The Illusion of an Improving Tax Structure

A while back, I pointed out (see the addendum) that what looked, at first, to be an economic improvement — the increased percentage of wealthy people in Rhode Island — turned out to be evidence of the contrary. The percentage improved because the non-wealthy left the state in such great numbers while the decreasing flat tax and capital gains tax maintained our population at the high end.

It seems likely to me that such less-encouraging factors explain the tax-related findings of the Rhode Island Public Expenditures Council (PDF), which Marc mentioned here. From the Providence Journal summary:

From 1998 to 2008, individual income tax collections, as a share of personal income, declined by about 7 percent, sales tax collections increased by less than 1 percent, and property tax collections increased by almost 4 percent.Simmons says the increasing reliance on the property tax in recent years can be attributed, in part, to the state’s decision to cut state local aid for education during the economic recession.

That forced communities to make up revenue losses through a combination of trimming expenses and raising the property tax — its only other major funding source besides state aid.

The silver lining is that Rhode Island's property tax grew at a slower rate than the national average of about 8 percent.

Because these calculations are made based on total income and population, in the state, and since our local economy has been struggling, while population has decreased, and since the General Assembly hasn't actually cut the tax, the sales tax revenue result is likely attributable to declining consumer confidence and increasing incentive to shop out of state, where sales tax is lower. On the income tax front, those who pay in the mid-range brackets have been leaving and out of work, while the tax on the upper range has been decreasing. That Rhode Island entered the recession ahead of the rest of the nation probably facilitated our "improvement" by this measure even more.

This puts a different light on the property tax question. Sure, the immediate cause was the cut in state aid, but the decrease in revenue from state-level taxes has surely been a prior cause (along with excessive spending and an unwillingness to cut state budgets to the necessary degree). That the growth in property taxes was slower than the national average need indicate only that Rhode Island was already closer to the threshold that residents could bear, and since the decrease in tax revenue for the state hasn't corresponded an increase, but rather followed from a decrease, in discretionary income for residents that threshold has, at best, remained stagnant.

Unemployment the Same; "Unemployment" Down

Here's an interesting observation. The Providence Journal's story about Rhode Island's decreasing unemployment rate may have been headlined "State's jobless rate declines to 12 percent," but the lead reads, "The figure is counteracted, however, by decline in size of labor force," and Andy Smith sets the tone of the article at the very beginning:

On the surface, there is good news in the state unemployment numbers released Friday. The Rhode Island jobless rate dropped to 12 percent in June, a decline from 12.3 percent in May, and the number of people classified as unemployed decreased by 1,900, falling to 69,300.

By contrast, the cycling news on WPRO — to which I'm able to listen at work, now that Buddy's show has moved to drive time — clearly presented the numbers as positive.

The upshot is that 800 government jobs (mostly for the Census) went away; 800 private sector jobs appeared (presumably with a significant percentage of temporary seasonal jobs); and 2,800 Rhode Islanders gave up their job searches and exited the calculation. Anybody who is tracking unemployment as a measure of actual economic health and resident well-being, in other words, should not be encouraged.

I will say this, though: It looks like my prediction of 15% unemployment was off the mark, but mostly because I didn't include the possibility of workers exiting the market.

Sailing in the Ocean State

Yes, we lost the bid to host the America's Cup, but there is still opportunity to grow our economy by focusing on sailing related business.

Warned ahead of time, the state administration immediately took a positive perspective, saying that Rhode Island is likely to host preliminary races that could become as big a benefit as the actual Cup defense....Keith Stokes, head of the state Economic Development Corporation and the leading state official on the issue, said the trials to select the Cup defender could involve several yachting syndicates.

Stokes said in an interview that the preliminary races in some ways offer a better opportunity than the final Cup challenge. Given the potential for multi-year events, “that provides a longer-term and stable economic opportunity.”

Long-time yachting expert Halsey Herreshoff, president of the America’s Cup Hall of Fame, said he sees another, long-term bright side to the situation: Newport is an excellent place to sail. Once current America’s Cup sailors find that out through sailing preliminary races here, he reasons, they’ll want to come back for future Cup competitions.

A Measure of Sustained Suckitude

We bat around the Lardaro Current Conditions Index from time to time, typically determining that it's not very useful, but it really does demand some .statement of context:

Rhode Island's recession is not over, but the end may be very close, according to the Current Conditions Index released Monday by University of Rhode Island Prof. Leonard Lardaro.

The index reported a value of 50 in April, down from 58 in March.

As I understand it, Lardaro's index measures current results against the same month one year prior, with a score of 50 indicating no decline or improvement. In other words, even if the recession technically ends in that the economy isn't shrinking, that doesn't mean that times are improving.

I say that not to issue in dark clouds, but because I think the general public thinks, when they hear that "the recession has ended," that the economy is back to normal, and if 2009 is Rhode Island's new normal, we're in a great deal of trouble. People in power keep pushing for economy-boosting reforms until the Current Conditions Index starts hitting 100, to compensate for the months on end that Rhode Island spent scraping zero.

In Defense of Realistic Taxation

In defense of the Tea Party — in the broad movement sense — Fred Deusch of North Providence sums up the problematic thinking of those who advocate for progressive taxation:

Rhode Island has about 1 million people, but only 12,000 pay 41 percent of the state's taxes, according to Treasurer Frank Caprio. How much does Mr. Platt want from those 12,000? In a May 9 Commentary piece, Michael McMahon, former head of the Rhode Island Economic Development Corporation, wrote: "Montgomery County, Md., similar in size and population to Rhode Island, tried to balance its budget by increasing taxes on the top wage earners from 4.75 percent to 6.35 percent. This was supposed to generate $106 million of additional revenue. But many of the wealthy, who are very mobile, left town. Revenue actually fell by $257 million as the number of millionaire taxpayers declined from 7,989 to 5,529."

When the wealthy leave for greener pastures, whether from Maryland or in Rhode Island, who does Mr. Platt think makes up the for the loss in tax revenues? Answer: We all do.

As I've pointed out multiple times, for much of the last decade, Rhode Island's tax policies — the flat tax and the capital gains tax — appeared to be maintaining our base of wealthy residents, while high property taxes (to fund unrealistic contracts for public-sector unions) and the general hostility of our political culture to economic growth continued to drive out the working-to-middle class folks who wish only to build on that base of wealth in order to improve their own circumstances.

Now, the capital gains tax is back with a vengeance, and the flat tax has been eliminated through a clever "overhaul" that appears to make the income tax more progressive, in its real effects, not less. And nothing has been done to improve the lot of those who've been fleeing all along. As Mr. Deusch suggests, we're all going to pay the consequences... all of us, that is, who stay.

Getting the Kids to Work

The Providence Journal's John Kostrzewa and the public officials on whom he reports miss some critical dynamics in their discussion of the problem of teen unemployment in Rhode Island:

More and more teenagers in Rhode Island can't find work because the recession has shrunk the number of job openings. The jobs that are available and that young people used to fill are being taken by seniors forced back into the labor market or out-of-work adults who can't find anything else.

Not to mention the factors of illegal immigrants and other unskilled labor attracted by our progressive welfare and tax policies. A more fundamental thought derives from this description of the problem:

When young people don't get jobs and are idle, they don't learn valuable behavioral traits and skills such as showing up on time, respect for supervisors, teamwork and the value of their labor.

Providence Mayor David Cicilline, Education Commissioner Deborah Gist, and others see the solution as more government programs, including education and training, but that's suspiciously helpful to bureaucrats and public-sector labor unions. The reality is that, as its policies across the board prove, Rhode Island is not designed for successful, upwardly mobile lives. Our state punishes success and rewards conformity and going along to get along. That dynamic leads to policies that restrict job growth and — in whom it attracts and what it encourages — floods out the opportunity to follow a clear course of opportunity from menial work to a successful career.

That's more of a cultural issue than an economic one, but if there's any hope to change it, it will come with the economic decision to encourage business activity — really encourage it, not by making forms easier to fill out, but my making business easier to conduct.

Where Rhode Islanders Are Going

Forbes has an interactive map where you can look at where the people are moving. I found it via Ryan Streeter's post concerning the difference in migration between California in Texas (Texas is gaining, Cali ain't). Consider Rhode Island more a Cali than a Tay-has. Here's Providence County, for instance:

Kent, Washington (er..."South") and Newport counties are also in the red, so to speak. Unsurprisingly, it looks like a lot of retiring Rhode Islanders are heading to Florida, Arizona and maybe SoCal. Another group, probably more based on economic reasons, is headed to Georgia--particularly Atlanta--and the Carolinas.

Cross Every Picket Line

Circumstances have made me slow to respond to this, and my position will hardly be a surprise, but I did want to express — ahem — solidarity with RIGOP Chairman Gio Cicione (as well as the RI Young Republicans) on the matter of crossing a union picket line to hold a Central Committee meeting at the Westin Providence hotel:

Explaining why the state Republican Party, along with the Rhode Island Young Republicans, decided to hold its State Central Committee meeting at the hotel, party chairman Giovanni Cicione said: "If Democrats continue to torture every local business with threats of strikes and boycotts, especially in the midst of this recession, Rhode Island will soon find itself with no employers left."

A Revolutionary Tax Twitch

Here's a humorous note for perspective: That revolutionary tax "overhaul" that the folks in the General Assembly are trumpeting as such a big deal, but that still needs to be watered down to remain "revenue neutral"? It will move us past a whopping three states in business tax climate:

Rhode Island's tax climate for business would improve somewhat if the state adopted a tax-overhaul plan proposed by the General Assembly's Democratic leadership, the Tax Foundation said Wednesday.

Rhode Island now ranks 44th of the 50 states, among the 10 worst nationwide, according to the Tax Foundation, a nonprofit group in Washington, D.C., that monitors government fiscal policy.

If the plan were implemented for this year, the group said, Rhode Island would rank 41st. "This indicates the plan would be a modest but positive change for the state's tax system," the group said in a report.

Look out Minnesota, Wisconsin, and Vermont! (PDF)

RI has 2 of 7 "Junkiest Cities"

Oy.

Think Greece and Spain are drowning in debt? Look a little closer to home. Seven U.S. cities recently had their municipal bonds downgraded below investment grade. Their debt is now junk, considered more worthless than that of the so-called PIIGS.

"America's short-term budget crises, long-term growth perspectives and needs for austerity are similar [to Greece]," said Matt Fabian, managing director at Concord, Mass.-based consulting firm Municipal Market Advisors.

Last quarter, Moody's Investor Services declared the debt issued by Harrisburg, Penn., and Woonsocket, R.I., to be junk, or below-investment grade. Meanwhile, Fitch Ratings currently has four other cities in the basement -- Detroit and Pontiac, Mich.; Harvey, Ill.; and Littlefield, Texas -- while Standard and Poor's has one -- Central Falls, R.I.

These seven cities are struggling under the weight of the recession. Residents are unemployed, and without a job, they can't pay their property taxes, which are the foundation of local budgets. And cities' operating expenses continue to soar; pension and debt payments don't go away. And as their credit gets worse, the cost of borrowing for municipal projects -- such as sewer plants and roads -- just gets more expensive.

"The fiscal stress is severe in cities around the country, and it's likely to stick around for at least a couple of more years," said Chris Hoene, director of policy and research at the National League of Cities.

Rhode Island's Love of the Bottom

I'm not sure whether or not it's a healthy development that Providence Journal economy columnist John Kostrzewa has come to the despair-bearing conclusion that many of us in the back alleys of conservative RI commentary have harbored for many months, now:

Hope has all but evaporated for a V-shaped recovery in Rhode Island — one in which the state quickly gains back the jobs and economic strength it lost during the recession. ...

Rhode Island has a noncompetitive tax structure, a lousy business climate and reputation, and an inability to solve state and local budget crises, leaving uncertainty for any taxpayer or business trying to plan a future here. Who would want to live or move into that environment?

During the long recession, a lot more could have been achieved if the state's leaders had kept their promise to rebuild the state's economy.

Because they didn't, Rhode Island is still stuck in the back of the pack.

Too many Rhode Islanders are invested in the status quo or duped by the arguments that what they love about the state is irrevocably tied to what's killing it or lulled by the preemptive assertions that we'll always be first in, last out of every economic decline for reasons outside of our control. The truth is that, in a state with a healthy political culture, every member of the General Assembly would be facing a tough fight to retain office, this November. The likelihood is that only a handful will change, and without significant effect.

The most sound advice, at this point, has to be to get out or hunker down. And if you choose the latter, for whatever reason, the best strategy for substantive change is to start local. It's not a thrilling call apt to rile up a revolution, but it's the only way forward.

Greece Is the Way

I'd been intending to highlight Ed Achorn's column from last week, anyway, but it's got special significance for me, after Saturday's vote in Tiverton:

See if any of this sounds familiar.

In Greece, politicians have duped voters into believing that it is compassionate to run up massive debts, fund unsustainable social programs, punish the work ethic and job creation, and give away the store to public-employee unions (with higher wages, better benefits and earlier, more generous retirements than those available to most in the private sector). ...

Still, thanks to a sufficient number of voters who pay little in taxes, get handouts, and/or have friends or relatives in government to protect, its politicians have gotten away with this behavior for quite some time.

Ed's focus is on Rhode Island, as a state, but the same characteristic philosophy resides in the cities and towns, to varying degrees. Some of the people who voted for a 7.88% minimum tax increase, in Tiverton, were parents riled by the threats of the School Committee, but most were teachers themselves or the family and friends of union members. Fill in the remainder with residents who enjoy what they perceive as free services and others who just resent having people who've lived here for only a decade or two deign to offer suggestions.

It's difficult to see what could turn the ship around.

What Reamortization Means to a Future Business Owner

Andrew gave listeners to the Matt Allen Show a quick and easy way to conceptualize the effects of reamortizing the state's pension debt.. Stream by clicking here, or download it.

Rhode Island's Beef with Business

When the "public option" fell out of the healthcare debate, I made the point that the legislation was the public option. The rules and restrictions under which our healthcare system must operate and bureaucratic presumption of dictating rates and expenditures make it, de facto, a creature of government design. There's something similar hindering business operation in Rhode Island.

Michael Morse's Engaged Citizen post, the other day, gave the worthwhile testimony that initial paperwork and fees weren't excessively burdensome. Of course, that's from the point of view of a man with some savings who determined to open a full-time storefront business. The calculation changes for folks with more drive than resources who want to ease into a business as a part-time affair.

More importantly, Michael's argument, like a legislative package that the General Assembly unveiled yesterday to make "it easier to do business in Rhode Island," is largely beside the point. In the General Assembly's case, one could argue that it's a smokescreen.

Assuming all of its components make it through the legislative gauntlet, the package makes some common sense changes, such as combining required paperwork into an online form and allowing government agencies to operate together and simultaneously when handling incipient businesses. But mention of taxes is nowhere to be found, and easing of mandates and regulations is danced in a circle. Consider the provision dealing with "Fire Code reforms":

... this legislation provides that fire alarm, smoke detection and carbon monoxide plans would have to be approved or denied within 15 days, instead of the current 90 days. To ensure that the fire code is enforced consistently, all assistant and deputy fire marshals would be required to participate in standardized national training and certification as determined by the state fire marshal. Approval of plans and construction of some buildings could be expedited, with the approval of the State Fire Marshal, if prepared and supervised by a professional engineer or architect. All other inspections and approvals would be conducted within timeframes to be established by the State Fire Marshal, not to exceed 90 days.

The problem with fire code regulations is that they're too onerous. For a non-business example, Tiverton has spent millions of dollars on new school buildings because recent changes to the fire code made them unsuitable for their intended purposes. In both the private and public sectors, requirements for construction add thousands of dollars to any project. If anything, this legislation increases mandates by requiring towns to hire new staff to meet requirements and ensure that employees can attend all necessary training.

The only component of the legislative package that actually touches on changes to regulations and mandates — as opposed to applying them more rapidly — is that old do-nothing mechanism of a panel to make reports:

This legislation, sponsored by Sen. Walter S. Felag, Jr. (D-Dist. 10, Warren, Bristol, Tiverton) and Rep. Peter F. Martin (D-Dist. 75, Newport), establishes the Office of Regulatory Reform within the EDC, to review Rhode Island’s regulatory processes and permitting procedures for businesses in an effort to further improve them. Each municipality would be granted the authority to appoint a liaison responsible for coordinating with the Office of Regulatory Reform. The Office will publish an annual report on the regulatory processes of state and municipal agencies and permitting authorities for the purpose of: encouraging agencies to improve procedures and reduce paperwork burdens impacting small business; making recommendations for simplification of regulatory processes, and making proposals to any agency for consideration of amendment or repeal of existing rules or procedures which may be obsolete, harmful or burdensome. The Office of Regulatory Reform would have the authority to intervene in regulatory or permitting matters before state agencies and municipal boards, commissions, agencies and subdivisions for the purpose of assuring efficient and consistent implementation of rules and regulations in order to foster the creation and retention of jobs in Rhode Island.

The wording of the statute could make a big difference, but this new office seems only to add one more government official into the mix of manipulation and noise-making. The reaction of big government to complaints that it isn't responsive to a particular constituency is too often to create another bureaucratic entity in the name of the unheeded group. Legislators, themselves, are supposed to be the people's voice in government, and this package does nothing about representatives who continue to present legislation with a "there oughtta be a law" mentality and refuse to ease up on their own financial demands in order to lower taxes.

Changing the Rules for "The Next Big Thing"

Special deals. Special laws. Once the state starts taking this sort of step, we're well past the point of reasonable accommodation for an incipient industry:

State lawmakers are attempting to breathe new life into a stalled proposal for an eight-turbine wind farm in waters off Block Island through legislation that would allow the project to bypass a difficult regulatory hurdle.

A bill filed late Wednesday would make it possible for developer Deepwater Wind and National Grid, the state's main electric utility, to enter into a power-purchase agreement without having to win approval from the state Public Utilities Commission. ...

Instead of the PUC, approval of a new contract for Deepwater would be in the hands of the appointed directors of four other state agencies: the Division of Public Utilities and Carriers, the Economic Development Corporation, the Office of Energy Resources and the Department of Administration. All four agencies would have to certify an agreement for it to go into effect, but they would each be given very narrow parameters for their review.

Deepwater and its government supporters didn't get the result they wanted through the normal path — permission to force energy consumers to pay three times the going rate of electricity for its product — so the latter are changing the regulatory path and putting blinders on the regulators. Whatever good intentions may lie behind such initiatives, this sort of special treatment should be a red flag for voters and legislators and is a bright beacon for corruption.

Amy Kempe, Carcieri's spokeswoman, said the introduction of the bill had no connection to the Cape Wind decision. Approval of the Massachusetts project, she said, only buttressed the belief held by Carcieri and House and Senate leaders in the promise of a national offshore wind industry.

"Yesterday's announcement shows that this is a viable industry," she said Thursday. "It is going to be moving forward."

It appears that Ms. Kempe misses the distinction between evidence that an industry is viable and evidence that it is politically popular. The former means that people are willing to allocate their own money for a good or service; the latter means that elected and bureaucratic officials are willing to allocate other people's money for it. The standards for success are clearly quite different.

Michael Morse: Doing Business in Rhode Island

Nobody said starting a business would be easy. I didn't expect it to be. Nobody told me I would get rich. I probably won't. A lot of folks said it would be impossible. Opening a business is not cheap. I needed every penny of equity from my home to make it happen. I've lived a simple life. I have no credit card debt. I drive a 1992 Toyota. My idea of an extravagant vacation is a weekend in New Hampshire. I've established good credit. I know how to work long hours with little sleep.

Along with my quest for independence comes a stubborn need to find things out for myself. An opportunity presented itself. I did some homework. I took an inventory of my current obligations. I ignored the incessant barrage of negativity that pervades the stream of consciousness of Rhode Island. I decided to act. My wife and I bought a tanning salon.

"Are you crazy?" was the reaction we encountered most. There are too many regulations! The economy is terrible! The government will tax you out of business!

Friends and family were amused by our latest idea. Though encouraging, I think some secretly hope we'll fail, if for no other reason than to prove to themselves that it can't be done, at least not in Rhode Island.

