Tuesday, October 26, 2010

The Solution to RI's Woes Has a Political Basis (an article the ProJo wouldn't publish)

Rhode Island has been through a great deal over the last three and a half years. I don't need to cite the statistics. All of us have had to live with them. Suffice it to say that after a truly horrendous year in 2008, our economy regained its "pulse" as of mid-2009. By the middle of this year it appeared that we were about to bottom at long last. Then, in April came the floods, which very likely postponed that bottom for several months. The question has now become what type of recovery will Rhode Island eventually have?

The vast majority of persons who attempt to answer that question, many of whom are politicians, will no doubt restrict their analysis either entirely or largely to cyclical factors. That is unfortunate since far too much of Rhode Island's unsatisfactory performance over the past several years has been driven by structural factors. Cyclical forces did matter, but they became the "afterburners" for a direction materially dictated by our state's structural deficiencies (see the earlier post that discusses this).

Normally, when I discuss our state's structural deficiencies, I focus on the very obvious problems with our state's tax and cost structure. That extends well beyond taxes, as we also have severe competitiveness issues based on our fees, regulations, electricity costs, and the skills of our labor force. However, as we move into this election season, during the late stages of our state's worst economic crisis since 1991, it is essential that we shift our focus to identifying the fundamental causes of our state's structural deficiencies so that remedial action can hopefully be undertaken. While it might sound strange coming from an economist, I believe that major changes to our state's economic climate over the longer term are predicated largely on structural political changes.

First, and foremost, Rhode Island can no longer afford a part-time legislature. I recommend a full-time legislature with four-year terms and a term limit of two terms. Details on pay and benefits will have to be worked out. This would largely eliminate obvious conflicts of interest and help us eliminate end-of-session flurries of bills that allow the elite of the legislature to capitalize on the benefits of the old saying: “In chaos there is profit.” But there is a more fundamental economic reason for this recommendation: During the worst of the global economic free fall of late 2008, our legislators ended their session and returned to their regular jobs, leaving our state entirely in reactive mode. I won’t argue with the legislators for leaving, they had to provide for themselves and their families. However, their inaction guaranteed that if and when they ultimately decided to attempt change, they would be forced to deal with a far more difficult and unforgiving economic climate. Rhode Island cannot afford to ever let this happen again.

Throughout the entire period since our state's employment peaked (in January of 2007), the legislature did virtually nothing to help us emerge from this recession, in spite of spending many hours doing who knows what. That combination, of course, is the definition of low productivity. Such low productivity argues strongly in favor of the need to downsize. So, my second recommendation is for us to dramatically downsize our state's legislature to approximately 50 persons in total. At this point, we should seriously consider moving to a unicameral legislature as well. As scary as it sounds, candidates for the legislature would actually have to run against someone and say what they believe! Even if we remain a largely one-party state, at least we would see meaningful debate during the primary season. Furthermore, since this state has been woefully inadequate in terms of undertaking due diligence over the years, we must provide the downsized unicameral legislature with meaningful research capabilities for its members. Contrary to the prevailing wisdom here, the long run doesn't just happen - you can actually plan for it! We need to institutionalize due diligence immediately.

The last set of recommendations deal with the obvious fact that affordability has never been a fiscal policy criterion for Rhode Island. First, I recommend that the Governor be given a Line Item Veto. Besides spicing things up, this would permit much more debate, not only among the legislative and executive branches, but among the public as well during a time of enhanced information availability and the desire for transparency in government. Second, as we will no doubt eventually enlarge revenue sources in the future, we must institutionalize the notion of earmarked expenditures. For example, if (more likely when) the state's sales tax base is broadened, we must earmark the added revenue (derived from consumption) exclusively for investment-oriented uses such as funding for public higher education. Not only would that provide an automatic linkage between consumption and investment-oriented spending, it would enhance future economic growth and tax revenue as well, while allowing us to end our state's de facto development policy: "Information age, hold the information." Last, and by no means least, we must regionalize municipal services so that we can at long last take advantage of our state's size, utilizing untapped economies of scale that promise to help us eliminate our structural deficits.

Persons reading this are probably thinking, how can anyone say that the legislature hasn't done anything during this recession? Aren't they passing income tax and regulation change legislation? Let's be honest - the primary reason this legislation has emerged now is because we are moving into the heart of election season. The legislature apparently discovered a political answer to a basic physics problem: How can you hit a home run when you never swing at the ball?" If you recall, the legislature rejected virtually all of the changes proposed by Governor Carcieri's tax commission, which were broader than those now considered, a few years ago. Because that legislature inaction forced our state to waste precious time, not only did we continue to be pummeled in just about every fifty-state business climate comparison, further damaging our state's image, it prevented us from moving beyond the lag time involved whenever fiscal policy changes are made. So, even if the "new" set of tax and regulation changes were passed and enacted tomorrow, the six to twelve month lag involved means that realistically their effects will not be felt until late 2011.

For a state our size with so many towns, school districts, so large a bicameral legislature, and such an abundance of structural economic impediments, maybe we should just rename our state "Redundancy Island" and call it a day. If the legislature ends its newly found penchant for action after the upcoming elections, that will probably be the best way for our state to proceed.

