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In Face of R.I. Meltdown, Hope

The Providence Journal Commentary Page
August 2008


   by Leonard Lardaro



THESE ARE INDEED difficult times for Rhode Island. The list of deteriorating economic statistics is long, and persistent. Once again, Rhode Island finds itself in a recession, the start of which I would date as August 2007.

To put today into a historical perspective, just 10 years ago Rhode Island had a budget surplus. Our economic growth had picked up significantly from earlier in the decade, and it seemed as though we were finally moving forward to far greener pastures based on our newly found economic momentum. The struggles we experienced during the banking crisis of 1991 appeared to be forever behind us.

I wrote a Commentary piece published on these pages at that time that discussed the types of things Rhode Island needed to do as it moved forward. I laid out a fundamental principle that I have been stating, apparently to deaf ears, since that time: Rhode Island needs to become more fiscally responsible, and to emphasize investment-oriented spending, which grows our state’s economy and adds to our tax revenues, over consumption-oriented spending. I even published a legislative report card that provided a basis for ranking legislation in terms of specific economic criteria, so that our leaders could have a meaningful basis for deciding upon competing legislation.

Suffice it to say that the response to my article was underwhelming. We did go on to have some surpluses in future years, but those are long gone.

Spending at rates well beyond income growth here came to be viewed as sound fiscal policy, necessitated no doubt by a historical pillar of our state’s fiscal policy: the refusal to undertake due diligence.

When we received the large tobacco settlement, we used those funds to close our state’s operating deficit — a clear violation of the principle I had been fighting for, as this emphasized consumption-oriented spending over potential investment-oriented uses of those funds. Life in the paropic (parochial plus myopic) lane!

As our paropic leaders continued to act as they had for decades, it became inevitable that we would eventually reach an economic “day of reckoning.” That began as the housing boom began to dissipate in 2006. Deprived of the economic momentum provided by housing, our structural problems quickly began to manifest themselves.

In addition to our flawed fiscal policy, our failure to generate high-tech and growth-oriented industries hastened our decline.

So, in January 2007, Rhode Island reached an employment peak. Our state has now been losing employment for 1 1/2 years. As housing weakened, our construction and manufacturing sectors also suffered. Retail sales, which had performed extremely well during the housing boom, slowed, initiating their current downtrend. Consumer confidence plummeted. Layoffs also began to rise. And, along with falling overall employment, the unemployed began to have great difficulty finding jobs here, moving continued jobless claims to disturbing levels. Long-term unemployment has surged as well. By August 2007, Rhode Island had entered into a full-blown recession.

As if all of this were not bad enough, energy prices began their steep rise and national financial weakness began to play a significant role as well. I pity the small businesses in this state that are trapped in the nightmare scenario of falling demand from the recession combined with rising energy and input costs compounded by Rhode Island’s tax and cost structure. This sounds more like a great idea for a new Survivor show than the environment a state should have its businesses in.

Then there is our fiscal situation. Tax revenues began to fall because of our recession. Entitlement spending, which is designed to automatically rise in bad times, has done just that. Add to this non-sustainable personnel costs, numerous instances of spending momentum that were never viable over the long-term, and large deficits emerged. But let’s be honest: These are largely self-imposed.

Ironically, I have become more optimistic about our state’s future economic prospects because of these largely self-imposed deficits. Deficits force fiscal discipline. Rhode Island fiscal policy is at long last beginning to become more fundamentals-based. Due diligence is also beginning to occur at non-random time intervals. Our leaders are beginning to understand the potential role of economies of scale and how those can affect spending. Instead of just considering the benefits of possible legislation, our leaders are starting to consider costs along with benefits.

Unfortunately, the temptation to gravitate back to the “old ways” will continue. I hope we have the collective will to reverse any such inertia. For example, we are now contemplating toll booths on our highways and told that the revenue raised would go toward improving our roads. Should we believe this? What guarantees do we have that some of the revenue won’t end up in the general fund as has been the case with gasoline-tax revenue?

The real threat to our state’s economic future is the general fund. To use Ross Perot’s analogy from years back, I view this as the “giant sucking sound” threatening our state’s long-term success. Until we are finally able to limit and more clearly differentiate the types of spending that are allowable, and to ultimately raise significant amounts of revenue from growth in a more competitive economic climate, we will have failed to institutionalize the changes needed to assure our state’s future economic vitality.

So, what will I be writing about 10 years from now?

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