax Climate Index, which ranked New

Jersey as 49th, with only New York behind it. This image, says Hughes,

"portends a continued pattern of lagging economic growth in New

Jersey." To change our future, according to Hughes, "we need to

totally reinvent and rebrand."

So Hughes is speaking up and people are listening. Earlier this week

he testified at a state senate committee reviewing the details of

Governor Corzine’s proposed budget and tax increases. Last week he

appeared at a meeting of 55 Plus, the nonsectarian group of senior age

men and women who meet at the Jewish Center of Princeton to socialize

and discuss contemporary issues.

A member of that audience asked Hughes to elaborate on the reasons for

this hostile business environment. Hughes pointed out that the

business climate is basically the flip side of the tax environment,

and New Jersey’s business taxes are severe. One problem, which Corzine

is proposing to change, is the absence of a provision that would allow

businesses to carry forward a loss to shelter future income. This has

been particularly injurious to small entrepreneurial firms, according

to Hughes.

Another problem is the alternative minimum assessment, which requires

a minimum tax payment even in the face of a total business loss. This

provision has pressed hard on the struggling new firms that are

responsible for major job creation.

Yet another problematic feature of New Jersey’s taxes, which Corzine

has proposed removing, is the 8.9 percent assessment on people earning

a half million or more. This provision is pushing high-wage earners

out of the state, as tax accountants advise their clients to move to

places like Florida or Jackson Hole, Wyoming. To avoid this tax, high

tech entrepreneurs who are planning to sell off their companies move

out of New Jersey before the sale to avoid this tax.

Another element of the rebranding New Jersey needs has to do with

support for research. In response to a question about the proposed

budget cutbacks at Rutgers, Hughes says that, "at the scale proposed

for the Bloustein school, I will have to find $650,000 to cover the

cutbacks, assuming no tuition increase. This will force a significant

restructuring of the entire university enterprise if the cuts hold."

Then he broadens the perspective. "The high-end, new industrial

research model in the United States is not large freestanding labs,"

he explains, as it was in the past. "The new model is to partner with

universities and locate near centers of university excellence," he

adds, citing Merck’s major research center in San Diego, and

Novartis’s in Cambridge, Massachusetts. Rather than taking advantage

of its own existing and potential "centers of excellence, says Hughes,

"New Jersey has systematically under-invested in its research

universities." But to successfully compete for research dollars, we

need to not only maintain, but to build up our resources.

Corzine has proposed the Edison Innovation Fund, which would combine

state bond money with investments from biotechnology firms and private

foundations to spur embryonic stem-cell research and offer research

funding for nanotechnology and alternative energy. Despite the risk,

says Hughes, "we must take some part of our tax resources and invest

in the future."

When establishing a new research venture, politics sometimes

undermines what is in the best interest of the state. Take the Stem

Cell Institute, which Governor McGreevey proposed as a joint project

of Rutgers and UMDNJ, situated in New Brunswick. The current proposal

includes research labs in Newark and Camden, and Hughes observes, "Now

we will have will have three mediocre centers rather than one

excellent one."

One area that Hughes believes will not strongly affect New Jersey is

outsourcing. "How destructive will the impact of outsourcing be on

white collar jobs in New Jersey and the post-industrial economy?" a 55

Plus attendee asked.

Although Hughes admitted that this had hurt to some degree,

particularly in telecommunications, he urges a longer view. "If we

straight-line current trends, we’re doomed. But we can’t do that

because ultimately costs will equalize," he says, citing anecdotal

evidence that China has a shortage of skilled labor and labor costs

are growing dramatically. He says there are also economic benefits to

outsourcing: We can acquire technology more cheaply and buy more

computers, thereby increasing the efficiency of our economy.

Hughes is not shy about his prognostications – he is well prepared for

his chosen role as economic prognosticator, even though he followed an

unusual path. Born and raised in Elizabeth, New Jersey, his bricklayer

father died in 1957, when Hughes was in junior high school. His

mother, who had been a homemaker, went back to work in various

positions at the Berry Biscuit cookie factory.