The closing was in late October. We incorporated in November. Filled out the state sales tax form, applied for a building permit and certificate of occupancy and went to work.

We planned on opening December 1st. We applied for a permit from the Department of Health. The Health Department paperwork took about a half hour to complete and cost two-hundred and thirty dollars. The people there were efficient and helpful. The only trouble we had was with our own unrealistic expectations. December 1st came and went, our place was a disaster. We worked through the holidays.

We finished construction of our store on January 12th. The people at Warwick City Hall helped us navigate the inspection process. In one day, the fire alarm, mechanical, plumbing, electrical and building inspections were done. We received the certificate of occupancy in the mail a week later. The entire process cost $50 and about three hours of our time. Somehow, the fact that we still needed a license to operate from the City of Warwick slipped our minds. We applied, and I had it the next day. We needed another license to do business on Sundays. A day later it hung on the wall of our new business, next to the Health Department license, the permit to make sales at retail and the CO.

We paid the State of Rhode Island a total of $740: $500 to incorporate, $230 for a license to operate from the department of health, and ten bucks for a permit to make retail sales. The City of Warwick got us for $150. This March we have to pay another $500 to the state to stay incorporated, the yearly fee of $230 to the Department of Health for our license, another $10 to keep our retail sales permit, about $1,000 to the City of Warwick for inventory taxes and the $100 for our sales licenses.

Insurance is costly, about $2,000 a year. Workers compensation another $400. I have to pay weekly payroll taxes of about $50.

Expensive, yes, but hardly onerous. Not quite the roadblock I had expected. It wasn't cheap or easy, but if it were, everybody would do it. The cost of doing business in Rhode Island is not a reason to not do business in Rhode Island. I needed to spend some money to make some money.

Now, I hope people come to my place and spend some of theirs!

The Mindboggling Contortions of Nanny Staters

Beyond her many ways of saying "raising taxes" without saying "raising taxes," note the convoluted language that this advocate of poverty uses to confuse voters (emphasis added):

Kate Brewster, executive director of the Poverty Institute in Providence, which analyzes tax and budget policies on behalf of low-income people, said, "State leaders need to take a balanced approach to solving our financial problems, which includes carefully reviewing our tax policies. We agree with RIPEC that the state should avoid a piecemeal approach to tax policy. However, there are several reasonable policies that could be enacted that would generate much-needed revenue in a fair and responsible manner, such as ending corporate giveaways, modernizing our sales tax and considering the hundreds of millions of dollars we forgo each year through tax expenditures."

Would any casual reader understand that not forgoing expenditures means raising taxes? Hopefully a reader who does will understand that, by Brewster's reasoning — which, to be fair, appears to have been the dominant perspective of those who determine Rhode Island's budgetary and spending policies — every dollar in the private economy is ultimately just tax revenue that the state chose not to collect and every decision not to collect it is an "expenditure."

Here's another interesting tidbit from the same article, by the way:

Taxes paid by businesses in tax year 2008 amounted to 5.7 percent of the state's gross state product for that year, compared with 4.2 percent for Massachusetts, 3.7 percent for Connecticut, and a national average of 4.9 percent. "We have a very heavy business-tax burden," Simmons said.

We must stop this now, or everybody who remains in the state of Rhode Island is going to suffer, the poor and working class most of all.

Will Disaster money become another "one-time fix"?

I've heard chatter about how, perversely, the flood disaster here in Rhode Island could turn out to be some sort of blessing. Why? Because the Federal Disaster Area tag brings with it Federal dollars that can be used to rebuild infrastructure damaged in the storm. And whereas Bastiat's parable of the Broken Window certainly applies to those businesses damaged by the flood (money they could have spent elsewhere is going towards just getting back to normal), does it apply to RI government?

On a macroeconomic scale, yes it does. Federal dollars are still our dollars, though filtered through Washington. That is money that could be spent elsewhere if there was no disaster. So, whether you agree or disagree with the other avenues of spending--ie; health care, military, etc.--disaster relief takes money away from other areas.

On the other hand, if we've already sent the moola to D.C., what the heck is wrong with getting it back because we need it, right? In fact, isn't disaster relief amongst one of the core functions of a government anyway? I would say yes and to heck with Bastiat.

But then there is this: RI government has done an awful job at one of its supposedly central functions of maintaining infrastructure. The budgetary crunch wasn't going to alleviate that any time soon and, at best, we would be subject to the same routine as past years such as voting on "transportation bonds" apart from the normal budget or cutting out school building improvements. But then we get the rains of March and the resulting disaster, which leads to the promise of a Federal bailout of a different sort.

My fear is that the General Assembly will manage to turn disaster aid--just like last year's stimulus money--into another short-term, one-time "fix" by moving money around and using federal dollars to replace state spending (like they did with education stimulus dollars) instead of as a supplement to it. So questionable programs favored by those in the General Assembly will be maintained and Federal dollars will be used to cover the basic areas that State government should be doing anyway. Another one time fix that will allow the GA to kick the can down the road again.

Stimulating Everybody in Rhode Island

Rep. Stephen Ucci (D., Cranston, Johnston) has proposed legislation with a targeted "stimulus" intention:

The bill (2010-H7905) would implement a three-year freeze on the sales tax of all building materials used in the construction of new or improvements to existing residential and commercial buildings.

"The retail sales tax incentive program would essentially amount to a seven-percent discount on raw materials used to construct or make improvements to any building, including wiring and plumbing supplies," said Representative Ucci.

In addition, Ucci's construction stimulus package would implement a three-year property tax moratorium on all new construction and improvements to existing buildings completed in 2011, 2012 and 2013.

I suppose, since it's my industry, I shouldn't be inclined to criticize the intention, and I suspect the legislation's chances of making it into law are just about nil. But I do wonder why the move should be so limited. If it would be a good thing, by decreasing sales tax and holding back property taxes, to stimulate the economy, why not stimulate it all around? Construction's an integral field for economic development, but it doesn't really open up new routes for economic growth.

Once the houses and office buildings are erected, people have to live and do productive things in them. That's what the state ultimately has to begin encouraging, rather than discouraging.

Special Interests Strike Again

This, reported in the weekend edition of the Newport Daily News, is very typical of the way Rhode Island does business:

The state has cited the company Newport’s water division hired to install new radio-read meters at all 14,500 water accounts in the city and in Middletown for not having master plumbers do the work.

The notice of violation from the state’s Division of Workforce Regulation and Safety caught the city by surprise.

Julia A. Forgue, Newport’s director of utilities, said forcing the city to hire master plumbers to change the meters would increase the project’s cost by two to three times. The contractor is appealing the decision to the Department of Labor and Training.

Non-plumber city employees have been changing and maintaining meters for years. These little requirements, jacking up the cost of living and operating in Rhode Island for the benefit of politically connected interest groups (notably unions), are why I say that the state could rocket out of its perennial recession if only it would toss aside its unnecessary burdens. This case is even more egregious, because the change of meters isn't self-initiated:

The state's Public Utilities Commission asked Newport to convert all water meters to ones that can be read from the street with a radio device, to reduce long-term costs and to make meter reading more efficient. The city in July 2008 awarded a contract to Stiles Co. Inc. of Norwood, Mass., to provide the meters. Stiles hired Five Oaks Construction Co. of Groton, Mass., as the subcontractor to install the meters, and it began the work in December 2008. By the end of last month, Five Oaks had installed just over 5,550 meters.

So, an unelected state board is requiring the change, and the state government is requiring that it be excessively expensive. Little wonder Rhode Islanders feel powerless (and just leave when the state hits their thresholds for tolerance of reductions in their quality of life).

First to Unemployment

Rhode Island should not, under any circumstances, increasingly burden the state's employers with the costs of its unemployed, but clearly, something must be done to adjust for our long-term burden of unemployment. This conversation is therefore very necessary:

The state Department of Labor and Training on Wednesday proposed sweeping changes to Rhode Island’s unemployment-insurance system to try to restore the state's unemployment trust fund to solvency.

The plan would gradually raise the state unemployment tax paid by more than 30,000 employers in Rhode Island and cap or reduce benefits that an unemployed worker could receive.

The mix of solutions is a matter for extended debate, but this suggestion makes absolutely no sense to me:

Benefit changes would apply only to people filing claims in the future, not to those currently collecting, officials stressed.

Frankly, I see no justification for that distinction, except (maybe) to keep the state from having to recalculate anybody's benefits. It's not as if the currently unemployed invested more into the system, and it's not as if those who are still working will have additional time to prepare for a change in unemployment benefits that they don't yet know that they'll require.

Under the same logic, one could argue that no businesses that are currently making payments for their unemployment insurance should see an increase in their rates.

What Profiteth a Non-Profit to Advocate Big Government?

I concur with Marc that seeking to compensate for horrendous government spending, taxing, and economic policies by squeezing money from non-profits would be shameful. We shouldn't let the news cycle revolve, however, without noting the significant overlap between the non-profit community and the segment of the population that advocates for the very policies that are sinking the state.

Every time somebody demands charitable assistance from the government, whether effected as a mandate or revenue, that person is demanding a shift in responsibility from private citizens to the government. Once the structures are in place, the government considers that it owns the cause. Heed well the parenthetical note from the article to which Marc links:

Aside from health facilities, Rhode Island law also grants tax-exempt status to churches, Little Leagues, public and private schools (Costantino noted that public schools and universities probably wouldn’t be affected by any proposal), and afterschool programs such as the YMCA.

First the government is a partner. Then it's competition. Then it gives itself unfair advantages. And ultimately, the same organization that extracts money by force of law for taxes is the same organization that grants college loans, manages the healthcare industry, maintains a criminal justice system, maintains a military, and determines how much help people deserve, what sorts of strings ought to be attached to that aid, and what social agenda ought to be furthered by the charitable process.

Promises Unkeepable

There it is on the front page:

The promises that Rhode Island and its cities and towns have made to their current and future retirees without putting money aside carry a dollar figure that is big enough to buy 345,588 Ford Mustang GTs, 47,000 houses priced at the state median or several hundred of the finest mansions along the state’s coast.

Put another way, the state’s unfunded retirement obligations add up to about $9,400 per Rhode Island resident.

All told, those promises come with a price tag of $9.4 billion — a number revealed for the first time in a report to be released Wednesday by the Rhode Island Public Expenditure Council.

That bit of news dovetails perfectly with a recent op-ed that I'd intended to mention, today, by RI Senate candidate for district 35, Dawson Hodgson:

Hard-working and dedicated government employees deserve a compensation and retirement structure comparable to that of their fellow citizens. In some cases, such as police and firefighters who risk their safety to protect ours, they even deserve a little bit more. All they have now, however, is an illusion that has been sold to them by irresponsible politicians. A deal that can't be kept is no deal at all. We owe these employees and our taxpayers a contemporary and competitive benefit structure within the confines of what we can afford.

Among the problems that government faces is that, when it tries to commit future generations to make specific (and imbalanced) payments, those generations don't have much reason to feel as if they have ownership of the promises made. Another problem that Rhode Island has, especially, is that those younger folks can just leave, making the promises even harder to keep.

A Bit of Hot Air

This is the proposed subsidy that the General Assembly and Governor are foolishly forcing energy consumers to provide for wind power, unless the Public Utilities Commission objects:

Under the deal being reviewed, National Grid would pay 24.4 cents per kilowatt hour for power from the project starting in 2013. The price would increase by 3.5 percent a year. The utility currently pays 9.2 cents per kilowatt hour for power from natural gas-fired plants and the like.

We've essentially created a controlled market for wind energy that begins two-and-a-half times the going rate and increases about 15% per year regardless of market forces. During a massive recession, this is a wonderful example of the insanity that Rhode Island does so well.

"A lot of industries are looking to pull out of this region," Energy Management vice president Dennis Duffy said. "This is one new industry that is trying to get in."

Of course, Mr. Duffy doesn't speculate as to what other industries might try to get in the region with the same subsidized deal and guaranteed market. Rhode Islanders should remember Duffy's argument in a few years when there are even fewer jobs, fewer business, and a smaller taxbase and public infrastructure has switched from crumbling to dissipating for lack of resources.

"Sins of the Past" Contribute to Pension Woes

ProJo has the story:

Acting Auditor General Dennis E. Hoyle said...cities and towns need to look at their sometimes generous retirement plans, determine whether they are “sustainable or not” and make changes. He said cities and towns could improve the situation by making full contributions each year, raising employee contributions and transitioning out of defined-benefit plans to defined contribution or hybrid plans for new hires.

“Without changes in the benefit structure, there’s not going to be that much of a dramatic savings” he told the commission.

...cities and towns are trying to deal with the “sins of the past” when it comes to promised retirement benefits, but he acknowledged it is a challenge. It would help, he said, if the state allowed defined contribution and hybrid plans for cities and towns that enroll employees in the state Municipal Employees Retirement System, because those would lower projected costs for new hires.

Hoyle cited the Cranston police and fire retirement system as an example of a plan that is in trouble. According to the report, the Cranston plan covers 70 active members and 426 retirees and has enough money to cover just 15 percent of its projected obligations. As a result, the annual required contribution needed to keep pace with projected costs is $20.1 million. By contrast, the annual required contribution for the state Municipal Employees Retirement System, which covers 14,667 active employees and retirees — more than 29 times as many people as the Cranston plan — is $33.5 million.

Any Way to Tax the Productive

A letter by Middletown Republican Town Committee Chairman Antone Viveiros in the Newport Daily News directs attention to H7563, submitted by Rep. Amy Rice (D., Portsmouth). The legislation would add the following language to Rhode Island tax law:

Opting out of the domestic production deduction. — All corporations doing business in the State of Rhode Island shall add back into their taxable income any amount deducted under the federal "domestic production deduction" also known as section 199 of the federal Internal Revenue Code. State tax forms shall be changed if needed in order to comply with this statute.

For the likes of Rice, it appears, ideology trumps economic wisdom. Even were it a principled correction to remove national tax reductions from the Rhode Island calculation, sucking money out of the productive segment of the state is plain lunacy in the current economy and in our current condition of civic deterioration. As Viveiros asks in closing:

Is this the way to create jobs?

Why won't the General Assembly majority cut spending, as we have? Do they have to, to get reelected? I'll leave those answers to you.

Trying to Comprehend the Amazon Tax

Being as circumspect as I'm able, I can't see the Amazon tax as anything other than myopic protectionism on the part of RI policy makers. Basically, the law states that a company has "a physical presence" in the state if it has affiliate agreements with local businesses, requiring them to collect Rhode Island sales taxes:

[RI House Finance Committee Chairman and General Treasurer Candidate Steven] Costantino said he wants to keep the law in place as a matter of equity. "Rhode Island businesses who are on Main Street need a fair playing field," he said.

Gary S. Sasse, director of the state Department of Revenue, put it this way: When buying a camera from a store in Rhode Island, a consumer must pay a sales tax. When buying online, a consumer may or may not pay sales tax.

"It's a violation of the basic concept of fairness in tax policy, to tax one seller and not the other," Sasse said. Repealing the Amazon law would be a mistake, he said.

The vision evident in that view is as narrow as a snake's scale. First of all, local businesses can compete on the lack of shipping costs and immediate gratification. Second of all, the Internet enables local businesses to create online stores and pursue customers worldwide. Large, national companies will have a huge advantage over small, Rhode Island companies once all states follow Rhode Island's lead.

The most mind-boggling thing is that consumers can still get the products without taxation, provided absolutely nobody locally benefits from the purchase. At the very least, one can say that Rhode Island is in no position, economically, to be in the vanguard of this government backlash against Internet retailers.

Once More, With Feeling: RI Government Must Shrink

John Kostrzewa notes what is likely just the baseline for actual results:

All of the recent turmoil is the result of Rhode Island's anemic economy and plans to close state budget deficits of $219 million for the year that ends June 30 and $427 million for the year that follows ..

The report shows the state's budget deficits for the coming years that end June 30 are forecast to be $362.2 million in 2012, $416.2 million in 2013, $457.8 million in 2014 and $535.7 million in 2015.

If the state government doesn't take dramatic steps to rework its functioning, I suspect those numbers are going to look like wishful thinking. Kostrzewa insists that entitlements and social services spending have to be cut back, and he's right. He's also right that cities and towns have to "redirect some of the energy they are putting into whining about state aid cuts to restructuring their governments," and the state will have to lighten the burdens it places on municipalities and school districts.

The only difference I have with Kostrzewa comes with this:

The tools [that the state should supply the cities and towns] range from changes to municipal pensions and minimum manning provisions, to municipal health insurance cost sharing and a uniform public school employee health care benefits program. Other proposals include eliminating mandates for school bus monitors and the requirement that school nurses be certified teachers.

My view is that the state should eliminate mandates, not reverse their direction. In other words, the General Assembly should provide relief from itself, but not impose terms on contracts, even if any economically literate resident would prefer those terms. Let residents get involved and rebuild their local governments on their own impetus; otherwise, the focus of activism for special interest will just shift away from towns, and they'll place even more emphasis on dominating the State House, which will be more difficult to reach from the grass roots.

Some Different (Not Necessarily Good) Ideas

I don't know much about Coventry's Victor Moffitt, who has announced his intention to announce a run for governor as a Republican. Most of his reported ideas represent the sort of reform of which my opinion ranges from suspicious to hostile:

Rhode Island no longer has a surplus, but Moffitt in a brief interview said many of the themes of his campaign for governor will echo his 1998 campaign [for treasurer]. At that time, he proposed eliminating school spending from the local tax burden, establishing a statewide 7 percent flat income tax (which he says would bring in enough new revenue to establish a statewide school-funding financing plan) and breaking the state into four regional school districts. He also wanted to reduce the state sales tax to 6 percent.

Centralizing financial control of the schools: bad idea. Increasing taxes for most Rhode Islanders: worse idea. On the other hand, the article offers an intriguing glimpse of rhetoric from Moffitt's past:

In response to news that the state had logged a $132-million surplus in 1998, for example, he wrote: "A 'surplus' is created when taxpayers are overtaxed ... Every 1 percentage point of the Rhode Island sales tax represents about $70 million in state revenue. Therefore, we should reduce the sales tax to 6 percent ... to allow our Rhode Island retail businesses fair competition with our neighboring states."

His general perspective appears to be correct, if his solutions would ultimately exacerbate our problems. My mind, of course, went to the Tiverton school district, which had a quarter-million-dollar surplus this year yet continues to complain that taxpayers "cut" its budget by declining to increase it by an additional $627,000 (or so) in the last budget cycle.

What Does Lardaro's Index Mean?

It seems as if URI Economics Professor Len Lardaro is changing his explanation of his index in a subtle, but significant, way:

The Current Conditions Index fell to 33 in December, down from 50 in November and 42 in October. But Lardaro emphasized that the latest report was not uniformly negative. ...

The Current Conditions Index uses a dozen national and local economic indicators to track the state’s economic performance. A reading of 0 would mean no indicators improved compared with a year earlier, while 100 would mean all 12 improved.

December was the eighth consecutive month that saw Lardaro's index top its year-earlier level, as four the 12 indicators showed month-over-month improvement, including manufacturing wages, the size of the labor force and new claims for unemployment benefits.

Every explanation that I've read up to now has stated that a score below 50 means contraction and a score over 50 means expansion. (I also thought the indexes compared each month to a year earlier, not the prior month.) Have we just been shrinking for so long that Lardaro has to delve deeper to find a positive message?

There's A Reason That "Hope" and an Anchor are on the Flag

Look, for obvious reasons, it's hard to be optimistic around here, but a couple stories should give us OCEAN staters a glimmer of "hope." First, Quonset Point is getting some stimulus dollars to upgrade infrastructure and, possibly, help build a new manufacturing facility:

The Quonset Development Corporation has been awarded $22.3 million in federal stimulus money to upgrade the infrastructure at Quonset Business Park and purchase a crane for Davisville Port with an eye toward creating a hub for wind turbine assembly.

Gov. Donald L. Carcieri said the money would give “a tremendous boost” to the state’s efforts to become a center for the renewable energy industry. QDC Managing Director Steven King said construction work may begin within six months....

