NEWSLINK, V3N1 Fall 1998: From the Executive Director

The writer James Branch Cabell once wrote, “the optimist proclaims that we live in the best of all possible worlds, and the pessimist fears that this is true.”

For the last seven years, the optimist has ruled. The United States has basked in an economic glow. The American job machine has churned out more than 13 million new jobs since 1991. In Massachusetts, more people are working than ever before. Our unemployment rate for September was only 3% compared to 4.6% for the nation. Today, Massachusetts workers are well represented over an array of high earning growth industries. Ten years ago, the state was dependent on defense and minicomputers.

Today, the federal government has balanced the budget and generated a small surplus. The states are also showing surpluses. Massachusetts is sitting on a $1.2 billion rainy day fund.

The job machine has eased the way toward national welfare reform, making it possible for former welfare recipients to become wage earners. At the other end of the economic scale, more Americans than ever before are earning more than $100,000 a year, giving rise to what has been called the new “mass upper class.”

Interest rates have been exceptionally favorable. This has allowed millions of Americans to realize the American dream by buying their first home or renewing the American Dream by refinancing their mortgages.

But this fall, we've begun to wonder if the pessimistic dancing bear is back again.

Since August, a volatile stock market has made investors jittery. Asia's floundering economy and uncertainty about Russia have contributed to a growing apprehension. Some expect the global economic crisis to spread through Latin America. Because America cannot isolate itself from the problems besetting a global economy, we are told to expect slower growth rates.


We may not be living in the best of all possible worlds, but the world in which we live offers the opportunity, if not the guarantee, of further robust growth.

The Asian shock has taken its toll. Plunging global demand has softened prices for everything from food to oil. At home, the real estate market is cooling. Massachusetts' September homes sales were down almost 14% from August and housing prices were down 7%. Corporate profits for major Massachusetts firms are down about 1% from a year ago. The state's mutual fund industry, the core of our financial services renaissance, is bracing for layoffs.

Economically, Massachusetts is closer to Asia now than ever before. Ten years ago our merchandise exports to Asia accounted for 6% of the total. Today they account for about 8%. Though exports to Taiwan, South Korea and Singapore have fallen, those to Japan, the state's largest Asian trading partner, grew by 4% between 1997 and 1998.

High unemployment rates and high state deficits characterized the 1989-91 recession. Could the Asian threat and its apparent link to the stock market bring about a similar decline?

Probably not. This is because the state economy is better prepared to weather an economic slump today than it was ten years ago. Last year's state tax revenues grew by more than 8%. The state ran a surplus of more than $1 billion. The economy is sufficiently robust and sufficiently diversified that even a “worse-case scenario” would have little impact on unemployment rates and on the state budget.

For the sake of argument, however, let's assume a worse-case scenario: A worsening Asian crisis causes the Dow Jones Industrials average to fall to 6,000, where it was in 1996. Let's imagine the employment roles and budget under a 1996 scenario.

Under this scenario, employment in Asia-sensitive export sectors and in financial services would fall by 10,997 jobs. The resulting increase in the unemployment rate would be a barely-noticeable .34%.

What would a 1996 scenario mean to the state spending? An uptick in the unemployment rate of .34% would necessitate about another $63 million in unemployment benefits and social services. The Federal Reserve Bank of Boston says that a recession could cause tax revenue growth to fall to 2.8%. Under these assumptions, the state could meet all of its current spending requirements and still balance the state government budget.

From this analysis, it appears that the state is not in store for a return to a recession of the kind on which it teetered ten years ago. We may not be living in the best of all possible worlds, but the world in which we do live offers the opportunity, if not the guarantee, of further robust growth. As the Dow moves back toward 9000, we can begin to again consider tax reduction as a catalyst for further economic acceleration.

BHI Research Associate Aniko Laszlo assisted in the preparation of this article.