Wednesday, October 13, 2010

Scary Questions about R.I.'s Economy (from the ProJo 10/9/2010 as I originally wrote this plus a labor market chart)

Everyone seems to gauge overall economic performance by the recent performance of the unemployment rate. If you listen to the media and my many of my fellow economists, you will frequently hear that the only way the unemployment rate can decline is for employment to begin rising substantially from where it is today. These newly added jobs will then directly reduce unemployment, leading us at long last to a period where the unemployment rate is well below its current levels. There are two potential difficulties within this scenario, which explains why this process is taking so long. On the labor supply side, much of the current unemployment is long-term in nature, the result of jobless persons failing to possess the skills demanded by the employers who are attempting to increase employment. Economists refer to this as "structural unemployment." The result is skill shortages, even with so high a jobless rate. On the demand side, employers have continued to find ways of meeting current product demand with fewer hours worked by their labor force than they thought possible in the past. This has produced rather sharp gains in productivity. The failure to hire by small and medium-sized firms has been exacerbated by their inability to borrow funds due to inadequate collateral. And, of course, uncertainties about the future also play a role, for firms of all sizes.

But is this the only possible scenario? And, how does all of this pertain to Rhode Island? Actually, employment gains have been occurring here for several months now. Since October of 2009, job gains have generally been above 1,000 each month (except for April of 2010). In fact, over the October 2009 through August 2010 period, Rhode Island's average job gain (year-over-year) has been just over 2,000 per month (see chart below -- click to enlarge it). How can this be with so high an unemployment rate? The answer is that while job gains are occurring, so too are job losses. From October 2009 through August 2010, monthly job losses for Rhode Island averaged around 15,250. Thus the proper context for analyzing overall employment change in Rhode Island is a simultaneous focus on job gains and job losses. While monthly job loss has declined sharply since the height of the post-2008 period, job gains have increased very little. But they are increasing. So, the question becomes what will be required for Rhode Island to generate substantial and increasing job gains?

 A viable response to this question requires that we confront what I view as the two scariest questions about Rhode Island's economy at present. First, does Rhode Island have a tax and cost structure consistent with generating the types of employment gains needed to substantially reduce unemployment? Second, what are our current engines of job growth? Importantly, these questions are not unrelated. Our children have known the answers for years. Ask them when they come back to Rhode Island to visit. The answer to the first question is not yet, even with the two-year-delayed tax reforms. As for the second question, our engines of growth at present are health services and tourism. While a small but growing tech sector is helping us, past failures of economic leadership here have relegated non-defense tech to levels that require time before they can make a substantial impact on our state's overall rate of growth.

Fortunately or not, for Rhode Island there is another way we can and likely will witness material reductions in our jobless rate. Rhode Island has a very high labor force participation rate, the proportion of our (non-institutional) working age population that is in the labor force. At present, Rhode Island's participation rate is just under 69 percent, a rate almost five full percentage points above the national rate. Over the past five months, as Rhode Island's unemployment rate fell from 12.5 percent to 11.8 percent, its labor force participation rate also fell. This indicates that some of our state's unemployed stopped looking for work over that period. Based on the way labor force statistics are calculated, they were no longer counted as being in our state's labor force. So, as increasing numbers of Rhode Islanders exhaust all benefit entitlement, if they then stop seeking employment, as is likely, our state's unemployment rate could potentially decline substantially from its current level, even without large employment gains.

June marked the third anniversary of Rhode Island's current recession. We have been through a great deal since our recession began in June of 2007. Perhaps that understates things a little (if that is possible) since our employment peaked in January of 2007, almost a full year before the national peak. Things never had to be this bad for Rhode Island. Is the second way I suggested for reducing our state's unemployment rate the best we can do? I refuse to believe that.

November's elections hold the potential for our state to make meaningful changes to the way things are done here. Voters must ask very difficult questions and demand highly specific answers to anyone running for statewide office. Sorry, wish lists don't work here!
  1. Candidates should be forced to outline in detail how Rhode Island will emerge from this recession.
  2. What specific measures do they propose for materially increasing job gains relative to the losses that will occur over the next two (or four) years?
  3. What are Rhode Island's economic strengths? How can those be built upon (i.e., what is Rhode Island's niche)?
  4. What are Rhode Island's major economic weaknesses? They should outline in detail proposals to eliminate these, or to somehow turn them into positives.
The upcoming election is more important than is generally presumed for Rhode Island, since federal bailout money will no longer be available by this time next year. Fiscally, this will force us to go "cold turkey." The resulting jolt to a fragile upturn may well force our state into a double-dip recession. The citizens of this state need to be proactive, even though our elected officials seldom are.


Tuesday, October 5, 2010

August Data for RI

The August data for Rhode Island show an economy that is continuing to improve. The table below (click to enlarge) gives the values for a number of key variables. Note that a number of the values from last August were fairly weak, making them easy "comps" and not too difficult to beat. Strange as it might sound, that's how an economy pulls itself out of recession -- beating weak values forming a base to expand from.