Looking at the economic efficiency of New Jersey after the Great Recession, Joseph Nicholson of the Department of Accounting and Finance at Montclair State University’s Feliciano School of Business, finds opportunity for overcoming setbacks due to the COVID-19 pandemic through targeted spending in certain state sectors, and with boosts from incentives.

Nicholson shared his findings with NJBIZ, stemming from his research in “The New Jersey Economy in Times of Crisis: Inefficiencies in Gross Domestic Product Contributions,” which show that as a whole, the most efficient places to spend in the Garden State are in real estate and new business.

Nicholson used data envelopment analysis and tested whether governing bodies of the state are operating efficiently. He measured the relative performance of the state’s 21 counties before, during and after the 2008-2010 financial crisis. And his results show that the economic inefficiency of New Jersey’s counties diminished in recent years and their subsidy structures are no longer inferior.

In fact, according to Nicholson, the New Jersey Economic Development Authority, and the economic investments of other New Jersey State funding sources, are the two main drivers of the increased efficiencies post-crisis.

Nicholson said that to maximize the state’s gross domestic product in a restrained state budget environment, spending needs to be increased – particularly with respect to real estate projects and new business investment. He believes these increases would add more than 20 percent to New Jersey’s GDP.

Without these incentives, the state’s economy could struggle for an extended period of time given the COVID-19 crisis.

“Almost $3.50 and $2.75 per dollar they spend comes back [real estate projects and new business investment]. So you’re talking a little over $3 for every dollar they spend is actually what they’re returning, which is unbelievable. And these funds are just sitting there – so I think this year they spent $15 million,” Nicholson told NJBIZ. “And that was just recently. Which is only a drop in the bucket.”

Nicholson, who completed his Ph.D. in real estate from the University of Georgia, has spent years researching in the areas of Real Estate Investment Trusts (REITs), real estate finance and urban economics. Prior to that he spent several years in finance as an institutional bond analyst and in real estate as a project manager.

He says that what truly is alarming is the lack of the NJEDA’s intervention despite its funding availability.

“I’ve had these models for years on efficiency and quite frankly, calculating how inefficient things are in New Jersey, it’s concerning. It is also concerning that no truly quantitative impact studies have ever been conducted surrounding the NJEDA’s billions of dollars of support and funding around the state. What is the return per dollar invested in the economy? Now more than ever the state needs smart spending to maximize its GDP,” Nicholson said.

Highlighted particularly in Nicholson’s work is the uncertainty of the state’s business environment overall, and not just business from the impact on the individual household.

He believes New Jersey is currently under a cloud covering the reality of lost cash flow, and the effects of the current pandemic situation will be dramatically negative to the state’s GDP in 2020 – especially when looking at the unemployment rate being around 35 percent greater than the national average.

“When combined with the fact that we live in one of the highest cost of living states in the country, we may be facing one of the worst economic environments moving forward. And without the maximization of GDP via incentives, New Jersey’s economic outlook could struggle for an extended period of time,” Nicholson continued.

Smart spending

What to do in this uncertain future? Nicholson says spend money where it is needed. “If they don’t start spending, what is there to spend at the end?” he asked.

He says the state will suffer consequences if it does not put its funds in the right direction – new business growth and real estate. He is also a proponent of more incentives for new businesses.

“I find that the impact of every dollar invested into the New Jersey economy pre-crisis by the NJEDA generated $2.78 of GDP. This number increased to $3.45 post-crisis. With a needed increase of around 38 percent from the NJEDA in inefficient counties, this would add $2.78 billion to New Jersey’s GDP this year alone,” Nicholson said. “Now, more than ever, New Jersey must maximize its incentive spending per dollar or struggle for an extended period through the post-COVID-19 era.”

While the basic economic principals of supply and demand are efficient, Nicholson says what doesn’t make sense in our state is the tax structure, and he believes it is because it is inefficient in many municipalities.

“That’s what this test that I did was about. How to maximize gross domestic product at the county level and therefore, at the state level, and as a whole—the same way you would apply this technique to a real estate investment trust.”

[W]ithout the maximization of GDP via incentives, New Jersey’s economic outlook could struggle for an extended period of time.

Nicholson said that after the 2008 to 2010 financial crisis, evidence shows that counties became more efficient.

His research provides a quantitative update on how to maximize New Jersey’s GDP in an efficient state-spending manner during a crisis. In other words: How to best spend funds to bolster the economy during a time of crisis, such as the COVID-19 outbreak, using the 2008 to 2010 financial crisis.

“Overall, I think I document an industry low-point for economic efficiency in 2010 with only 10 percent of New Jersey counties maximizing GDP during the crisis. And this efficiency rises back to 76 percent by 2018 in the post-crisis recovery period.”

While efficiency appears to be getting better, the problem according to Nicholson is the lack of spending. “When you’re becoming more efficient and you’re not using funds, that’s scary. That doesn’t make sense,” he said.