The QDC says the upgrades will help offshore wind developer Deepwater Wind LLC open a planned wind turbine assembly plant at the park. However, the federal government has not yet said exactly which projects have been funded, King said....In its application, QDC said the money would create between 500 and 800 jobs. The bulk of those jobs would be at the Deepwater plant, with the agency anticipating the remainder coming from businesses that expand or move into the park as a result of the infrastructure improvements. The new crane and refurbished docks also could create jobs, QDC said.

The spectacle of America’s Cup yachts flying anew across Rhode Island Sound became more than a shot in the dark after software billionaire Larry Ellison — who apparently bought Astors’ Beechwood Mansion on Bellevue Avenue recently — won the 33rd America’s Cup challenge on Sunday in Valencia, Spain.

Ellison, whose BMW Oracle team seized the Cup for the Golden Gate Yacht Club, immediately cited San Diego, San Francisco, and Newport as possible venues for the next Cup challenge, expected to be held in 2013....

Larry Fisher, executive director of the Herreshoff Marine Museum and America’s Cup Hall of Fame, said, “Apart from the great tradition and spectacle that the race is, and all that leads up to it, it’s a great opportunity for economic development.”

Fisher cites two recent studies that determined the economic impact on the 2007 America’s Cup in Valencia to be “in the realm of 70,000 jobs created, and billions of dollars.” Fisher said, “The opportunity for this magnitude of jobs-creation and this kind of economic impact will not be ignored by any venue that wishes to host the next America’s Cup competition.”

The Not-Well New England State

Perhaps Rhode Island's problem is it's size. I mean, looking at the map that accompanies the results to Gallup's poll concerning Americans' well-being, one can hardly tell that we're in the "lower range" category. I mean, the bottom half of New England is "midrange," and Vermont, New Hampshire, and Maine made the "higher range" category so it looks like the region's doing pretty well. You can hardly see the little bile-colored spot amidst the region's green hue.

And yet, there we are, in company with the Deep South.

Gallup-Healthways Well-Being Index 2009 state-level data encompass more than 350,000 interviews conducted among national adults aged 18 older across all 50 states. Gallup and Healthways started tracking state-level well-being in 2008. The Well-Being Index score for the nation and for each state is an average of six sub-indexes, which individually examine life evaluation, emotional health, work environment, physical health, healthy behaviors, and access to basic necessities.

The Same Ol' Government-as-Solution Thinking

Got that sinking feeling that nobody's really interested in keeping the state afloat? The ideas floating from Rhode Island legislators have that distinctive feel of suggestions that sound good to constituents but that avoid addressing the real problems:

House Finance Chairman Steven M. Costantino, too, voiced his backing, saying that while the state would be liable for the so-called IRBA money, he believes the risk remains "very low," given what it could do to help limping businesses.

"They could come to the EDC, get a loan backing, and the bank will ease up on the borrowing because the state is taking the risk," Costantino said. "Now you have a company that can put on an addition and hire new employees." Fox said he also sees value in Governor Carcieri's proposal that would give employers a $2,000 tax credit for certain full-time workers hired between July 1, 2010, and Dec. 31, 2010. And he hinted at other potential proposals, including the possibility of state-issued bonds to finance a seed fund for new businesses.

Yes, you read that right. More government debt to finance start-ups.

RI's Rut Is Intellectual as Well as Economic

In a general sense, the front-page, top-of-the-fold story in the Sunday Providence Journal isn't really news at all. Rhode Island led the region in job losses, over the last decade, and its 3.85% drop compared with a national average of 2.2%. The message to readers: get used to the pain.

Of particular concern is that the economic brain trust of the state, mostly academic economists, are offering advice that is both too sweeping and too targeted. Bryant professor Raymond Fogarty laments that "we didn't put enough money into business development," but also (rightly) notes that our "regulatory system is out of control." As we're hearing in the vague proposals that legislators have been floating, money isn't going to come without more government strings. URI professor Edward Mazze asserts (correctly) that government doesn't create jobs, but goes on to say that government should pursue a particular type of economy — the much-cited "knowledge economy" — by (naturally) investing more money in Mazze's employer.

Then, there's this common argument:

[Economic Development Corp. Director Keith] Stokes said Rhode Islanders need to realize the state is part of a regional economy, and people can move seamlessly across state borders. That means Rhode Island's workforce training and tax structure need to be competitive with neighboring states. Unless the state has a trained workforce, Stokes said, even areas of relative success for Rhode Island in the past decade — life science, defense, finance — don't benefit the state as much as they could.

Education is a long-term matter. Even a complete turnaround, today, would take years to change the general workforce and years more to attract businesses to employ it. With teachers' unions that would rather risk their members' jobs and tie up districts in court than allow their members to agree to additional support for students, it will take years of draining battle just to begin to implement a turnaround. And then, if the state doesn't have jobs on offer, the newly competent young adults will simply cross those seamless borders.

In the short-term, who cares if Rhode Island runs that scenario in reverse — attracting well-educated employees from other states? Over time, they'll move here, invest in the state, and help (or force) its natives to figure out how to change things for the better.

As I've noted before, I don't have a fancy title, and I certainly don't receive my paycheck from the public sector, but the answer seems simple, to me: Cut taxes. Eliminate mandates. Erase regulations. No targeted sectors or industries. No additional strings. Just a major overhaul and a big sign at the border that reads, "Open for Business."

Reminder: Teacher Pink-Slips Don't Actually Mean Layoffs

Pink slips are flying at teachers in Woonsocket, East Providence and Lincoln and probably soon in your town, too. Two points:

1) State law dictates that all layoff notices be sent by March 1st. Why then and not later, say mid-May? Could it be that it is more politically beneficial for some to have teachers and parents upset at layoffs during the budget-making season of late winter/early spring rather than later.
2) Aside from the fact that laying off anywhere from 1/3 to 2/3s of all of the teachers in a district is frankly impractical (if not impossible), most teacher contracts cap the number of layoffs allowed each year. For instance, in Warwick (p.48 of document), only 40 layoff notices can be sent and only 20 teachers can actually let go in any given year.

Now, this isn't to say that laying off teachers is the way to go by any means. But so long as the teacher union leaders refuse to renegotiate their contracts, this is one of the only ways left to school committees and administrators to cut costs. (Often due to their own shortsightedness!).

A Phony Incentive for Hiring

Does anybody believe this will work?

The deal would give employers a $2,000 tax credit for each new full-time worker hired between July 1, 2010, and Dec. 31, 2011. The tax credit would apply for the year the hiring takes place. ...

There are controls on the tax credit. The newly hired workers must have collected unemployment, received welfare benefits, or graduated from college in the previous 24 months.

The employee must work 30 hours a week or more and earn at least 250 percent of the state’s minimum wage. Doing the math, that’s about $18.50 an hour, or close to $40,000 a year for a 40-hour-a-week worker. He or she must also be granted access to group health-insurance benefits, if interested.

A small one-time tax credit in exchange for a median-cost permanent employee? About the only businesses that are apt to take advantage of the credit are those that already planned to hire, it seems to me. In other words, they'll hire when the numbers make sense, and the numbers are well beyond the reach of such a credit.

Companies aren't going to take on additional burdens or additional risks for $2,000. What they need is a reason to believe the state to be worthy of investment and the local economy to be primed for explosion. Under those circumstances, the extra two grand might spur them to get ahead of the hiring curve (although not likely). As it is, this is like offering a free after-dinner mint to get passengers to make dinner reservations on a sinking ship.

Start Installing Highway U-Turns, Now

My blogging time has been constricted, this week, for two reasons: First, I've been working on a piece of writing of the sort that dangles a thread of hope that someday I may actually be able to make a living stringing words together. Second, I've been rushing to get back some of the excess tax money that the various tiers of government have been taking from my family rather than allowing me to pay all of my bills — of which I now have a large unpaid stack, with the late-fees piling up each month.

A few years ago, I figured out the necessity of redefining what I'd considered to be a normal, modestly frugal lifestyle. Per cultural norms, the prior calculation had been based on desires and expectations, not on any mathematical equations involving reality (which may be the defining error of municipal, state, and federal government, these days.) So, for small example, my lunch boxes at the time typically held a yogurt for morning break, a large sandwich, some sort of snack desert, a bottle of iced tea or something similar, and a 20oz coffee. I figured three dollars or so per day was a small expense for the comfort.

Of course, three dollars per workday is around $750 per year, so my current lunchbox now contains an apple for break, a modest sandwich, and a 20oz coffee. The savings aren't huge, but they might pay a bill each month. Introduce this:

Governor Carcieri Tuesday proposed a toll on the new Sakonnet River Bridge just like the one on the Pell Bridge over Newport Harbor, $4 each way or 83 cents for Rhode Island residents with EZPass.

For those of you way on the other side of the bay, I'll explain that, for most of us, the Sakonnet River Bridge has more the aspect of a main road than a highway. My family, for one, crosses it an average of six times per weekday and four on the weekends. At the "local" rate, that would add up to almost $1,500 per year, easily three times my lunchbox savings.

This isn't a cry not to have my own mule gored; it's advice not to gore any such beasts. Usage fees are generally preferable to broad-based taxes, but from its current position, the last thing the state should be doing is adding to the cost of a productive life in Rhode Island. Moreover, those in the thrall of regionalization should think twice about policies that would have the cultural effect of drawing lines around our communities.

Too Big to Fail Towns?

Along with a table with the statewide results, Providence Business News has an article describing the results of "fiscal stress tests" that a state panel ran for cities and towns:

Pawtucket, North Providence, East Providence, Central Falls, Warwick and West Warwick are in the most serious trouble, the Municipal Fiscal Stress Task Force reported Friday after examining municipal reserves, property tax rates, pension liabilities and public employee health care benefits, among other factors. ...

Task force members -- made up of financial experts, CPA and several municipal finance directors -- have asked that a permanent commission be formed to monitor local spending and develop recommendations.

Peder Schaefer, chief of the Department of Revenue's municipal finance division and a member of the task force, told reporters Thursday that the report would lead to legislation that would "beef up oversight by the state."

For instance, one bill that being worked on would require local school departments to file quarterly financial reports with the R.I. Department of Education, he said. Another would give municipal councils or chief executives the authority to approve school department spending plans, administration officials said.

I remain skeptical about the urge to consolidate and control from above. The state is hardly in a condition of fiscal health, and residents have more access to change their local government than they do their municipal leadership. Indeed, the policies of the state are a contributing factor to the difficulties of the towns. It would be a mistake to assume that the people leveraging this greater influence, at the state level, would be the same people who took the initiative to study the numbers in the first place.

I say this as an active taxpayer in the most fiscally stressed "rural" town, by far. Tiverton's Fiscal Stress Test score is in company with the state's "urban" communities and fares only slightly better than the "urban ring" municipalities about which the state is so concerned.

Asking the Most Indebted Entities to Lend

Does the capacity to have government do it — "it" being everything and anything — ever end? I ask in response to Brian Hull's musings on small-businesses' access to capital:

How do we solve the lending problem? One way to increase lending is for the state to do it directly. If banks are unwilling to lend, and lack of access to capital is stymieing growth in Rhode Island, then I would argue that it is contingent upon the government to assist. Rhode Island should establish a loan program targeted specifically for expanding access to capital for locally-owned and operated small businesses that wish to expand their business, but are unable to do so because of rigid lending practices.

[Note: I think he means "incumbent upon government."]

Realizing that the money would have to come from somewhere, Brian lists all of the possibilities but those from a conspicuous category:

There are a couple places to look, and each has benefits and challenges. The state could borrow the money from the federal government or from national lending institutions. The state could change its tax laws to generate more revenue in order to lend. The state could eliminate existing corporate subsidies that benefit large employers with no positive economic effect (the state should eliminate these anyway). The state could establish a state-run bank funded by the current deposits held by the state and its cities and towns (I’ll write more about the benefits of a state-run bank in another article).

Without even bothering to list the possibility that the funds to lend could be shifted from some other area of current spending, Brian suggests that the most deficit-ridden entity in the state of Rhode Island should put itself into further debt in order to lend. And one way it could do so entails asking to borrow from the most indebted entity in the world — the United States government!

As far as I can tell, the only advantage that a government entity has, in just about any capacity, is that it can take money by force. That shouldn't be the first principle of economic recovery — especially for a small state that is easily left.

That Anti-Republican Feeling

An interesting call to the Dan Yorke Show as I was nearing home on my commute. The caller started out complaining about the corrupt, one-party political system in Rhode Island and then suggested that he simply couldn't vote for Republicans because, while he's fiscally conservative, he's socially liberal. He included opposition to the welfare state in his fiscal conservatism (erroneously, in my opinion). So, when Dan asked about social issues, he came up with abortion and same-sex marriage.

Dan got the caller to agree that abortion is a national issue, not a state issue, and asked (paraphrasing), "You're not putting same-sex marriage above the economic collapse of the state, are you?"

At that point, the caller switched to, "Well, Republicans can't govern." He said they're typically a rubber stamp. Assuming we're able to tease out the Rhode Island context, the caller thereby illustrated two of the attitudes that have helped to doom this state.

The first is the need for saviors, whether in the form of a person or a party. Having such a small minority is not going to be conducive to expert performance from Republicans. They do what they can, no doubt, but sometimes the going along thing can seem like a fair trade for some small pittance of success. To turn things around, one must vote Republicans into office so that (1) what they do carries the minimal weight of, well, mattering, and (2) people who might be reluctant to spend valuable time on a futile effort will increasingly see public office as worthwhile.

The second attitude, under which the first arguably falls, has been bred by decades of manipulation in movies, art, education, media, magazines, and so on that voting Republican is just a bad thing to do. Special interests have gotten a lot of return on that particular investment. The impression of too many Rhode Islanders that good people have to vote for Democrats has certainly helped unions and the welfare industry, and we're seeing the consequences, nationally, when the Democrats cash that chip in.

"Social issues," in other words, can be cover for intellectual laziness and moral cowardice. It's nice and vague and allows the voter to give in to the fully flourished seed of propaganda... without having to hurt the brain trying to dig up a plausible reason.

Whatever Progressives Might Wish to Be True, Money Must Be Made in the State

Financial analyst Lou Mazzucchelli offers the sort of economic opinion piece that we should expect from professionals in the field:

Entrepreneurs build businesses where there is economic opportunity. A large pool of investment capital is one measure of that opportunity. A cursory comparison of Rhode Island and Massachusetts shows the pool of venture capital in Massachusetts is at least 882 times Rhode Island’s. With six times our population, Massachusetts has 142 times the available venture capital per person. Why are Rhode Islanders chagrined about new business creation here? It only makes sense for entrepreneurs to go fishing where there are fish.

Measuring venture capital investment in Rhode Island and Massachusetts from all sources, not just in-state investment, we see the total amount invested in Massachusetts since 1995 was $45.5 billion across 5,773 investments, or about $7,000 per capita. Rhode Island attracted $687 million across 104 investments, or $654 per capita. Massachusetts saw 55 times the number of investments, and almost 11 times the investment per capita compared with our state.

Mazzucchelli speaks of "heavy assets" and "light assets," the former being structures and established communities and the latter being more mobile. Universities are the former; military installations are the latter. Unskilled workers are the former; highly skilled workers are the latter. What Rhode Island needs, in a nutshell, is to attract light assets and leverage them to build heavy assets.

One method of doing so would function through taxation. Eliminate and decrease taxes of concern to people who invest preexisting wealth as their source of income (the rich) and who are sufficiently successful in their careers to generate a lot of income (the productive). That means eliminating the estate tax and the corporate tax and decreasing income and sales taxes to the lowest rates in the region. Then, structure investment taxes in such a way as to encourage investments to be made within the state. That means reducing the capital gains tax and eliminating it entirely on long-term investments within the state of Rhode Island.

I'd expect any revenue loss to the state to be temporary, pending the take-off of our way-over-burdened economy. But in the meantime, the state's leaders simply have to admit reality. First, they should lower all social welfare expenditures below others in the region; give healthier states the opportunity to assist those for whom we lack resources. Second, resolve imbalances in goverment operations, such as the pension liability.

All it will take is a little intelligence and a lot of political will (which is why it probably won't happen, leading the state toward insolvency).

Mainstreet Loses an Anchor and the Council Looks to Tax

So, Bank of America is abandoning the Main Street location in North Tiverton that it has inhabited for decades (most of the time as Fleet bank). According to somebody in a position to know, the branch remains profitable, but corporate executives have analyzed the prospects of Tiverton, Rhode Island, and determined that there will be insufficient small business activity to justify a presence in the town. Municipal officials may dream of a down-town-style business district, but when one of the two institutions that would anchor the community with access to capital and money management expresses its skepticism by packing up and leaving, residents should stop daydreaming and look at what's happening in reality.

In reality, Town Solicitor Andy Teitz has put it on tonight's agenda (PDF) for the town council to discuss the state law that places a cap on the amount that towns and cities can increase their taxes. At issue is this statutory language:

Any levy pursuant to subsection (d) of this section in excess of the percentage increase specified in subsection (a) of this section shall be approved by the affirmative vote of at least four-fifths (4/5) of the full membership of the governing body of the city or town or in the case of a city or town having a financial town meeting, the majority of the electors present and voting at the town financial meeting shall also approve the excess levy.

What the solicitor is expected to argue is that the town should entirely disregard the word "also" and accept it as town policy that a simple majority of the electorate in attendance at the financial town meeting should be able to authorize an increase above the tax cap. A lawsuit is already in process, in the town, to test that reading of the law, so one avenue that the solicitor and certain town councilors may be interested in pursuing is to change the above language, through the General Assembly, to remove the "ambiguity" of the law to conform with their reading.

Residents should decline to join in the imaginative exercise of pretending there's any ambiguity at all beyond the grammatical error of using "or" rather than a semicolon in the statute. The town council ultimately approves the baseline budget that the residents consider at the town meeting, and elected officials should therefore have to submit themselves to accountability. Otherwise, voters should take it to be their duty to reconstruct the budget line-item by line-item, perhaps with constituencies developing complete and competing budgets.

Also at tonight's town council meeting, by the way, will be a vote on the "pay as you throw" policy by which the town is seeking to more than double the cost of trash pickup for residents. Not coincidentally, I'm sure, its plan to charge households for the garbage bags that they use will not figure into the tax cap. Put it all together, and over the course of a few Monday night hours in January, Tiverton's council of seven could lay the groundwork for a truly massive increase in taxes and fees in the midst of a deep economic recession in a town and state in long-term economic decline.

Putting Rhode Islanders in the Slow Lane

Sometimes, it's difficult to know what to say about an idea. Such is the case with the following example, in which Bridgewater State College Economics Department Chairwoman and Massachusetts Council on Economic Education President Margaret Brooks endeavors to illustrate how Rhode Island can "find new and creative ways to raise revenue that don't cause undue burden to businesses or homeowners":

... why not have a speed-pass system at the Department of Motor Vehicles that gives people the option of moving to a fast-track line by paying a $50 or $100 premium? Like the speed passes offered at amusement parks, this type of system would extract additional revenue from those who place the highest value on time, and who could most afford to pay. If we put our heads together, we can generate creative solutions such as these that will help us successfully navigate through the state’s economic crisis.

As if a trip to the DMV isn't demoralizing enough without having to watch rich people skip on through. You rearrange your workday to sit in a painful plastic chair for untold hours, and they swing by between tennis and spa.

Class envy aside, it is supremely discouraging to see an economics professor so enamored with gimmicks. Of all people, such academics should be able to identify the state's long-term problems and suggest corrections.

If anybody's interested, here's a solution that I just thought up: How about we cut taxes, eliminate mandates, and lighten regulations? It doesn't take a dozen words to describe my official title, but I think something like that just might work. Although, if we're going to "put our heads together" in the fashion advised by Ms. Brooks, my suggested gimmick would be to offer preassembled packages of documents that would assist productive Rhode Islanders in cutting ties with the state.

RIPEC's Analysis of Firefighter Pay/Contracts

My post concerning the Warwick Beacon's look into Warwick firefighter pay/contracts has generated some commentary regarding the RIPEC report (mentioned in Russell Moore's story) that found:

On average, [a RIPEC] report showed that Rhode Islanders spend about $6.24 on fire services for every $1,000 of personal income, or just under double the national average of $3.21 per $1,000 of income.

