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.”