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Bad Government Saps R.I. Recovery

The Providence Journal Commentary Section
April 2011

Rhode Island's recently revised labor market data provide us with a more accurate understanding of where we have been. The picture we now have of our state’s economy is a combination of annoyance, good results, and some concerns moving forward.

We had been led to believe that our state's employment peaked in January of 2007, versus a national peak in December of 2007. The new data show that Rhode Island's peak actually occurred in December of 2006, a full year before the US. This timing difference should serve as a vivid reminder that Rhode Island's economic problems have a major structural component, since: we were one of the first states to experience budget deficits; our state's population has been continually declining since July of 2004; employment here peaked well before the US; and we entered a recession far ahead of the US. Understanding why our unemployment rate has remained stubbornly high requires little more than viewing how long ago employment here peaked and the duration over which job loss occurred.

Interestingly, our state's leaders often attempt to lay the blame for our state's woes entirely on national and global factors. Those forces by themselves were incapable of causing our woes, since our state's economy had already deteriorated noticeably by the time they occurred.

Happily, the upward revision to payroll employment for 2010 was 7,700, so the total employment decline from our peak was not 10 percent, as we had thought, but "only" 8 percent. And monthly job gains are different than perceived. For January of 2011, employment rose by 100 compared to a year ago. While the media presented this as only 100 jobs added, the correct interpretation is that 4,100 jobs were gained versus a loss of 4,000. The net change, not the total job gain, was therefore 100. Job loss has continued to decline. Unfortunately, job gain, while better than we had thought, is far less than what we need.

These improved employment figures produced positive changes to my Current Conditions Index. Originally, CCI values in 2010 failed to exceed 58, indicating improvement in only seven of twelve indicators. Positive revisions to two indicators, one of which is a leading labor market indicator, increased CCI values last year to as high as 83 (ten of twelve indicators improving), which ironically are fairly "typical" recovery readings. In light of the new data, I have now moved the date for the beginning of Rhode Island's recovery from June of 2010 to February, a significant change! Yet in spite of these revisions, our state's jobless rate continues to be stubbornly high while employment change remains weak. Our rate of improvement remains less than satisfactory in spite of this newly discovered cyclical momentum.

All of this reinforces the fact that Rhode Island's economic problems transcend merely cyclical factors. We are saddled with a list of major structural deficiencies that urgently need to be addressed. Budget deficits promise to sap our cyclical momentum in coming months and years. Pensions are badly underfunded. The skills of our state’s labor force are inadequate.

A major source of the confusion surrounding the severity of our existing problems and the path we need to take is a logical outcome of a fixture of our state's culture: due diligence occurs rarely if at all. During good times, when we had time to accurately and honestly assess our state's strengths and weakness, our "leaders" were little more than cheerleaders who attacked anyone attempting to identify problems so that remedies could be identified and applied. Their motto was "look at 'the glass' as being half full." They saw no role for due diligence to systematically evaluate relationships between key economic elements, most notably the magnitudes and interdependencies involved. Not only did this make Rhode Island flat footed when economic hardship arrived, it has continued to hinder our ability to eliminate structural deficiencies and to improve future growth prospects. Apparently lost on these cheer-"leaders" is a basic economic fact: the only thing that matters is the size of the glass, not how we view it. And the size of the glass is determined by our state's tax and cost structure, most notably the skills of our labor force, which are inadequate, to put it kindly. So, while lowering corporate tax rates should have a significant impact here, how large will the actual impact be in light of the continuing inadequate skills of our labor force?

I continue to be amazed by the leisurely pace of our state's leaders in dealing with our budget and structural problems. Hopefully the newly revised data and CCI values will increase the urgency with which they embrace true structural reform since it is now apparent that our cyclical momentum by itself is incapable of allowing us to attain our long-term goals.

by Leonard Lardaro

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