Rethinking economic development (photo: Edwin J. Torres/Mayor's Office)

The COVID-19 pandemic has profoundly altered state economies. At this point, it’s clear that some of the changes will last, with significant implications for how governments should think about the future. State economic development agencies are tasked with building that future and they need new approaches to address these changes.

In January 2021, with the assistance of staff from the New York Empire State Development Corporation, we began a process of reviewing research literature and reports and interviewing experts across the country to develop a new approach to state economic development in the post-pandemic environment.

The result is a report, issued June 16 and titled Strategies for Building Inclusive and Progressive State Economies in the Post-COVID Era, that discusses how existing state policy tools can be adapted, reoriented, and improved to build a more equitable and prosperous society.

Our report emphasizes there are three key imperatives that must inform a new approach to economic development.

Confronting Systemic Inequality
The most important lesson of COVID-19 is that we must do more to confront the enormous systemic inequities that continue to plague our society. According to the CDC, Black and Hispanic Americans were roughly three times as likely to be hospitalized and twice as likely to die from covid as white Americans.

At the same time, the economic impact of COVID-19 fell particularly hard on people of color and lower-income communities, in part because they are over-represented in the most impacted industries, such as food and hospitality. 

No longer can government policy, including the billions spent on economic development, be detached from a central focus on bridging inequities and addressing structural barriers to success. An estimate from the Economic Policy Institute found that rising inequality has slowed U.S. economic growth in aggregate demand by two to four percentage points in recent years as the share of income has shifted from lower income, lower-saving households to higher income, higher-saving households. Addressing structural inequality is not only a moral imperative – it is an economic imperative. 

Embracing New Models of Work
Covid changed how many people work and live and those changes are proving to be long lasting, not transitory. State government must help lay the groundwork for new “spoke and hub” models of work that involve better transit-based, sustainable infrastructure.

In the past, jobs that required high levels of interaction with peers were mainly located in dense urban centers and some of their employees traded off higher housing costs and smaller spaces for shorter commutes. An infrastructure of in-person services – from restaurants and bars to shoe repair and dry-cleaning shops – grew up around the businesses. Service firm employees often struggled to find affordable housing within reasonable distance of their jobs. 

In the post-covid world, many people who can do their jobs all or in part remotely will choose to live further away from the urban core. For example, the commuting hub around New York City will expand substantially – perhaps by up to 100 miles, encompassing all of Long Island, the Hudson River Valley nearly up to Albany, and much of the way to Binghamton. 

Leveraging Increased Federal Spending
Policy levers on the federal and state level that were previously politically untenable or considered too costly – ranging from eviction moratoria to economic stimulus – have been utilized.

The influx of federal funding, including from the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed in March 2020, the $1.9 trillion American Rescue Plan Act passed in March 2021, and the $1.2 trillion infrastructure bill passed in November 2021, will have long-term implications. These new funding streams, if used strategically and effectively, have the potential to make a lasting impact on state economies.  

Based on these themes, our report offers a clear thesis for change over the next five years focused on five key areas and objectives:

1. Economic Development Policy: Reorient states’ economic development tools to focus on strategic, data-driven investments.

2. Workforce Development: Align workforce development investments with business needs and future job opportunities.

3. Affordable Communities: Reimagine cities and new commuter hubs as affordable, sustainable communities where people can live and work.

4. New Business Development: Support business expansion and leverage  universities to drive new R&D ecosystems.

5. 21st Century Digital Infrastructure: Lead on digital infrastructure to lay the foundation for economic growth in the 21st century.

The post-covid world poses new challenges for state economies. Without further action, remote work is likely to exacerbate already unacceptable economic inequalities. Existing neighborhoods, communities, and transportation networks may be a poor fit for the new economic environment. State economic development agencies will be expected to respond, and if they do so by using the tools of the past, they are unlikely to achieve the results needed in this unexpected future.

The good news is that there has been a wealth of research and an explosion of data that economic development agencies can use to improve and target their practices.

State economic policy has the tools to focus on projects that produce not only more but better jobs for disadvantaged communities, to leverage data that enables the promotion of efficient workforce and infrastructure development policy, and to emphasize building a more equitable and flexible labor force and economy. It can, and must, shift from an emphasis on individual firms and projects to a strategy that emphasizes the development of human capital and infrastructure.

Our hope is that our report can serve as a blueprint for states at a moment when we have the potential to produce the most progressive economic change since the great depression. 

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Sherry Glied is Dean of New York University's Robert F. Wagner Graduate School of Public Service. Carol Kellermann was president of Citizens Budget Commission from 2008 through 2018.