Graphic2.jpg (11074 bytes)







BankRI, Lardaro on the Economy Series
August 2004

In last month's article, I noted how things have returned to “normal” for Rhode Island: our rate of job growth, which led the nation for a couple of years, has seriously lagged national growth for 2004; and our unemployment rate, well below the national rate for years, had equaled or exceeded the national rate for two months as of May. Sadly, June’s labor market data extended these worrisome trends.
Is Rhode Island “doomed” to being a lagging state economy forever? No, it is not. To gauge our state’s future economic prospects it is necessary to consider today’s budget decisions in light of our current economic environment.

Rhode Island is now a post-manufacturing economy. While manufacturing is still important, the service sector now provides the vast majority of jobs here. The education and skills of our labor force (“human capital”) are now central to our economic future, and innovation is critical. Our most basic problem is that we have yet to define our dominant economic niche in this post-manufacturing era. This requires greater investment in human capital and a business climate that encourages innovative firms to locate then want to expand here.

Does this year’s budget have any substantial bearing on these prerequisites? Yes, it does. The good news: It appears that we are at long last moving toward defining our dominant niche -- Biotechnology. The budget allows a $48 million bond referendum for a Biotechnology Research Center at URI, and it includes $1.5 million to match federal funds to institutions of higher education, allowing them to pursue funded biotechnology research. The bad news: While there are a few “special cases” of tax incentives, overall, Rhode Island will remain as a high cost, high tax state. Our leaders apparently refuse to undertake the intensive systematic analysis of our tax/cost climate that is necessary before we can truly move from our “lagging” status.

What about education? Both the Governor and the Legislature have begun to question educational expenditure (K-12), which should prove to be a welcome change. The Legislature, however, wants to transfer funding decisions for higher education from the Board of Governors for Higher Education to them, allowing them to potentially move portions of a very large source of money that should be directed toward investment in human capital into The General Fund. If this is allowed to occur, investment-oriented expenditure for human capital, which adds to future growth, jobs, and makes sustaining our niche easier, may well end up in consumption-oriented uses, feeding “The General Fund” for things like operating expenses. Anyone reading this column who has taken any economics will quickly recognize this as a major violation of prerequisites for economic growth, Rhode Island’s “Nightmare on Smith Street.”

So, it appears that we have taken an important first step – defining our dominant economic niche. Our failure to move meaningfully to improve our tax/cost structure will make it more difficult for us to move as far with this niche as we would like, and should continue to work against us in terms of job growth in the future.


by Leonard Lardaro

  bott2.jpg (7892 bytes)