New England's once-faltering economy is in the chips

``The time has come,'' the Walrus said, ``To talk of many things: Of computer chips and services, Of New England's big upswing . . .''

Not Lewis Caroll's exact words, but then, he wasn't an economist in 1985.

Despite the recent troubles in the computer industry, New England deserves a verse or two.

New England came out of the country's worst postwar recession unscathed. It has surged ahead of the rest of the country in personal income and employment growth. It is roping in a disproportionate chunk of the nation's venture capital.

High-tech is credited with much of this. But economists say that it is New England's economic mix -- the pastiche of high-tech, the stability of services, and the scrappiness of well-educated entrepreneurs -- that is cushioning the area during the present computer slump. And it is that mix, they say, that will allow New England to outperform the rest of the country in the next few years. From bust to boom

The economy has not always been kind to New England. A decade ago, Massachusetts had the highest unemployment rate in the nation, averaging 11.2 percent for the year. Today it has the lowest rate, 3.4 percent in May. The region as a whole weighs in at 4.2 percent, far below the 7.2 percent national average.

A decade ago, unemployed workers were forced to move south as some of the area's traditional manufacturing industries -- shoes, textiles, leather -- creaked to a halt.

Today, the exodus has slowed to a trickle. New businesses dot the landscape. Vermont scored the nation's biggest increase in new business incorporations in 1984, and New Hampshire had the fourth-largest, according to Dun & Bradstreet. Last year, Massachusetts and Connecticut alone grabbed 17.5 percent of the nation's venture capital, says Venture Economics Inc.

Even as recently as five years ago, New Englanders had the second-lowest personal incomes, with only the South earning less. In 1984, New England had the highest per capita income. The region's $14,251 average is 12 percent above the national average and represents a 59 percent increase over 1979, the fastest growth of any area, according to the Northeast-Midwest Congressional Coalition, a research group for the US House of Representatives.

Although New England's rebirth has taken place in the last decade, the seeds were planted 30 years ago. In the 1950s, as New England saw production of those major industrial products -- textiles, shoes, rubber, leather, and brassmaking -- move south, a core of highly skilled, low-paid manufacturing workers remained. These people were snapped up by new high-tech companies.

New England's prolonged depression ``was a blessing in disguise,'' says Neil B. Murphy, a professor of finance at the University of Connecticut. The area is now reaping the rewards of ``its historical investment in education, and is well positioned to adapt'' to the national shift from a heavy manufacturing economy to a service and information economy, he says. The educational linchpin

``The retooling of New England has to do with sheer brainpower,'' says Athena Costopoulos, vice-president of the New England Council Inc., a regional business association of 1,300 companies. ``People come from other parts of the country for their education and stay here.''

Massachusetts Institute of Technology, the most celebrated example, is a training ground for engineers and scientists who often move on to computer companies around Boston's Route 128. MIT research labs perform much of the basic research that keeps New England at the edge of innovation. And it is a major moneymaker in its own right. In 1983, it landed $250 million worth of government contracts, making it the fifth-largest defense contractor in Massachusetts.

Nor is MIT squeamish about leasing out its brainpower to the corporate world. Its Industrial Liaison Program, which gives member corporations access to MIT research, publications, conferences, and private consultations, has tripled in the last 10 years. It now has 312 member companies worldwide that pay an average fee of $35,000 a year.

But Boston can't rest on its laurels. ``For New England to hang on to its technological edge, it has to get aggressive'' in educational recruiting, says Mark Baribeau, an economist at the New England Council. ``MIT says it hasn't lost any professors to Texas. But the question is, how many professors didn't apply? It's the future talent that's important.''

Besides that, research at MIT doesn't necessarily mean dollars for New England. Mr. Baribeau points out that ceramics research, which can be used in engines, might be licensed in Massachusetts but produced commercially in Detroit. The same is true of biotechnology research, which may profit pharmaceutical-rich New Jersey more than New England. But artificial intelligence and computer-aided engineering will likely stay close to home, he says. That old standby, services

If high-tech is the engine to New England's economic growth, services are the shock absorbers.

``New England now has a huge investment in services,'' says Kenneth Geiser, professor of environmental policy at Tufts University. ``They are the home base for New England's economy.''

The service sector, he points out, tends to be less volatile than manufacturing. The swings are tied to demographics: The number of young people in school or the number of elderly needing medical facilities, for example, varies only incrementally from year to year. In addition, he says, services tend to be insulated from foreign competition and business cycles abroad.

A steady flow of MBAs, doctors, and other professionals from Harvard, MIT, Tufts, Boston University, or one of the 50 other colleges and universities in the Boston area has lit a fire under the service industry.

