A TANGLED WEB Of R.I. COMPETITIVENESS

The Providence Journal, Commentary Page
May 2006

I read with amazement the Op Ed piece by David G. Tuerck (“R.I. Needs Lower Taxes and Tougher Labor Laws,” 4/4/2006). The totally ad hoc nature of the symptoms he lists for our problems makes this one of the strangest articles about prescriptions to fix our state’s economy that I can ever remember reading.

As manifestations of the competitiveness problems facing Rhode Island, Mr. Tuerck cites the fact that in January of this year, Rhode Island lost 2,300 jobs while the nation experienced a substantial rate of job increase. He correctly points out that these job losses occurred in the areas of Health Services, Education, and Tourism, which he contends “reflects Rhode Island’s stifling labor and tax laws.” He goes on to state that a major problem for Rhode Island is: “… The monopoly rights and compulsory dues granted to its labor unions, which dominate the public sector…” As a manifestation of this he cites our minimum wage, which exceeds the national level, stating that it “destroys jobs and keeps potential employers from investing in the state.” All of this is supposed to provide convincing evidence of the downside to the initial question he poses: “Is your job safe?” Mr. Tuerck goes on to recommend major tax changes, something I have been publicly recommending for quite some time now. The nickname that Rhode Island has been given, “Tax Hell Rhode Island,” is hardly a complement.

The underlying basis for the Mr. Tuerck’s analysis is contained in the Beacon Hill Institute’s (BHI) State Competitiveness Report for 2005. In that report, Rhode Island received a ranking of 37 out of 50 states, while Massachusetts was ranked first. If we are to be worried about our state’s economy because of January’s employment change, I have good news: for February, Rhode Island’s employment change was 2,100, a 0.4 percent rise which exceeds Massachusetts’ February job change of 0.3 percent. For all of 2005, the year the Competitiveness Report refers to, Rhode Island’s job change outpaced that of first ranked Massachusetts (0.6 percent versus 0.5 percent). Furthermore, in the most recent quarter available (2005:Q4) personal income growth for BHI’s 37th ranked Rhode Island was the same as that for its #1 ranked Massachusetts (1.6 percent). And, guess what? The last time I checked, not only were there were labor unions in Massachusetts, their minimum wage also exceeded the national level.

How can there be such similarities in states with such vastly different rankings? The answer lies in the nature of all of the 50-state economic comparisons. These run from the utterly absurd (The Small Business Survival Index) to the Beacon Hill Institute’s study, which I believe is probably the best of all these studies. Every one of these studies has one critical element in common: they have found ingenious ways of adding apples and oranges. To do this, they employ “weights” to define how important various indicators are, and then add the resulting

numbers (scores) together. Ultimately, the answer to the question of how much is one apple and one orange is some number between 0.7 to 1.5 of something or other. Exactly what is never adequately specified, since these studies seldom obtain their weights statistically by correlating the indicators they use with desired outcomes.

The troubling question for Rhode Island is why our rankings are seldom very flattering. After reviewing these studies for years, I came up with a rule of thumb, call it Lardaro’s Law for Rhode Island: In any 50 state economic comparison, Rhode Island will tend toward its alphabetical ranking of 39th. Is it our small state status that is responsible for our rankings? Perhaps. Do our demographics have any bearing on this? It is difficult to say. My recommendation is not to take any of these studies too seriously. While it has been very clear to me for years that Rhode Island does not have a competitive tax or cost structure, which is a very negative factor in these studies, we should thank God that regulations and fees are not included. If they were, our only competition would probably be Washington, DC. But the other element that troubles me about these studies is something you might recall from your math classes – linearity. Each indictor or category is viewed as being separate and independent of every other. In reality, the impact of one variable is often affected by a number of other conditions that exist. For example, current efforts to improve labor demand here by enhancing the quality of K-12 education will be hampered by our non-competitive tax and cost structure. So absent meaningful tax reform, this success of this initiative almost certainly be more modest than policymaker expectations. Similarly, the quality of life here is very likely a mitigating factor to many of our economic negatives, something that allows us to overcome some of the outcomes that these studies suggest should be inevitable.

So, what about the initial question posed by Mr. Tuerck, “Is your job safe?” If this is the fundamental factor that needs to be considered in an economic study such as his, then I strongly suggest that he correlate his indicators with various measures of job security, obtain weights, then re-calculate his rankings. I’m still willing to bet that Rhode Island end up with a rank around 39th.

by Leonard Lardaro