RHODE ISLAND'S ECONOMY:
Unpublished Part One of Three-Part Series
Tourism has fortified its role as a success story. It is currently our second largest employer and its growth has been extraordinary for quite some time. In 1997, goods exports from Rhode Island grew at 18.5 percent, well above the national average. My Current Conditions Index (CCI) did something this past November I thought it would not do in this business cycle it attained its maximum value of 100! Monthly values have been quite respectable for quite some time now, remaining well above 75 which, based on historical performance, seems to indicate some acceleration in the overall pace of economic activity. Thus, Rhode Islands recovery, while not particularly rapid by either its own historical standards or national benchmarks, has become more broadly based. The last few months have been very encouraging, even though the level of the CCI has remained at or near 92 as the magnitudes by which several of its indicators have improved have increased noticeably
And, last but not least, we have a budget surplus, something that only a few years ago we wondered if we would ever see again. The current two-year estimate is $132 million.
The benefits of past development efforts have begun to pay dividends as well. Rhode Island moved aggressively into the financial service arena by passing a series of tax incentives, then luring Fidelity Investments here, adding close to 1,250 jobs by the end of 1998, and ultimately 2,000 jobs by Fleet. Building of the Providence Place Mall continues, which has breathed some long-anticipated life into construction employment here. As of April, 1998, construction employment finally broke through the 14,000-15,000 plateau it had remained stuck in for some time. The Mall itself is expected to be completed in August, 1999. While this mall will not bring the hoards of persons from Massachusetts that its more ardent proponents have promised, it should still be able to keep fairly large numbers of Rhode Islanders in this state, curtailing the number of visits by Rhode Islanders to the Emerald Square Mall.
Amid all the celebration of our improved economic circumstances, I remain concerned about our future. Why? Because Rhode Islanders in general, and the executive and legislative branches of our state government in particular, have become far too complacent about our states economy. While there is no shortage of policy recommendations on how to spend the surplus, it is surprising (or depressing) how few of these recommendations have as their basis either an accurate assessment of the current structure and performance of our states economy or a grasp of the distinction between consumption and investment-oriented spending. All too often, proposed policy measures treat the symptoms of things we are unhappy with, not the problems. Their perspective tends to be the short-run, with a consumption orientation.
Perhaps the best example of this is the proposed phase-out of the excise tax on automobiles. Everyone knows how expensive this tax can be, especially when new cars are involved. The proposed measure provides a way to lower these taxes, not by treating the problem, high property taxes, but by directly dealing with a symptom, high vehicle taxes because property tax rates here are high. Furthermore, this is a consumption-oriented measure. Why not lower the excise tax on business vehicles, or, for that matter, attempt to phase out the tangible property tax? Both of these are investment-oriented measures, which, by expanding overall economic activity, would generate future tax revenues that could help diminish the property tax "culprit." Last, and by no means least, lets not forget that the revenues that will enable us to continue with the proposed phase-out are not a certainty, especially since a recession will more than likely occur over the proposed phase-out period.
Were things very different here, the current emphasis would be acceptable. True, we are definitely doing better than we have at any time in this recovery. In fact, I would label the present economic climate as what we were dreaming about back in the early part of 1992, when even the US recovery was labeled "the jobless recovery." It seems as though the existence of a budget surplus has exerted some strange power over our state government. While revenue projections continue to surprise in the positive direction, legislators have apparently interpolated this to be the dominant trend for the foreseeable future. Never-ending surpluses? They are substituting "rulers for reason" when determining the future state of our economy. This is typical of behavior as a cyclical peak is approached. We saw this in the 1980s, as persons would simply apply a ruler to the nice upward trends we were experiencing, which led them to define their expectations for the future as "up, up, and away." What their perspective lacks is a critical appraisal of whether our current industry mix is adequate for our future expectations and whether our current economic performance has "legs."