Consulting, medical services, real estate, insurance, and banking made the biggest employment gains in the 1980s. While the manufacturing sector lost some 114,000 jobs between 1980 and 1983, services added 115,200 to the area, according to the New England Council. Services now create 3 out of 4 new jobs in the region and will make 80 percent of the new jobs in the next two years, the council projects.

Some economists warn against relying on services for the nation's growth. While manufacturing employs only 20 percent of the nonagricultural work force, it produces nearly half of the nation's gross national product. And since manufacturing wages are higher than service wages, a trimmer manufacturing sector means less money out there buying pizzas, cars, and newspapers like this one.

Michael Wachter, professor of economics, law, and management at the University of Pennsylvania's Wharton School, disagrees. Manufacturing jobs are not more valuable, he says: ``A job is a job, and much of the service sector is exportable.'' New England is becoming an international financial hub, he notes, as well as a leader in consulting. Banking on the little guy

Insurance is now pulling out of a bad slump, which gives a big boost to Hartford and other areas of Connecticut. Banking will continue to expand, analysts say, as deregulation opens up new avenues to profit and a growing high-tech industry stirs new investment. Massachusetts in particular has been at the cutting edge of banking: The mutual fund industry, regional banking, and NOW accounts all started in Massachusetts.

That's good news for entrepreneurs -- and, incidentally, for the regional economy, since the best way to grow is to nurture small businesses into big ones.

Dr. Murphy at the University of Connecticut points out that a competitive banking environment -- which New England already has, and which will only be sharpened by the Supreme Court's recent decision to allow regional banking -- has for years been helping entrepreneurs coming out of MIT or spinning off from a Digital Equipment Corporation.

``Banks don't make money lending to General Motors,'' Murphy notes. ``It's only [in loans to] small or medium companies where spreads are large enough'' to make a profit, he says.

New England is hardly deindustrializing, however. Even as the number of manufacturing jobs in the US shrank by 2.4 percent in the last decade, the manufacturing sector here grew 4.4 percent, according to the US Labor Department. And the region has its fortunes tied to manufacturing more than the nation as a whole. Manufacturing provides more than 25 percent of the jobs here, while it only employs about a 20 percent of the national work force.

New England's manufacturing is a different breed, however. It has shifted from capital- and labor-intensive manufacturing to high-tech goods. That includes computers, electronic products, especially strong in Massachusetts, and defense technology. Electronics and defense are expected to grow rapidly in the next few years.

But because they are so oriented toward research and development, high-tech industries employ fewer production workers than traditional manufacturing industries, according to the New England Council. In 1981, only 44 percent of employees at computer manufacturers were blue collar, vs. 66 percent in other manufacturing industries. Therefore, blue-collar workers such as those laid off at the Quincy, Mass., shipyard last week can't automatically look to the growing high-tech sector for a job. Living by the sword

The defense industry is big business in New England, and it will get bigger. If the Reagan administration gets its way, the region's defense production will grow at almost 15 percent a year through the rest of the decade, Data Resources Inc. estimates. That is almost twice the nation's 8.1 percent growth rate. Connecticut, Massachusetts, and New Hampshire will be the biggest winners.

Dr. Geiser at Tufts notes that about two-thirds of manufacturing in Massachusetts is directly or indirectly based on military contracts or procurement. In fiscal year 1984, prime military contracts put $1,731 in the pockets of every resident in Connecticut -- the highest in the nation -- and $1,212 for Massachusetts residents, the fourth highest.

But defense money may be a wolf in sheep's clothing. As the 4,200 at the General Dynamics shipyard found out last week, the military market is fickle.

``The military tie concerns me,'' says Geiser. ``We seem to be building up to a situation similar to the one in 1971, when a conversion from a military economy in the wake of Vietnam left thousands of high-tech people out of jobs.

``It's a fragile way to build an economy,'' he notes. Caveats for a high-flier

There are other economic uncertainties lurking around the corner.

Like foreign competition. The New England Council claims that the region has already lost 105,900 manufacturing jobs between 1980 and '84 because of the dollar's appreciation.

But the dollar's strength is not the whole story. Asia makes high-tech goods like semiconductors, printers, and other ``commodity'' (assembly-line) products much more cheaply than American high-tech companies. ``Three years ago, when we said the Japanese would take business away from us [in computers], everyone laughed,'' says James Botkin, a partner at the Technology and Strategy Group, a high-tech research and executive education firm. ``I'm sorry to say, we were right.'' Both Massachusetts and the US

have a balance-of-trade deficit with Japan in electronics.

New England also has an image problem. The Massachusetts government administration has an adversarial relationship with the High Technology Council.