1) EMS services are included for Rhode Island but not the other states. By including EMS, you couldn't even compare Providence to Worcester- two very similar sized cities, but Worcester's EMS is provided by UMass Hospital, and Providence's by the Fire Department.

2) The cost represents the total cost of fire protection in RI, meaning sprinkler systems, alarms and other additions, not just the actual fire department budgets.

3) Belief that pension costs are included in the RI costs but not in those for other states.

All the RIPEC report says about it's methodology is:

Fire Protection comprises expenditures for the prevention, avoidance and suppression of fires and for the provision of ambulance, medical, rescue or auxiliary services when provided by fire protection agencies.

1) Whether cities and towns pay for EMS or not is not as relevant as some think. Having tax dollars pay for EMS is still a governmental (taxpayer/resident) choice. Just because some don't cover EMS via taxes doesn't mean it should be excluded from a comparison of tax dollars spent on fire/safety services. Those are real dollars no matter what column on the spreadsheet you want to put them in. Don't let the inconsistent accounting methodology obscure the fact that other cities and towns in other states appear able to provide EMS services through private companies or hospitals and not through taxpayer supported fire departments.

2) It is probably true, given the brief explanation by RIPEC, that they include expenditures for fire suppression (sprinkler systems, etc.) the state paid to have installed in government buildings (for instance). There can't really be any doubt that much of that expenditure is a direct result of government over-reaction to the Station Night Club fire. We all know that small businesses have screamed that they can't afford to pay for the new requirements. Unsurprisingly, local governments didn't because, well, they had the money, right? (Ours....)

3) There is no way of knowing whether pension costs were included or not without the raw data.

I'm sure this won't satisfy RIPEC's critics, though I wonder if they have similar reservations about the rest of RIPEC's analysis regarding other areas of government expenditures?

The Uneducable Must Be Replaced

With the legislature back in session, the press releases have resumed, and I'll tell ya: If all Rhode Islanders received them in their emailboxes and gave each a moment's thought, there might be more discouragement across the state. Those whom we elect don't seem to understand cause and effect and the 1,000-papercuts principle.

So, here we get Rep. Joanne Giannini (D, Providence) conspiring to ensure another incremental increase in the baseline cost of health insurance:

Legislation sponsored by Rep. Joanne M. Giannini would require health insurers to cover the cost of donor breast milk for infants who are severely allergic to formula and whose mothers are unable to produce milk.

"For women who, for whatever reason, are unable to lactate, formula is usually the solution. But for those whose babies are allergic to formula, donor breast milk is the only option, and although it is extraordinarily expensive, the child's life depends on it. That's exactly the type of extraordinary but critical health expenses that insurance should cover," said Representative Giannini (D-Dist. 7, Providence).

If the government is to the point of deciding every minute benefit that health insurance should offer, what need is there of a public option?

Then, we get Rep. Charlene Lima (D, Cranston) illustrating why Rhode Island's strategy of "targeted" tax cuts for businesses is an extremely diluted method, at best:

Representative Lima is calling for an immediate halt to the distribution of more [business] tax credits until the state has a system in place that complies with the requirements in the law that was passed allowing the tax credits. She is also calling for a temporary halt to film tax credits until it is proven that the state is getting enough value in return and making the tax credit dollars worthwhile to Rhode Island taxpayers. ...

To that end, Representative Lima will be submitting legislation today requiring any business applying for tax credits to sign a waiver of confidentiality and an affidavit stating they will turn over all financial records needed by the state to verify the benefit to the State of Rhode Island. Under the bill, before any tax credit can be issued to a business, those requirements must be met.

Additionally, any business already receiving tax credits would also be required to sign and comply with the waiver and affidavit or pay the state an amount equal to the tax credit previously given. Because the law already requires verification, any business not willing to turn over requested documents immediately would be breaking the law and would have to forfeit and reimburse the state for any tax credits given. Representative Lima said she will be asking the Attorney General to investigate any company unwilling to comply with the verification requirement.

So, the General Assembly passed targeted tax credits to attract and support economic development in Rhode Island, and because the government is having difficulty compiling data related to its targets, Lima wishes to shut the incentive down and hereafter require all businesses that wish to be developed to open up their books to the ravenous state. The next step, one supposes, is to have public battles over every bonus that a business receiving tax credits hands out.

What business would want to bind itself to a state in which this crew of clowns might swoop in on any given year and demand either financial documents or the return of tax credits already given? The state should stop with the "targeted" and stop with the presumed right to be invasive and just loosen its grip on the economy. Say it with me: cut taxes, eliminate mandates, lighten regulations across the board.

How a Ruling Class Is Maintained

Ed Achorn makes a familiar observation when he writes:

Ocean State politicians have long supported a two-tiered society in which there is a privileged class of public employees — about one in six workers in Rhode Island two years ago, probably a higher percentage today — and an underprivileged class of private-sector drones.

We should remember, though, that the dynamic isn't entirely of two groups buying each other's support. It's more of an incestuous cabal. Look no farther than newly elected RI Representative Mary Duffy Messier (D, Pawtucket), who leaped directly onto our Legislative Stooge list:

But Messier was among the 47 House members who successfully voted to override Carcieri's veto [of the bill mandating teacher health insurance].

[Rhode Island Association of School Committees Executive Director Tim] Duffy said his sister, who recently retired as a Cumberland school teacher with a $46,536 annual state pension, "has always been a strong union advocate."

Duffy Messier is 57. The average per capita personal income in Rhode Island is $37,523. Sometimes political victory is a matter of who has the time to make noise and join legislative bodies that pass harmful laws. And sometimes, I wonder whether we should stop complaining when public-sector workers who retire at a young age have their retirement largess sent to their new homes out of state.

Come to Rhode Island! (We'll Take Your Money.)

Even without taking up the debate about Rhode Island's flat tax, a press release announcing legislation to eliminate it, sponsored by Rep. Helio Melo (D, East Providence), illustrates why Rhode Island's economy will go nowhere until there's massive turnover in the state house:

"The flat-tax was championed as a way to attract employers to our state, but it's really more of a no-strings-attached gift to the fortunate few who just happen to be very well-off," said Representative Melo, a Democrat who represents District 64 in East Providence. "That's certainly not real tax relief to our citizens, the majority of whom are working people struggling to pay their bills. If one group gets a tax cut, that money has to be made up somewhere, and the result is that it's deepening our state's deficit and creating more of a burden for us all to pay. We all keep hearing that taxes will have to increase. Does that mean more taxes for the working-class people in my district while the high-income people get tax cuts? I don't think so."

If you were evaluating locations in which to invest your life to build a business, would you be comfortable choosing a state in which legislators believe that the rewards of your labor would be something that "just happened"?

If Mr. Melo wishes to help his working-class constituents, he should advocate for lightened tax burdens all around, compensating for potential losses of revenue by cutting government expenditures. Rhode Island's politicians would rather play ideological games than get results.

Sweeney's Plan to Perpetuate Government's Centrality

In a commentary piece in Providence Business News, Bryant Economics Professor William Sweeney insists that it's crucial that the Rhode Island government borrow a quarter-billion dollars for targeted investments in small businesses (there's that slippery "targeted" word again):

To recover from the Great Recession and to expand in the future, [the small-business] sector, while resilient, will require state help.

My proposal for an economic-development plan is designed to place its greatest effort on encouraging local small businesses to expand here. But it should also attempt to lure fledgling, out-of-state companies to locate in Rhode Island. To be effective, such a dual-edged, aggressive, economic-renewal program is likely to cost at least $250 million, based on the number of potential beneficiaries. ...

Rhode Island can make an economic metamorphosis, if it puts together an aggressive economic-development program, one that would establish a strong connection with young, fledgling firms captained by entrepreneurs.

In addition, this plan must nurture old-line growth companies as well. These two economic driving forces are always searching for a lower-cost location in which to operate. Rhode Island can exploit this golden opportunity with generous tax breaks and financial assistance to small businesses that have plans to expand in the Ocean State. The net result should be an updraft in the creation of new jobs.

Must we continue banging our head against this wall? Like many others, Sweeney ignores the essential problem that Rhode Island faces (a practice that's beginning to look deliberate in certain instances). Our local aristocracy lacks the intelligence and objectivity to pick winners. Where they're not ideologically blinded, they're bound by personal loyalties and a cliquish mentality. We cannot, therefore, trust them to direct the state's economy with further money for ideas that they, personally, like and people with whom they, personally, can do business.

Furthermore, government-initiated investments will always bear the risk that politics will wash them aside, perhaps just when businesses most need them. All of the gimmicky solutions to the state's problems have the taint of the temporary, and our leadership has neither long-term vision or patience.

In short: slash taxes, erase mandates, and lighten regulations. Let the productive make the decisions with their own investments of time and money. Send the signal that Rhode Island is open for business, not for reciprocity. That is the only way forward, and the governing class must be almost completely overturned and the advisory class ignored en route.

A Mainstreet Scam

A commenter to yesterday's post on unemployment insurance appears to believe that I misunderstand the way the system works. He or she is wrong.

The point is that the system is not able to address times of economic hardship. Since the federal government won't allow the state to hold off repayment of the relevant loans when it meanders into a good economy at some undefinable point in the future, the missing resources can come from one of only three places: 1) cutting the benefits to the unemployed, 2) increasing the tax on businesses, or 3) looking elsewhere in state government for the money.

Something similar to number three is done as a matter of course across government. Consider the telephone tax/fee in Rhode Island:

The money raised by the phone surcharge is used to provide and upgrade Internet access at 460 public schools and libraries across the state, but revenues have dropped by 35 percent since 2004, forcing the state to contribute out of the general fund, said Carolyn Dias, chief of operations at the state Department of Education.

So here's a program in which a tax was sold to the people of Rhode Island as a relatively painless way to finance school technology (rather than using the money that we've already provided for such things by way of our regular taxes). The model turns out not to work, so the government takes the money from something else.

Of course the phone surcharge is in the news because Governor Carcieri has a plan to decrease it as a trade-off for creating a similar surcharge on cell phones:

The cell phone proposal would add a 16-cent monthly surcharge to all cellular phones (or numbers), while reducing the existing surcharge on landlines to 16 cents from 26 cents.

With the number of cell phones rising and landline accounts dropping, the measure could boost revenues by $300,000 in the current budget year and $600,000 during fiscal 2011, according to the governor’s budget office.

Given the ubiquity of cell phones, one is tempted to argue that this is merely another broad-based tax disguised as a user fee, but it's actually worse than that. It's a tax on the productive and fruitful, benefiting those who are neither. The only people who would actually benefit by the shift toward cell phones are people who don't have them, probably the elderly, most prominently. Young families and businesses often have more than two. And:

... speakers from Verizon and T-Mobile opposed the new surcharge, saying Rhode Island already has among the highest cell-phone fees in the country.

The sentence before that, in the report, points toward another indication of the scam that is big government: "The state receives two federal dollars for every dollar it contributes to the program." In other words, the federal government uses taxpayer dollars to create incentive for states to take taxpayer dollars in order to fund some preferred program.

If a program is worth funding, officials should be honest and straightforward and pay for it from the general tax base. Carcieri should be ashamed to perpetuate this government card trick, which disproportionately harms the demographics that the state should favor... if it wants to survive.

How About the Philosophical Questions?

Part of our problem, in Rhode Island, is that our political class likes to treat each issue separately. It focuses on whether policy A is good or bad, but rarely considers whether funding A ought to have implications of the funding of B, C, and D. In other words, our elected officials don't like to answer large, self-definitional questions, which is to say that they aren't too keen on leading.

So, we get concerns about the solvency of our unemployment benefit system:

Even before the recession struck, Rhode Island employers had to pay a comparatively high tax to provide benefits to the unemployed.

Now, with the state's 12.7-percent unemployment rate the second-highest in the nation (behind Michigan), and as thousands of out-of-work Rhode Islanders keep drawing benefits, the tax is higher — and could increase further.

The result could be a blow to businesses at a time when many are struggling just to survive, said state Rep. Steven M. Costantino, D-Providence, chairman of the House Finance Committee.

"There's a potential that business, under these very difficult times, will be incurring an additional tax," he said.

And we learn that (as usual) our public services are generous in this area:

Rhode Island's maximum weekly unemployment benefit is set each year at an amount that equals 60 percent or so of the statewide average wage.

As the average statewide wage rises, so does the maximum amount of benefits.

This puts Rhode Island among the top states for benefits, according to a recent report prepared by the Department of Labor and Training for a state advisory board.

The first link describes various mechanisms that will force taxes on RI businesses up with continuing high unemployment, but nobody asks or offers opinion on whether the money necessary to assist down-on-their-luck Rhode Islanders who are generally productive should come from somewhere else. Government revenue is fungible, meaning that the unemployed and the businesses that would like to employ them are not the only sources of revenue. Maybe, just maybe, it's time for our state to begin considering whether civic survival might have to come at the expense of benefits to which certain of its residents have come to rely on a long-term basis.

Perhaps it's possible to defend, on moral grounds, the proposition that the government should not allow maintenance of the lifestyles of working and middle class unemployed to eat into the resources allocated for the less fortunate, and maybe it's defensible, on political grounds, to argue that the government should protect against erosion of what it provides as an employer. Unfortunately, the practical reality is that not everybody can (or wants to) work for the government, and those who wish to work and prosper are not going to assent to descent onto the welfare rolls. They're going to leave.

RE: Budget Misery - Moderate Solutions

Over at the FrumForum (a moderate Republican blog run by David Frum) Eli Lehrer explains:

Many of the biggest budget items for states—Medicaid, bond payments, pension obligations to retirees—are virtually impossible to reduce. Big , broad-based tax increases, although difficult to avoid under many states’ balanced budget laws, will simply discourage investment and growth. Without indulging into liberal (“tax the evil corporations”), moderate (“run government like a business”), and conservative (“cut taxes to increase revenue”/”privatize all education”) fantasies, states looking to balance their budgets aren’t totally out of luck.

In efforts to attract new enterprises, revitalize decrepit areas, boost politically favored types of business, nearly all states run massive corporate welfare programs including “enterprise zones,” “TIF (tax increment financing) districts,” “job retention tax credits,” state “HUB (historically underutilized business) zones.” Although a few states simply give grants to private businesses, most of these programs involve issuing bonds, building infrastructure, or granting tax credits that benefit only a particular business or development. The practice produces headlines for politicians but largely serves to let political leaders decide on the location of development that would happen anyway. These business subsidies tend to feed on themselves: cities like Chicago and Syracuse, New York have made such widespread use of them that almost all new development requires some sort of tax abatement or other assistance since unabated tax rates are so high as a result. Although it appears almost certain to cause some short-term pain, many states would almost certainly increase revenue while cutting base tax rates if they simply quit the abatement drug cold turkey. Certain areas, many of them in need of help, probably would lose out. But, in the end, the free market would make better decisions about business locations than central government planners ever could.

Budget Misery and the Government Payroll Economy

Rhode Island is not alone in facing budget deficits as many other states (if not most) are in the same predicament. As a recent study by the Cato Institute shows, a lot of the deficit problems stem from generous public employee compensation packages.

State and local governments face large budget deficits as revenues have stagnated and spending has remained at high levels. To reduce deficits, large savings can be found in the generous compensation packages of the nation’s 20 million state and local workers. In 2008, wages and benefits of $1.1 trillion accounted for half of total state and local government spending.

We've gone from providing jobs in profit-making private industry to providing jobs in profit-eating government work. Toward the end of 2007, the total number of government jobs exceeded the total number of goods producing jobs. Welcome to the government payroll economy.

Re: A New Year Begins...

Trying to effect change in Rhode Island at even the local level has been a monumental struggle with almost no success to show for it. Frankly, after years of trying, I have concluded it is not worth the effort.

I crossed the state border again this Fall, this time leaving Rhode Island permanently. I recommend it highly. It's relatively easy, too.

And it is liberating to rediscover that the need to fight the colossal failure that is Rhode Island is optional.

It appears that nothing will change until there is a total collapse. So let the rats go down with the Rhode Island ship. It's apparently the only possible way to get rid of them.

It's sad, isn't it? Because it did not (and does not) have to happen that way. Which is a common conclusion when looking retrospectively at crises.

Meanwhile, some (updated) previous reflections:

Meaningless talk and inaction in a crisis: Why Rhode Island's crisis will get worse before it gets better & what to do about it
Lessons for Rhode Island from Silicon Valley: An historical reflection on an actual innovation economy
Innovation and the entrepreneurial business culture revisited

Morfessis Withdraws as EDC Director

WPRO news (630AM) and Projo 7-to-7 are reporting that Ioanna Morfessis has withdrawn herself from the Directorship of the Rhode Island Economic Development Corporation, citing a family medical concern.

Economy for Better and Worse

My thesis is that economic predictions are currently being made after the method expressed by respondents to a recent Providence Business News survey:

A sense of nervousness can be gleaned from the results, but the respondents also maintained the optimism that came to the fore in the summer 2009 survey. Many in the business community say that hopefulness is a byproduct of the feeling that Rhode Island can’t go much lower.

Things will get better because they always do. Right? The economy can't go much lower because it never has. It would be historic. Catastrophic. Well, I'm not predicting the end of the world, but the simple reality is that no economic mechanism of which I'm aware automatically kicks into gear when hard times top the Great Depression. Until we're hunting rats in the streets of Providence for food, the reality is that Rhode Island can go much lower.

Of course, one non-automatic mechanism that would help the state can be discerned in the survey's results: The pain could become so acute, and so clearly attributable, that state and local leaders will make it easier to live and do business in the state, lowering the unnecessary costs and lightening the misguided burdens that the state imposes with taxes, mandates, and regulations. A resolution by those whom Hasbro and Lifespan Chairman Alfred Verrecchia called "the collective leadership," in his keynote speech before the Rhode Island Public Expenditure Council, to set Rhode Island's economy free through rapid deregulation and dramatically shrunken government could make our state a bright spot in a dark region of a fading country.

The problem — the central flaw in Verricchia's reasoning and in the reform-by-consolidation movement to which he's contributed — is that the leadership class is going to do no such thing. Self-insulation and death-grip protection of special interests — coupled with the utter lack of a political price for their calamitous failures thus far — are going to keep RI's aristocrats marching along the same path, and the mechanisms of consolidation — moving government farther from the individual taxpaying voter, fiddling with the tax code without reducing its all-around burden, and paying out large sums to unelected administrators at the top — are all contrary to the prior necessity to end Rhode-apathy and cultivate a new collective leadership group that can wrest control of the government from incumbent hands.

What the EDC Can't Do

Yesterday, shortly before the 5:00 hour, Dan Yorke referenced my post about the elimination of the Rhode Island Economic Development Corporation, suggesting (in a very friendly manner) that I've lost my mind. As readily as I'll admit to my own insanity, my point is worth defending.

The critical question is what, exactly, the EDC would have to do to be successful in its mission, and Dan suggested the example of coming up with a more economically productive tax code and putting the General Assembly on the spot to enact it. There are certainly a variety of other actions that the EDC can and will take, but this one stands as an excellent test case. Putting aside private organizations, such as think tanks, that undertake such missions of their own volition, from the government's perspective, it's a political task. It belongs under the auspices of elected officials, such that the governor (say) will propose and promote a change and the General Assembly will pass or obstruct it, allowing the voters to decide whom to support.

Adding a powerless quasi-governmental agency into the mix accomplishes nothing. The politicians — who actually have the power to enact new policies — can put their fingers to the wind, enact select provisions from the proposal, and then scapegoat the EDC if things don't work out, as would surely be the case once entrenched interests distort the original, coherent plan. An even worse outcome would be if the EDC somehow managed to collect the power to enact changes over the heads of elected officials, because special interests would then have an unelected target on which to focus for lobbying and manipulation.

Apart from the EDC, Dan mentioned ending welfare-state programs as a necessary component of reform, and while I agree with that suggestion, I'd emphasize the broader necessity of eliminating the mentality that we need to be taken care of. That sort of cultural shift must start with the voters and their representatives; there is no shortcut. Setting up the EDC as a potential savior organization is at best dilatory and at worst apt to exacerbate apathy and reinforce habits of dependency.