A state scholarship enabled him to be the first in his family to

attend college. As an undergraduate at Rutgers University he chose an

unusual major, one that combined civil engineering and city planning.

"I took it seriously; I felt I had an obligation," he says.

After two years in the Army, including a stint with the United Nations

command in South Korea, he came back to New Jersey in 1967. At that

time the Rutgers campus was starting an urban planning program, and

they told him, "We need students." He stayed on as part of the new

Ph.D. program, and in 1971 was offered a job as an assistant

professor.

At Rutgers in the early 1970s he met his wife, Connie, who also has a

degree in planning. She is now commissioner of the Board of Public

Utilities and she herself is a former U.S. 1 cover subject, profiled

in 1990 when she was with the State Data Center in the Department of

Labor, linking the Census Bureau with data users, assisting them if

they had questions on demographic or population trends.

At that time Hughes was contributing editor to American Demographics,

"We got a lot of razzing," he recalls. "People wondered what we talked

about at dinner."

When he is out in public, as he often does, Hughes does manage some

optimistic observations, despite his humorous observation that he is

often called the Doctor Kevorkian of economics. Despite all the

state’s problems and relative erosion, Hughes acknowledges, New Jersey

does maintain several demographic strengths:

1. In 2004, according to the American Community Survey, New Jersey

continued to have the highest median household income among the 50

states. The one caveat here is that New Jersey also ranks first among

the states in median housing costs. While New Jersey incomes are 38

percent higher than that of the nation, housing costs are 52 percent

higher.

2. New Jersey ranks third among the states in the percentage of

foreign born, 18.8 percent in 2004, and demographic diversity can be a

key advantage in a global economy.

3. New Jersey ranks second in mass transit usage among the 50 states,

and very few states have equivalent public transit infrastructures. On

the other hand, we rank third in length of commute (a ranking that

Hughes chooses to see as an illustration of our "unique transportation

fortitude").

One member of the audience took umbrage at this supposedly positive

characteristic, saying: "You can’t get anywhere in this state on mass

transit," except New York. Hughes agreed and disagreed. Yes, the

development patterns of the 1980s and ’90s were suburb sprawl and

office corridors on the freeways; homage to the automobile was a

given. But, no, the Northeast Corridor line is actually excellent,

making sites along it a good place for new office buildings.

Hughes cited the Gateway Center in Newark, which is accessible from

the Northeast Corridor as well as from Morris County, which is

connected by a light rail extension. "The existing rail infrastructure

is there, and we must take effective advantage of it," he says. "These

can be job nodes even if people do not live there." He added that Rush

Holt’s concept of Einstein Alley is based partly on New Jersey’s

unique concentration of higher education on this one railway, which

goes through Princeton, New Brunswick, and Newark.

4. The state ranks first in density. With 1,173 people per square

mile, New Jersey is more dense than either Japan or India. Again

looking on the bright side, Hughes suggests this demonstrates "our

demographic resiliency."

5. Despite this density, a higher proportion of New Jersey is covered

by forest even than states like California and Alaska, which, says

Hughes, "demonstrates our unique environment and quality of life – a

key advantage in a knowledge-driven economy."

Speaking to a small group after his talk, Hughes sounded hopeful. The

necessary first step he mandates for a positive future is that "we

must straighten out the fiscal mess first and must do it this year."

He thinks Corzine is headed in that direction, starting with selective

business tax cuts. The state also needs to bring in more money, and

Hughes suggests that a one percent increase in the sales tax would

probably be the best step: "Since food and clothing are not taxed,

it’s not that regressive."

His conclusion combines the pragmatism of an engineer with the trust

in the future that fuels a prognosticator: "I’m a pessimist at heart,

but Corzine gets it."

— Michele Alperin


Previous Story


Corrections or additions?


This page is published by PrincetonInfo.com

— the web site for U.S. 1 Newspaper in Princeton, New Jersey.

Facebook Comments