Charting Maine’s Future: Delivering the Next Economy in Maine

Bruce Katz
Bruce Katz Founding Director of the Nowak Metro Finance Lab - Drexel University

October 23, 2012

Editor’s Note: During a recent speech in Maine, Bruce Katz urged state leaders to make government more efficient and to invest strategically to move toward the next economy.

Thank you, Bonnie, for that introduction and for the invitation to speak today.  I also want to commend Nancy Smith and her colleagues at GrowSmart Maine for undertaking an update of our original Charting Maine’s Future report from 2006.

It is great to be back in the state of Maine to see and hear about the tremendous progress since 2006 on many of our goals and recommendation and to hear about the numerous economic success stories throughout the state. These stories illustrate the depth of commitment and breath of talent throughout the state of Maine.   

As so many do, Mark Muro and I fell in love with this state in the course of researching and writing Charting Maine’s Future.  I talked about Maine so much at home that my older daughter spent two summers on Outward Bound in the state and now attends the University of Maine at Orono, getting an undergraduate degree in Wildlife Ecology. 

That’s impact!

Yet while there is much to highlight, we all know that the American—and Maine—economy is much different today than it was in 2006. The Great Recession was a wakeup call for the United States.  It revealed the failure of the prior consumption and debt-fuelled economic growth model and the urgent need to shift to an economy that is more innovative, productive, and globally-focused. While Maine has certainly been hit hard by the downturn, it’s clear that the state has the assets to thrive in the next economy … if it is focused, disciplined, and strategic.

Today, I want to begin by first briefly revisiting and reflecting on our recommendations from 2006 and what has been accomplished to date, offer some reflections on why the economic, demographic, and fiscal dynamics post-recession reinforce the roadmap from Charting Maine’s Future, and, finally, conclude with some observations about what the state, its cities and towns, businesses, universities, associations, and citizenry should do to drive sustainable growth in Maine going forward.

In 2006, we proposed a blueprint for action to build on the distinctive competitive assets and advantages of this state.

While many reports issue a laundry list of “to-dos”, our plan proposed that this state do three essential things:

  • Make a few big investments in what matters—quality places and the innovative economy —and sustain those investments over time
  • Fund these critical investments by streamlining government and shifting more of the tax burden to tourists and people from outside the state; and
  • Accommodate more growth in existing towns and cities through reduction of regulations and improvement in planning.

Let us review each of these recommendations in more detail.

First, we proposed two major investments for the state, a Quality Places Fund and an Innovation Jobs Fund.

It is not surprising that we recommended you focus intently on preserving and enhancing your quality of place and community. That is your brand and calling card, but it has been threatened by chaotic, dispersed development.   

The Quality Places Fund was intended to give the state the resources it needs to invest primarily in land conservation/open space preservation on the one hand and community/downtown revitalization on the other. These two priorities go hand-in-hand. The more you invest in smart development and the more you re-invest in your older towns, main streets, and downtowns, the less you have to invest in protecting rural land from suburban development.

The Innovation Jobs Fund proposed doubling the state’s annual investment in research and development, as well as investing the remaining money in Maine’s traditional and emerging clusters – boat building, precision manufacturing, organic farming, ecotourism, hunting and fishing, creative arts, information technology, biotech, green building—to grow in strength and realize their full economic potential.

Second, we recommended that these critical investments be funded by streamlining government and shifting more of the tax burden to tourists and people from outside the state.

To pay for the Quality Places Fund, we argued that the state increase the lodging tax by three percentage points to bring it more in line with other states that depend heavily on tourism and recreation. To pay for the Innovation Jobs Fund, we recommended that the state pursue a “streamline to invest” strategy to weed out inefficiencies in government and use those savings to invest in building an innovative economy.

We also proposed that Maine establish a Maine Government Efficiency Commission, modeled on the federal base closing commission, which would have the powers and analytic resources to propose specific reforms to realize substantial cost savings in state government that would then be presented to the state legislature for an up or down vote. These savings would have been used to back bonds for the Innovation Jobs Fund and adjustments to the state tax code.

Finally, we recommended the state aim to accommodate more growth in existing towns and cities through reducing regulations and improving planning. We urged the state government to undertake a concerted multi-year effort to remove the regulatory barriers that now undermine the smart, commonsense development in the state, including the establishment of uniform building codes that level the playing field between new construction and rehabilitation and model zoning ordinances that enable quality planning in town centers and downtowns rather than mandate suburban chaos.