We Need Smaller, Smarter Government, Not More of the Departments We Prefer

Count me in agreement with Scott Moody, Fellow for Economic Policy at the Ocean State Policy Research Institute:

Where should the state government begin its spending cuts? One way to cut spending is to eliminate programs that have proven to be ineffectual. Consider the example of the Rhode Island Economic Development Corporation (EDC), whose primary goal is to create jobs. However, given that Rhode Island has the third-highest unemployment rate in the country, the efficiency of this program is highly suspect.

Eliminating the EDC would save about $10 million per year. Some may consider that a paltry sum for such an effort. Yet, if that money was applied to reducing taxes, the state could nearly eliminate the alcoholic beverage tax ($11.5 million) or documentary and stock transfer taxes ($10.4 million), which are taxes on transfer documents such as mortgages, deeds and stocks. These small taxes are especially egregious because they act like bits of sand in the cogs of the economy.

Try to envisage what the EDC's presumptive big-salary director, Ioanna Morfessis, might target as evidence of success: While she'll certainly look into policies to support incremental, smaller-scale improvements among small and innovative businesses, the nature of her office and its powers suggests that she'll also look to make some splashes by luring a large company or two to the state.

If anything, Rhode Island should already have learned how flawed that approach can be. We don't need special deals to attract new special interests. We need changes in the core laws and policies affecting the state's economic environment overall, and for that, a public bureaucracy isn't necessary.

15 Ways to Leave Your Corruptor

Capers Jones makes 15 suggestions that are worth considering toward improving Rhode Island's economy, in yesterday's edition of the Statewide Coalition's daily RISC-y Business newsletter. Jones unequivocally places us in the conversation that we ought to be having across the state.

Of course, that doesn't mean that everybody has to agree on every item, and several of his points pick up the consolidation theme about which I'm supremely skeptical. Consider:

9. Consolidate our department of transportation with either Massachusetts or Connecticut. Our DOT is dysfunctional, expensive, and has little value.

Here's a question I'd offer as decisively opposed to such a plan: Of the players in the public-sector battle, who would be better able to work the levers of a big-dollar, multistate public agency — taxpayers/voters or unions? There's no contest at all. Unionized labor will have the motivation of billions of dollars funneled to a relatively small group, while taxpayers will only have the motivation of a small portion of their total taxes, now entirely pulled apart from the many other issues that motivate voters, because those differ from state to state.

Jones also suggests consolidating schools and reducing the number of towns, cutting the General Assembly to a grand total of fifteen legislators. In a state with our specific problems of voter apathy and strong, statewide special interests, it'd hardly be worth coming up with a point spread to wager on the outcome of that centralized battle for a handful of powerful positions.

Unemployment, Jobs, and Taxes

We'll have to await more-descriptive data, but the latest on unemployment in Rhode Island suggests that the state may have found the key to lowering its rate. Indeed, for November, unemployment fell 0.2%, to 12.7%, and 2,100 more Rhode Islanders are working. The available information isn't yet sufficiently granular to know how many of those newly employed folks are seasonal temps or part time or how many people gave up on job searches, last month.

Still, it may be that we've been too harsh on Senate Majority Leader Dan Connors and Senate President Theresa Paiva-Weed. Along with the above statistics, employers report having eliminated 1,300 jobs. Additionally:

... despite the improved unemployment figures locally, DLT said the average weekly claim load for unemployment insurance benefits climbed to 36,281 in November, a gain of 2,295 — or 6.7 percent — over October's average because of increased eligibility.

It appears, in other words, that the way to bring down the state's unemployment rate is to drive people out of the job market and out of the state more quickly than we lose jobs. Theoretically, if there were zero non-government jobs, we could still have a zero percent unemployment rate.

So let's have those tax increases for which legislators have been floating trial balloons. After all, we've got to fund those who've decided that they don't even care to look for work, and the more pesky unemployed ambitious people whom we can remove from our statistics, the better we'll feel.

And Then the Other Side

From AP writer Ray Henry's ">report, it looks like RI Senate Majority Leader Daniel Connors drew the short straw:

"I think we need to look at all of our taxes and determine, you know, those that could be changed to provide sufficient revenue for the state to provide its services," Connors said during a Statehouse interview.

You know, we'll just find a way to take "sufficient revenue" from the people of the state. That's all. Easy.

Of course, Senate President Teresa Paiva-Weed stands right with Connors and is apparently in need of a civics lesson from the people's perspective:

"Essentially, the proposal the governor is making is we're going to cut taxes with the left hand ..., income taxes, and we're going to increase property taxes," Paiva-Weed said.

Note that Paiva-Weed makes no distinction between the scope of her tier of government and more local tiers. The Democrats are trying to protect their public-sector union pals at the municipal level by shifting the narrative to insist that municipal leaders have no choice. They do, and so do their local constituencies.

Another Link on the Chain Binding Small Businesses in Rhode Island

The governor should veto this legislation:

Legislation approved by the General Assembly in the waning hours of a special session in October could transform the work force for large public projects in the state.

The bill would limit the number of apprentices employed on certain building projects by requiring that a higher share of more experienced journeymen workers be hired.

My understanding, from when the General Assembly debated the issue, is that reporter Alex Kuffner's assessment of the scope of the legislation is far too limited. For instance, the language cites residential projects. The determining factor is whether the contractor participates in the state's apprenticeship program.

The bottom line is that this sort of regulation — which the state should be shedding, not installing — helps large, established companies keep their prices (and, therefore, the cost to businesses and residents of construction) up and safeguards the strangulating negotiated salaries of union workers. For all the talk about small businesses' being the "lifeblood" of the state's economy and the necessity of "targeted" tax breaks for small businesses, when it comes down to it, Rhode Island's aristocracy doesn't prioritize economic opportunity.

The governor should veto this legislation.

Can't See the Jobs for the Tree Stumps

Gerry Goldstein reports in Thursday's Valley Breeze that State Senator John Tassoni wants to kill the North Central State Airport.

But Tassoni, who represents some of Smithfield and North Smithfield, termed the airport "a thorn in Smithfield's side" that generates no revenue for the town, is an eyesore because of extensive tree cutting there, and disturbs some residents with flight activity between 3 and 5 a.m. "It looks like the Johnston landfill," said Tassoni. "If I had my druthers, close it down, sell it, and develop it." ...

"You can't leave it like that. You're not going to attract good corporations the way it looks with all those tree stumps," he said.

Discussion about the future of the North Central State Airport was sparked by EDC's applause-worthy efforts to identify and catalogue "potential office and industrial sites" around Rhode Island.

[EDC Interim Executive Director of the EDC J. Michael] Saul said his agency is "very supportive" of North Central because it can help attract corporations to this part of the state, which he called a "sweet spot" for economic expansion and job creation. ...

[The study] sees the Route 146 area as suitable for "manufacturing, selected warehousing, and small to medium offices, noting that "a large manufacturing facility with land is for sale (and) several parks are being developed."

Note that this is the EDC's list of potential manufacturing and business sites in Rhode Island, not the EDC's Sightseeing Guide to Scenic Rhode Island. Corporate types flying in and out of North Central will be focused not on tree stumps or irrelevancies along the flight path but on business prospects and the attendant details. (This translates into jobs and a larger tax base on both the state and local level.) For the sake of his constituents and the state as a whole, Senator Tassoni may wish to broaden his field of vision correspondingly.

Only High-Paid Executives Need Apply

We can all appreciate the benefits, from an administrative point of view, of bringing in strong-willed people to help shock some of the Rhode-apathy and corruption out of state government, but we're barely three months past this announcement:

Less than a day after a Supreme Court justice blocked the first of 12 proposed government shutdown days, the state has imposed a complete hiring freeze, with no exceptions made for even the most critical jobs.

So how can Governor Carcieri justify this, from the Providence Business News:

The R.I. Economic Development Corporation's board of directors voted unanimously Tuesday morning to appoint Ioanna T. Morfessis, a consultant from Phoenix with a Ph.D. in economic-development policy, as the agency’s next executive director. ...

The board voted to give Morfessis a three-year contract that will pay her $250,000 a year plus benefits. The state also will cover her relocation costs and provide her with an automobile.

Morfessis' compensation would be more than double that of the EDC's last executive director, Saul Kaplan, who made just under $100,000 a year before he resigned in December 2008.

It's beginning to seem as if the only jobs in Rhode Island are for extremely high-paid government executives from out of state. Furthermore, as I suggested when Education Commissioner Deborah Gist was lured to the state with an outrageous compensation package, Rhode Island's executives appear to be suffering from a case of "employer's vanity" whereby the people who control hiring spend as much as they can as if salary and success are directly proportional.

To the contrary, we may be charging toward some unintended consequences: Strong-willed people — those with "big personalities," as Hasbro Chairman Alfred Verrecchia says of Morfessis — will often usurp what power they believe themselves to need to accomplish what they want to accomplish. With Rhode Island's leadership class demonstrably lacking in the spine and in the head, we may soon find ourselves being governed by an oligarchy of unelected directors. They will, no doubt, be competent and admirably focused, but not only must we remember that power corrupts, we shouldn't forget that our current stars will eventually hand all of the authority that they've grabbed over to somebody else.

Everybody's Got a Secret Plan

Last night, Matt and I mused on the unspoken and do-nothing plans of Rhode Island's leadership class when it comes to fixing the economy, Matt Allen Show. There's a related thread, here, to the conversation that Matt had been conducting during the previous hour, regarding Congressman Patrick Kennedy's support for micromanaging the credit card industry; Rhode Island is at the other end of the process whereby politicians seek to compile constituencies by promising to force other people to fund their lifestyles. By "the other end," I mean when the system begins to fall apart. Stream by clicking here, or download it.

Gordon Fox Has a Plan for Fixing Rhode Island's Economy…

…but he's not ready to tell us what it is yet, reports Ray Henry of the Associated Press…

[Gordon Fox], D-Providence, said he had proposals for reviving the economy but was not ready to discuss them.

"For me to sit here today and say we're going to do X, Y and Z, I think, is premature," said Fox, who is campaigning to succeed House Speaker William Murphy in early 2011. "I don't think it's fair to the members and it would be foolish of me to do that."

A Corporate Tax by Any Other Name

So, Governor Carcieri and his Director of the Department of Revenue, Gary Sasse, have switched from a "gross receipts tax," which would essentially be an expanded and hidden sales tax, to a "net receipts tax," which Providence Journal reporter Neil Downing describes as follows:

Under a net receipts tax, a corporation generally would pay tax on its revenue after claiming only a limited number of deductions (the number and nature of which have not been set). Thus, more of a business's income would be subject to Rhode Island tax. But a lower tax rate would apply, Sasse said. ...

Sasse also said that any such plan would not harm the many small businesses that are organized as "pass-through" entities, such as limited liability companies and subchapter S corporations.

Sounds a bit like an expanded corporate income tax, no? Downing reports that the plan would be to "eliminat[e] at least one other tax, such as the state's corporate income tax, the sales tax or the personal income tax"; if it's not the first that goes, then Rhode Island would be killing its economy, not helping it. If it is the first that goes, it would essentially be a name change with the promise of future increases. Once the deductions are eliminated through the trick of changing what we call the tax, the General Assembly will find it a relatively simple matter to ratchet the rate up.

Suppose that the income tax is what's eliminated. Corporate entities will have an irresistible incentive to organize as pass-through entities, which will limit their ability to expand and ultimately undermine estimates of the revenue that the state receives from the "net receipts tax," because more income will flow to the untaxed channel. (Except for the restraint on expansion, that's not an unattractive outcome, but it will ensure the continuation of continual budgetary shortfalls.)

And if it's the sales tax, we're left with a gimmick that increases prices and shifts the tax burden to businesses from out-of-state consumers.

The faster Rhode Island's leaders come to the realization that there is no easy way out of this mess, the better off we'll all be. Taxes have to be cut, not reconfigured. Regulations have to be relaxed. And mandates have to be rescinded. Start selling that message now, because it's going to be a long, hard fight. Tossing out a new taxation buzz-phrase every few months merely delays decisiveness and confuses the public.

Too Much Fish Giving

Maybe it's my surfeit of familiarity with this sort of story, or maybe it's living through the worst recession of my lifetime, but this sort of comment, from a story about a woman protesting on behalf of the homeless by staying in a tent on the State House lawn, is increasingly jarring (emphasis added):

But housing advocates say the plan [to add beds to homeless shelters] doesn't go far enough. According to the Rhode Island Coalition for the Homeless, the state's shelters were beyond capacity in late October, while nearly 80 people slept outside. The homeless population will grow as the economy worsens, said coalition director Jim Ryczek, who has asked to meet with Governor Carcieri to discuss the issue.

Why isn't Mr. Ryczek advocating for an overhaul of economic policy — removing burdensome regulations and mandates, reworking tax policy to create pro-growth incentives, and so on? Clearly, the single most effective method of helping the homeless would be to increase the number of jobs available to them. Shouldn't that be the subject of advocates' conversations with political leaders?

An Oversold Index

Whatever its retrospective analytical utility, URI Economics Professor Len Lardaro's Current Conditions Index seems pretty useless as a gauge of future trends. The news reports that use it simply make no sense:

The Current Conditions Index dipped to 33 in September from 42 in August. ...

"While Rhode Island will not emerge from its recession until the first quarter of next year, the foundations for an eventual upturn are beginning to fall into place," he said.

What foundations? Lardaro's optimism derives from the index's improvement from last year, when it was alternating between 8 and 0, but the current year figure is relative to that period, so our economy is still shrinking. If last year was terrible, we're now doing worse than terrible.

Rhode Island's Unemployment Picture: Ahead of Lowly Michigan in One Way but Behind in Another

The good news is that with the highest unemployment rate in the country, Michigan still beats out Number Three Rhode Island. The bad news is that they also beat us on a positive front.

Paragraph four of the possibly over-optimistic ProJo article that Justin highlighted has Rhode Island's status in this area.

And the state continues to bleed jobs, losing 1,100 more in October, a separate survey of employers shows

And ABC News notes the Michigan element that the Ocean State lacks.

It wasn't all bad news for state, however: Michigan was one of six states, according to the government, to see significant job gains between September and October. With 38,600 new jobs, Michigan came second only to Texas in payroll increases.

So while their overall unemployment rate is higher, Michigan gained new jobs while we lost.

It is to be hoped that current members of the General Assembly have the fortitude to undertake the structural changes that decades of preceding G.A.'s have cravenly dodged. In the absence of a reformation of the business and regulatory climate, Rhode Island will continue to lag behind other states with unenviable economies in certain indicator areas as evidenced by an ongoing shedding of businesses, jobs and (Ground Control to Major Tom) the corresponding tax revenue.

Unemployment Down, Lack of Jobs Up

One wonders whether the editorializing in this Projo report of unemployment numbers follows some sort of template, because it's otherwise difficult to understand:

For the first time in nearly three years, Rhode Island's unemployment rate dropped, to 12.9 percent in October, offering a faint but reassuring sign that the state's economy may be on the road to improvement.

But in paragraph four:

And the state continues to bleed jobs, losing 1,100 more in October, a separate survey of employers shows. The work force also contracted, a potential signal that some of the most discouraged workers may have given up looking for work entirely.

How can it possibly be "reassuring" that the unemployment rate slightly decreased because thousands of people gave up their employment searches? Theoretically, unemployment could approach zero as the population admits utter economic ruin.

Rhode Island Must Solve This Problem

Here's the Budget Office document showing the always-too-optimistic early revenue estimate for the state of Rhode Island: PDF. As you've likely read, the deficit is projected to be $219.8 million. It wouldn't be surprising to find that number come in hundreds of millions of dollars too low.

The reality is that Rhode Island has to cut a structural billion dollars out of its budget. Over the past few years, we've been chasing a sinking chest deeper under water.

Table 3, on the last page of the PDF, shows the decreases in revenue by source. Wading through the sloppiness of the table (mostly misplaced and missing minus signs and parentheses), the take-away is that raising taxes is not an option. Revenue is shrinking because people are doing less of the things that generate it. What's frightening is that Rhode Islanders don't seem interested in doing anything about it.

Re: What Sort of Hope Are We Talking About?

Believe it or not, I think that Justin was being too kind to Rhode Island's leadership class yesterday, when he said that…

Strictly speaking, it probably isn't accurate to say that the "housing crisis" caused the recession, in Rhode Island. Rather, the housing bubble disguised a weak economy that would otherwise have begun its dramatic slide several years earlier,

…as URI Economics Professor Professor Leonard Lardaro just noted" URI Economics Professor Professor Leonard Lardaro just noted, while Rhode Island's economy has been contracting, the national gross domestic product has been growing by 4%.

…as the National Governors' Association noted in June, Rhode Island was one of only three states that couldn't cover its beginning-of-the-year projected spending for fiscal year 2007 -- if Rhode Island's fiscal problems are rooted primarily in a national slowdown, then why are 47 other states able to stay within their projected budgets when Rhode Island can't?

…as the Rhode Island Public Expenditures Council noted in their analysis of Rhode Island's current operating budget, spending from general revenues in fiscal year 2008 increased by 5.7% over the previous year. How exactly is it reasonable to assume that it will take something as dramatic as a recession to prevent revenues from automatically "keeping pace"...with 5.7% expenditure growth?

Whether you want to call it the "What Can We Do?" attitude prevalent amongst RI public officials (Justin's description) or the "putrid Rhode Island gene" (WPRO host Matt Allen's description) or an endogenous attitude towards the surrounding world (URI Economics Professor Leonard Lardaro's description), it is these kinds of attitudes towards the possibility and the necessity of reform held by too-many Rhode Islanders in power, and not immutable iron laws of economics, that cement Rhode Island's position as first in and last out of economic problems.

What Sort of Hope Are We Talking About?

The person who emailed me Ted Nesi's Providence Business News article about the Pew research study that Andrew mentioned this morning began his email, "Hope you're well. Off..." At first glance, I misread that as, "Hope you're well off." That might be a fitting new motto for the state. (Is it too late to get it on the next ballot?)

Frankly, I'm not sure that even the folks sounding sirens about Rhode Island's economy and government deficits have the right mindset to address the problem. As Nesi quotes from the report:

"The country's smallest state has big problems," the report said. "It was one of the first states to fall into the recession because of the housing crisis, and it may be one of the last to emerge, hampered by high tax rates, persistent state budget deficits and a lack of high-tech jobs."

Strictly speaking, it probably isn't accurate to say that the "housing crisis" caused the recession, in Rhode Island. Rather, the housing bubble disguised a weak economy that would otherwise have begun its dramatic slide several years earlier.

The California of New England, but Not in a Good Way

Here is the Christian Science Monitor's bleak summary of the results of a rapidly-circulating Pew Center on the States report, which says that 9 other states are facing California-like fiscal disaster in the near term…

The “great recession” may be over, but its impact on state governments is still unfurling – and could threaten America’s fragile economic recovery…

The Pew Center on the States released a report concluding that nine states have joined California in a condition of “fiscal peril.” Their budget troubles could cause a round of job cuts and tax hikes in states from Florida to Illinois and Oregon.

A link to the entire report and report summary is available here.

"Why Do I Live Here?"

That's a question that Rhode Islanders must be asking themselves almost on a daily basis.

It's not just that the November Revenue Estimating Conference set the baseline for the current year's budget deficit at $200 million. It's not just that, but for one-time fixes, the state government would have run deficits for several years even before the recession. It's not just that, as recently as two weeks ago, the General Assembly continued to pass legislation restrictive of businesses and the economy. It's that legislators still get away with junk like this, from the first link above:

"It's extremely bleak," said House Finance Committee chairman Steven M. Costantino, considered the legislature's budget architect. "Let's hope at some point this stabilizes."

Hope? That's it? People are losing their jobs, their homes, their health insurance because of you, Representative Costantino. Because of the damage that you have done to this state — in part (but only in part) because of your utter incompetence. If your constituents in Providence had any civic awareness whatsoever, they'd give your seat to a dog from the local animal shelter before returning you to the State House.

"Let's hope this stabilizes." News flash: You're a representative — the chairman of the Finance Committee — and Rhode Island's government is the fundamental contributor to our problems. How about you set your sights on stabilizing it.

