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The new global economy, with its worldwide competition, presents great opportunities
and daunting challenges. A nation with cumbersome state laws and regulations can’t
respond effectively to the ever-changing dynamics of the world marketplace. It will
quickly fall behind. To compete, nations must radically streamline legal and regulatory
requirements.
Some would respond to the global economy with top-down, one-size-fits-all federal fixes.
These efforts are defended by some in economic terms, but they erode the sovereignty of
the states and compromise innovation, local control and accountability. States must
resolve this dilemma. It is the new frontier of federalism. The challenge of this generation
is to create checks and balances in our democracy, in a world no longer constrained by
natural boundaries. States can fight the changes and die, accept them and survive or lead
and prosper.
With the theme of "Strengthening the American State in a New Global Economy,"
Governor Mike Leavitt will focus on two broad areas as NGA chairman:
To further strengthen the states, a landmark meeting will be convened next February.
Every governor and every senator will be invited to gather in Washington, D.C. for a
historic meeting on the state of the states to celebrate and discuss the role of the states.
The governors will meet with their House delegations on the same day.
Global Economy
The National Governors’ Association will develop a significant policy agenda to assist
states in adapting to the new global economy. The agenda will be carried to the states
through a series of meetings all over the country.
Like their employees, businesses, too will need to reinvent themselves to take advantage
of innovations in the way they can manufacture goods or provide services. Businesses
will need to continue investing heavily in information technology and worker training to
ensure productivity growth. To find the skilled workers they need and seize the
opportunities provided by technological change, businesses will be drawn to regions that
produce an educated and skilled labor force, provide a supportive environment for
research and development (R&D), and enable innovative partnerships among businesses
to flourish. Finally, businesses will need to consider factors such as telecommunications
infrastructure and quality of life when deciding where to locate.
Government must also change to meet the needs of the new economy. State government
will need policies that nurture growing businesses and attract the skilled workers that
power them. If state government is to remain progressive in the new economy, it must
enhance the proficiency of its workforce, maintain an infrastructure that supports new
businesses, and offer superior delivery of services to its residents. States must have
flexible regulations, a simple and equitable tax system, a strong educational structure, and
an environment that encourages business formation and entrepreneurship. To attract and
maintain a large pool of able workers, states must provide opportunities for lifelong
learning. Finally, states must focus on the environment and other quality-of-life issues
that help attract a young and productive population. This is a tall order for any
government.
States will need to steer a new course to succeed in the new economy. To ensure
economic vitality in the next century, every state must:
Build Workforce Skills and Education And Promote Lifelong Learning to Ensure a
Competitive Workforce
In 1959 only 20 percent of workers between the ages of 30 and 59 needed some college
instruction to succeed; today, that figure is 56 percent.1 The skills of the nation’s
workforce will determine its ability to compete in the new, global, and technology-based
economy. States must help ensure that higher education systems maximize their resources
to expand learning opportunities and teach the skills needed in the new economy.
Distance learning may need to be combined with traditional campus curricula to expand
the number of subjects covered, and special attention will be needed to increase access to
postsecondary education for all qualified students.
States must also help create systems for lifelong learning and support firms’ efforts to
strengthen worker skills. Strategies include using work-based learning to advance low-
skill, low-wage workers up the job ladder as well as training higher-skilled workers to
achieve greater proficiency. The most promising results seem to occur when public-
private partnerships focus on upgrading worker’ skills to build a competitive workforce.
The infrastructure for the new economy includes both traditional and nontraditional
elements. Many of the new economy business clusters occur around university campuses
and suburban and rural areas with limited transportation corridors. States may need to
upgrade air, road, and rail travel to these areas to maintain their growth. However, in the
new economy, infrastructure means more than just roads, sewers, trains, and airports. To
attract businesses in the next century, communities will have to offer access to high-
bandwidth transmission systems and a wide array of telecommunications services.
By some estimates, traffic on the Internet doubles every 100 days. Yet as many as twelve
states may be at serious risk of not achieving the broadband access required to stay
competitive in the growing digital economy.2 To support demand, many states will need
to make or encourage dramatic increases in communication investments. In most cases,
states and localities will need to work with private telecommunications companies to
ensure that all communities have access to high-capacity service. In other cases,
governments may need to make their own investments or leverage their rights-of-ways to
obtain the telecommunications systems they desire.
Government must also examine the services it delivers and determine whether the private
sector can play a role in delivering the services more efficiently at government’s
direction. Government licensing functions that involve minimal review, such as hunting
and fishing licenses and vehicle registration, can benefit greatly from IT solutions. Many
states are turning over these government functions to private firms that provide services
nationwide using state-of-the-art techniques. The dollars needed to run these programs
are often collected through processing fees; no state outlays are required. In some cases,
the state may need to work alongside private contractors to deliver services more
effectively, blending government employee functions with support from private
employees. In other cases, such as employer training, government could find it most
efficient to subsidize employer-based programs.
Align State Tax Systems to Meet the Demands of the Twenty-First-Century Economy
Most state and local governments administer a tax system designed for the economy of
the 1950s—one oriented toward manufacturing and tangible property sales. As states
enter the next century and the output of services and intangible goods continues to grow
they will need to revamp their outdated tax systems. Key issues include finding ways to
achieve a stable and broad revenue base for basic government services such as education
as well as avoiding taxes that discriminate against new and fast-growing businesses.
