Globalization, technological innovation, and entrepreneurial dynamism in recent decades have fundamentally transformed the U.S. economy, but California is far better positioned than most other states to reap the benefits of this so-called “New Economy.” In fact, it ranks second in The 2017 State New Economy Index, released today by the Information Technology and Innovation Foundation (ITIF). California earns its high rank by showing strength in key fundamentals such as creation of new high-growth companies, the export orientation of its manufacturers, and the number of patents being awarded.
The top five states in ITIF’s 2017 State New Economy Index are Massachusetts, California, Washington, Virginia, and Delaware. The five lowest-scoring states, from 46th to 50th, are Louisiana, Wyoming, West Virginia, Arkansas, and Mississippi.
“A defining trend of this economic era is the way innovative new technologies drive productivity and competitiveness in everything from agriculture and mining to professional services. That affects all state and regional economies, regardless of their particular areas of focus,” said Robert D. Atkinson, ITIF’s president and co-author of the report.
“California is doing well, but there is always room for further improvement. The bottom line is all the states—and the federal government—need concerted innovation strategies to compete in the New Economy. Without the right fundamentals, states will find themselves stuck in the economic doldrums, unable to reap the job growth and quality-of-life improvements that the New Economy enables.”
ITIF’s Index measures 25 economic indicators in five categories to assess states’ capacities to harness innovation for economic growth. The categories are: knowledge jobs, globalization, economic dynamism, the digital economy and innovation capacity. The 2017Index builds on seven earlier editions, published in 1999, 2002, 2007, 2008, 2010, 2012, and 2014.
Each edition of the Index has included additional refinements in methodology as new data sets have become available, so states’ movement up or down the rankings may be attributable not just to changes in the structure of their economies, but also to a clearer picture emerging from the data. With this as context, the 2017 Index finds:
- Massachusetts ranks first, as it has consistently in every edition of the Index since 1999.
- Mississippi ranks last, as it has in every edition except the 2007 Index when it was 49th.
- The biggest shifts upward since 2014 came in Nebraska and Tennessee, both of which rose eight positions in the overall ranking—to 28th and 32nd, respectively.
- The biggest change in the other direction came in Alaska, which dropped 10 spots to 42nd.
Since the first edition of the Index in 1999, the data also have revealed broad structural trends in the New Economy. For example:
- The number of IT jobs in the U.S. economy grew by 35 percent between 2006 and 2016, while private-sector employment in general grew just 6 percent.
- Much of the 9 percent improvement in the U.S. trade deficit from 2011 to 2016 can be attributed to a 20 percent expansion in services exports over the same period—and, specifically, to strong growth in IT-enabled services exports.
- From 2012 to 2016, average broadband connection speeds across the country have increased by 162 percent.
- Alongside the economic recovery, venture capital investment nearly tripled from 2009 to 2016, peaking at $74 billion in 2015.
“With each edition of the Index, we see the sustained impact of innovation in spurring economic growth,” said John Wu, an economic analyst at ITIF and co-author of the report. “There is more access to broadband, Internet connections are faster, and services exports are growing, to name just a few indicators. These trends indicate states must continue modernizing their economic policy frameworks if they want to remain competitive in the innovation-driven global economy.”
The 2017 State New Economy Index offers a series of policy recommendations to spur innovation-based economic growth. To succeed in the New Economy, ITIF concludes states should align their economic development strategies to incentivize having a workforce and jobs based on higher skills; strong global connections; dynamic firms, including strong, high-growth startups, industries, and individuals embracing digital technologies; and strong capabilities in technological innovation.
Atkinson added: “The success of a state’s economy depends most of all on the success of its companies that export goods and services and compete in tough international markets. Most often, those are big firms, so states should rethink policies that give preferences to small businesses. One way to realign incentives would be for states with below-average top marginal income tax rates for individuals to increase them and then use that revenue to cut corporate taxes and boost innovation incentives for activities such as R&D and capital investment.”