Was there no one whom Providence Journal reporter Steve Peoples could contact for the article to call Costantino on this?

Looking at a Big "L"

How fast can economists downshift expectations? Well, in just a few weeks, we've gone from this:

[Edinaldo Tebaldi, assistant professor of economics at Bryant University] and Edward Mazze, distinguished university professor of business administration at the University of Rhode Island, will give a somewhat gloomier forecast for the state at a conference next month in Boston organized by the New England Economic Partnership. They predict the jobless rate to rise to at least 13.5 percent and hover there next year. By 2011, it will fall, but only to around 12 percent, their preliminary calculations show.

To this:

The state will shed an estimated 9,000 more jobs in the coming year, and unemployment rates will keep creeping up, hitting a high of 14.1 percent in the second quarter of 2010. Housing prices, meanwhile, will struggle in the short term before beginning a slow climb, starting in 2011, a report from the New England Economic Partnership, a nonpartisan forecasting group, predicts.

Of course, by way of assessing credibility, here's what the same crack squad was saying a year ago:

The latest jobs report is grim even in light of the economic forecast released yesterday by the nonprofit New England Economic Partnership. The NEEP economists predicted that during the next two years, Rhode Island would lose nearly 15,000 more jobs and unemployment would hit 10 percent, probably by the end of next year.

Mazze says we're looking at a U-shaped recovery. Face reality, Rhode Island: Until you radically change the way this state operates (and who operates it), we're looking at an indefinite L.

Students Aren't Economic Gurus

As a follow-up to this morning's post on Rhode Island's need to get out of the way of its economy, Tabetha recently offered a comment in our discussion of the economy and higher education to which I'd like to return:

If RI wants to keep college grads, the number 1 need is pretty simple: have jobs in the most popular fields available. Without jobs in their field, recent grads have no reason to stay in RI. It would make most sense to analyze the most popular majors and then try to attract businesses that would hire graduates in those areas. RI has a high unemployment rate and I suspect that a dearth of employment opportunities in popular fields of study most affects the decision to leave town. After 4 years (or more) of study and the probable accumulation of student loans, I doubt many recent grads are going to be content to work the counter at the local Dunkin' Donuts.

This approach comes at the problem from the wrong perspective. Students choose their fields of study for a variety of reasons, ranging from personal desire to experience with adults' careers to advice and research about economic directions. Even to the extent that a college degree dictates a particular industry or type of business (which is less and less the case), the student's research and preferences are not the most reliable criteria on which to build an economy.

It's like giving the folks in entry-level positions a decisive say in the company's big-picture management. To the contrary, the people who have invested their years and their fortunes in a particular business are the ones best suited to say what it should do and where it should be located.

Again: Rhode Island's focus should be on getting out of the way of people who are willing to imagine and build the economy, not on allowing government functionaries to try their hand at economic prognostication or selecting an array of jobs that might dazzle young adults who know little about the way of the world or even what a career should look like.

Drowning in Desire for Other People's Money

The state of Rhode Island's revenue take is like a chest of treasure sinking to the bottom of the ocean, and some folks are intent on having us all chase it to the bottom:

"We've already been cutting, cutting, cutting," said one of the few people watching Wednesday's discussion, Russell Dannecker, fiscal policy analyst for the Poverty Institute at Rhode Island College. He cited a study by State Policy Reports that reports 29 states have proposed tax increases for the coming fiscal year.

Frankly, Rhode Island has to stop "cutting, cutting, cutting" around the edges and give some serious thought to wholesale excisions of programs. Information from the first link above illustrates why that is the necessary direction:

Among the highlights of Wednesday's presentation:

• Collections from the state's business-corporation tax plunged to $4.5 million from $14.8 million in the same period a year earlier, a $10.3-million drop.
• Sales-tax collections fell by $19.77 million, or 6.6 percent, to about $278.6 million.
• Net receipts from the personal-income tax (after refunds and other adjustments) fell by $14.3 million, or 4.5 percent, to $307.8 million.

The number 1 job of the state government must be to do whatever it can to help Rhode Islanders make money. The quick first step should be to cut taxes, and the larger step, still expedited, must be to slash regulations and mandates. We cannot afford to govern ourselves as we've been doing.

The Time for Investment Has Passed; Now We Need to Produce

Can't Republicans at least agree that the last thing the state needs is more government "investment"?

Governor Carcieri Friday morning said Rhode Island must invest more in higher education and mentoring programs if it wants to encourage young, educated people to stay here for the long haul.

"As you invest in higher education, you make a statement to young people about what you value and what's important to the state," Carcieri told the crowd at the Knowledge Retention Symposium, a gathering at Brown University focused on preventing what's known as brain drain in the Ocean State.

Even within the brief article is evidence that the governor is misassessing the actual problem, with the following from Providence College President Rev. Brian J. Shanley:

"I hear this all the time and it drives me crazy. They come to Rhode Island to these great institutions and they fall in love with Providence and the state of Rhode Island, but they don't think this is a place they can stay. They think this is a launching pad to New York or Boston, or Chicago and Washington, and it's critical to the future of our state that our students, when they come here, think 'This is a place I can stay.' "

The students are already coming; the problem is that they leave, and to the extent that further government investments (read: taxes and bonds), regulations, and mandates continue to hinder the Rhode Island's private sector, the state will continue to circle the bowl and graduates will flee before they're sucked in.

A Black Spot in the Northeast

Rhode Island's saving grace, on this sort of graphic showing state-by-state unemployment rates, is that the folks creating the images continue to use "higher than 10%" as the top category. So, a baker's dozen of other states have joined us in that group, but conspicuously, none of them are north of the Carolinas or east of Ohio. We're a little black dot in a sea of purples and maroons.

Imagine what would happen if we made a concerted effort to shed our business unfriendly image... instead of continuing to elect legislators who are apparently intent on pushing us in the other direction.

Don't Turn on Capitol TV

I made that mistake, and the House is debating H5582, which would mandate the number of apprentices who can be supervised by journeymen in trades. Majority Leader Gordon Fox just gave an impassioned speech about good workmanship, living wages, people of color, etc. In short, it's a lot of rhetoric by people who have no idea what they're talking about.

The simple economic fact is that the proposed ratios are ludicrous wastes of opportunity that will protect large, union contractors and prevent small entrepreneurs from advancing. Reviewing the legislation, it wouldn't be outlandish to suggest that special interests are attempting to adjust the market because Rhode Island's commercial market is drying up.

Every crew working on a residential job would require one journeyman or master for every apprentice.* You don't need to have experience with construction sites to understand that bricklaying is the sort of work that allows an experienced guy to supervise several workers of varying experience somewhere below the level of journeyman. (Often such workers have enough experience to become journeymen but fall short by some other criterion.)

Carpenters. Laborers. Painters. Glaziers. All would be one to one on residential projects, under this bill. That's crazy, and it is very suggestive of ulterior motives that there's no difference from trade to trade.

Rep. Trillo and my representative, Jay Edwards, who actually works in construction, are trying to explain how a jobsite works to the rest. Deaf ears, I'd say.

This is why the state is in its current condition and getting worse every time this legislative body meets.

* There's been some talk on the floor that the residential ratios only apply to projects with four or more units, but that appears to only apply to certain trades, including (for example) sheet metal and pipefitters, but none of those that I list above.

ADDENDUM:

Edwards made the point that it's difficult to get apprentices, anyway, hypothesizing the reason as a desire to go to college. Part of that desire, I'd propose as somebody who entered the trades after receiving a college degree and working in offices for a couple of years, results from the lack of clear and quick opportunity in trades.

A number of years ago, I explained how Rhode Island's approach to licensing results in fewer tradesmen than our neighboring states — specifically in terms of the hurdles one would have to clear upon identifying a particular trade as a market opportunity:

Starting everybody green, and assuming everybody passes the tests immediately, after 12 years, Rhode Island's system will have turned one master plumber into four masters and four journeymen, able to take eight apprentices. The Massachusetts system? Double in every category. Not only will twice the customers receive service, but twice the unemployed people can step onto the career path. Moreover, the gap ripples outward into the economy in innumerable forms — from the cost of home renovations to the rates of pay for less-skilled jobs.

If the trades were such that smart people could hop in, learn the profession at a self-direct pace, and quickly turn the job into a profitable career, more would make the attempt. With labor laws and union influence as they are, the choices are skewed. As a young adult graduating from high school, would you rather work full time in crawl spaces and bathrooms for five years while taking night courses in order to become a master plumber or party for four years and do enough classwork to get a degree that opens a door into an air conditioned office in which you'd begin learning an actual occupation only generally related to your education?

ADDENDUM II:

The legislation passed by a healthy but not overwhelming majority. The governor should veto this particular bill. The voters should upend the legislature.

The Method Is the Message, in RI Recovery

Reviewing a recent RIPEC study (PDF), Brian Hull pulls back from the most relevant question:

When we look at the 2007 Per Capita Personal Income for RI, MA and CT we find the following: Rhode Island is $39,829, far less than Massachusetts ($48,995) and Connecticut ($54,981). The per capita personal income of MA is a little more than 23% than that of RI. Likewise, the PCPI of CT is 38% more than RI. With these numbers, it's easy to see why general expenditures per $1,000 of PI is higher in RI than in MA and CT. There are fewer "$1,000s of personal income" here to support the government's expenditures.

Does this make the expenditures more expensive, or even less necessary? No. It just means that, as a society, we earn less money than our neighbors to fund these services. All things being equal, if we raised the per capita personal income in the state, then the spending per $1,000 of personal income would decrease. We should aim for that!

An interesting tidbit of information that I learned from Tom Sgouros, in his book "Ten Things You Don't Know about Rhode Island," is that blue-collar, working-class jobs in the state pay much less than comparable jobs in MA and CT. This is in contrast to the relative equivalent salaries earned by professional, white-collar jobs (even though RI still earns a little less). And this helps explain why RI earns less, but that's a discussion for another day.

His heavy reliance on Tom Sgouros notwithstanding, Hull presumably does not buy into the idea that our problems require the reduction of spending through consolidation and the like. After all, consolidation, of itself, will not prime the job-creation machine, and it will not bring Rhode Island salaries up to the levels of our neighboring state. It is not, in other words, the reason that Rhode Island fares so much more poorly than the states by which we're engulfed. Since the problem is too few $1,000s — not who holds them — the answer cannot be that our tax structure doesn't take enough from the rich (which is nonsense, anyway).

If he asks the right questions, Hull may be dangerously close to agreement with we who believe that Rhode Island's government must get out of the way of its economy. Schemes that allow for continued regulations and mandates and wealth redistribution will fail. Have failed. We cannot mandate that people have more money. We have to allow them to make it.

What's Ailing RI?

John Kostrzewa's description of Hasbro Chairman Alfred Verrecchia's speech at the recent dinner hosted by the Rhode Island Public Expenditure Council brings to mind a few questions:

"Unless we change the way we do work we will not achieve long-term sustainable cost reduction nor will we eliminate the structural budget deficit and be able to provide a more competitive and stable tax environment," he said. "... We can't afford to have 39 fire, police and public works departments; we can't afford to have 36 school districts. We need to consolidate the backroom activity of government at both the state and municipal level."

Presumably, Rhode Island once had a stable economy and a sustainable public budget; did it have fewer towns and school districts, then? On the matter of structural budget deficits, does Verrecchia have evidence that consolidation would save towns — some of whose total budgets are only in the tens of millions — the hundreds of millions that the state's budget is perpetually lacking?

Lastly, would consolidation solve this problem, enunciated by Ed Mazze, or would solving this problem be more likely to end the structural deficit?

In Rhode Island, there is a high underemployment rate since virtually no jobs have been created since late 2007. Some of the underemployed remain in Rhode Island rather than look for jobs in other states because their spouses have good jobs and they want to focus on their children, the family or other personal matters. Presently, the average time it takes to find a job is longer than the time unemployment benefits are paid.

The whole consolidation thing seems faddish to me, and I don't see how it saves sufficient money or resolves Rhode Island's manifold problems.

The Slow, Painful Burn of a Dysfunctional Government

Yesterday, at lunch time, two younger carpenters were discussing the dirt-cheap real estate that's available and one opined that now might be the time to buy, with values expected to increase in the near future. I suggested that they be cautious about assuming proximate economic recovery in Rhode Island, as if a healthy economy is some sort of natural state of being. In fact, I argued that a national recovery will drive Rhode Island deeper. Consider John Kostrzewa's article in the Sunday Providence Journal focusing on one small business — long in local history — that has no option but to close its doors:

That's one of the tragedies of Rhode Island's recession, now in its third year.

Small businesses are disappearing at an alarming rate.

That's important because of the clusters of jobs that are lost, and the income, sales, property and other taxes that will no longer be collected to pay for state and municipal services.

It's also important because when the national expansion starts, there will be fewer Rhode Island companies ready to fill orders or provide services. It will take time for new small companies to organize, get financing and open to do business. That means Rhode Island's recovery will be slower and shallower than in other states that compete for the same contracts.

I wouldn't even count the delay in new businesses as the biggest concern: Rather, the likelihood that the sorts of people who would start new businesses and make them successful, as employees, will see recovery elsewhere as an opportunity to leave. Even if they don't follow local news and politics as closely as we all do, they pick up the general reality that nobody in government (with the mild exception of the outgoing governor) is even making substantial noises about fixing what's wrong with the state that they ostensibly run.

And the opportunity to make even minor shows of comprehension and concern are so plentiful that the negligence can only be deliberate. Back to Kostrzewa and the lamp shop that can't:

"It's not a friendly state to get people to come to," [store owner Patricia Lena] said, "If anything, they leave."

She mentioned the inhospitable business climate. She said the inventory tax on unsold lamps left on the shelves was costly. She said at one stage of the business she would have liked to hire more employees, so she didn't have to work seven days a week. But the taxes, specifically under the workers' compensation law, made the cost prohibitive.

The current General Assembly — whose members the last election gave no electoral reason to change — is more likely to increase the burden on such entrepreneurs with "living wage" legislation and the like than to respond to their plight. Brace yourselves, Rhode Islanders; we're chasing an ignorant fantasy to the bottom of the well.

The End Not in Sight

Maybe there's something about an article that begins by saying that the now-13% unemployment rate in Rhode Island "fulfill[s] experts' predictions that the state's job market will get worse before it gets any better" and then proceeds to quote experts who keep adjusting their predictions to chase the dark reality, with the latest being as follows:

[Edinaldo Tebaldi, assistant professor of economics at Bryant University] and Edward Mazze, distinguished university professor of business administration at the University of Rhode Island, will give a somewhat gloomier forecast for the state at a conference next month in Boston organized by the New England Economic Partnership. They predict the jobless rate to rise to at least 13.5 percent and hover there next year. By 2011, it will fall, but only to around 12 percent, their preliminary calculations show.

My unscientific gut assessment, based on general understanding of the problem and the signals of people who could fix it were they not simultaneously clueless and corrupt, remains that we're going to 14% indefinitely — although I'm tempted to put Rhode Island's new status quo at 15%. Take, for example, a companion article about a RIPEC event at which neither of Rhode Island's legislative leaders appeared willing to do more than offer empty phrases in the dialect of their audience. At least Governor Carcieri called for abolishing the corporate income tax, but that's only a start.

Take, also, the latest tidbit related to the foolish illusion of the stimulus program:

The federal government reports that at least 30,383 jobs have been created or saved across the United States as a direct result of federal contracts made possible by the stimulus package signed by President Obama in February.

Rhode Island, however, received just 6 of those jobs, according to federal data reported this week on the Obama administration's stimulus Web site, recovery.gov.

The Ocean State ranked dead last, even behind Puerto Rico (126 jobs) and the District of Columbia (370 jobs), in the national rankings.

To the extent that the "stimulus" has "created or saved" jobs, they are temporary — based on the continued provision of taxpayer dollars. And I'd hypothesize that Rhode Island's poor showing is evidence of the fact that our system is so constrictive that there aren't jobs waiting to be created, merely lacking investment. Rather, Rhode Island doesn't even have the machinery for job creation.

Sure, the article goes on as follows:

The numbers do not include, however, the number of jobs saved or created by stimulus dollars funneled through the state, which the state's congressional delegation said would exceed $1.1 billion and produce at least 12,000 jobs through transportation projects, green energy initiatives and job training programs.

Those figures -- which will likely show many more jobs created -- will be released Friday, according to the Carcieri administration.

But consider one component of that effort:

The state Office of Energy Resources, which has received tens of millions of dollars in federal stimulus funds in recent months for energy projects, announced Wednesday that it is finally distributing about $15 million, largely to help weatherize homes for low-income people.

Most of the money ($12.2 million) is going through local "community action agencies" as a sort of income redistribution to low-income households in the form of home improvements. In other words, it's being processed through Rhode Island's corrupt system in perfect harmony with the entrenched poverty industry and union constituencies that latch onto this state as a sixty-pound tumor. At the very minimum, one can infer that the effect of the money will be greatly diluted by the imbalanced pay that union workers will receive to do the public work.

This project from the energy office, although relatively small, is even more indicative of the deadly thinking in state government:

$250,000 to the state building commissioner to develop new building codes that would require more energy-efficient houses. The money may also be spent on training building officials and contractors.

Apparently, it is now "economic stimulus" to contrive ways to make it more expensive to build homes. That's not stimulus — it's asphyxiation. And it's the way Rhode Island operates and will continue to operate for the foreseeable future.

Maybe 15% isn't a high enough prediction.

The General Assembly's Persistent Free Pass

It's one of those things that, once you've noticed, it's difficult not to see everywhere: How in the world does the General Assembly always manage to step forward as the great authority and protector without shouldering any of the blame or responsibility? Consider:

"Any way you slice it, [next year's budget] is going to have to focus on how we get the cities and towns to get by on less, do some of the same cost-saving things we're doing with state employees and do some consolidations," Carcieri said.

But several Finance Committee members said they want to see more of an effort from state agency directors to cut their budgets before the administration targets local communities.

Why isn't the governor making allies of the cities and towns by hammering again and again the need for the General Assembly to get off their backs with mandates and regulations? And why didn't reporter Cynthia Needham redirect along those lines when the Finance Committee members tightened the rhetorical screws on the relatively powerless administrators?

Whatever the case, municipal and school officials had best be doing some screw tightening of their own, because the state apparatus is intent on bringing them down with the ship.

Shouldn't Consolidation Savings Go to Cities and Towns?

Could be I'm missing something, but Rhode Island Senate Finance Committee Chairman Daniel DaPonte's proposed solution to the state government's money problems sounds like an answer to a different question:

Offering a hint of what might be to come in the legislative session that starts in January, DaPonte said lawmakers must seriously look at "municipal and school consolidation throughout the State of Rhode Island" as a long-range cost-cutting measure.

Legislators and Governor Carcieri have in the past called for merging certain municipal and school services, but rarely in recent years has a lawmaker with such standing suggested consolidation of different districts.

"It's too early to talk about what any final recommendations look like. But I think it's very fair to say that the numbers are large enough and the concern is enough that there are very, very serious conversations taking place about this," DaPonte said.

He declined to discuss what other budget cuts may be in store if revenues continue to fall.

Consolidation is a good feint, because Rhode Islanders across the political spectrum have a vague feeling that it would be a good thing — "Yeah, yeah, consolidation would save money." — but the only way helps with state fiscal problems is if the General Assembly sucks up all the savings. In the case of school districts, that means less state money per student, probably with the claim that the state is giving more money to each larger district than it had to each smaller one. In the case of municipalities, it means less assistance offsetting property taxes and even less money to account for mandates.

And that assumes that consolidation saves significant money, which isn't at all proven, as far as I'm concerned. Towns could secure most of the savings through joint purchasing agreements and the like.

Only one thing can keep this state from a perpetual decline in the decades to come: economic activity. For that to be a real possibility — beyond reverberating ripples from national growth — the General Assembly is going to have to overhaul our tax system, erase the long list of mandates on towns, residents, and private businesses, and take a big red marker to the regulatory regime. Of course, that would require enduring the howls of special interests and undoing the pet bills for which legislators sold their souls.

