Only R.I. Cure: Cut Spending and Taxes

The Providence Sunday Commentary Page
June 2008
 
   by Leonard Lardaro

Rhode Island’s budget problems continue. The way things are going now, it seems we won’t to be able to balance this fiscal year’s budget until early in the next fiscal year the way things are now going. Then, we get to confront a vastly larger deficit starting in July.

There is a great deal of angst about our state’s economy by both citizens and lawmakers. In a recent exchange, a member of the legislature’s Joint Committee on Economic Development, took the head of the Economic Development Corporation (EDC), Saul Kaplan, to task for his alleged contribution to our state’s current economic dilemma. According to the Providence Journal story about this (“EDC is grilled on bad R.I. economy,” May 2), EDC was: “ … chastised … for allowing the state to slip into  … the Northeast’s only recession.” Wow! I never imagined Mr. Kaplan was powerful enough to single-handedly draw Rhode Island over the edge into recession!

Pardon my sarcasm, but I remain stunned by what this quote reveals: how grossly out of touch some of our state’s legislators are with economic reality. What a vivid illustration of the paropic (parochial and myopic) mindset held by so many of our state’s leaders! Does the above view also pertain to the entire Joint Committee? I hope not, because what was sorely missing from this exchange is cause and effect.

To understand the problems currently facing Rhode Island, it is necessary to go back to the end of 1987, when Rhode Island first became a post-manufacturing economy. The rules of the economic game today are very different from those in the “good old days” of manufacturing. As job loss today often entails the permanent elimination of jobs, the addition of jobs, or job creation, has become job initiation, not job resumption as it once was. And, since the initiation of new jobs is more risky and costlier than job resumption, production and employment costs are more critical to the success of states in raising employment.

Taken by itself, this presents one glaring problem for Rhode Island in the post-manufacturing era: our tax and cost structure (which includes fees, regulations, and potential problems with the skills of our labor force) is nowhere near as competitive as it must be for us to be successful in this post-manufacturing environment. Is this the fault of Saul Kaplan and the EDC, or is this the responsibility of the legislative and executive branches of our state’s government? My answer, which might surprise you, is that it is the responsibility of both. But, getting back to the exchange with the EDC, given Rhode Island’s current non-competitive tax and cost structure, what “cards” does EDC have to play in attempting to expand businesses and employment here?  It appears to me that the love Rhode Islanders have for their state often leads them to presume that everyone outside this state will love it as much as we do, so they should want to locate here.

This brings me to the second problem for Rhode Island: What is our state’s dominant niche?  Recently, we decided to move towards biotechnology, pharmaceuticals, life sciences, and oceanography. Is our current tax and cost structure consistent success in this niche? I seriously doubt it. How far, then, will our existing economic climate be able to carry us? Will we be able to generate the levels of employment, income, and tax revenue that will allow us to attain our desired economic goals? 

It is on this count that the glaring deficiency of our non-competitive tax and cost structure exacts its toll. All too often, EDC is often forced to make deals with individual companies or industries to generate these types of economic gains. How large have these gains been? Generally, not large enough, as employment here has continued to fall since January of 2007.In terms of fairness, these deals add insult to injury for existing firms here who ask why they can’t receive better treatment all the time. Efforts to expand existing businesses and to get new firms to locate here absent specific incentives have not been sufficient for us to be as successful as we should have been in this post-manufacturing era. Unfortunately, the old saying about Rhode Island remains as valid as ever: “If you can make a profit in Rhode Island, you can make a profit anywhere.”

Because the legislative and executive branches, along with the EDC, have jointly failed to produce a competitive tax and cost structure, economic growth here has suffered. Experiencing less growth than we should have seen is one of the reasons why we currently find ourselves in a recession when few other states are. Along with this, our state’s economy has generated less tax revenue than it would have had we been more competitive and our niche better (and earlier) defined.

The deficits we now face are largely self-imposed, resulting from non-sustainable spending practices over the last twenty years, the failure of our paropic leaders to re-define our state in terms of a niche with a compatible tax and cost structure until very recently, and a separation of economic leadership that, as the exchange between the EDC and legislature shows, is all too often “us” versus “you.” Deficits are not pleasant, especially when largely self-imposed. But they will serve our state’s long-term interest by forcing the type of fiscal discipline that has been so sorely lacking, and hopefully, an end to factionalized economic policymaking.