Why not all economic activities are created equal
Real estate is a powerful locomotive of economic development, providing shelter for a myriad of specific industry sectors and activities whose presence and growth adds great benefit to society. And economic development is a crucial priority in New Jersey, as the state’s post-Great Recession economic growth, while long in duration, still lags that of a sustained national expansion which is now the second longest in the nation’s history.[1] As such, it is useful to revisit the classic economic development concepts that sometimes have been obscured by short-term pressing immediacies and concerns.
Not all economic activities are created equal. When evaluating which industries provide maximum benefits to the state, or what industries should be the prioritized recipients of state economic incentive programs, a convenient starting framework consists of the major partitions of traditional economic base analysis that we all learned in graduate school: basic industries and non-basic industries. In an earlier era of manufacturing dominance, the terms often applied were export-based, goods-producing industries (basic) and local service-providing industries (non-basic).[2]
Basic industries primarily (but not completely) export their goods and services to out-of-state markets. Traditional economic base theory posits basic industries as crucial to economic development because they draw dollar flows (their revenue streams) into the state from outside of it, thereby increasing the state’s aggregate wealth position.[3] The salary and wages received by, and the taxes paid by, New Jersey employees of basic industries are primarily paid for by out-of-state sources. Basic industries also create the economic support for non-basic economic activities that provide goods and services to the basic industry (and to its employees and their households). Basic industries therefore have a significant multiplier effect, i.e., each basic-industry job (X) supports “Y” number of non-basic jobs.
Non-basic industries generally comprise businesses, large and small, whose primary markets are local in-state customers, whether they are basic industries (or other non-basic industries) or households. Thus, the revenue sources of non-basic industries are dependent upon dollars spent by basic industries, or by dollars already resident in the state economy, i.e., dollars that are being recycled within New Jersey economy. Non-basic industries do provide a valuable source of job opportunities and tenants for real estate development. Moreover, they provide needed services for not only basic-industries, but also for other non-basic industries, and for individual household needs and requirements.[4] However, the classic classroom quip is that you cannot have a strong economy predicated solely on residents’ supporting themselves by taking in each others’ laundry, i.e., recycling the same dollars over and over again.
Perhaps the term “externally-supported industry” is a better descriptor today than the term “basic industry.” The enormous potential benefit of an externally-supported industry is amply illustrated by AT&T in New Jersey as it existed before the 1982` “Consent Decree” (which mandated AT&T relinquish control of both its local Bell Operating Companies as well as Western Electric, its manufacturing subsidiary) and before the Telecommunications Act of 1996 (which was designed to open up “telco” markets for competition). To oversimplify for example purposes, AT&T once had a federal government-sanctioned monopoly to provide all long-distance telephone services in the United States. At the time, New Jersey accounted for approximately three percent of the nation’s population, and three percent of the nation’s employment base. Thus, the balance of the country overwhelmingly comprised most of AT&T’s service market. Other things being equal, 97 percent of AT&T’s revenue came from outside of New Jersey. This represented a sustained massive flow of dollars and wealth into the state, which supported some of the crown jewels of New Jersey’s then vast inventory of sophisticated high-technology economic assets: the expansive Bell Lab facilities in Murray Hill, Holmdel, and Whippany; its National Networks Operations Center in Bedminster (AT&T Long Lines); and its magnificent 2.7 million square foot headquarters palace in Basking Ridge. These facilities, and others, housed tens of thousands of high-paying jobs (all of which represented potent household consumer expenditure streams) and supported a myriad of various suppliers (non-basic industries). And all of this was essentially paid for the by rest of the country. A better engine powering and propelling the state’s economy did not exist.
But wait, there’s more! There is another dimension of the benefits provided by externally-supported industries: taxes paid in New Jersey! The state’s corporation business tax (CBT) paid by AT&T, the local property tax paid by all of its real estate holdings, the gross (personal) income tax and residential property taxes paid by its employees, and the sales taxes paid by both the corporation itself and its employees were essentially taken care of by the rest of the United States.[5] They did not come from New Jersey-derived/originated dollar resources. How great is it to have tax streams that originate and continually flow from outside the state into it that support all levels of government in New Jersey? It exemplifies the classic New Jersey maxim: “Tax not me, tax not thee, but tax that fellow behind the tree!” This is particularly so when the tree lies outside of our state boundaries.
