It’s Rhode Island’s Economy, Stupid

Last week, the Rhode Island Public Expenditure Council (RIPEC) published a report that recommended changes to Rhode Island government intended to foster business growth. Rhode Island Governor Lincoln Chafee commissioned the report in response to the collapse of 38 Studios, a video game company founded by former Red Sox pitcher Curt Schilling. The company was given a $75 million loan from the Rhode Island Economic Development Corporation (EDC), a quasi-state agency.

Rhode Island is in rough economic shape. The state’s unemployment rate in August was 10.7%, second worst in the nation. The average unemployment rate in the six New England states (including Rhode Island) is 7.4%, and the national rate is 8.1%. A July report from CNBC ranked the state last in a list of the top states for business in 2012. The top ten states in the CNBC ranking had an average unemployment rate of 6.3% in August.

It’s clear that action is needed. RIPEC advised creating an executive office of commerce, with a secretary who would report to the governor and oversee state economic policy. The EDC would stay a quasi-state agency, but be rebranded as the Rhode Island Commerce Corporation, and would fall under the new executive commerce department. Governor Chafee has not yet committed to any aspects of the RIPEC plan.

How much can the government really affect commerce? Conservative politicians like to argue that government cannot create jobs, but also like to claim credit for any jobs created on their watch. This irony extends to conservative Curt Schilling, who was happy to take a government loan after years spent decrying the excesses of government. This American Life devoted an entire show to the subject of job creation, and the conclusions were ambiguous. It’s extremely hard for states to promote job creation in the short-term, and any short-term measures come at the expense of long-term concerns (such as the improvement of infrastructure and education). Economic development at the state level consists mostly of stealing companies and jobs from other states.

Another frequent refrain is that government regulations destroy jobs. This is probably the rationale for RIPEC’s recommendation to move the Department of Environmental Management (DEM) under the new commerce secretary. There is evidence that government regulation does not play a large role in the job market. As the Washington Post reports:

In 2010, 0.3 percent of the people who lost their jobs in layoffs were let go because of “government regulations/intervention.” By comparison, 25 percent were laid off because of a drop in business demand.

While it’s logical to assess the economic impact of new regulations, making environmental protection subservient to commercial interests is a troubling move.

This seems like a no-win scenario: Rhode Island needs jobs but the government can’t do much about it. In fact, the best way for the Rhode Island economy to improve is probably to wait for the national economy to get rolling. But Rhode Island’s unusually high unemployment rate suggests there are systemic problems with state. Rhode Island is known as a corrupt, one-party state, and this stereotype is proven correct with disheartening regularity. Pointing out the problem is easy, finding a lasting solution is difficult. Rhode Island needs to change something fundamental, like how the state holds elections. A nonpartisan blanket primary system, in which all the candidates from all parties run in one primary, with the top two candidates advancing to the general election, could lead to more competition and allow moderate Republicans to emerge as a political force (or it could lead to general elections filled with only Democrats). Even if fundamental change proves elusive, Rhode Island should focus on improving the aspects of the state that already stand out, such as tourism and education. Regardless, I doubt that reorganizing how the state administers commerce is the real solution to Rhode Island’s economic troubles. RIPEC’s recommendations may be beneficial, but deeper reform is needed.


  • Sam, your argument is interesting but it overlooks a lot. Fundamentally I come down on Matt's side (categorically) in terms of what (if anything) could make a difference.

    First, states don't have the kind of latitude to borrow or practice Keynesian economics to any large degree—especially states with less-than-sterling credit like ours. I don' think anyone disagrees with a simple Keynesian remedy; the problem is that states often can't do this. Hence the Federal Stimulus Package sending a huge portion of money simply billed "aid to states."

    When you say we simply shouldn't have laid off public sector workers or raise property taxes, I want to ask: you realize those things were going to **pay** for something, right? And that bankruptcy is an imminent option when states can't pay their bills? By contrast, it's the exact opposite situation for the federal government. Keynesian economics largely exists as a federal, not state, option.

    Thus, when you write: "Do stimulus. Rehire the laid off workers. Lower
    property taxes. And pay for it by restoring the income taxes on the
    wealthy," we should remember that reinstating taxes on the wealthy
    wouldn't even pay for one of these things. And paying for it matters because states can't borrow like the federal government can. In
    fact, RI can't even borrow like most states can, which are in bad shape
    on average as it is.

    Second, The idea that Rhode Island at large–the most Democratic state in the Union–and EDC specifically, are suffering because the climate is too conservative is exactly as odd as it sounds. "38 senators being pro-choice" is not a substantiation of the influence over statewide economics (I'm sure there are good examples, but that's probably not one of them). Neither are emergency public sector layoffs, which every state was doing and has done; nor property tax increases, which nearly every state has done as well to plug major deficits. Something like minimum wage, on the other hand—where RI is above the federal average—is (so are tax cuts for the wealthy, which are a fair point).

    The real reason the EDC has failed, as I wrote to Matt earlier, is that the EDC has enough graft and corruption to fell a beluga whale. The ProJo had an excellent front-page piece on this over the summer. We don't have leaders who are serious about boosting growth; part of that failure is the pathology for terrible decisions like the one's Sam lays out (tax cuts for wealthy). But while emergency decisions like layoffs and tax hikes are what every state does during recessions, finding creative ways to invest in the state (exactly the job of RIPEC and EDC) could be influenced by the brain power we put in leadership. To that extent, election reform I think is on the right track (whether a blanket primary solves it is another story).

  • Overall, this article is pretty much right about RIPEC's report being woefully inadequate for the challenges our state faces. But let's be honest, even if you believe that a bureaucratic reshuffle to disadvantage environmental management is somehow a good idea, you don't need a middle school diploma to work out that it's nowhere near big enough to fix Rhode Island's economy.
    But the proposed solution vaults right up to almost RIPEC levels of policy silliness. A nonpartisan blanket primary is a fun idea to read about in political theory classes, but how it would actually fix the state's problems is unclear. Indeed, Rhode Island already basically has a nonpartisan blanket primary since everyone runs as a Democrat regardless of what their political views actually are. The reality of local elections is that people really don't know what the candidates' views are, so they usually have to rely on party affiliation. So very conservative candidates whose views are basically Republican can win races in Rhode Island that they never would be able to win if they actually ran as Republicans. As a result, the General Assembly is one of the most conservative state legislatures in the country. For instance, out of 38 senators, only 8 are pro-choice. And that's really the reason for our current economic mess. We've followed extremely conservative economic policies, and they've been a complete disaster. The two pinnacles of our economic strategy have been austerity and radical upward redistribution of wealth.
    Basic economics tells us that when the government lays tons of people off during a crash, the economy underperforms. This is, of course, what happened in Rhode Island. We had the second highest per capita public sector layoffs in the country, losing 7.75% of state and local workers between January 2008 and April 2012. Not coincidentally, we have wound up with the second highest unemployment rate in the country. This is textbook austerity.
    Of course, this isn’t the whole story. We've also done a lot of qualitative austerity by shifting the tax burden to taxes which do more damage to the economy. For instance, huge property tax hikes dumped a massive tax burden on businesses, especially small ones, and working families took a pretty tough hit as well. These cuts and property tax hikes were balanced out by–you guessed it–massive income tax cuts for the wealthy. This Romney Hood tax policy of taking from the middle class and giving to the rich goes a lot further than what most Republican legislatures around the country have been able to cook up during this crisis.
    So how do you fix our economy? It's simple–undo all the dumb things the General Assembly has done. Do stimulus. Rehire the laid off workers. Lower property taxes. And pay for it by restoring the income taxes on the wealthy.

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