RHODE ISLAND'S ECONOMY:
HOW TO ASSESS THE LEGISLATIVE ROLE

The Providence Journal, Editorial Page, June, 1998

So, here we are. Our economy is performing the best it has at any point in the 1990s. Do we celebrate? Should the legislation we pass have any specific emphasis? Should we be concentrating on how to spend the surplus?

At the present time, we should put things in a meaningful perspective then take actions that move us forward over the long-term. While our economic momentum is the best we have seen for this entire decade, we didn’t really join the "party" of rapid economic growth until 1997. What do I base this assessment on? First, payroll employment grew at its most rapid pace in this recovery in 1997, 1.7 percent. But, that followed an anemic 0.3 percent rate of growth in 1996. In fact, the just-released Gross State Product data for 1996 showed Rhode Island’s growth rate that year to be 0.2 percent, which ranked us 48 out of 50 (only outperforming Hawaii and Alaska which had negative growth). Second, exports of manufactured goods from Rhode Island in 1996 were virtually identical to their value in the first year of this recovery, 1992. It was not until 1997, after two consecutive years of decline, that we saw a meaningful rise in exports (of 18.5%). From 1992-1996, Rhode Island’s export growth never exceeded 2.3 percent, by far the worst performance in New England! So, while we have just joined the rapid growth "party," celebration for us amounts to complacency.

What about legislation, in terms of emphasis or whether we should be concentrating on how to spend the surplus? There are three principles that we must follow if we are serious about moving toward a better economic future. First, economic policy here should no longer be piecemeal, based on "linear think." By this I mean that each proposal must not be viewed as being largely or entirely independent of existing policies or proposals that are being evaluated at the same time. We must make sure that all the pieces fit together into cohesive policy. Second, we should judge tax/expenditure policy in terms of how effective it will be in moving Rhode Island away from the bizarre "top five" private industries it now has, and how it will make firms want to locate here in the future without resorting to major deals. Finally, combining the implications of the last two points, we must alter our present emphasis from how to spend our surplus to how we can invest some or all of it to alter the structure of our economy in ways that will provide us with higher future tax revenue than if we continue on our present course. We must therefore find ways to increase what economists term our "fiscal dividend." By moving toward more investment-oriented spending with a long-term orientation, we will begin the transition from our currently unsatisfactory industry mix, increasing future rates of economic growth. Future tax revenue will then be higher than if we maintain our present emphasis on consumption and the short-term. To this end, let me suggest the following "Report Card" that can be used to grade proposed legislation (note: check only one entry per row):

 
  REPORT CARD TO GRADE PROPOSED LEGISLATION

Legislative proposals can be ranked in terms of their scores, with the most preferable legislation earning the highest score of 10, and least preferred receiving a score of 5. Let’s contrast two of the proposed pieces of legislation using this. The inventory tax reduction focuses on the problem, it is a long-term solution, it is investment oriented, using an existing source of funding that is very likely to be adequate for this purpose. Score: 10. What about the excise tax phase-out? Very different result: it treats the symptoms of a problem (high property taxes) with a short-term "fix" that is consumption oriented, it does use an existing source of funding, and the adequacy of funding is somewhat speculative. Score: 6. I’ll leave it to you to score a revision of the phase-out to a reduction in the tangible-property tax.

The "giant sucking sound" for Rhode Island does not refer to NAFTA, but instead to the General Fund. If we continue to feed this beast as we have in the past, we will clearly diminish our future standard of living. As several of our legislative leaders recently acknowledged, this requires that we not repeat one of our mistakes from the 1980s, lowering taxes and raising spending to unsustainable levels. What I am saying is that we made an even bigger mistake in the 1980s, one that has had far longer-lasting consequences: we failed to define ourselves in the information age. As a result, we probably have the most bizarre "top five" industries in the nation, which virtually guarantees that job growth here will continue to lag the nation. My hope is that some day, when I hear that tourism is Rhode Island’s second largest employer, I will no longer cringe as a result of realizing that this lofty ranking is partly the result of our failure to define our economic niche in the information age.

How urgent is it that we act now? Let me point out a disturbing trend: our current areas of strength: retail sales; construction; existing home sales; state income tax withholding; and local government employment, are all highly vulnerable to increases in interest rates or slowdowns in the pace of national or regional activity. Unfortunately, this trend has yet to be realized by persons in Rhode Island, especially those running this state! We should assume that we have a two or three year window before we are visited once again by the business cycle. It is critical that we be proactive now, while we have the opportunity, to make Rhode Island a more economically viable entity, less vulnerable to business downturns and whose private sector is capable of sustaining a standard of living that will make us a model for other states in terms of what to do, not what to avoid.

by Leonard Lardaro