However, “what was once the 800-pound global telecommunications gorilla became a sitting duck with deregulation, rapid changes in technology, and the emergence of more nimble national and international competitors. Headquarters jobs once assumed to be New Jersey’s proud birthrights are now firmly ensconced in other states.”[6] But, AT&T’s glorious past still stands as the model platinum standard of an externally-supported industry that bulwarks a state economy. It is a key baseline of for evaluating the benefits that a specific industry sector brings to New Jersey.[7] And it is also a painful reminder of what the state has lost over the past two decades.
Another example of the benefits of a powerful externally-supported industry centers on federal government activities in the state.[8] And, here we have also not fared well. For example, the closure of Fort Monmouth in 2011 terminated billions of dollars in annual federal expenditures that flowed into New Jersey. This cost the state more than $6 billion in total annual economic activity (both direct and indirect), as well as 10,000 jobs, both of which had mostly been supported by the rest of the country.[9] Finding new externally-supported industry replacements that come close to replicating the scale of Fort Monmouth’s federally-derived economic benefits is proving to be a difficult task, to say the least.
So, as New Jersey attempts to plot its economic future, it behooves us to recognize the fact that not all industries are created equal. Some have much greater long-term sustained economic payoffs than others, with externally-supported industries standing at the top of any benefit-ranking list. Economic development efforts and strategies need to be cognizant of this fundamental reality. This is particularly the case as the new administration in Trenton plans to review, and perhaps restructure, the New Jersey Economic Development Authority’s (EDA) incentive programs – such as the Grow NJ and ERG (Economic Redevelopment and Growth) Programs – that offer powerful resources to spur economic development in the state.[10] Moreover, real estate developers have powerful arguments in advocating the benefits of their projects when the latter encompass externally-supported industries.
[1] In May, 2018, the national economic expansion, which started in June 2009, reached 107 months in length, surpassing the previous second-place record holder, the 106-month long February 1961—December 1969 expansion. The first-place record holder is the March 1991-March 2001 expansion, which lasted 120 months, or a full ten years. If the current expansion lasts until July 2019, it will reach 121 months in length, then making it the new longest in United States history. The specific starts and ends of US business cycle expansions and contractions are determined by the Business Cycle Dating Committee of the National Bureau of Economic Research.
[2] In the distant past, the often used classroom example of a basic industry involved the fashioning of “widgets” from raw materials, adding value, and then selling this added value to out-of-region, or out-of-state, markets.
[3] The development of economic base analysis is often credited to Robert Haig, when he worked on the landmark “Regional Plan of New York and its Environs,” which was published in 1929 by the Regional Plan Association (RPA). Although this classic initiative was the first to recognize a New York metropolitan region – one that encompassed New Jersey and Connecticut – we were relegated in the title simply to “Environs.”
[4]Moreover, non-basic businesses often provide the supplier ecosystems that make the state an attractive locational environment for externally-supported industries.
[5] An unverified estimate is that AT&T and its subsidiaries and spinoffs once occupied more than 16 million square feet of suburban office space in New Jersey.
[6] James W. Hughes and Joseph J. Seneca, New Jersey’s New Economy Growth Challenges (Rutgers Regional Report Number 25, July 2006) p. 7.
[7] It should be pointed out that many small and medium-sized businesses also export their services and products to out-of-state markets, drawing revenue streams into the state.
[8] Because of New Jersey’s high personal incomes, the state’s share of total national personal income taxes is greater than the 3 percent metric cited earlier. Thus, somewhat less than 97 percent – but still an overwhelming share – of federal expenditures that take place in New Jersey originate in the rest of the country.
[9] Michael L. Lahr, New Jersey’s Military and Coast Guard Facilities: Economic Contributions to the State Economy (Rutgers Economic Advisory Service, Edward J. Bloustein School of Planning and Public Policy, June 2013) p. 1. Fort Monmouth was the epicenter of the Army’s electronics and communications research, funded by the federal government and dependent on many civilian contractors (including AT&T) in New Jersey. Thus, its multiplier effect was highly significant.
[10] Rutgers University’s Edward J. Bloustein School of Planning and Public Policy is currently undertaking an EDA-sponsored review of its various incentive programs.