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Solution to RI Economic Malaise

Has a Political Basis

Rhode Island has been through a great deal over the last three and a half years. I don't need to cite the statistics. All of us have had to live with them. Suffice it to say that after a truly horrendous year in 2008, our economy regained its "pulse" as of mid-2009. By the middle of this year it appeared that we were about to bottom at long last. Then, in April came the floods, which very likely postponed that bottom for several months. The question has now become what type of recovery will Rhode Island eventually have?

The vast majority of persons who attempt to answer that question, many of whom are politicians, will no doubt restrict their analysis either entirely or largely to cyclical factors. That is unfortunate since far too much of Rhode Island's unsatisfactory performance over the past several years has been driven by structural factors. Cyclical forces did matter, but they became the "afterburners" for a direction materially dictated by our state's structural deficiencies.

Normally, when I discuss our state's structural deficiencies, I focus on the very obvious problems with our state's tax and cost structure. That extends well beyond taxes, as we also have severe competitiveness issues based on our fees, regulations, electricity costs, and the skills of our labor force. However, as we move into this election season, during the late stages of our state's worst economic crisis since 1991, it is essential that we shift our focus to identifying the fundamental causes of our state's structural deficiencies so that remedial action can hopefully be undertaken. While it might sound strange coming from an economist, I believe that major changes to our state's economic climate over the longer term are predicated largely on structural political changes.

First, and foremost, Rhode Island can no longer afford a part-time legislature. I recommend a full-time legislature with four-year terms and a term limit of two terms. Details on pay and benefits will have to be worked out. This would largely eliminate obvious conflicts of interest and help us eliminate end-of-session flurries of bills that allow the elite of the legislature to capitalize on the benefits of the old saying: “In chaos there is profit.” But there is a more fundamental economic reason for this recommendation: During the worst of the global economic free fall of late 2008, our legislators ended their session and returned to their regular jobs, leaving our state entirely in reactive mode. I won’t argue with the legislators for leaving, they had to provide for themselves and their families. However, their inaction guaranteed that if and when they ultimately decided to attempt change, they would be forced to deal with a far more difficult and unforgiving economic climate. Rhode Island cannot afford to ever let this happen again.

Throughout the entire period since our state's employment peaked (in January of 2007), the legislature did virtually nothing to help us emerge from this recession, in spite of spending many hours doing who knows what. That combination, of course, is the definition of low productivity. Such low productivity argues strongly in favor of the need to downsize. So, my second recommendation is for us to dramatically downsize our state's legislature to approximately 50 persons in total, in a unicameral legislature. As scary as it sounds, candidates for the legislature would actually have to run against someone and say what they believe! Even if we remain a largely one-party state, at least we would see meaningful debate during the primary season. Furthermore, since this state has been woefully inadequate in terms of undertaking due diligence over the years, we must provide the downsized unicameral legislature with meaningful research capabilities for its members. Contrary to the prevailing wisdom here, the long run doesn't just happen - you can actually plan for it! We need to institutionalize due diligence immediately.

The last set of recommendations deal with the obvious fact that affordability has never been a fiscal policy criterion for Rhode Island. First, I recommend that the Governor be given a Line Item Veto. Besides spicing things up, this would permit much more debate, not only among the legislative and executive branches, but among the public as well during a time of enhanced information availability and the desire for transparency in government. Second, as we will no doubt eventually enlarge revenue sources in the future, we must institutionalize the notion of earmarked expenditures. For example, if (more likely when) the state's sales tax base is broadened, we must earmark the added revenue (derived from consumption) exclusively for investment-oriented uses such as funding for public higher education. Not only would that provide an automatic linkage between consumption and investment-oriented spending, it would enhance future economic growth and tax revenue as well, while allowing us to end our state's de facto development policy: "Information age, hold the information." Last, and by no means least, we must regionalize municipal services so that we can at long last take advantage of our state's size, utilizing untapped economies of scale that promise to help us eliminate our structural deficits.

Persons reading this are probably thinking, how can anyone say that the legislature hasn't done anything during this recession? Aren't they passing income tax and regulation change legislation? Let's be honest - the primary reason this legislation has emerged now is because we are moving into the heart of election season. The legislature apparently discovered a political answer to a basic physics problem: How can you hit a home run when you never swing at the ball?" If you recall, the legislature rejected virtually all of the changes proposed by Governor Carcieri's tax commission, which were broader than those now considered, a few years ago. Because that legislature inaction forced our state to waste precious time, not only did we continue to be pummeled in just about every fifty-state business climate comparison, further damaging our state's image, it prevented us from moving beyond the lag time involved whenever fiscal policy changes are made. So, even if the "new" set of tax and regulation changes were passed and enacted tomorrow, the six to twelve month lag involved means that realistically their effects will not be felt until late 2011.

For a state our size with so many towns, school districts, so large a bicameral legislature, and such an abundance of structural economic impediments, maybe we should just rename our state "Redundancy Island" and call it a day. If the legislature ends its newly found penchant for action after the upcoming elections, that will probably be the best way for our state to proceed.

by Leonard Lardaro


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