This Extended Recession Brought to You By: The General Assembly and Friends

The Providence Business News points to a Forbes article that puts Rhode Island at the leading edge... of business unfriendliness. Yup, we rank number 50 on a list of the Best States for Business, with the following subranking:

• 2008 rank: 45
• Business costs: 40
• Labor: 35
• Regulatory environment: 50
• Economic climate: 48
• Growth prospects: 18
• Quality of life: 21

Providence Business News attributed the higher ranking in growth prospects to "projected growth in jobs, incomes and economic output, as well as its rate of net new businesses and venture capital investments." One should keep in mind, though, that when you're at the bottom, like Rhode Island, growth rates should be easy to come by. It would be useful to know, too, when the work for this list was performed; the change in our capital gains tax won't likely help when it comes to "venture capital investments."

A Rhode Island Business Tale

It doesn't appear to be online, but a story in the current Sakonnet Times tells the sad tale of entrepreneurialism in Rhode Island:

During their years spent trying to establish a beachhead in Tiverton's hospitality and business community, the couple hired architects, lawyers, and engineers, and jumped through permitting hurdles with the Coastal Resources Management Council, the Department of Environmental Management, the Department of Transportation, the local planning board, the zoning board of review, the town council, and the town zoning and building official. ...

"There are several reasons [we're giving up], one of the main is best described as investor fatigue. Due to the extraordinary amount of time and expense required at the state and local levels, as well as expensive restrictive conditions put in place by town officials, the funding for the project has been pulled," said Mr. Rivera.

"Another consideration," he said, "is the condition of the local economy, local political makeup, and the larger economy as a whole. We have been advised this is not the right opportunity at the right tie in the right place."

Look, I don't know this project well enough to know whether it was a good plan for investors or a good deal for the town, but this is the image of Rhode Island and is, I'd suggest, the state's biggest problem — a self-inflicted, fatal wound for which the patient refuses to seek treatment. Indeed, killing the capital gains tax cut was like shoving dirt in the wound to stop the flow of blood.

ADDENDUM:

Rushing to get up this post during lunchtime, I forgot that I had no link to which readers could refer for specifics. To answer a question in the comments, the business was meant to be "a 15-room inn and spa on a three-quarter acre patch of waterfront property at the intersection of Nannaquaket and Main Roads in Tiverton."

A Burning Ring of Revenue Fire

One thing to remember: Every time you read about state tax revenue lagging expectations, the expectations have likely already been downgraded since the last time analysts were disappointed:

Two reports issued Tuesday afternoon by the state Revenue Analysis Office showed total state revenue in July and August was down 4.2 percent from the same two months last year, after adjusting for money collected in one year that is accounted for in the previous year.

Besides trailing last year, the revenues for July and August also trailed what state budgeters projected would come in. The shortfall is $12.8 million or 3.3 percent.

I don't know if we can afford to wait until the next election to replace the legislators who've brought us to this impasse. Here's a fantastic, small-scale example of the incompetence at work:

The cigarette tax collection is trickier to figure out.

The amount of money taken in during July and August is ahead of last year, $23.5 million compared with $20.5 million. But that is far less than what lawmakers budgeted: $26.3 million.

They looked for the increase because the state raised the cigarette tax by a dollar — to $3.46 a pack — in April, toward the end of the last budget year.

Simmons said that budget makers may have underestimated how much the tax hike would decrease consumption of cigarettes that are taxed in Rhode Island.

So, the legislators increased this tax 40% in the hopes of increasing revenue 28%, and thus far they've realized 15%. During the summer, when smoking tourists are trapped and aren't likely to waste their valuable vacation time searching for deals across the border (or quit altogether).

The governor's staff proposed this particular tax hike, and one hopes they're duly embarrassed. Ultimately, however, the budget was reconfigured in the General Assembly's name.

Whoever's to blame, anybody looking for an economic turnaround in Rhode Island shouldn't put their chips on the table until well after just about every other state in America has already been humming along for quite some time.

What Rhode Islanders Should Fear

Here's a Dilbert cartoon from July that certain segments of Rhode Island society should consider:

A State Unable to Save Itself

So the news is that Rhode Island ranks very low among the states for receipt of small-business, no interest loans through the federal America's Recovery Capital (ARC) program. Reading along, one can already hear the partisan and ideological attacks on the governor.

Well, those may be forthcoming, but the article lays the blame elsewhere:

The problem for Rhode Island businesses, [state director for Rhode Island Small Business Development Center at Johnson & Wales University John] Cronan says, is that they often aren't healthy enough to qualify for ARC loans. In addition to other requirements, the businesses must have been profitable for at the least one of the previous two years.

"We entered the recession much earlier than anybody else. Now, we have too many companies that are not bankable," Cronan said. "You still have to be a stable company to get a loan. The criteria being used is strict. The banks are making loans to stable companies, but we don't have enough stable companies."

In other words, the state has so burdened its businesses and burned out its economy that the federal government has little confidence that individual companies would be able to pay back a $35,000 loan. If the General Assembly would just get to work trimming the taxes, slashing the regulations, and eliminating the mandates that it imposes on the economy, this state would soar.

Location Should Help Rhode Island Economy

It doesn't take an expert to figure out that Rhode Island is in a great location and should benefit economically from it. The Providence Business News reports that a "relocation consultant" is readying a report that says that and more:

Location. Location. Location. That was the message delivered by a relocation expert to the R.I. Economic Policy Council this morning....[John] Rhodes [senior principal at the consulting firm of Moran, Stahl and Boyer] stayed away from making recommendations, but said the state must seize its considerable university base and entice graduates to stay in Rhode Island by providing internships, industry connections and a good quality of life. The state, he said, also needs to design a permitting process that allows businesses to set up shop quickly to take advantage of market conditions.

“When I bring clients to your state I want to see something developed,” Rhodes said. “I want to see land ready. I want to see a building.”

Corporations also want to see low taxes and a streamlined regulatory structure.

“This is where ‘needs improvement’ is on your report card,” Rhodes said.

The state has consistently ranked at or near the bottom in business friendly surveys, but Gov. Donald L. Carcieri told the council the state was holding the line on taxes when neighboring states were increasing them.

The governor also said he understood that the cost of electricity – three to four times here than in much of the South – was a barrier to bringing large companies and manufacturing jobs.

Still, Rhodes said that the GDP output from manufacturing remains strong around $4 billion annually despite the industry shedding about 20,000 jobs since 2001.

“The folks that are staying in the state today are very productive people and people that want to be here,” he said.

And while the state is constrained geographically by its position in the corner of the country, Rhodes said for a tiny state it provided an extensive transportation network, including a deepwater port, a rail link, a commuter rail station and an airport “people in New England brag about.”

Forget Wind and Green, This Is the Economic Gimmick for Rhode Island!

What Rhode Islander doesn't read this and think, "I want one"?

Ken Andrade's 1964 Amphicar 770 has a unique set of instructions pasted on the dashboard:

"Warning — Before Boating:

1. Put bilge plug in.

2. Secure front luggage deck.

3. Use lower locks to seal doors."

The instructions serve as a reminder to properly seal the two-door convertible before driving it into the water for a spin.

Multiple states are striving to become the hotspot for the "green industry," but I've yet to hear of any competition to become the global hub of amphibious automobiles. And Rhode Island is perfectily situated, if you ask me. Think of the ease of hopping from Little Compton to Newport to Jamestown to Narragansett, or from Tiverton to Portsmouth to Bristol to Warwick. These towns all sound distant from each other, but in a road vehicle that could slide effortlessly into water, the state would be much more easily traversed.

And we'd save millions in bridge repair (which the state historically accomplishes, it seems, via full bridge replacement).

Going Right Where They Sent Us

So the national unemployment rate is 0.3% shy of 10%, and economists are debating when, not whether, it will achieve double-digits. In Rhode Island, which has been in double-digits for quite some time, already, the experts continue their reluctant predictive marches toward my initial gut estimate of 14-15%. And worst of all, usage of the term "jobless recovery," perhaps calling forth that terrifying creature, the W-shaped recovery, has moved from whisper to indoor-voice.

Oddly, for all the distinguishing between young workers and older workers, employed, unemployed, and not-looking, discouraged workers, few reports are differentiating between employers in an attempt to explain how the economy can grow without creating jobs. One wonders whether the reason has something to do with the subsequent conclusion, to which Larry Kudlow comes based on this picture:

The large companies are gradually recovering as a result of major cost-cutting, inventory reduction, and a lean-and-mean return to profitability and high productivity. So the payroll survey registered a 216,000 job loss, the smallest drop in over a year.

However, the household survey, which picks up small, owner-operated, LLC/S-Corp-type businesses, registered a devastating 392,000 job loss, which follows losses of 155,000 and 374,000 in the prior two months. This is the source of the unemployment-rate jump, as 466,000 newly unemployed were scored in the report.

In a nutshell, this is without question now the Obama administration's recession:

Borrowing from Peter to redistribute to Paul is not fiscal stimulus. It's a fiscal depressant. Small businesses are having enough trouble getting their hands on credit. And now they can't find enough capital for new start-ups. The government prospers, but the small-business sector sinks.

Then there are all the tax and regulatory threats related to health-care and energy reform. Until Mr. Obama retreats from his plan for a government takeover of the health-care sector, and a cap-and-trade program that will cripple the energy sector, the cost of hiring the new job will continue to rise.

The threat of higher payroll taxes and energy costs is more than enough to deter new hiring. Taxes on upper-end investors are going to rise, too, and there may be a health-care surtax on top of that. And don't forget that small businesses pay the top personal tax rate, which is going up. Oh, and how about the recent minimum-wage hike? Yet another business cost.

So while the government doles out money for transfer payments and one-time temporary tax credits, the ensuing increase in the private-sector tax-and-financing burden becomes a complete deterrent to new job creation, as well as capital formation.

Kudlow suggests that Obama and the Congressional Democrats could perhaps spur recovery simply by backing off their mad-dash for government power. Similarly, Rhode Island's General Assembly could hand their ostensible constituents hope of a quick turnaround if legislators would signal soon and decisively that the state has learned the error of its ways and intends to make itself the most business-and-taxpayer-friendly cut of land in the Northeast.

Neither of those conversions is very likely, of course, which means that our highest priority, as individuals, should be to find something buoyant to hold onto, and to grab it tightly.

A World of Labor's Own

The union organizations probably have to go through these motions, if only to perform a tribal dance proving their value to members, but I wonder whether such news doesn't serve to remind taxpayers why they're increasingly annoyed with the existence of an alternate employment reality in the public sector:

With the largest state employees union rejecting a state-offered compromise that would let workers recoup some — but not all — of the pay they stand to lose during a government shutdown, the two sides are headed to court Wednesday over the union's bid for a temporary restraining order to block Governor Carcieri's 12 shutdown days.

As is often the case with cartoons, I think Jim Bush captures a swelling mood with this one (reprinted with permission):

The Thing About Taxation

Oswald Krell is at it, again — proving, this time, that beating a strawman for long enough begins to resemble a pillow fight against one's self:

Low tax states are more violent, have higher rates of teen pregnancy, somewhat higher poverty rates, and lower median incomes.

Do low taxes cause these problems? No. Correlation is not causation.

Rather, to me, what is emerging is the description of an attitude. Low-tax proponents favor "Stand on your own" rhetoric, which is really a coded term for letting the rich shirk their civic obligations. The result is that the bulk of the population is noticibly worse off in low-tax states: more violence, more teen pregnancy, more poverty, lower incomes.

Now, explain to me: why this is an attractive paradigm?

I repeat: The argument for taxes in Rhode Island isn't that low rates are the decisive factor in a given region's economy, and adding social data doesn't change the fact that people and businesses do take the cost of government into consideration.when they plot their financial lives. The question that Rhode Island's progressives are so studiously striving to ignore is that taxation must be judged based on a given state's circumstances, and Rhode Island is overburdened with them, as with other manifestations of big government like mandates and regulations. "We will let you operate your business as you see fit and to keep more of what you earn" need not be innuendo for gun violence and teen pregnancy.

Lower taxes and lightened regulations would encourage economic activity and improve the earning potential of all residents, which I'm reasonably certain would correlate positively with improved social markers in the state, as well. (Krell doesn't provide his sources, so I'll simply offer the hypothesis that Rhode Island fares poorly, by such measures, compared with similar states.)

That's a suggestion that RIFuture-owner Brian Hull should consider, as well:

The recession effect is having a profound impact on the state's economy, but the long-term financing of the state would be better served if the General Assembly would make the "tough choices" and restructure the tax code, shifting the burden away from the vast majority of Rhode Islanders who have seen their incomes shrink and are struggling to make ends meet.

For perspective, don't lose sight of the fact that, in the name of improving the economy, Hull wants both to raise taxes and to shift them toward a particular group. Apart from being manifestly unjust, such a strategy would be economically devastating. What, pray tell, would Hull like to change about this picture:

Me, I'd like to see less red across the board.

They Must Have Some Thoughts, Mustn't They?

From a Providence Journal editorial on the General Assembly's annual avoidance of structural change:

And this series of cuts may be minuscule compared with the ones Rhode Island may face soon. Ms. Mumford estimates that the state may confront a $1.2 billion deficit in the coming months, given overly optimistic forecasts of tax revenues in a bum economy. Former Cranston Mayor Stephen Laffey warned that "the deficit could be north of $800 million and is leading to insolvency." As painful as the state's 12-day shutdown will be, the savings from that measure — $17.3 million — pale in comparison with such eye-popping potential deficit numbers.

And Rhode Island faces the question of what to do when the hundreds of millions of federal stimulus dollars that have been used to sustain government budgets run dry.

Do you suppose most legislators have some sort of a strategy list, such as:

• First, hope for things to work themselves out.
• If that doesn't work, trim some blatant fat.
• If that doesn't work, raise taxes.
• If that doesn't work, cut social services.
• And so on.

Or are most of them just winging it — trying not to think about the inevitable.?

He Could Be the Perfect Man for the Job

So, last week, Pat Crowley intimated that he may run for General Treasurer of Rhode Island. Those familiar with his body of, ahem, work will likely find it difficult to believe that the notion isn't a put-on at some level. Today, Crowley announced that RIFuture is something like the state's online hot potato:

RUTURE has been sold. After much consideration, and after receiving a substantial offer of purchase, I have decided to sell RIFUTURE. The sale creates an opportunity to pursue other state wide goals while still maintaining a voice in the progressive blogosphere. I will continue to be an active contributor to RIFUTURE, amongst other activities.

So, Patrick Crowley "small business owner" is no more, but based on his experience, I'm tempted to endorse his candidacy for the treasurer job. Who better to occupy that seat as Rhode Island plunges into the chilly waters toward which our gleeful leap off the economic cliff sent us rocketing?

The State's Spending Practices

Former state representative Carol Mumford deserves a hear, hear for her op-ed in yesterday's Providence Journal:

Those who believe that Rhode Island is a poor state would be surprised to know that during most of my 10 years in office, the state's revenue increased at the approximate rate of 3.5 percent a year. While our revenue increased at this modest but steady rate, our expenditures increased approximately 7 percent to 11 percent a year. That says it all, doesn't it? No matter what the income, those people or entities that live beyond their means find themselves in the situation Rhode Island faces today. ...

On another note, those who believe our state population figures are static at about one million should look closely at the composition change. The Rhode Island Economic Development Corporation testified before House Finance that in the last decade those who are considered affluent in Massachusetts have doubled in number. The number of people who are considered affluent in Rhode Island has decreased by 50 percent. The affluent did not lose their assets; they fled. An examination of the latest "Kids Count" figures shows that the number of poor children in Rhode Island has mushroomed. The population numbers remain static, but many who used to pay the bills are elsewhere.

But how can that be? An opposition analyst assures us rich taxpayer interests have won battle after battle at the State House, and welfare benefits are difficult to procure.

Expanding Cargo Operations at Quonset

As I was commuting to work via Airport Road in Warwick the other day, the light turned red and a single UPS truck pulled out of the T.F. Greene Cargo terminal. This normal everyday occurrence got me wondering about how this was a really inefficient way to get cargo from airport to the highway. If cargo operations are to grow, then they need to have a more efficient method of getting the cargo to the major highways than through 5 or so sets of lights via Airport Road and Rt. 1 (Post Road) through Warwick. It looks like Kevin Dillon, head of RIAC, thinks Quonset may be the solution:

Dillon said the Quonset airport, as a result of more than $7 million in recently completed infrastructure improvements, including a new hangar, is a “real gem,” with the port, rail lines and enhanced Interstate 95 access part of or near the complex.

In addition to the Rhode Island National Guard facility, the Quonset airport is used for general aviation, with about 20,750 operations per year, including 5,800 by the military, according to the Federal Aviation Administration. Dillon noted that Quonset has “lots of room, so it lends itself to cargo growth.”

Cargo carriers in the past were concerned about limited highway access, but improvements to the Quonset access roads within the last 18 months should have satisfied those concerns, according to Dillon.

Most cargo in New England now goes through Logan International Airport in Boston and Bradley in Hartford, Conn. However, Dillon said, Logan is “constrained” by passenger flight needs, so there is opportunity for Green or Manchester “to step in and fill that void.”

Warwick Mayor Scott Avedisian said he was surprised to hear Dillon’s concerns about the curfew because the airport “violates it all the time.” Avedisian said the curfew has been in place more than 20 years, but “they don’t pay attention to it most of the time” and there are “many nights when they deviate from the curfew.” At the holiday season in December, Avedisian said, the curfew usually is lifted.

Told of the plan to redirect cargo traffic to Quonset, Avedisian said it was news to him and that airport officials, including Dillon, have assured him that cargo service would not be moved from the Warwick airport. “This just leaves the city further confused about what [the airport’s] plans are,” he said.

“This represents a big opportunity, not only for the airport system, but for the entire state,” Dillon told Providence Business News. Cargo service “is a huge generator of employment.

“Just think of all the processing that takes place [when cargo is delivered],” Dillon continued. “This is more than just parochialism. I believe there’s a lot of employment opportunities that can be generated” by increasing cargo flights to the state....“It stands to reason [that more jobs would be created if cargo activity were expanded]. Just think of the nature of cargo, the processing and the handling. It creates a number of jobs just in terms of the airline itself,” he said.

However, the larger picture, Dillon said, suggests that for manufacturing and commercial sectors to flourish, “you need good cargo processing.” He spoke of spinoff jobs that would be created in manufacturing, the commercial sector, trucking firms and at support facilities, such as the FedEx office in Warwick, if more cargo came into Rhode Island.

A Program to Help Unemployed Rhode Islanders

In yesterday's Providence Journal, Neil Downing reported on the thousands of Rhode Islanders who are running out of unemployment benefits, after being unemployed for up to 79 weeks, or about a year and a half:

In response, the state Department of Labor and Training, the agency which administers unemployment benefits, began mailing notices on Friday that offer people tips on where they can turn for help when their benefits run out, said agency director Sandra M. Powell.

The initial mailing is going to about 3,200 people, including those who have already exhausted their benefits, and those who will run out of benefits soon. Hereafter, the agency plans to mail the notices to about 150 people a week. The notices provide information on how to obtain food stamps, government-sponsored health insurance and other assistance.

I propose that the DLT's packet ought also to include information assisting recipients in find work in other states and relocating. If Rhode Island hasn't managed to create a job for a particular person in eighteen months, the best advice that person can receive is to find a location with an economy that can provide work.

Pushing It as Only Rhode Island Can

The latest news on the business sales tax front — which isn't online, because Projo.com is still down — is that Liberty Elm diner has come up with the $5,000 needed to prevent closure, while the Carcieri administration will begin notifying local police about which businesses to keep closed sometime next week. As I suggested yesterday, discussion of this matter must begin with the acknowledgment that businesses collected the sales tax money and then, apparently, spent it. That said, this is more than a bit heavy-handed:

For the Liberty Elm, the reprieve will be short. The diner must pay another $5,000 by the end of August before the state will allow it to establish a monthly payment plan.

