CFED Study Shows Some States Fare Better than Others in Recession

If states are to emerge from the recession stronger than when they went in, state policymakers must make long-term investments in economic fundamentals such as a skilled workforce, technological capacities and quality amenities, reports the Corporation for Enterprise Development (CFED). They also need help from the federal government, according to the 16th annual Development Report Card for the States by CFED, a nonpartisan Washington-based think tank.

CFED uses 71 measures to provide a relative, state-by-state assessment of economic development in three main areas — performance, business vitality and development capacity. Colorado, Connecticut, Massachusetts, Minnesota and Virginia were the top performers in 2002, all earning straight As. Seven other states – Delaware, Maryland, New Hampshire, New Jersey, New York, Utah and Washington – joined them on an honor roll with all As or Bs. Virginia is a new addition to the honor roll in 2002. Eight states got an F in at least one of the three categories.

One of the longest running barometers of state economic development policies and their impacts, the CFED study suggests states that have historically invested in the building blocks of long-term economic development – K-12 education, world-class universities, good roads, and research and development – are performing better overall than their peers, despite hard economic times. They have demonstrated sustainable growth and development for the long haul, the report notes. However, states are facing a combined deficit estimated at nearly $90 billion this year, and the temptation is to cut programs across the board to balance their budgets.

Ten guidelines are provided by CFED to help state policymakers make wise choices in what programs to cut, what investments to sustain, and what taxes and fees to raise. The authors recognize that intense competition for scarce state resources will force painful tradeoffs for citizens. For example, pressure may increase to provide more tax incentives to recruit new businesses to achieve short-term employment goals. But policymakers should understand that most jobs are homegrown and that economies benefit from a workforce supported by solid educational, health and other human investments, the report adds.

States face major obstacles, however, in their efforts to balance their budgets and spark economic growth. They do not control monetary policy and cannot run budgetary deficits. CFED calls for the federal government to provide immediate short-term revenue-sharing assistance to states as well as to initiate a new, permanent federal-state partnership to combat future recessions.

The federal government also should provide a pool of matching funds that states could draw from on the basis of their need and their own contributions, the authors say. Contributions from a state's general revenues would be triggered by the performance of their economy — when revenues are large, contributions would be large. During weaker periods, contributions decline and shrink to zero when growth falls below normal. And, rather than rely on existing but erratically funded stabilization programs, the federal government could distribute funds among states according to their own contributions, with some allowance for local fiscal effort.

Such a permanent partnership, the study argues, would allow for a faster and more evenly shared response to future economic downturns. Hard times may not be here to stay, the report observes, but they will return. CFED concludes states should use this time of hard choices to lay a strong foundation to weather future recessions better.

The 2002 report card reflects some changes over the 2001 edition. As a result of an apparent anomaly in the 2000 study, the sector competitiveness measure was suspended for evaluation and not included in the 2001 report card. CFED discovered a significant error in the 2000 data, namely that grades were assigned based on inverted rankings. The error has been corrected, and the measure is reintroduced in 2002 as the "competitiveness index."

The Development Report Card for the States is available at: http://drc.cfed.org.