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The State of Massachusetts Business

Posted by Rick Lord on Jan 24, 2014 6:36:00 AM

Editor's note: Richard C. Lord, President and Chief Executive Officer of Associated Industries of Massachusetts, delivered the following State of Massachusetts Business address this morning at the AIM Economic Outlook Forum.

All the promise and all the challenges of the Massachusetts economy in 2014 meet these days at a massive construction site in Brighton, just off the Turnpike as you drive into Boston. 

AIM member New Balance athletic footwear broke ground in September for its $500 million Boston Landing project, a 1.45 million-square-foot health and wellness district. The project will include a new company headquarters, state-of-the-art athletic complex, hotel, restaurants, retail space and parking.

New Balance is even taking the unprecedented step of building a new commuter rail station on the tracks of the Framingham-Worcester line that abut the site.

Take a look…

The New Balance project may be just a hole in the ground right now, but it represents all we dare to hope about the Massachusetts economy.

A 107-year-old manufacturing company uses technology to evolve and grow in the new economy, providing good jobs to 1,350 men and women; it is the only athletic footwear company in the world determined to make its products in the United States through intelligence, lean manufacturing and efficiency.

But the project also lays bare our worst fears about the economic future of Massachusetts. The governor of Ohio called New Balance a dozen times offering generous incentives for the company to move its headquarters to that state. What will happen if the next growing company does not share New Balance’s loyalty to Massachusetts? What if the next company does not have the resources to improve the transportation infrastructure by building a train station?

Will there be enough skilled employees in Massachusetts to engineer and build the high-tech running shoes New Balance will use to double its size during the next five years?

As you know, Associated Industries of Massachusetts (AIM) engages in public policy work on behalf of employers who provide jobs to nearly 650,000 Massachusetts residents. We do so guided by the belief that only a vibrant, private-sector economy creates opportunity that binds the social, governmental, and economic foundations of our commonwealth.

The creation of a job and a person’s ability to do it weaves together every important aspect of social and economic stability – the desire for a better life, the ability to support a family, the confidence to start a business, and the need for efficient government management of services such as education, health care, and public safety.

Economic growth strengthens these bonds.  The employer buys new equipment; workers use pay increases to send their children to college; and communities find ways to fix broken water mains.

Economic downturns, such as the one that unfolded five years ago, strain the bonds between employers and the community, which suddenly worry about layoffs, turmoil in the markets, the value of savings and municipal budget cutbacks.

So, which way is the Massachusetts economy pointing as we enter 2014? Are we entering a “New Balance” economy, poised for new buildings, new jobs, new discoveries, new opportunities and new prosperity? Or do we remain mired in a lackluster economy, struggling against the loss of federal defense and research funds, a continuing recession in Europe, and an unemployment rate that for the first time in many years now stands higher than that of the rest of the country?

There is ample evidence for both optimists and pessimists.

Like your glass half full? U.S. stock markets posted their largest annual gains since 1997 last year, with the Dow rising more than 26 percent on stronger-than-expected economic growth.   The economy created an average of 195,000 jobs per month and the US unemployment rate fell from 7.9 to 6.7 percent. In Massachusetts economic output grew 3.5 percent during the third quarter, while Bay State venture capital firms raised $5.4 billion for new investments, more than triple the amount raised in 2012.

Prefer your glass half empty? The Massachusetts unemployment rate rose from 6.4 percent in April to 7.0 percent in December as the innovation economy that outperformed the rest of the nation for half a decade slipped into neutral. More than a quarter million Massachusetts residents remain out of work. Sequestration alone cost the commonwealth an estimated 14,000 jobs in Fiscal Year 2013.

It’s no wonder that the monthly AIM Business Confidence Index for 2013 looked like this:

Massachusetts Employer Confidence

 

Employers are clearly as puzzled about the course of the recovery as anyone else.

AIM believes it is time for Massachusetts to restart its economic engine. It’s time to build the momentum needed to navigate beyond what Ray Torto, Chairman of the AIM Board of Economic Advisors, recently called a “lost year” for business confidence.

