Endogenous Mediocrity:
Six Perilous Myths About Rhode Island

The Providence Journal Commentary Section
September 2009
 
by Leonard Lardaro

Listening to our state’s leaders lately, one continues to hear the blame for our state’s economic woes placed squarely on the back of the national recession. It is true that the US has been in one of the worst recessions since the Great Depression, so bad that this has come to be named “The Great Recession.” Clearly, a national recession of almost any magnitude will hurt Rhode Island’s economy. And let’s make no mistake about it: Rhode Island has been hurt a great deal by this recession. But is the “Great Recession” the cause of all of Rhode Island’s fiscal problems?

Sadly (and obviously) the answer is no! Rhode Island was one of the first states to enter into recession, in July of 2007 according to my Current Conditions Index, about a half year before the national recession. And, we were one of the first states to experience budget deficits. In fact, even before the recession occurred, budget deficits were projected to remain for about as far into the future as anyone cared to look!

The interesting problem that is now emerging for our blame-deflecting leaders is the fact that the national recession has either ended as of the time this article is being written or will end very soon. The news is not as good for Rhode Island: our recovery will not occur until the first quarter of 2010, lagging the national recovery by about two quarters. The most obvious reason for this disparity is the lack of sufficient tech and growth industry presence here. Add to this highly ineffective economic leadership as exemplified by the FY 2010 budget and what our future holds is continued “endogenous mediocrity.” In other words, Rhode Island’s sub-par economic performance, which is the logical and predictable outcome of the way things are done here, promises to remain with us well after the recession ends. What lies at the heart of much of this is a faulty managerial philosophy espoused by our state’s leaders. Let me elaborate on six primary examples of their faulty economic logic.

#1: Lowering taxes only entails costs (loss of revenue) without any offsetting benefits. This is truly amazing, as it assumes that the initial loss of tax revenue is all that occurs and recurs, and that nobody will ever react favorably to an improved tax environment here by either expanding their activity or locating here in the future. This is a wonderful example of the PAROPIC (parochial and myopic) thinking that has guided our state’s leaders over the last decade (and longer). Add to this linear thinking, where everything is assumed to be independent of everything else. In light of the horrible image Rhode Island now has nationally and internationally, not making our state’s tax climate more hospitable (and even less so with the change in taxation of capital gains) is perfectly consistent with the world’s view of us as being out there somewhere on an interplanetary plane. Can anyone explain to me how treating capital gains as ordinary income when tax rates are so high is supposed to help Rhode Island make substantial inroads into expanding its far-too-small tech and growth presence?

#2: Lowering taxes is merely a method for engaging in a “race to the bottom” in terms of economic outcomes. Actually, persons who believe this have not kept up with the news:  The race to the bottom is over: RI won! Our extremely high and still rising unemployment rate, no obvious growth vehicle to move us out of this recession when other states do, and deficits that will substantially diminish any momentum we do gain when we start to emerge from recession as far as I can tell isn’t an orthodox view of being at or near “the top.”

#3: Raising taxes only entails benefits (higher revenue) without any offsetting costs. Yet another wonderful example of the PAROPIC and linear thinking of our leaders. As far as I can tell, the intellectual underpinning of this can be traced to the pledge night scene from Animal House. As the pledge master (the state of RI) paddles the pledge (RI business or taxpayer), the reaction is the proclamation: “Thank you, sir, may I have another?” Come to think about it, doesn’t Rhode Island’s economic climate bear a strange resemblance to the Animal House?

 #4: RI spent less in FY09 than it had allocated for spending, therefore spending here is now under control. So, are we to assume that with the original spending figure there wasn’t bloated and unsustainable spending? Oh, to be Paropic, as we can forget all but the present! Let’s not forget that as other states emerge from recession before Rhode Island and balance their budgets over the long term, spending imbalances will keep us fighting deficits far into the foreseeable future.

#5: The unemployment rate tells us a great deal about where our state’s economy is heading. This is, of course, completely wrong, as the unemployment rate is a lagging indicator, telling us far more about where we have been instead of where we are headed. But then too, the managerial philosophy of our leaders in economic matters is, to put it kindly, lagging as well.

#6: We should always be positive: if we look at the “glass” as being half full not half empty, things here will improve. How one looks at “the glass” is totally irrelevant. All that matters is the size of the glass, which depends on economic growth, tax policies, and managerial philosophies. But seeing as this is a largely catholic state, predicating the effectiveness of fiscal policy on divine intervention should not come as a total surprise.

Things here got worse than they ever had to be, even with a severe national recession. Make no mistake, our state is not doomed. Nor is future mediocre economic performance inescapable. Unless, of course, our leaders are allowed to continue doing things as they always have and we the people remain on the sidelines as the enablers.