The state sales tax is the single most important source of revenue at the state level. This
tax falls largely on tangible goods, a shrinking revenue base. As services continue to
grow as a share of economic output, sales tax revenues decline. This poses problems in
terms of the fairness of the tax burden and the ability of the sales tax to provide a stable
revenue source. Extending the sales tax to cover services would broaden the tax base and
spread the burden, but extending the sales tax to cover services is very difficult for both
political and technical reasons.
Moreover, changes in the way the state treats formally regulated industries could make
some traditional taxes no longer viable. For example, revenues from taxes previously
levied on electric utilities and telephone companies could decline sharply in a deregulated
environment. Many utility plants will fall in value when placed in a competitive
environment, lowering property tax revenues and forcing states and localities to search
elsewhere for income. Similarly, antiquated telecommunication taxes—once considered
reasonable when telephone service was the only traffic on telephone lines—can now
present major barriers to businesses that deliver and receive services through the Internet.
The challenge for states is to create a tax system that spreads the burden across a wide
array of activities and does not discourage the startup and growth of new businesses.
Meeting this challenge will eventually require a shift in how and what states tax today.
Develop More Uniform Regulatory and Tax Structures among States to Reduce
Complexity and Eliminate Market Distortions
Entrepreneurs and small, fast-growing firms are powering most of the current job growth.
Small businesses now comprise 98 percent of all U.S. businesses, and their sales account
for 50 percent of the gross national product (GNP).3 States must nurture these seeds of
economic activity with tailored services. For example, many states have begun to create
incubation centers that offer new firms legal and technical assistance on business
formation, help them gain access to capital, and linking them to potential product
purchasers and suppliers.
States must also streamline business regulations and licensing. Many businesses face
problems starting or expanding operations because they must spend considerable time
determining what regulations affect them and petitioning various entities in state, local,
and federal government for the requisite permits or licenses. State government can relieve
this burden by offering businesses a "one-stop shop" to obtain business licenses, apply for
environmental and operational permits, and file taxes. Streamlining often requires
changing the culture of government agencies and creating new ways of doing the
"government’s business." Instead of putting the burden on businesses to identify how
they are regulated and by whom, it requires government to tell businesses what
regulations affect them and guide them through the regulatory morass to achieve
compliance.
Promote University Policies That Encourage Research and Development and Build the
Intellectual Infrastructure
States must create an environment that supports research and development and attracts
intellectual talent. According to a recent report of The Milken Institute, state universities
— traditionally major sites for public research and development—can play an important
role in a technology-based economy. Of the top thirty high-technology metropolitan
areas, twenty-nine are home to, or within close proximity of, a research university.4 States
can build the intellectual infrastructure by strengthening the R&D capacity in their higher
education system, investing in areas of higher education that teach skills relevant to the
new economy, and encouraging better university-industry partnerships.5
In addition, states need to encourage partnerships among businesses that want to work
together on developing products. These strategic alliances can help maximize the
investments needed to bring new products and services to market.
To attract the businesses and workers needed in the new economy, states must focus on
the quality-of-life issues that concern them. Many employers and employees cite quality
of life as a chief factor influencing their location decisions. Quality-of-life considerations
include what condition the environment is in, what recreational opportunities are
available, whether policies exist to steer development and check unrestrained growth, and
whether plans exist to revitalize languishing cities and neighborhoods. Quality of life can
also be measured by the value of certain community services, such as public education,
public health and safety, and public supports for working families. All of these quality-
of-life issues must be addressed to attract new businesses and workers.
To help Governors understand the new economy and position their states to flourish in
the next century, the National Governors’ Association (NGA)—through the New
Economy Task Force—will be examining the driving forces and implications of recent
economic changes. Its goal is to give Governors the tools to respond to these changes and
identify policies and to sustain programs economic growth. In 1999-2000, the Center will
prepare new economy papers on topics such as the following:
More information on the NGA new economy project can be found on NGA’s web site at
http://www.nga.org/NewEconomy/Links.asp
Table sources:
Edward Yardeni, "The Economic Consequences of the Peace in 1990 and Beyond",
Deutsche Bank Research Topical Study #43, (New York, New York: Deutsche Bank
Research, January 6, 1999), at http://www.yardeni.com.
U.S. Department of Commerce, "The Emerging Digital Economy II" (Washington, D.C.,
June 1999), at http://www.ecommerce.gov.
"U.S. On-line Business Trade Will Soar to $1.3 Trillion", press release of Forrester
Research, Cambridge, Massachusetts, December 17, 1998, at http://www.forrester.com.
U.S. Department of Commerce et al, 21st Century Skills for 21st Century Jobs
(Washington, D.C., January, 1999), at http://www.ecommerce.gov.
Robert D. Atkinson and Randolph H. Court, "The New Economy Index" (Washington,
D.C.: Progressive Policy Institute, November 1999)), at
http://www.neweconomyindex.org.
U.S. Small Business Administration, "The New American Evolution: The Role and
Impact of Small Firms" (Washington, D.C., June, 1998), at http://www.sba.gov.
Endnotes to text:
1. Tony Carnevale, "A College Education is the Key" (Washington, D.C.:
The National Center for Public Policy and Higher Education, Summer 1999),
available at <http://www.highereducation.org/crosstalk/ct0799/index.html>
2. Erik Olbeter and Matt Robison, "Breaking the Backbone: The Impact
of Regulation on Internet Infrastructure Deployment" (Washington, D.C.:
iAdvance, July 27, 1999), at <http://www.iadvance.org>.