Is the Massachusetts Miracle Fading? Despite deficits and a high-tech slowdown, analysts say its economic slide is exaggerated. NEW ENGLAND

FOR most of the 1988 election campaign Michael Dukakis ran and ran on the ``Massachusetts miracle.'' Democratic presidential hopeful Albert Gore ridiculed it. Republicans portrayed the miracle as news media hype - and when last summer word got around that Massachusetts faced a $100 million-plus deficit, that's what many voters thought it was. Now New England states face huge deficits (Massachusetts - $600 million; Connecticut - $730 million; New Hampshire - $100 million), and the economic picture is made foggier by a limping computer industry and high living costs.

So was there a miracle - and what is its future?

The truth is, analysts here say, there was a miracle. A unique cluster of high-powered college cultures feeding private high-tech industry transformed the formerly depressed industrial state. Per capita income jumped 20 percent above the national average between '80 and '86. Unemployment went from 15 to 3.5 percent. Yuppies settled down; real estate values tripled. The rest of New England also prospered. But regional good times were driven by the Route 128 high-tech belt around Greater Boston - an entrepreneur's haven where in one case 39 new businesses spun off of one major electronics firm.

Defense contracts, which went from $3 billion to $8 billion a year during the Reagan era and were supposedly the dirty little secret of the miracle, merely ``put an already hot economy into overdrive,'' a local economist says.

Whether or not Governor Dukakis was responsible is another subject. (The debate is over history vs. leadership: Was the miracle going to happen anyway? Or was it a result of Dukakis's strategic development policies?)

Regardless, a new story is now developing. Along with budget deficits, high-tech has slowed down: Digital Equipment, the largest employer in New England, saw its stock drop 10 percent on a single March trading day. Last week Wang Laboratories in Boston laid off 880 workers, with more to come. Bankruptcies in New England are now the second highest in the nation, at 18 percent. Real estate is soft.

Dukakis, announcing he would not run for governor again in order to pass a tax package, became a lame duck instead. Recently the Boston Globe described his ``political eclipse'' on Page 1.

``What people were really angry about was that Dukakis lied to us - and then lost,'' political economist David Osborne says. ``If he'd won the presidency, he'd have been forgiven.''

But while the Wall Street Journal called it a ``fading miracle,'' economists say that despite New England's problems, reports of its economic death are exaggerated.

``New England is a different place than it was 10 years ago,'' says Federal Reserve Bank economist Lynn Brown. ``The `faded miracle' is a bad rap. Our performance has been truly remarkable.''

Average Bay State salaries are $19,142 while the national average is $15,481, she says.

Other indicators, such as the employment rate, are strong. Three public works megaprojects - the Boston Harbor Cleanup, a third harbor tunnel, and a huge ``central artery'' highway under the city - will bring the area $15 billion over the next 10 years.

``We've got a 7 percent [adjusted] revenue growth rate,'' says Charles Parker of the Pioneer Institute, a think tank here. ``Some states would kill for that.''

It's not surprising that a boom earlier in the decade would one day settle down, economists say.

Still, everyone admits the game has changed. The buoyancy of 1984 has passed. New England states must now adapt to and face a less dramatic and more competitive situation. Expectations may have to be lowered.

``We're now finding you can't take economic growth for granted,'' Ms. Brown says. ``For a while we forgot about competition from places like the Sunbelt.''

The miracle itself worked against the region's economy in two ways.

The first is the ever-higher cost of living in a boom region. The state has become a victim of its own prosperity. Housing and rents in the Boston area are among the highest in the nation. The high costs have brought about labor shortages; new construction costs are exorbitant.

The second effect is the continual erosion of manufacturing in New England. Massachusetts lost manufacturing jobs at a time when the rest of the country was gaining them. Between '84 and '88 the state lost 150,000 manufacturing jobs; during the same period, the US gained 248,000.

Mr. Osborne says the two effects are related: ``Growth has slowed because everything is so expensive. If you want to start a business, it doesn't make sense to do it in New England right now.''

Then there's the deficit. Bay State analysts are worried about a wolf at the state budget door. ``If the deficit is this high [$600 million] during good times, what's it going to be like if we have a recession?'' asks Mr. Parker.

Debt service, pension payments, and health care are constantly increasing costs.

One warning is issued by Marcia Howard of the National Association of State Budget Officers, who says states weathered the 1980 recession because of cash reserves they held equivalent to 9 percent of their expenses. Today, reserves are about 4 percent.

Deficit spending has become a chief source of worry for many New England governors.

Yet most observers agree the solutions they've seen are short term: A one-time tax increase, or a one-time spending cut isn't a progressive, long-term approach to a cooling economy, they say.

Most economists agree on fundamental areas of spending: the environment, roads, schools, prisons, trash disposal, airports, bridges. The debate that is shaping up now is how much to spend, and how to pay for it.

It's a debate between economic ``tinkerers'' who want strategic investments in business and social services and don't mind higher taxes - and free marketeers who want lower taxes, say economies can't be managed, and feel social service agencies are unaccountable.

Currently the debate is focused on taxes. A group called the Massachusetts High Tech Council put out a study in January showing that state taxes were the fourth highest in the country. Legislators responded by passing a ``no new taxes'' budget.

University of Massachusetts economist Barry Bluestone now says that based on personal income, state taxes have been below the national average throughout the miracle, and would remain so even with an increase.

``The most important thing now is where the state makes strategic investments. That isn't going to solve all problems. But it will help in the margins. We can't just let things go,'' he says.

The state rescue of the Morse Tool Company, a now-profitable firm in New Bedford, is an example of such investment, he says.

In practical terms, Mr. Parker argues, pouring money into investment councils is like supporting ``third-world fiefdoms; you don't have any idea how the money is spent.''

Osborne says the answer lies in an operation in which an ossified state bureaucracy is replaced. ``In a nutshell we really need to keep investing. But the only way to keep investing is by tackling this bureaucratic structure in government. We can't do it by continually raising taxes.''

Stay tuned.