``The president of one of the major computer firms in Boston told me that the two states in the union that are doing the least and are facing the most potential trouble are Massachusetts and California -- because they are so successful,'' says Dr. Botkin. ``The amount of government involvement in those states doesn't compare favorably.''

The administration of Gov. Michael Dukakis is trying to rectify that with its ``Centers for Excellence'' plan, an attempt to clone Route 128. The program unites businesses, universities, and state government in five places: biotechnology research in Worcester; polymer sciences (plastics development) at Amherst; photovoltaics (turning sunlight into electricity) at Lowell; microelectronics in Westborough; and marine sciences in New Bedford.

The plan has met with some criticism, although Botkin, who has just completed a study of 15 similar industry-university consortia already under way, thinks the idea is ``on target.'' And like many other analysts, he considers New England the economic star of the US. GRAPHIC]BARTH FALKENBERG -- STAFF PHOTO:Early morning on Maine coast; NEAL MENSCHEL -- STAFF PHOTO:Sun glints on the Boston skyline

All of New England is going strong, but some states are stronger than others. Below is a New England Council forecast of expected performance of individual states, listed from most promising to least. New Hampshire Unemployment rate: 3.9 percent in 1984; 4.5 percent in '85; 4.2 percent in '86. Real per capita income growth: 5.7 percent in 1984; 5.1 percent in '85; 2.0 percent in '86. Strengths: New Hampshire has just about everything going for it, from favorable taxes for individuals (none) and businesses, to cheap real estate near Route 128, to an educated work force. Its manufacturing sector, defense contracting, services, and tourism all spell fun, fun, fun. Pitfalls: Getting enough people to fill all the new jobs. Massachusetts Unemployment rate: 4.6 percent in 1984; 4.4 percent in '85; 4.1 percent in '86. Real per capita income growth: 6.5 percent in 1984; 4.1 percent in '85; 0.8 percent in '86. Strengths: High-tech, education, services, defense, and construction give the economy diversity and long-term strength that is hard to beat. Pitfalls: ``Taxachusetts'' is working to dispel the acrimony with business groups like the High Technology Council, but to date it's met with little success. Companies will likely continue to locate plants or employees in nearby New Hampshire. The computer slump will probably continue through the end of this year at least. A key problem will be finding enough labor. Connecticut Unemployment rate: 4.5 percent in 1984; 4.8 percent in '85; 4.8 percent in '86. Real per capita income growth: 5.9 percent in 1984; 2.5 percent in '85; 0.3 percent in '86. Strengths: Connecticut has no personal income tax, making it a favorite among businesses and their executives. With nearly 10 percent of the state's total industrial output coming from defense contractors, the robust defense industry is, and will continue to be, a boon for the state. Lower interest rates will help the large service sector: real estate, trade, insurance, as well as construction. Pitfalls: The machine-tool industry is being hit by imports; further, General Dynamics may lay off some 1,000 employees at its Electric Boat Division by year-end. Maine Unemployment rate: 6.4 percent in 1984; 6.2 percent in '85; 6.8 percent in '86. Real per capita income growth: 5.4 percent in 1984; 3.6 percent in '85; 0.6 in '86. Strengths: Maine has done surprisingly well, given that pro-business, low-tax New Hampshire is next door. Maine's retail trade, finance and service sector, paper industry, and budding electronics industry will continue to fuel growth. Pitfalls: Maine's transition from traditional to more-advanced technology has been rough. Shoe manufacturers, unable to compete with foreign companies, laid off 4,000 employees, and the outlook is for more of the same. Vermont Unemployment rate: 5.5 percent in 1984; 5.2 percent in '85; 5.0 percent in '86. Real per capita income growth: 4.0 percent in 1984; 2.9 percent in '85; 0.7 percent in '86. Strengths: Vermont has had some spillover from Route 128, although not at much as New Hampshire. Defense manufacturing, services, especially tourism, are on the upswing. Pitfalls: Eager to preserve its environment, Vermont severely restricts development. It has neither an investment tax credit or R&D credit, making the corporate tax bill substantially higher than in even Massachusetts. This is unlikely to change soon. The state has been hard hit by imports, especially in electronic components. Rhode Island Unemployment rate: 5.7 percent in 1984; 5.2 percent in '85; 5.6 percent in '86. Real per capita income growth: 6.1 percent in 1984; 3.0 percent in '85; 1.4 percent in '86. Strengths: Defense spending and the financial sector are holding the economy up. Pitfalls: Poor Rhode Island. It can't seem to shake its reputation as a loser. The strong dollar has brought in a wave of imports in a big chunk of its economy: jewelry manufacturing, nonelectrical machinery, and textiles. Even defense contracts are shaky: General Dynamics may have to trim its shipyard at Quonset Point. Construction is also weak.

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