Beyond simply changing rules, we also argued that the state must become a better partner with local governments that are trying to do the right thing. We recommended that the state give towns meaningful incentives, such as a local options sales tax, to collaborate on a regional basis, and also that the state increase its support for towns that want to develop and enforce zoning and land use ordinances that better reflect community values and citizen demand.

This ambitious agenda for growth that we outlined with GrowSmart Maine—with input from stakeholders throughout the state—offered a path forward for economic success in the state.

And progress has been made.

Voters approved a bond package that included $3.5 million of new funding for a “Communities for Maine’s Future Fund,” which matched state funds with local government and private funds to make major new investments in the state’s main streets, downtowns, and local economies.

Investments in land conservation and preserving Maine’s open space have also been made through voter-approved bonds and the private sector, and tourism promotion has increased across the state via public and private efforts despite the lack of a Quality Places Fund.

The state’s historic preservation tax credit was expanded in 2008, giving developers a financial incentive to redevelop historic buildings, generating dozens, if not hundreds, of design and construction jobs with nearly $100 million in investments.

On innovation, the more than $50 million Maine Technology Asset Fund has helped the state’s universities and non-profit research institutions improve tech transfer outcomes for things like patents, licenses, and spin-offs, and the state’s promising tech clusters have received support through the Cluster Initiative Program.

On government efficiency and taxes, there has certainly been some progress, including a decrease in the state’s top income tax rate from 8.5 percent to 7.95 percent while eliminating any income tax obligation for an estimated 70,000 lower-income residents, but no reform has yet been enacted that exports more tax burden to non-residents, despite many legislative proposals with this goal.

While these are great steps forward, we all know there is much more work that can be done to move the state forward.

The challenge of implementing the recommendations from our 2006 Charting Maine’s Future report were no doubt made more difficult by the onset of the Great Recession.

Nationally, the U.S. lost 8.8 million jobs during the downturn, and we still need to add 11.2 million jobs to fully recover all of those lost during the downturn and to keep pace with population growth.

Beyond pure job growth, we also need better jobs to grow wages and incomes for lower and middle class workers and to reverse the troubling decades-long rise in inequality. Today, nearly 100 million people—about one in three Americans—are either poor or near poor.

In Maine, the picture is not much different. During the last decade, the state’s population grew by 4 percent, from 1,277,072 in 2000 to 1,327,567 in 2010—about 50,500 people. The Great Recession, however, wiped out 29,800 jobs in Maine between 2008 and 2011, and job growth has been minimal in the recovery.

Maine’s unemployment rate—at 7.6 percent—remains better than the rate for the U.S. overall, but the state’s median household income—$45,815—is below the national level of $50,046 and the number of people in poverty grew by 16.4 percent, from 135,501 in 2000 to 157,685 in 2010.

On the positive side, the distribution of people across the state began to shift slightly back towards your cores.  Between 2000 and 2010 service centers collectively grew by 2 percent … not as fast as the fastest growing suburbs, but a reversal of losses from prior decades.

The Great Recession, both nationally and in Maine, revealed the failure of the growth model of the prior economy. In the aftermath of the recession, one thing is clear: the U.S., and Maine,  needs to purposefully restructure the economy from one focused inward and characterized by excessive consumption, debt, and sprawl to one globally engaged, driven by production and innovation, and smart growth development.

This means moving to a “next economy” that is fuelled by innovation, powered by low carbon, driven by exports, and rich with opportunity. Let’s unpack that a little, so we both understand the broader growth model and the special moment we find ourselves in.

The vision begins with innovation—to spur growth through the interplay of invention, commercialization, manufacturing, and skilled workers.  

Over the past two decades, the discussion of innovation in the U.S. narrowed, positioning it as something only conducted in the ivory tower or among exceptional entrepreneurs like Steve Jobs.

We forgot something early generations intuitively understood: the inextricable link and virtuous cycle between innovation and manufacturing.

While only about 9 percent of all U.S. jobs are in manufacturing, about 35 percent of all engineers work in manufacturing.

