First Into Recession, Last Out:
Is This the Best R.I. Leaders Can Do?

The Providence Journal Commentary Section
July 2009
 
by Leonard Lardaro

The FY 2010 budget has now been passed and signed into law by the Governor. My reaction has been a combination of disappointment, frustration, and confusion. Apparently lost on our state’s leaders was the fact that the way we balanced this budget was every bit as important as balancing it in first place. Clearly, the severity of this crisis presented our state with a unique opportunity to reinvent its economic profile, something made more urgent in the last year by the tarnishing of Rhode Island’s image: we have come to be viewed as “damaged goods,” a state with an extremely high unemployment rate for no apparent reason.

How bright are Rhode Island’s prospects, either for when the current recession will end or during the next recovery? To answer this question, it is necessary to view the context in which recovery will occur. We are now in a “new normal,” a phrase coined by Mohamed El-Arian. Gone are the days when excessive debt and leverage propelled economic activity, allowing us to attain rapid rates of growth. In that environment, severe recessions were typically followed by rapid recoveries. But today, the financial system is still healing, a process that will take time to complete. Much of the home equity that we relied so heavily on in the past is no longer available to generate spending momentum. And, a great deal of current unemployment is not the result of temporary layoffs, but was created by the permanent elimination of positions based on downsizing and consolidations. This last point promises to make job recovery very challenging, promising to bring about yet another “jobless recovery.”

In a recession in which so many jobs have been permanently eliminated, job resumption, where persons move back to their prior jobs or other persons fill existing positions, tends to be eclipsed by job initiation, where new jobs must be created. Obviously, job initiation is more costly and riskier than job resumption, a fact that puts Rhode Island at a disadvantage. Rhode Island has a notoriously unfavorable business climate, as its tax and cost structure is non-competitive. Let’s be clear: Rhode Island’s problems in this area extend well beyond tax rates: we have problems with tax rates, fees, regulations, electricity costs, and the skills possessed by many in our labor force. While the quality of educational outcomes K – 12 is beginning to improve, after years of hard-fought reform, current proficiency levels remain below those consistent with what Rhode Island will need to be successful moving forward.

Does Rhode Island’s business climate provide the types of incentives necessary for businesses, whether new or existing, to create these new positions in large numbers? We were recently presented with an opportunity to favorably alter our state’s tax and cost structure based on the recommendations of the Governor’s tax workgroup (of which I was a part). While I didn’t agree with everything recommended, it did lay out a very substantial framework that Rhode Island could have used to become more appealing in this climate. But these recommendations were entirely omitted from the budget, leading me to question whether our leaders truly grasp the longer-term implications of this budget. Absent any meaningful changes to our tax and cost structure that could have and should have been made, expect our state’s primary “engines of job growth,” health services, tourism, and not-for-profits to maintain that status, sustained by those portions that rely on job resumption. Incentives for existing firms to expand their activity here or for new firms to move operations into Rhode Island remain scarce, to put it kindly. While our leaders will no doubt cite the fact that other states are raising taxes and other costs, they need to consider where those states are starting from. Don’t expect Rhode Island to surge in business friendliness rankings any time soon!

In this environment, the inadequacy of Rhode Island’s small but slowly growing tech and growth-oriented sector will continue to haunt us. Our lack of a sufficient “critical mass” in this area was a fundamental cause of our falling into recession before most other states, since we lacked the momentum this sector typically generates. And, when this recession finally ends (which is not independent of our failure in this sector), we won’t have the benefit of very much activity generated in this sector that is so sensitive to economic growth.

Can any of this be explained by the caliber of information-age leadership here? Governors and the legislature abandoned public higher education here about a dozen years ago. Originally, the budget proposed to abandon the Economic Development Corporation as well, until a compromise sensibly spared this cut. Add the non-competitive tax and cost structure that this budget guarantees will continue, and what emerges is a management philosophy something akin to: “Information age, hold the information,” relying far too much on divine intervention (translation: “dumb luck”).

So, when it comes to recessions, Rhode Island will continue to be first in, among the last out, a fate largely sealed by this budget. What we have to look forward to is a recovery whose job creation momentum is tepid at best. Is this really the best our leaders can do?

Crisis always brings with it opportunities, if leaders are capable enough to seize them. I fear that the way our leaders have chosen to deal with this crisis has, in effect, broken the mirror of opportunity facing us, condemning our state to largely relying on “dumb luck” for the next seven years. They have, however, acted in a manner entirely consistent with the way the world perceives us: Persons outside of Rhode Island will look at all of this, shake their heads, laugh, and wonder what in the world our state’s government is thinking about.

While the world finds itself in a “new normal, sadly Rhode Island’s leaders are stuck in the “same old, same old” that made Rhode Island one of the first states to move into recession and condemn it to being one of the last to emerge from recession.