R.I.'s Flood Disaster Will Boost Its Economy
While it is probably natural to observe all the damage and conclude that this will damage our state’s economy for quite some time, a number of other things must also be considered. Like any disaster situation, the short term holds a lot pain for our state, along with a loss of economic momentum. But over the longer term, there is reason for optimism.
Having failed to reinvent ourselves during this recession, rebuilding of our physical capital will now be undertaken on a scale that would otherwise never have occurred. The economic momentum from this will generate a greater rate of growth over the medium term than we would otherwise have experienced. To understand why this is the case, it is necessary to look back at where Rhode Island has been over the last several years.
Even before the floods, Rhode Island’s economy had been through a wide range of experiences since 2004. We did fairly well, at least on the surface, during the housing boom, as housing and retail sales provided our economy with much of its momentum back then. Lurking below the surface were issues that have ultimately come to haunt us, most notably the subprime-mortgage problem, and a host of structural deficiencies within our state’s economy.
Before the financial meltdown and global recession, Rhode Island found it increasingly difficult to escape the inevitable downdrafts from its structural deficiencies. Our obviously non-competitive tax and cost structures hurt us badly in terms of sustainable momentum, as did persistent budget deficits. These structural factors, along with an insufficient presence of both growth-oriented industries and non-defense technology, fueled by a decade-long defunding of public higher education, left Rhode Island highly vulnerable to any slowdown in the pace of national activity.
The statistics going as far back as 2004 are less than flattering for Rhode Island: Its population began a prolonged decline in July 2004; we were among the first states to experience budget deficits; payroll employment here peaked in January 2007, 11 months before the national peak; and our state’s economy lapsed into a recession in June 2007, six months before the national recession started. During this recession, Rhode Island has come to “distinguish” itself, not in terms of its economic accomplishments, but in its failures: The world has now come to view Rhode Island as a state with a very high unemployment rate for no obvious reason.
Rhode Island has now been in a recession for more than 2 1/2 years, the worst economic crisis since 1991. Pardon the pun, but before the recent storm, we had weathered the worst of this recession. For Rhode Island, 2008 was the “year from hell,” as our cyclical economic momentum, as recorded by my Current Conditions Index (CCI), was virtually non-existent.
Prior to this recession, my indicator had never recorded a value of 0, where none of the 12 indicators improved compared with a year ago. During this recession that has occurred four times. In addition to this, we had never had a value of 8 (only one indicator improving) for more than a single month, even in 1991. For almost all of 2008, the CCI had values of 8 or 0. After all of this economic weakness, our state’s economy finally regained a pulse in May 2009, as the CCI returned to more “normal” recession values.
As of now, the CCI has bettered its year-earlier value for nine consecutive months.
So, prior to this storm, Rhode Island’s economy had completed the first two requirements for ending this recession; the rate of decline in our economic momentum had moderated; and the CCI reached its “neutral” value of 50, albeit for only two months. Our state’s cyclical momentum was beginning to return, and the end of this recession was becoming ever more possible to visualize.
What would that recovery have looked like? As Rhode Island progressed through this recession, it became ever more apparent that our failure to seriously address our structural deficiencies and a lack of momentum even in good times was actually the result of twin deficits: the fiscal deficit, which extends as far as anyone cares to look; and the deficit in legislative economic leadership, which is curable starting this November.
The legislature has done nothing to get us out of this recession, unless you view the overriding of Governor Carcieri’s vetoes and negating his attempts to eliminate our structural deficiencies as “positives.” So, absent the flood’s impact, Rhode Island was headed for a painfully slow recovery, hindered by an inadequate presence in growth and non-defense technology sectors, a total lack of legislative economic leadership, continuation of the poor funding of public higher education, and persistent deficits that will largely sap whatever national momentum we might have otherwise benefited from.
By way of contrast, our post-flood rates of growth will eventually exceed the rates that would otherwise have occurred, once the short-term dislocations have been addressed and federal funds are effectively flowing to our state. While we can no longer rely on new home construction to power our recoveries, remodeling and rebuilding activity will now be very substantial in the coming months. The federal government will also be pouring a great deal of money into our state’s already inadequate infrastructure, sparing us the need to do some of this for ourselves. Happily, construction activity has large multipliers, which promise to give our state’s economy a meaningful push forward for several years.
There is an old saying that a crisis is a terrible thing to waste. Our initial crisis, the worst recession since 1991, has largely been wasted without us reinventing ourselves. This second crisis, damage from the floods, will delay the start of a recovery while ironically producing eventual rates of growth beyond what we would have been able to attain if left to our own devices.
Until we get to that point, many Rhode Islanders will be forced to suffer greatly for some time to come. If we don’t seize this opportunity for our state to reinvent itself, one has to wonder exactly what it would take for us to do so.