Strengthening the American State in a New Global Economy

Governor Mike Leavitt, Utah

NGA Chairman 1999-2000
Over the next decade, forces of globalization will reshape governments more profoundly
than the industrial revolution and the progressive era combined. With today’s technology,
the boundaries that have defined political jurisdictions for more than two centuries are
becoming constructively less relevant.

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:

Strengthening the State

States have a historic constitutional role to serve as a counterbalance to the national

government. Protecting and strengthening this responsibility is of particular importance
in a global economy. In this new frontier of federalism, the states must carry an
aggressive bipartisan legislative agenda. Governors are the most visible and viable voice
for the states, and they must be at the table as critical issues are debated and decided in
Washington.

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.

Included in the agenda will be:

• Reinventing with technology

• Preempting federal preemptions

• Creating public private partnerships

• Simplifying sales tax

 What Is Unique About the New
Economy?
The new economy is global.
Between 1929 and 1970, combined
imports and exports averaged only
• Investing in skills, training and 9.5 percent of gross domestic
elementary education product (GDP); today they now
exceed 25 percent of GDP.
• Investing in infrastructure, including
telecommunications Knowledge and innovation are
the key inputs of the "weightless"
• Focusing on customers new economy. Energy and raw
materials were the inputs of the old
• Increasing velocity of learning in post- economy, but the microchip is
secondary education replacing the car as the major
product of the next century. Today,
• Improving environmental management the nation’s GDP is five times
through Enlibra greater than in 1947, yet the total
physical weight of American’s
output has not grown because of the
shift from heavy manufacturing to
knowledge-based products.

The new economy places a

The New Economy: An Overview premium on skills and education.
In 1997 the average college
The American economy enters the twenty-first century graduate made 77 percent more
having undergone a profound change. For most of the past than the average high school
100 years, the vitality of the U.S. economy was determined graduate, and the average wage of
by the success of its major manufacturing industries— an information technology worker
automobiles, steel, oil, and chemicals. Most Americans exceeded the industry average wage
made their living by working in these industries or in the by the same percent.
businesses that supported them or distributed their products.
Moreover, for most of this century, the U.S. economy was a Small, fast-growing firms power
relatively closed system. Few Americans looked to the job growth. Between 1993 and
world as a venue for opportunity or competition. 1996, 70 percent of new job growth
came from small, fast-growing
Today, the economic landscape is significantly different. In firms (20 percent growth per year)
just the past twenty years, America’s business environment and the small-firm sector is
has become global and highly competitive. Information expected to supply about 60 percent
technology, communications, and intellectual capital, rather of all new jobs through 2005.
than energy and raw materials, power today’s businesses.
The driving force of the old economy was heavy Information technology is at the
manufacturing. The driving forces of the new economy are core of all business. Whether work
ideas, knowledge, services, and higher-order skills. occurs in an office, at home, or on a
Manufacturing remains important, but the major source of factory floor, information
economic growth since the mid-1980s has been technology technology (IT) is integral to any
and services—products that require a different mix of successful business. Today, 50
inputs. Moreover, innovation and change have replaced percent of all business capital
tradition. Invention, adaptation, and reengineering are the spending goes to IT, compared with
watchwords of success for today’s businesses and workers. just 7 percent in 1970. Moreover,
the Internet is revolutionizing how
Identifying the Challenges and Opportunities of the New business does business. In 1998
Economy Internet business-to-business
transactions reached an estimated
This "new economy" is bringing increased productivity and value of $43 billion. By 2003, they
a rise in real wages to many Americans, but it also presents are expected to reach an astounding
major challenges to the nation’s workers, businesses, and $1.3 trillion, surpassing 9 percent of
governments. To succeed in the new economy, workers total business sales.
must be prepared to enhance their skills and make a
commitment to lifelong learning. Long-term job security in Markets and businesses are
a single career will decline, because technological advances dynamic. Between 1995 and 1996,
697,457 new firms created 5.9
million jobs while nearly 5 million
jobs were lost to 606,426 dying
firms. In the new economy, new
jobs and businesses are being born
while almost as many are dying,
that create new jobs in some industries will also eliminate them in other industries. To
thrive and even survive in this churning job environment, workers will need to acquire
new knowledge and be prepared to constantly reinvent themselves. It is likely that the
wage gap between the skilled and unskilled will continue to widen. Those who enhance
their skills will experience wage growth; those who do not will experience wage
stagnation or even real wage decline.

