Business

In managing economy, Baker needs a long view

Jessica Rinaldi/Globe Staff

Governor-elect Charlie Baker inherits a state economy that is riding high as more workers land jobs, unemployment falls, and consumer optimism soars.

Baker’s challenge will be to build on those strengths, undertaking efforts to help businesses expand, make Massachusetts attractive to new employers, and spread the benefits of an improving economy, analysts said. He must nurture the state’s key high-tech sector while making sure that workers struggling to fit into a new economy get the skills and training they need.

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But most important, he will need to take the long view.

Economists and policy experts said the best governors have committed to improving the state’s competitiveness over time, recognizing that the biggest gains are won over decades, not in a single political term, or even two.

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That’s because many of the economic forces at work are broad, complex, and ultimately outside a governor’s control — such as a recession, said Michael Widmer, president of the nonpartisan Massachusetts Taxpayers Foundation.

“A governor is largely, in the short term, the prisoner of the national economy,” Widmer said. “When it’s going up they get credit, and down they get blame.”

Widmer, who has watched governors come and go in 22 years studying Massachusetts budgets, added: “And neither is deserved.”

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As Baker prepares to take office nearly six years after the end of the last recession, here are some of the economic challenges he faces.

A diverse economy

The governor-elect must ensure that Greater Boston’s thriving technology sector, including the state’s key health care, medical device, and biopharmaceutical industries, remains competitive. With regions across the country and around the world seeking to lure Massachusetts firms, that means addressing issues such as the state’s high energy and housing costs.

“Nothing can really happen, nothing else is really possible, unless that [tech] sector thrives,” said Robert Nakosteen, an economics professor at the University of Massachusetts Amherst. “And if you want the kind of public services that the state does want, that sector needs to stay healthy.”

Massachusetts already offers one the nation's best-educated labor forces. Approximately 43 percent of adults over 25 hold at least a bachelor’s degree, ranking Greater Boston third among the nation’s 30 largest metropolitan areas (after Washington and San Francisco).

But the state also has some of the nation’s highest energy and housing costs and corporate taxes have risen under both Governor Deval Patrick and his predecessor, Mitt Romney. In addition, companies in technology and other leading industries increasingly complain that they can’t find enough of the workers they need to compete in a global economy.

Those complaints come, ironically, when unemployment is still at high levels and manufacturing, construction, and other workers who lost jobs in the last recession can’t find new ones paying comparable wages. The problem: their skills don’t match job openings.

In an economy largely built on the know-how of its workers, one of the greatest challenges the Baker administration will face is supporting the training and education that workers and cutting-edge industries need to thrive, analysts said.

“The skills gap needs to be front and center going forward,” said Susan Houston, executive director at MassEcon, an economic development group. “It’s really important to have a diverse economy.”

Promoting economic diversity includes supporting traditional industries such as manufacturing, which employs about 250,000 in Massachusetts, said Barry Bluestone, director of the Kitty and Michael Dukakis Center for Urban and Regional Policy at Northeastern University.

The majority of the state’s 7,000 manufacturing firms employ fewer than 25 people,and many do not have the resources to expand or market products internationally. Bluestone said the state needs to help these companies apply for federal export credits and break into international markets.

“That’s really the key, and the most important thing we could do,” Bluestone said. “Many don’t know how to find wholesalers in other countries, understand tariff laws, currency exchanges.”

An economic divide

The divide between the economic fortunes of Eastern and Western Massachusetts is only growing. But it didn’t happen overnight, and it has vexed various governors who have tried to fix it.

For example, in the 1980s, the computer maker Wang Laboratories opened an assembly plant in Holyoke, sparking hopes of a renaissance in the struggling mill town. But the plant closed a few years later, in 1987, as demand for Wang computers plunged. Wang later went bankrupt.

Holyoke’s situation remains obstinately bleak; in November, more than five years after the recession ended, unemployment there was above 8 percent, about 3 percentage points greater than the state average.

“It stumps and bedevils,” Nakosteen said of the inability to close the state’s east-west gap. “It’s intractable in some ways.”

Earlier this year, the state completed a $45 million project that installed a 1,200-mile fiber optic network to provide high speed Internet across Western Massachusetts and make the region more attractive to technology and other firms. In addition, the state gambling commission recently granted a casino license to MGM Resorts to build a casino and entertainment complex in Springfield.

Those efforts are at best a start, analysts said. Baker needs to convince technology, biotechnology, and other companies bringing new products to market that manufacturing them in Western Massachusetts is a cost effective option. And to help them compete with firms in states such as South Carolina and Texas, he should pursue policies to lower energy costs and corporate taxes, he said.

In addition, he needs to use state assets, such as the University of Massachusetts Amherst, as catalysts to economic growth.

Transportation and housing

The state’s roadways are clogged with commuters, but the state’s voters rejected a measure that would have indexed the gas tax to inflation to finance transportation projects. Efforts to extend commuter rail service and stabilize the finances of the state’s biggest transit agency, the Massachusetts Bay Transportation Authority, also have progressed slowly.

If Baker can find the money and will to improve transportation systems, he could help address both economic disparities and the lack of affordable housing by opening new areas to development and making it easier to commute to employment centers from communities with lower housing costs, analysts said.

But better transportation alone won’t solve an emerging affordable housing crisis. Despite the recent surge in luxury condominium and apartment construction, the rate of new housing production in Massachusetts remains among the lowest in the country. The state’s shortage of homes on the market has frustrated buyers, hampered sales, and boosted prices. It has also pushed people to move farther from the Boston area, adding traffic woes.

Traffic congestion “certainly costs people and businesses time they could be spending doing productive things,” said Michael Goodman, a public policy professor at the University of Massachusetts at Dartmouth. “It’s just an added cost, economically and in our quality of life.”

Business (cycle) as usual

As Baker’s predecessors have learned, timing is everything. Even governors undertake long-term measures to improve the economy, forces beyond state government’s can derail their efforts in the short term.

Baker takes office nearly six years into the economic expansion that followed the last national recession, and chances appear reasonable that another downturn could occur before his first term ends. Since the end of World War II, US expansions have averaged about five years; the longest on record lasted 10, from 1991 to 2001.

There are no magic wands for managing the state’s economy, Goodman said. “But if you make strategic public investments in the capacity of the region to grow, and you’re patient and take advantage of opportunities if and when they come, at least you’re in the game.”

Megan Woolhouse can be reached at megan.woolhouse@globe.com. Follow her on Twitter @megwoolhouse.
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