WHAT WILL IT TAKE TO BRING NEW FIRMS HERE?

The Providence Business News, August, 1996

Manufacturing employment in Rhode Island has fallen continually since 1984. The common presumption about this trend appears to be that manufacturing output has been declining as well. What amazes me most about this is the number of politicians and persons in the media who view such an employment-output relationship as an immutable law. It is not terribly difficult to find discussions about the "inevitable demise" of Rhode Island manufacturing in local newspapers, television stories or as part of political speeches. Policy discussions and candidate debates all too often move quickly to outlining prerequisites for returning manufacturing to its status a decade ago.

The good news is that any discussion about the demise of manufacturing in Rhode Island is, to say the least, premature. The "norm" for the behavior of manufacturing employment has changed, making this "immutable law" view misguided.

Throughout all of the 1990s, the sheer volume of regional and international competition faced by manufacturers in all fifty states has largely precluded them from increasing prices. Since production costs have been rising, they have been forced to cut costs. Rhode Island is no exception to this trend. The primary vehicles for cost savings have been downsizing and the continual introduction of labor-saving technology into production. Both of these have resulted in employment reductions. The fact that has been missed by the "immutable law" crowd is that the firms who downsize or incorporate newer technology, our SURVIVING manufacturing firms, have actually increased output at the same time employment has been reduced. So, in our present economic climate, inferring changes in manufacturing output from declines in manufacturing employment is almost certain to be fraught with problems. Declining manufacturing employment might actually be associated with higher production. It is the exodus of firms from Rhode Island that reduces both employment and production. This is the major problem we face and the basis for the general presumptions about the ill health of our manufacturing sector.

Barring any major uptick in inflation, our manufacturing sector will follow a new "rule:" layoffs will become the norm rather than the exception for surviving manufacturing firms in our state. From now on, layoffs in manufacturing can be expected to occur not only when the economy sours (cyclical unemployment), but as part of the underlying process of structural change in our manufacturing sector. State economic policy cannot prevent these "structural" layoffs. Instead, it must work to assure that manufacturing employment IN THE AGGREGATE rises. To borrow from the old retail saying, we must make up for these individual-firm employment losses by "making it up in volume." We are thus more dependent than ever before on attracting new businesses to our state and having our existing firms expand.

Whether we like it or not, manufacturing employment in this state will probably never return to its level of a decade ago. From this point forward, state fiscal policy must explicitly acknowledge the new "rule" of manufacturing stated earlier. As a first step, it will have to deal far more aggressively than it has in the past with the widely acknowledged problems associated with doing business in Rhode Island. It should not restrict its focus to determining what it will take for individual firms to remain or expand here. That emphasis, as we saw in the 1980s, necessarily lent itself to a "let’s make a deal" mentality. It was doomed to failure since it treated the symptoms, not the problems associated with our manufacturing climate. The most important question that needs to be asked is: "What will it take for firms to willingly choose to locate in Rhode Island?" Once that question has been satisfactorily answered and appropriate policies have been implemented, our concerns about both the exodus and expansion of existing firms will be rendered moot.

by Leonard Lardaro