Although the manufacturing sector comprises only 11 percent of GDP, manufacturers account for 68 percent of the spending on R&D that is performed by companies in the United States and are responsible for 90 percent of all patents in the United States.

Going forward, we will innovate less if we do not produce more.  We must make things again.

The discussion of innovation naturally leads to the notion that the next economy should be powered by “low carbon” and advanced energy.

Everything is changing.

The energy we use, the infrastructure we build, the homes we live in and the office and retail buildings we frequent, and the products we buy are all shifting from modes that are outdated to systems that are smarter, faster, more technologically enabled, and more environmentally sound.

Our competitors—China, Germany, Brazil—have embraced the clean economy, creating markets, growing jobs and stimulating investment.

The U.S., on the other hand, treats the clean economy as a political and ideological football, undermining our potential to position the U.S. at the vanguard of the next innovation-led industrial revolution. 

An economy that innovates, particularly around clean energy and products, is an economy that can take advantage of rising global demand for quality U.S. products and services.

That is more important than ever. The locus of economic power in the world is shifting. 

Together, Brazil, India, and China—the BICs—accounted for about one-fifth of the global GDP in 2009, surpassing the United States for the first time.  By 2015, the BIC share will grow to more than 25 percent.

The top 30 metro performers today are almost exclusively located in Asia and Latin America. The 30 worst metro performers are nearly all located in Europe, the United States and earthquake-ravaged Japan.  

This is not a rocket science.  The U.S. needs to reorient our economy to take advantage of this new demand. In 2010, exports made up only 13 percent of the GDP of the U.S. compared to 30 percent in China, 29 percent in Canada, and higher levels in India, Japan, and the entire EU.

Finally, the next economy should be opportunity rich, so that working families can earn wages sufficient to attain a middle class life.

Building the next economy is essential here: research shows that firms in export-intense industries, for example, pay workers more and are more likely to provide health and retirement benefits. 

Yet building the next economy will require the United States to get real smart, real fast.

Over the next several decades, African Americans and Hispanics will grow from about 25 percent to nearly 40 percent of the working-age population.

Yet the U.S. and this region have sharp racial and ethnic disparities on education. Upgrading the education and skills of the next, more diverse American workforce is a competitive imperative.

This macro growth model is a sharp departure from the one that dominated American thinking pre-recession—one that extolled consumption and excessive financial risk and raised the absurd prospect that the U.S. would somehow become a post-industrial economy.

We need to change our mental map. Market dynamics are changing radically.

Labor costs are now rising in China, and concerns persist about the protection of intellectual property. 

Energy can be cheaper here, and more reliable. 

The tsunami in Japan, the world’s main supplier of many high tech components, revealed the fragility of far flung supply chains for many U.S. companies.

And, the best news, manufacturing is coming back, fueling 38 percent of the recovery.

We must innovate again. We must make things again. We must embrace clean and green as an environmental imperative and market proposition. We must embrace the world.

Finally, quality of place knits this next economy vision together, as this type of economic restructuring has enormous implications for the built environment and the form of towns, cities, and metros. A consumption economy focuses on building homes and big box retail, in isolated zones, generally far away from denser urban cores. 

An innovation economy, by contrast, craves proximity, extols integration, and champions the synergistic mash up between firms in disparate sectors, educational institutions, and the housing, retail, and amenities. These are the sorts of interactions and mutual benefits that cities, with their density and diversity, can disproportionately supply. As one industry feeds another, productivity improves, entrepreneurship is encouraged and employment and wages increase in the region.

Yet physical form is not only affected by economic imperatives. Demographics play a central role and the location and living preferences of rising demographic groups are changing radically.

Research shows that a growing segment of the population prefers communities that are walk-able and livable. Elderly individuals increasingly seek places with easy access to medical services, shopping, and other necessities of daily life. Middle-aged couples whose children have left the nest are newly receptive to urban neighborhoods, cultural amenities, and shorter commutes. Young people, in particular, are experimenting with urban lifestyles, eschewing auto-centric lifestyles of previous generations in favor of biking, public transportation, and car sharing programs in urban areas.

As you can probably tell, this next economy vision aligns well with the goals and recommendations outlined in Charting Maine’s Future.