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.

Steering a New Economic Course

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;

• enhance the infrastructure—transportation and communications—

needed to support the burgeoning knowledge-based industries, and electronic
commerce;

• reengineer government to deliver services more efficiently, using

technology, privatization, and partnerships with the private sector;

• align state tax systems to meet demands of the twenty-first-century

economy;

• develop more uniform regulatory and tax structures among states to

reduce complexity and eliminate market distortions;

• support entrepreneurs and business startups by streamlining business

regulations, providing timely decisions, and assisting firms in their search for
venture capital.

• promote university policies that encourage research and development,

build the intellectual infrastructure, and facilitate R&D partnerships between
universities and businesses; and
 • address quality-of-life issues to attract new businesses and workers.

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.

Enhance the Infrastructure Needed to Support Knowledge-Based Industries and

Electronic Commerce

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.

Reengineer Government to Deliver Services More Efficiently

Government must transform itself into a customer-driven organization, delivering

services and information more efficiently to businesses and citizens. Information
technology can play a major role in streamlining and improving government operations.
IT and the Internet can help create a user-friendly portal to the public for complying with
regulations, applying for and receiving benefits, and obtaining information on
government services. Many states are working to organize their web sites not by
department, agency, and function, but by the services citizens’ need and the questions
they want answered.

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

Today’s businesses think globally when deciding where to locate. As location

opportunities increase world trade continues to grow, and electronic commerce traffic
rises, states will be pressured to eliminate sharp differences in regulations and tax
structures. To avoid federal preemption, states will often have to work together.
Regulations on businesses within and across states will need to become more consistent
and predictable. Tax programs will need to become more uniform, at least in terms of
what is taxed if not in terms of what rates are set.

Support Entrepreneurs and Business Startups to Ensure Job Growth

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.

In addition, performance-based regulations can facilitate cost-effective compliance. For

example, state "brownfield" regulations that incorporate cleanup standards based on final
use and local conditions have encouraged the cleanup of thousands of abandoned
industrial sites. Such regulations can promote compliance without compromising
standards.

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.

Address Quality-of-Life Issues to Attract New Businesses and Workers

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.

Helping States Sustain Economic Growth

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:

• state research and development investment strategies;

 • real change for small businesses through one-stop licensing and
permitting;

• venture capital as the critical gap in entrepreneurship;

• telecommunications tax policies for the digital age;

• the role of technology in adult learning;

• university-linked technology innovation and commercialization;

• state strategies for competing in the new economy;

• Innovative uses of information technology in tax collection and

financial transactions;

• the economic implications of deregulated electric utilities;

• work-based strategies for raising the skills of low-skill workers:

• ways to expand opportunities for low-income families to advance in the

new economy; and

• industry-specific skill standards in state workforce and education

programs.

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.

Ross C. DeVol, "America’s High-Tech Economy" (Santa Monica, California: The

Milken Institute, July 13, 1999), at http://www.milken-inst.org.

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.

American Electronics Association, "Cyberstates 3.0" (Washington, D.C., May 1999).

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>.

3. Erran Carmel, Jeffrey Eisenach, and Thomas Lenard, "The

Digital Economy Fact Book" (Washington, D.C.: The Progress &
Freedom Foundation, 1999).
4. Ross C. DeVol, "America’s High-Tech Economy" (Santa
Monica, Calif.: The Milken Institute, July 13, 1999), at
<http://www.milken-inst.org>.
5. Dan Bergland and Marianne Clark, "Using Research and
Development to Grow State Economies" (Washington, D.C.:
National Governors’ Association, forthcoming).