As the campaign for governor of Massachusetts takes shape, the employer community believes that two public-policy issues hold the key to accelerating job growth and putting some of the 250,000 Massachusetts residents who are currently unemployed back to work.

One is excessive business costs, which in a global business environment challenge employers daily. The second is a pervasive shortage of trained and qualified employees.

First, let’s look at business costs.

If you think business costs don’t affect jobs, take a look at the frenetic competition among multiple states to land the New Balance project.  Or consider the recently concluded free-for-all among a dozen states to land the Boeing 777x manufacturing line.

In such a competitive environment, can Massachusetts, or will Massachusetts, provide a hospitable business climate for the new and developing enterprises that will become the New Balances, Fidelitys and EMCs of the next 50 years?

Massachusetts must first and foremost continue the progress it has made to control the most troublesome non-wage cost confronting employers – health insurance.

AIM supported the commonwealth’s Health Care Cost Control Law of 2012, which linked medical spending to the overall rate of economic growth, and we are hopeful that health-care spending will not exceed the 3.6 percent benchmark for 2013.

Insurance premiums have moderated nationally, increasing at their lowest rate in a decade last year. More employers are offering coverage that allows employees to better manage their health care. Employees are increasingly seeking high-quality care in moderate-cost community settings.

A good start, but the hard work of solving the health insurance crisis is just beginning.

Unfortunately, health-care analysts expect premium increases to accelerate during 2014 as the economy strengthens and the Affordable Care Act is integrated into the health delivery system.

In Massachusetts, health care spending still accounts for a staggering 16.6 percent of the state economy. Health-care spending per capita in Massachusetts is 36 percent higher than the national average.

Even more staggering is that fact that a recent study by the state Health Policy Commission found that 21-39 percent of medical expenditures in our state are wasteful – that’s $26.9 billion in wasted money on the high end, almost as much as the entire state budget.

And thousands of small employers in Massachusetts enter 2014 facing the prospect of double-digit premium increases because key provisions of federal health reform threaten to accelerate the already burdensome cost of providing insurance to employees. AIM calls upon state officials and our Congressional delegation to continue to seek a waiver from these onerous provisions.

AIM believes that Massachusetts must address the cost of health insurance in a meaningful way to ensure that the commonwealth remains an attractive place to do business.

But we also urge lawmakers to address other business costs that set Massachusetts out of the economic mainstream:

  • We call upon the Legislature and Governor Patrick to freeze the unnecessary and imprudent $500 million increase in Unemployment Insurance rates that took effect January 1. The Unemployment Insurance Trust Fund used to pay benefits to jobless residents showed a balance of $800 million in November and needs no additional infusion of funds. We further call upon Beacon Hill to finally make structural reforms to an antiquated and expensive unemployment insurance system.
  • We call upon lawmakers to resist the temptation to increase the tax burden. We seek to avoid a repeat of last year’s ill-fated expansion – later repealed - of the sales levy on software and computer services that made national news and set back the commonwealth’s reputation as an innovation-friendly state.
  • And we call upon the commonwealth to do everything it can to relieve the burden of electric rates that are among the highest in the nation.

The objective is to create a uniformly vibrant ecosystem of interdependent companies - large and small, Berkshires to Boston, bistros to biotech – that together create the moments when a job opportunity meets the person who needs it. It must be an ecosystem that allows a family sports apparel company like 47 Brand in Westwood to come full circle from its roots with two Italian immigrants selling newspapers outside Fenway Park to a $200 million a year business today.

Take a look at their story…

Please join me in acknowledging brothers Steven, Bobby and David D’Angelo of 47 Brand, who are with us this morning.

The second key to accelerating job growth is solving the troubling paradox of persistent worker shortages in a high-unemployment economy.

Ask any Massachusetts employer about what worries him or her most and you’ll hear the same response: “I can’t find enough qualified people to run my business.” It’s a concern shared by technology and bioscience enterprises in Cambridge, manufacturing companies in the Pioneer Valley, health care providers in Worcester, and restaurants and hotels throughout the commonwealth.