In fact, if there is a silver lining to this difficult period for both the state of Maine and the country overall, it is that the recession and weak recovery to date have confirmed and reaffirmed the course for Maine—it must act with intentionality and purpose to become a better and stronger version of itself.

How should the state continue to recover and move forward?  

First, and foremost, remember what makes you special.

The pre-Recession economy, driven by consumption and amenities, celebrated the uniform.   The next economy, driven by production and innovation, rewards the distinct. 

A Walmart outside Portland is the same as a Walmart outside Phoenix or Atlanta or Houston.   A housing subdivision in Southern Maine looks the same as one outside Charlotte or Tampa or Richmond.

But what makes Portland and Southern Maine and all of Maine distinctive and competitive is not what drives these other places. 

You have tremendous assets to build from. You have an innovative and production-oriented economy. Manufacturing accounts for about 10.6 percent of the state’s total output, about 51,000 jobs, and pays a significant wage premium—about 58 percent higher than other non-farm employers in the state.

In the Portland area, you’re specialized in leather and allied product manufacturing, transportation equipment (non-aerospace and auto), and pharmaceuticals and medicine.

The Lewiston area is also highly specialized in producing leather and allied products, as well as beverages and tobacco, and textiles.

The Bangor area is a major producer of paper, and also manufactures leather and allied products and wood products.

These industries help play a critical role in spurring new ideas and innovation that spillover into other sectors. Other innovation clusters that I mentioned earlier—such as organic farming, ecotourism, information technology, and biotechnology—build on your ample base of natural resources and reflect national and global trends in technology, consumer preferences, and the demand for quality.

Maine also has a strong base in the clean economy, with over 12,200 clean jobs in 2010. While the state ranks 44th out of 50 states in terms of number of jobs, it ranks 24th among the 50 states for the concentration of clean jobs in the overall economy at 2 percent (the same as the level for the U.S. as a whole).  Our research shows that Maine is particularly strong in sectors like wave/ocean power, sustainable forestry products, hydropower, conservation, and pollution reduction.

The state has a great set of educational institutions—both research universities and small colleges—that will train the next generation Maine workforce, whether for advanced manufacturing, the clean economy, environmental preservation, sustainable farming, boat building, etc.

And, Maine has many historic towns and cities and a natural landscape that is second to none in the United States.

My advice: pick those few catalytic projects and interventions that will further your progress, green light and fast track them … and get stuff done. 

Second, get back on track. You have many unique strengths that I just named, but they will not realize their full economic potential if they are not supported by smart, targeted policies and investments.

In recent years, important programs and initiatives have been eliminated under the current Administration, including the Quality of Place Council and the State Planning Office that were shut down earlier this year. Other programs, such as the Office of Innovation in the Department of Economic and Community Development, have not been given needed focus and attention from the current administration. Lack of support for the 2010 Maine Science and Technology Action Plan reduced the momentum that had been created over the previous decade or so.

Governor LePage’s recent veto of $20 million research and development bond that would have been administered through the Maine Technology Institute could have a major impact on the state’s innovative capacity going forward.

Further, the $2 million budget cut to Head Start earlier this year, as well as cuts to Medicaid and other health care and social service programs, reduce the state’s safety net for those most vulnerable and will be costly to Maine’s economic competitiveness in the long term.

These actions are penny wise and pound foolish.

Maine cannot cut its way to prosperity. You must continue to make smart, targeted investments in those critical areas that will drive productive, sustainable, and inclusive growth going forward.

Finally, the coming fiscal storm in Washington D.C. makes it even more important to know who you are and act with focus and discipline.

Whoever wins this election will preside over the scaling back of the federal government.  Mired in debt and deficit, and riven by partisan rancor and division, our federal government is not likely to provide the leadership or investments of recent years or decades past.

So you are on your own.

There is no deus ex machina. The cavalry is not coming. To paraphrase Pogo, we have met the solution and it is us.


Let me conclude with these thoughts.

I fundamentally believe in this state. And I fundamentally believe in the people in this room and the places and causes you represent.

Your state has experienced tough times. And you have undergone wrenching change in your economy stretching back 50, even 75 years.

But you have good bones, strong assets, and a solid hand to play in these dynamic, disruptive times.

Play that hand well. Invest in what makes you special, invest in your places and invest in your people.

Be bold.  Be focused. Be disciplined. Seize the future.  Carpe diem.