ADVICE AND A REPORT CARD FOR THE LEGISLATURE ON STATE'S ECONOMY
The Providence Business News, Opinion Page, January, 1999

As the new legislative session begins, the fiscal condition of our state is readily apparent: not only do we find ourselves with over $100 million in surpluses, federal dollars from the tobacco settlement are also forthcoming. It doesn't get any better than this, does it?

By just about any objective measure, our state's economy is performing the best it has this decade. Defense layoffs are over -- Raytheon and Electric Boat are hiring. The banking crisis has all but ended, except for repayment of the remaining DEPCO debt. Our unemployment rate is hovering around 5 percent, a level we once thought wouldn't be seen for years. Retail sales in Rhode Island outperformed those for the nation for the second straight Christmas season. Existing home sales continues to set records. Long-term unemployment has declined greatly over the past two years. Layoffs have also fallen dramatically. The list goes on.

In light of all of this, what guiding principles should the legislative and executive branches follow during the current session? I suggest that they follow three principles if they are truly serious about improving Rhode Island's economic future.

#1 Economic policy should no longer be piecemeal, based on "linear think." In other words, individual proposals should no longer be viewed as being separate from and independent of existing policies or competing proposals. It is incumbent upon you to make sure all the "pieces" fit together into cohesive policy. To this end, it is essential that you collectively formulate what Rhode Island's economic niche in the information age is -- well before the next downturn occurs.

#2 Judge tax/expenditure policies in terms of how effective they will be in improving our economic future based on an accurate assessment of the current state of the Rhode Island economy. While Rhode Island's economy is currently performing the best it has in this decade, compared to the nation, we remain one of the worst performing states. And, let's not forget that the largest job gains for 1997 in our state's "top five" occurred for temporary employees ("temps") with an average annual income of $13,250, or that Rhode Island is one of the most cyclically sensitive economies in the nation. The time has come for you to define what is meant by the phrase "doing well" when referring to our state's economy. Should we continue to compare our current performance to what it was in the past (I hope not), or should we contrast our economic performance to that of the region or nation?

#3 Avoid the temptation to find ways, however popular, of spending the present surpluses. To this end, it is vital that you distinguish between two types of spending. The first of these is consumption-oriented spending, expenditure for present purposes or programs that does not raise productivity or economic growth in the future. The other type is investment-oriented spending, expenditure that enhances and generates economic growth now and in the future. The benefit of this type of expenditure is that by increasing the size of our economy, it automatically raises future tax revenue, resulting in what economists call "fiscal dividend." Part of the reason our annual surpluses have not been all that large (everyone I talked to had presumed our annual surpluses to be the $132 million two-year figure cited so often in the media), is our relatively slow rates of economic growth throughout this decade. Greater focus on the long-term and investment-oriented spending will greatly assist us in improving tax revenue during both good and bad times. And, if you are really ambitious, you can take measures to assure that Rhode Island's economy, and therefore its tax revenue, will be less volatile in the future.

Let me suggest the following "Report Card" for you to utilize to grade proposed legislation other than "safety net" expenditures. Using this "report card," legislative proposals can be ranked based on their scores, with the most preferable legislation earning the highest score of 10, and least preferred receiving a score of 5 (note: check only one entry per row).

REPORT CARD TO GRADE PROPOSED LEGISLATION

To illustrate the use of this report card, let's rank two pieces of legislation that passed last session: the inventory tax elimination and the phaseout of the of auto excise tax.

• The inventory tax reduction focuses on the problem, it is a long-term solution, it is investment oriented, and it uses an existing funding source. Score: 10.
• The excise tax phase-out gets a very different score. It treats the symptoms of a problem (high property taxes) with a short-term "fix" that is consumption oriented. While it intends to use an existing funding source, the adequacy of funding is somewhat speculative (i.e., according to RIPEC, funding this in its final year and thereafter requires $195 million -- three times our best annual surplus throughout this upturn). Score: 6.

As we have now passed the cyclical peak in our rate of economic growth, it is incumbent upon persons in both the legislative and executive branches to plan proactively -- while we are still enjoying a recovery. Rhode Island's economy must be made less volatile and the key ingredients for non-major-project growth must be put into place. If you fail in your responsibility to do this, then, when the next recession comes, Rhode Island will once again find itself in the all too familiar role of reacting to the myriad of negative forces swirling around us. It is these negatives that define the cost of inaction or ineffectiveness in the legislative session that has just begun.

by Leonard Lardaro