More than three years on from the end of the Great Recession, only six states have regained employment levels enjoyed prior to the recession, and 17 states are still more than 5 percent below their pre-recession employment levels. As many state economies continue to struggle through the lingering effects of the Great Recession, a question commonly asked is, “What is this seemingly invisible force that prevents the economy from returning to prerecession and especially 1990s growth rates?” In other words, why is it that, despite massive monetary and fiscal stimulus, employment seems locked in a persistent malaise? Some argue that the problem is a lack of consumer demand and that more federal government stimulus spending is the answer. Others argue that it is uncertainty over the massive national debt and that fiscal austerity is the answer. However, one diagnosis that has gone largely unnoticed holds that this invisible force is the decline in the competitiveness of the U.S. economy in the global marketplace. As ITIF points out in Innovation Economics: The Race for Global Advantage, this decline has been a relatively untold story over the past decade, although its symptoms have clearly manifested in the dramatic fall in manufacturing employment and investment since 2000. The failure of the United States to adapt to a global economy that is evermore dependent on knowledge and innovation for growth—the so-called “New Economy”—is causing traded sector firms, and manufacturers in particular, to look to other, more competitive countries when it comes to choosing locations. And this loss of traded sector activity, including jobs and investment, holds back the entire U.S. economy and its component state economies as well.

For the United States to be competitive, one key will be to compete more on the basis of innovation and entrepreneurship, and less on cost. With a globalized economy enabling easy access to low-cost production systems in nations like China, India, and Mexico, U.S. competitive advantage will continue to be found in making things and providing traded services that other nations are unable to make or provide as easily or as efficiently. And success in this means, among other things, 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. These keys are the same for state economies and this is why the State New Economy Index focuses on these five areas. 

The 2012 State New Economy Index builds on prior State New Economy Indexes published in 1999, 2002, 2007, 2008 and 2010. Overall, the report uses 26 indicators, divided into those five key areas that best capture what is new about the New Economy:

1. Knowledge jobs
2. Globalization
3. Economic dynamism
4. The digital economy
5. Innovation capacity

The state that is farthest along on the path to the New Economy is Massachusetts, as it has been in all previous editions of the State New Economy Index. Boasting a concentration of software, hardware, and biotech firms supported by world-class universities such as MIT and Harvard, Massachusetts survived the early 2000s downturn and was less hard hit than the nation as a whole during the Great Recession, at least in terms of job growth and per-capita income growth. However, Massachusetts no longer holds the commanding lead it held in the 2010 index; in this edition, it shares the top quartile with Delaware, Washington, California, and Maryland. Second-place Delaware is perhaps the most globalized of states, with business-friendly corporation law that attracts both domestic and foreign companies and supports a high-wage traded service sector. The state has moved up four ranks from 2010, driven by big improvements in entrepreneurship levels, R&D investment, and movement toward a green economy. Washington state, in third place, scores high due not only to its strength in software aviation, but also because of the entrepreneurial hotbed of activity that has developed in the Puget Sound region, and heavy use of digital technologies in all its sectors. Fourth-ranked California thrives on innovation capacity, due in no small part to Silicon Valley and high-tech clusters in Southern California. California also still dominates in venture capital, receiving 50 percent of all U.S. venture investments, and also scores extremely well across the board on R&D, patent, entrepreneurship and skilled workforce indicators. Maryland occupies fifth place and Virginia sixth. Their high rankings are primarily due to high concentrations of knowledge workers, many employed with the federal government or related contractors in the suburbs of Washington, D.C. Colorado, in seventh place, maintains a highly dynamic economy along with an educated workforce. The state is also a hotbed for venture capital investment in the middle of the country, ranking behind only California and Massachusetts. Eighth-place Utah is ranked number one in economic dynamism while it ranks third in digital economy factors. Moreover, its high-tech manufacturing cluster centered around Salt Lake City and Provo support its first-place ranking in manufacturing value added. Ninth-place Connecticut’s success is not based on any one area or indicator. In fact, Connecticut does not rank first on any of the 26 indicators; however, the state scores highly across most indicators, having a highly educated population, strong defense and financial industries, and robust R&D investment. New Jersey’s strong pharmaceutical industry, coupled with a high-tech agglomeration around Princeton, an advanced services sector in Northern New Jersey, and high levels of inward foreign direct investment help put it in tenth place. However, relative to its peers, the state has declined in many categories—most notably in entrepreneurial activity, health IT, and initial public offerings—which explains its fall from its fourth-place ranking in 2010.