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The Providence Journal, Commentary Page
October 2007


In spite of more than occasional evidence, apparently I am the only person in the entire state of Rhode Island who realizes that balancing budgets with such large deficits is already beginning to exact a toll on the pace of our state’s economic activity. Of course, the combined effects of an international financial crunch and a slowing national economy have masked this to some extent. But if my assessment is correct, not only have these deficits begun to negatively impact our state’s current economic performance, their endless recurrence may well end a “positive” trend of late -- the ability of our state’s economy to slow less than the nation as a whole in relative terms during bad times.


In order to meaningfully analyze where we find ourselves today, it is necessary for me to first congratulate Rhode Island on an important anniversary: Rhode Island has now been a service and information-based economy for twenty years. In the fourth quarter of 1987 Rhode Island moved from being a manufacturing-based economy, in some ways “the good old days,” to an economy where manufacturing still matters but the service-producing portion matters even more. Not only did Rhode Island find itself without a niche in this new era, a very different set of economic trends and rules came to define “the norm.”


First, a job is no longer what it once was -- full-time with fringe benefits. Often, service-sector jobs are part-time and don’t pay fringe benefits. Ironically, as far as payroll employment goes, it doesn’t matter whether a job is part or full time, both are counted the same.


Second, layoffs occur during both recessions and recoveries. Back in the manufacturing era, layoffs were generally confined to periods of recession, and these occurred largely among blue collar employees. When recessions ended, formerly laid off persons were able to return to their original jobs, having weathered the bad times. So, in recoveries, a significant portion of employment growth was really job resumption. Today, not only are layoffs a constant fixture, they are often permanent – the original jobs are eliminated so there is nothing for workers to return to. Nor are layoffs restricted largely to blue collar workers. In the current environment, employment gains during recoveries often require actual job creation. Because of the greater cost and risk of job creation of versus job resumption, employment gains during service-era recoveries have generally been less than during our manufacturing days, leading to the term “jobless recovery.” Of course, the fact that Rhode Island’s tax and cost structure is highly non-competitive has had a significant negative effect on job creation here. What was the last decade with excellent job creation in Rhode Island? The 1980s. What a coincidence!


Third, while manufacturing employment here continues to fall, this does not mean that manufacturing matters less than it once did. At present, manufacturing employment has fallen to just over 10 percent of payroll employment here. Much of this employment decline has been the result of rising labor productivity, as surviving firms have been forced to adapt in a globally competitive world. Some of the loss has resulted from firms leaving, though. Although the job classifications have changed, as far as I can tell, the last time annual manufacturing employment in Rhode Island actually rose was in the late 1970s.


How has Rhode Island adapted to this new era? As almost everyone here knows by now, our state’s efforts to attain a critical mass in high technology were an abysmal failure in the 1990s. So, while high tech jobs exist here, and there were some gains in the 1990s, all too often the tech jobs in neighboring states paid better, had preferable job ladders, or both, leading to a redirection of the skills of too many of our residents.


But, Rhode Island never seems to do things like other states. Many of these persons didn’t actually move out of our state. Instead, they opted to commute to Massachusetts and Connecticut. Rhode Island was thus able to redefine brain drain: Monday through Friday, 9 – 5. Ironically, as these persons returned home after work, they brought with them spendable income, which helped to prop up both retail sales and our state’s housing market.  And, in an even greater irony, when the tech bubble finally burst in 2000, Rhode Island was spared the large economic losses experienced by states that had succeeded in the tech era up to that time. This led to perhaps the greatest irony of all: Rhode Island didn’t experience a very deep or long recession in 2001. Propped up by health services, tourism, and not-for-profits, our state began a period where it has actually improved relative to the national economy when national economic activity turns south.


In fairness to our leaders, they did try to reverse our lack of tech success, but all too often with meaningless undertakings like “MASS Exodus.” Nothing systematic was undertaken to improve our state’s non-competitive tax and cost structure. In effect, our punishingly high marginal tax rates, even after several rate cuts, have symbolically become a sign on our state’s back that says: “Kick me.” Add to this the unsatisfactory performance of K-12 public education here, and the picture our state has presented to a globally competitive world has been less than enticing. Bloomberg’s anointing us as “Tax Hell Rhode Island” is not exactly a complement.

So, here we are in the late stages of this decade. After almost twenty years as a service and information based economy, we finally gravitated toward a niche: biotechnology, pharmaceuticals, and life sciences. We have recorded a number of successes in this highly competitive niche, ranging from small startup firms to our “big catch,” AMGEN, which produces their very successful drug Enbrel here. There have also been setbacks, notably being turned down by Bristol-Meyers and having one-third of AMGEN’s global layoffs directed at our state. Nonetheless, this is an excellent niche for us to pursue. But pursuit of this niche will require more of our state’s leaders than denial when setbacks occur. I believe that Rhode Island is either doing something wrong, or not right, in terms of its ability to move to the next level in pursuit of the niche it has chosen. Remediation will require a detailed assessment of what we need to do to move forward.


This is where the state’s budget deficits come in. By not having as severe a recession in 2001 as so many other states, Rhode Island wasn’t forced to make the tough choices required to balance its budget. Since the states that made those sacrifices aren’t facing fiscal situations anything like that of Rhode Island today, they are able to devote their energies toward improving their states’ economic climates. Balancing our ongoing deficits appears to be distracting our leaders from attending to several critical areas, perhaps most notably assessing our state’s readiness for its niche. But, since our state has up to now been able to dodge sharp contractions, piecemeal policy, not systematic analysis, has been the rule here.


You’ve probably guessed the ending by now. Balancing large and recurring budget deficits will clearly slow the pace of economic activity here – for as long as those deficits recur. So, in the future, when the national economy slows, Rhode Island will begin to see that it no longer declines by less than does the national economy. Combine this with the fact that we lag in good times, and we at last see the inevitable consequences of having PAROPIC (parochial + myopic) leadership.


Welcome to the information age!  I have little doubt that our state’s leaders will be appalled at this article and quickly assert that they prefer to view the proverbial glass as being half full.  In this era, that’s merely additional evidence of how out of touch they often are. How one chooses to view “the glass” is totally irrelevant. The only thing that really matters is the size of the glass! In this new era, it’s not too late for Rhode Island to make the transition from being a shot glass toward becoming a “guzzler.”

Should we fail to meaningfully deal with our deficits and reinvent our economic environment, the ultimate arbiter of our fate may well become Moody’s Investors Services.


by Leonard Lardaro

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