Enterprising States

Sunday, June 19, 2011 - 8:00pm

Recovery and Renewal for the 21st century

Executive Summary

Over a year and a half into the recovery, the condition of the American economy is far from satisfactory. Unemployment remains high, job creation meager, and American workforce participation has dropped to near record depths — the lowest rate in a quarter of a century. The U.S. will need to create 20 million jobs in this decade to recover from the 7 million lost in the Great Recession and 13 million needed for the country’s growing population.

Since the first Enterprising States study in 2010, 29 new governors have started their terms. Governors of every state, along with their legislative counterparts, are taking steps to grow their states’ economies, create jobs and compete globally. They want to help businesses prosper, to produce an educated and skilled workforce, and to provide other essential services and infrastructure that foster the entrepreneurship and innovation that will lead to greater productivity and competitiveness.

In the past, states could look to Washington for assistance. Now, whatever the intentions or real achievements of the stimulus package, future increases in federal spending seem likely to be meager at best. This presents a new, and perhaps unprecedented, challenge for the states. With Washington effectively forced to the sidelines, states will now have to address fundamental economic issues relating to growth and employment on their own. Most will have to do so without significantly increasing their own spending.

For many states the short-term prognosis is dire. Altogether, 44 states and the District of Columbia are projecting budget shortfalls for 2012 amounting to $112 billion. The upcoming fiscal year, according to the Center on Budget and Policy Priorities, will be “one of the states’ most difficult budget years on record. Retiree benefits for state employees add yet another strain, with the states facing a $1.26 trillion shortfall.”

Most states have already taken actions to streamline and downsize government to meet the new economic realities and this has proven to be challenging given the increased demand for state services during the national recession. Surely more redesign, streamlining and reforms are on the way. To recoup lost revenue, states have taken such actions as eliminating tax exemptions, broadening the tax base, and in some cases increasing rates as well as raising fees. Low tax rates by themselves are not a silver bulletsummaryfor growth, but it has become clear that outdated state tax systems can undercut economic vitality. Any state with a budget tilting towards insolvency is in a weak position to make and maintain investments in its workforce and economic infrastructure.

Determining where to cut and where to invest is the central challenge of the day. States must carry out short-term strategies to jumpstart and/or sustain an as of yet lackluster recovery and cut costs to make state government more efficient and to avoid financial calamity. Simultaneously, though, they must craft and invest in innovations and structural solutions that will foster long-term economic growth while reining in taxes and regulations that stifle job creation.

“Ultimately, there is only one route to sustainable state economies, and that is through broad-based economic growth,“ writes study co-author Joel Kotkin. “The road to that objective can vary by state, but the fundamental goal needs to be kept in mind if we wish to see a restoration of hope and American optimism about the future.”

The 2011 Enterprising States study highlights state-driven initiatives to 1) redesign government, including measures to deal with excessive debt levels that inhibit economic growth and job creation and 2) implement forward-looking, enterprise-friendly initiatives with a primary goal of creating the conditions for job creation and future prosperity.