Worker shortages caused by both skill gaps and demographic changes are pervasive throughout the Massachusetts economy. The 2013 Massachusetts Job Vacancy Survey indicates that five percent of all jobs in the Bay State – 135,000 positions in all – stood vacant at year end.

Vacancy rates ran 6.1 percent in computer and mathematical occupations, 4.8 percent in healthcare support occupations and 2.7 percent in manufacturing.

What’s wrong with this picture? We have urban high-schools where half of all students drop out before graduating while employers located less than a mile from these schools remain desperate for smart, motivated workers. With a quarter million Massachusetts residents unemployed, why are technology companies in Cambridge paying their workers thousands of dollars in referral bonuses for new employees?

The picture doesn’t improve as we look into the future. Northeastern University Economist Barry Bluestone estimates that 100,000 skilled manufacturing jobs in Massachusetts will open up in the next decade as older workers retire. The number of young people graduating from Massachusetts high schools, meanwhile, is projected to fall by 9 percent by 2020.

AIM challenges employers and the commonwealth to work together to make 2014 the year Massachusetts begins to solve the worker dislocation crisis once and for all. Innovative and creative initiatives are taking place throughout commonwealth - it’s now time to take these success stories and scale them into a comprehensive solution.

Massachusetts needs first and foremost to complete the task of creating public schools that effectively prepare students for the rigors of the knowledge economy. We may have the best schools in United States, but we do not lead the world, and in fact we're losing ground. AIM members recently participated in a survey about the steps schools need to take to improve, and business will soon offer specific reform proposals based on international benchmarking.

We support the Department of Higher Education's Vision Project to align the state's public higher education system with the knowledge demands of the global economy.

But our greatest human capital deficiency compared to other countries comes in training both students and current workers to master the demanding skills that drive areas such as high-value manufacturing, information technology and health care.

Precision manufacturing companies in greater Springfield struggle to find men or women who can operate five-axis machining centers under just-in-time conditions. An online educational startup in Kendall Square would hire 40 programmers today if they were available. The Brookings Institution reports that many of the people filling jobs in health care are not even trained here - half of the medical scientists and 40 percent of pharmacists in Massachusetts are foreign born.

The good news is that employers in various sections of the state are taking matters into their own hands.

Let’s look at just a few examples.

The Manufacturing Advancement Center in Worcester has developed a training pathway for manufacturing skills that can take individuals from basic knowledge though 26 credits of an associate of science degree in Applied Manufacturing Technology. State government, to its credit, recently announced four awards totaling more than $1.3 million to support regional programs to train unemployed and underemployed individuals, including veterans, for careers in the state’s advanced manufacturing industry.

Beth Israel Deaconess Hospital in Boston has established pipeline programs to attract, train, enhance and to retain a talented technical and professional workforce.

And nearly two dozen Massachusetts school systems recently participated in “Hour of Code,’’ a nationwide campaign to help introduce millions of students to programming during Computer Science Education Week.

AIM supports these efforts and urges the private and public sectors to expand such creative initiatives to benefit the entire commonwealth. We also look forward to working with education officials on ideas to integrate computer science courses into the high school curriculum and to convince students and parents that advanced manufacturing represents a challenging and rewarding path to success.

The alternative is a future in which high-octane companies run out of the human fuel they need to remain in the innovation fast lane.

Today I have touched upon two of the primary challenges facing Massachusetts employers – high business costs and persistent worker shortages.  AIM believes these issues must be addressed to maintain the growth we have finally achieved, accelerate it, and create the thousands of new jobs we still badly need.

We must embrace and expand policies to drive growth; and reform or modernize policies that threaten to choke it off.

I very much look forward to hearing what our panel of business leaders has to say about these important issues. And don’t be shy – we want to know what you think as well.

Thank you very much.

Anthony…

Topics: Associated Industries of Massachusetts, Massachusetts economy, Massachusetts employers, Economy, Business Costs

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