Granted that the state has a right to that money, but the impression begins to be of an extortionist with his thumb on a "client," especially in light of anecdotes such as the following email that I received this morning:

One of your points need a little clarification: "businesses find it necessary to help themselves to free loans from the state." Its worth pointing out that the state charges a hefty 18 percent interest rate and late fee on delinquent payments. Hardly giving them an advantage over other businesses that pay on time. In fact the debt that piles up on late payments is in many ways more holes in a leaky boat. I was in the same situation with my business in November. (You have to be paid in full by December for license renewal and again by July for your sales tax permit.) Business started to fall off. I went through my savings and then maxed out my credit cards to try and keep things going. I managed to come up with the tax money that was owed but was short on the interest and penalty. The business was employing people, making money, and I would have been able to have everything paid in about 3 months. The state refused a payment plan. I was looking at being unemployed, broke, and seeing a business that I gave 11 years to go away. I had to bring them to court and get a court order for a payment plan. Got that news 3 days before the deadline. So I one-hundred-percent agree with you that the state should make payment plans with these businesses. In an ideal world maybe even lower the interest rates.

The way the system works now, a business that employs people, pays vendors, and does not leech off the welfare system could be closed for hitting a rough patch. But I can't complain; after all, the state pays all their bills exactly when they are due.

It certainly fits the image of this state to squeeze those who are trying to be productive while coddling those who demand handouts.

Nailing Off the Coffin but Quick

If the mob of seven wins its lawsuit, it's lights out for Rhode Island:

Rhode Island's public employee labor unions are mobilizing to file a class-action lawsuit against the state to block pension changes the legislature adopted in June to save taxpayers tens of millions of dollars.

The executive committee of Council 94, American Federation of State, County & Municipal Employees, officially voted last week to file a lawsuit, according to President J. Michael Downey. And Council 94 has been joined by a coalition of other unions representing 26,000 public school teachers and state workers affected by new pension rules, which among other things, establish a minimum "target" retirement age of 62.

"All the public employees unions are in," said Marcia Reback, president of the Rhode Island Federation of Teachers & Health Professionals. "We had a meeting of all the lawyers who represent the public employees ... Now we're in the process of selecting our lead attorney."

The coalition of at least seven labor unions expects to file suit by "the early fall," according to National Education Association executive director Robert A. Walsh.

This against pension changes that didn't come close to sufficient in the first place. What's the state-level equivalent of canceling sports and not buying any supplies or textbooks? Whatever it is, the headline after a union victory should read, "Leave Now."

Just Another Dog-Bites-Rhode-Island's-Business-Climate Story

This sort of thing doesn't really qualify as news anymore, but Rhode Island ranks 48th on CNBC's list of "top states for business". Here's how the six New England states ranked…

8. Massachusetts
21. New Hampshire
30. Vermont
35. Connecticut
40. Maine
48. Rhode Island

Rankings based on adding up a collection of indexes should always be taken with a grain of salt, at the very least. That said, Rhode Island's most surprising sub-ranking has to be its low "quality of life" score relative to the rest New England, especially given that quality of life is often touted as one of Rhode Island's strongest selling points...

1. New Hampshire
2. Vermont
2. Connecticut
6. Massachusetts
8. Maine
24. Rhode Island

The Unemployment Clock Clicks On

For some reason, it feels as if this new report has come early, but be that as it may, Rhode Island is now up to 12.4% unemployment. That's about an eighth of the workforce, and as Andrew pointed out, that doesn't include folks who are partially employed, which brings total under-employment to over one out of five Rhode Islanders.

Here's the part that I find especially disturbing:

The June jobs report was not without positive signs. The number of employed state residents rose by 1,400, the second monthly increase this year. That category did not grow in a single month in 2008.

Many of the newly employed are probably working in other states. The total number of jobs in Rhode Island declined by 900 in June.

The work to be found, in other words, is being found elsewhere, and as I've been predicting, as the rest of the country recovers (especially the rest of New England), Rhode Island will watch its most motivated, productive citizens packing up and finding a better life elsewhere. I'm beginning to think that stabilization will ultimately come as a result of the workforce's shrinking to the size of the economy, not the other way around.

Ouch

From United Press International…

Add the number of part-time workers who would prefer full-time employment and those who have given up looking for work and the unemployment rate reaches 23.5 percent in Oregon, more than one in every five workers, The New York Times reported Wednesday.

In Michigan and Rhode Island, the unemployment rate with the two extra groups added would reach 21.5 percent. In California, it would reach 20.3 percent.

In the comments section of the original New York Times article that reported the statistics, reporter David Leonhardt can't figure out why things should be so bad here…

South Carolina, likewise, is a manufacturing-heavy state....Rhode Island is more of a mystery. It has some manufacturing, but not a ton. It’s probably also been hit by the housing crash, since parts of the state are Boston exurbs

Leonhardt also adds this interesting bit…

These broad unemployment rates have soared over the last two years. In California, the rate was under 10 percent two years ago. This spring, it was above 20 percent. You can say the same about Oregon. In South Carolina and Rhode Island, the rate was below 9 percent two years ago. Now it’s above 20 percent.

The Future That the Speaker Saw

Put aside that it was pure fundraising pabulum; it's a pity that Speaker of the House Nancy Pelosi probably doesn't know just how right she was:

"When I return to Washington, D.C.," Pelosi said, "I'll tell them that I've been to Rhode Island and I've seen the future."

What she was talking about hardly matters. It could have been a new ice-cream mixer at the Frosty Freeze. What she wasn't talking about was the thing that ought to keep somebody of her position awake at night: The effects of high taxes, over-regulation, one-party rule, labor union dominance, an overly "compassionate" and organized poverty industry, and insider politics on a polity.

Yes, Rhode Island's sclerotic economy, crumbling infrastructure, high unemployment, and prominence at the wrong end of every list may indeed be the ghost of America's future. If it is, Pelosi shouldn't "return to Washington, D.C., to tell them" (whoever "they" are). She should run to Washington to warn them.

The folks across the street from the last event of her long day of mooching would surely have been able to provide a concise message, if she'd deigned to acknowledge their presence:

Pelosi and company wrapped up their visit with an evening fundraiser at the Jamestown home of Princeton Review CEO Michael Perik and his wife, Elizabeth. For the first time all day, Pelosi and Kennedy received a less-than-enthusiastic welcome.

Shouting "Vote them out" and carrying signs that said, "Welcome, Comrade Pelosi," more than 50 boisterous protestors jammed the sidewalk while sleek SUVs with tinted-windows arrived at the waterfront fundraiser, where some couples paid $30,400 to be in the "Speakers Cabinet."

Every conservative political stripe was represented, from the Rhode Island Tea Party, an anti-big government group, to Rhode Islanders Against Illegal Immigration. A few protesters, though, had it in for Kennedy.

"Patrick is incompetent," said Chris Kairnes, of North Kingstown, who was wielding an anti-Kennedy placard. "You can't perform your duties if you are highly medicated. He should be realistic and resign."

Ultimately, the crowd was disappointed. Pelosi and the local congressional delegation slipped into the party through a back entranceway. They never saw Rhode Island's version of the populist spirit.

Laffey Still Fighting

He doesn't say where he's been or what his intentions are, but Stephen Laffey is clearly still paying attention to Rhode Island and its problems:

... Laughing and joking last year, our leaders signed off on the 2008-09 "balanced" state budget. That "balanced" budget was really a $600 million deficit. It was fraud because they knew it then. And they know it now.

With 11 months of data in for fiscal 2008-09, revenues are running more than $400 million behind the final revised $3.1 billion estimate for total general revenues. And the last few months are showing even more ominous trends. So an aggressive total revenue budget for fiscal 2009-10 would have been $2.7 billion. Instead, our leaders agreed to forecast $3.1 billion in revenue again, putting us all at least another $400 million in the hole. ...

One of the worst things about public fraud is that it's contagious. When Governor Carcieri raids the rainy day fund and gets away with it, what is to stop cities like Cranston and Warwick from doing the same thing? Nothing, since they did it, too — and got away with it.

Let's be frank. This fraudulent budget now puts Rhode Island on the road to collapse. Only, unlike California, whose comptroller has put out a loud warning, the Rhode Island populace will have to wait to be "surprised" when Rhode Island is about to miss payroll. The similarities between Rhode Island today and Cranston in 2002 before I became mayor are eerie. The lies were plentiful then and near bankruptcy ensued.

Perhaps Mr. Laffey still intends to join us for the sing-along:

Do you remember the day
They sold us down the river?
Neither do I
'Cause it's been happenin' so long

But here we all are
Long miles from where we started
So out with those words
They chained us for a song

Fish Ladders

Conservative. Conservation. Fish Ladders.

For years, a consortium of government agencies and advocacy groups has struggled for funding to knock down dams and build fish ladders to help restore local fish migrations. That work was jump-started on Tuesday when the federal government came forward with $3 million in stimulus money for six projects on the Ten Mile and Pawcatuck rivers.

When the work is done, fish will be able to migrate all the way up the Pawcatuck from Watch Hill, in Westerly, to Worden Pond, in South Kingstown.

In East Providence, the 30-year campaign by volunteers to lift spawning herring one bucket at a time over the Omega Dam may finally come to an end. A fish ladder will be built there and at two other locations upstream.

In all, the money will open up 13 miles of rivers and streams and 1,640 acres of spawning habitat, including Worden, the state’s largest freshwater pond.

These projects were chosen partly because they were "shovel ready," and far along in the permitting process. The National Oceanic and Atmospheric Administration points out that this project may create up to 18 jobs. Does that seem right? $3 million in federal stimulus dollars will create up to 18 jobs. That comes out to $166,667 for each temporary job they create. For just a moment, let's put the project aside. Is it really worth while to spend $3 million to create 18 temporary jobs? Will this project have an economic impact that will stimulate the economy and put more people to work long-term? It seems doubtful.

Augusta's Capital Riverfront Improvement District (CRID) is using the removal of the Edwards Dam as the keystone of its efforts to revitalize Augusta's downtown core. The District's legislative purpose is to “protect the scenic character of the Kennebec River corridor while providing continued public access and an opportunity for community and economic development ..." With funding and leadership from the August CRID, the Kennebec River waterfront is being cleaned and beautified, underutilized buildings are being renovated and converted into housing and commercial space, and the Edwards Mill Park is now on its way to completion.

I have argued the merits of promoting conservation as a conservative cause, including the construction of "fish ladders." I cringe when I hear Eric Cantor and other GOP leaders railing against this and a handful of other conservation projects as "wasteful" government spending. Not only are the hook'n bullet crowd one of the largest voting constituencies in the hinterlands, they spend billions of dollars every year on hunting and fishing and helping to support local communities. This is a wise investment not only for the fish but for the voting and recreating public.

The Sad Gavel Falls; Budget Now Law... with No Credibility for Future Gubernatorial Complaints

From the governor's office (full release in extended entry):

Governor Donald L. Carcieri today transmitted, with signature, the FY 2010 budget, citing he had no other choice with more than $200 million at stake.

In a letter to Speaker William H, Murphy, Governor Donald L. Carcieri voiced his disappointment with the budget stating, "My signing this budget is not an endorsement of it in its entirety. I had intended to allow this budget to become law without my signature, however it was delivered to my office too late to do so. I am signing for this reason: over forty million dollars of state funding, plus hundreds of millions in Federal FMAP funds are at risk if the budget does not become law before July 1st."

"I had the option to veto this ill-conceived budget, however it was overwhelmingly approved by both the House and Senate. A veto would have required both chambers to return to override it before July 1st. It appeared highly unlikely that they would have returned, leaving us with no budget. As Governor, I was not willing to risk forfeiture of this money and the potential of creating an enormous additional burden for our taxpayers."

Governor Carcieri underscored the lack of long-term vision by the General Assembly in crafting the budget. "My original budget proposal, which I submitted in February, balanced our immediate needs, and most significantly presented a plan to address many of the ongoing budget problems that have plagued our state for decades. My goal has always been to build a positive future for Rhode Island. Unfortunately, the General Assembly chose a short-sighted scheme with narrow political goals that addresses some but defers more far-reaching, difficult choices for yet another year." ...

In conclusion, the Governor again reiterated his decision to sign the budget was based on the potential to lose hundreds of millions of dollars in savings if not signed by July 1, 2009. "As I have said, this budget is not good for Rhode Island in the long run, and my signature should not be seen as an approval of this budget. However, given the little time left before the start of fiscal year 2010, and because of the hundreds of millions of dollars at risk, I have reluctantly signed this budget into law."

So it was "highly unlikely" that both houses of the General Assembly would rush to override a veto? Is that judgment based solely on House Speaker Bill Murphy's European vacation, or are there other considerations that led the governor to demur from forcing the senators and representatives to show just how vehemently they wish to let the state stagger in the wrong direction?

Sorry, governor. You signed the beast's release papers; the blood of its victims will be on your hands as much as the legislature's.

Re: No Amazon Money for the Little Local Guy

In the previous post, Justin said that…

According to the Wall Street Journal, Amazon has around 2,000 affiliates in Rhode Island who pay an estimated $3 million in state income tax…

The Internet giant Amazon.com has severed formal ties with all Rhode Island businesses, a move intended to shield the online retailer from the General Assembly’s push to tax some online sales as soon as Wednesday.

An Amazon spokeswoman declined to say how many businesses –– local book dealers and other retailers — will be affected, but she confirmed that notification letters were distributed to “many local associates” early Monday morning.

No Amazon Money for the Little Local Guy

Matt Allen has been talking about the Rhode Islander's grab for tax revenue from Amazon.com. Amazon's affiliate/associate program is essentially a referral service. Web sites link to items on Amazon, and if their readers/visitors buy the item, the referrer receives a percentage of the sale.

Some folks use the service as another source of advertising revenue. Some use it to avoid creating an online store for their own products. What states, like Rhode Island, have been trying to argue is that affiliate programs amount to a "physical presence" in the state, requiring online retailers to collect sales tax on all items sold into the state, whether or not there's an RI affiliate involved in the sale. The budget legislation accomplishes this end by changing the definition of "retailer" to include (PDF):

Every person making sales of tangible personal property through an independent contractor or other representative, if the retailer enters into an agreement with a resident of this state, under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an Internet website or otherwise, to the retailer, provided the cumulative gross receipts from sales by the retailer to customers in the state who are referred to the retailer by all residents with this type of an agreement with the retailer, is in excess of five thousand dollars ($5,000) during the preceding four (4) quarterly periods ending on the last day of March, June, September and December. Such retailer shall be presumed to be soliciting business through such independent contractor or other representative, which presumption may be rebutted by proof that the resident with whom the retailer has an agreement did not engage in any solicitation in the state on behalf of the retailer that would satisfy the nexus requirement of the United States Constitution during such four (4) quarterly periods.

According to the Wall Street Journal, Amazon has around 2,000 affiliates in Rhode Island who pay an estimated $3 million in state income tax. (The article doesn't relate that income directly to Amazon.) Say this for our state: Rhode Island is very innovative — cutting edge — when it comes to finding ways to harm residents who are trying to scrounge together a living.

Rhode Island, Always Striving to Make Life That Much More Difficult

So, with legislation to make energy more expensive for all Americans making its way through Congress, what can one say about this?

Governor Carcieri on Friday signed into law legislation that could pave the way for offshore wind farms in Rhode Island.

The bill, passed by both chambers of the General Assembly earlier this month, allows electrical utility National Grid to enter into long-term contracts to purchase "green" energy. For Deepwater Wind, the company proposing more than 100 wind turbines off the Rhode Island coast, the law means having a guaranteed buyer for its energy, a crucial selling point to investors. The legislation will also benefit other clean-power proposals, including a plan to build a solar farm in Coventry.

The first thing on which to remark is Journal Staff Writer Alex Kuffner's peculiar choice of the word "allows" to characterize the bill's relevance to the energy company. Here's how the General Assembly press release about the legislation puts it (emphasis added):

The House and the Senate each took final votes today approving legislation sponsored by House Majority Leader Gordon D. Fox and Senate Corporations Committee Chairman Joshua Miller to require the state's largest electric utility to enter into long-term contracts to purchase power from renewable energy producers in Rhode Island.

Under the eye of the state Public Utilities Commission (PUC), National Grid (and any other energy distribution companies that may be lured into the Rhode Island market) will have to enter into contracts with "new," "green," "renewable," whatever energy producers with a duration of at least 10 years. Then, if we turn to the statutory language itself (PDF) we find explicitly what we all should expect implicitly:

The electric distribution company shall file tariffs with the commission fo commission review and approval that net the cost of payments made to projects under the long term contracts against the proceeds obtained from the sale of energy, capacity, RECs or other attributes. The difference shall be credited or charged to all distribution customers through a uniform fully reconciling annual factor in distribution rates, subject to review and approval of the commission. The reconciliation shall be designed so that customers are credited with any net savings resulting from the long-term contracts and the electric distribution company recovers all costs incurred under such contracts, as well as, recovery of the financial remuneration and incentives specified in section 39-26.1-4.

In short, National Grid must enter into decade-long contracts for the purchase of energy at prices consistent not with the energy market in general, but with "newly developed renewable energy resources," however much more it may cost than regular ol' energy resources. It then sells the energy at market rate and tacks the "newly developed" premium on the bills of customers across the board. Oh, and the law permits the company to add another 2.75% premium to the cost of the fancy new energy as "incentive."

Let's follow the money, shall we? You, energy consumer, will pay more for your usage so that the distributor can, without loss (indeed, with explicit profit), subsidize politically preferred energy sources in order to guarantee sales of an energy product whose risk investors are not otherwise willing to accept. Your money, in other words, is serving to secure investment earnings for others. Those investments, in turn, will flow to land owners, materials suppliers, and workforces. To some degree, the prices of all of those things will be inflated; to the extent that unions are involved, another layer of money-takers slips into the mix; and to the extent that materials, land-owners, and workers reside elsewhere, the money will flow out of the state.

To those parties, the law represents a net benefit, but that requires a net cost to a much larger field of people. That field of people is contained geographically within the borders of Rhode Island, because National Grid has no reason to spread the "renewable" deficit more broadly across its own operations. Moreover, the state is contained geographically within the borders of a nation with a government hell-bent on piling on its own premiums.

UPDATED: The Governor's Proper Stance

Governor Carcieri struck the right notes on budget deliberations in his op-ed yesterday:

THE STATE BUDGET plan for fiscal year 2010 passed by the House Finance Committee is not a plan to lift our state out of this economic malaise. It lacks a coherent policy and strategy to move our state forward.

My budget, which I submitted back in February, proposed a clear strategy to move Rhode Island in the right direction and offered real solutions to pension reform, economic development, tax reform, education and municipal spending. ...

My budget proposal made new investments in education and economic development, and included significant tax reforms for individuals and businesses. These changes would send a loud and clear message that we are serious about growing jobs in our state, and that we are serious about improving our children's education. Our early- literacy programs and charter schools are having great success, especially in the urban districts, and we need to continue investing in them.

The House budget eviscerates these critical investments and sends a message that we don't care about jobs, economic development or our urban children.

For too long (probably), the governor allowed an aura of comity and cooperation to serve as cover for the General Assembly's mismanagement. The message from here on out has to be that Rhode Island's problems legislators' doing.

ADDENDUM 6:09 p.m.

George rightly snaps me out of the Rhode Island fog that had drifted over me somewhat with the rainy days: The governor could have been much more vociferous and prominent in declaring that there should be no changes to his budget. Every day in the news. Once a week outside the State House with a bullhorn.

Flat Tax Good, but Not Enough

As you may have heard, the gradually decreasing flat tax in Rhode Island has survived attempts to freeze or repeal it (so far). I'd note, though, an excellent point that Matt Allen made during the six o'clock hour: It's foolish to think that the flat tax decrease is sufficient. For two things: Rhode Island's tax advantage for capital gains is evaporating with this budget, and new savings for businesses have been left on the cutting room floor.

The tendency of disputants to break the big questions into their constituent parts goes a long way toward explaining the condition of our state. It's all patchwork policy, with no overarching principle. We trade this tax break for that union concession and that welfare adjustment, with the result being incoherence and inadequate counterbalance to the special interests that have infested the State House and town halls. Any potential reform candidates loitering about the edges of public consciousness should come up with a holistic plan and insist that it only works as an irreducible machine — as I've been suggesting that the governor do by disowning the budget if the General Assembly made any substantial changes.

We need responses to such statements as the following example, from Matt Jerzyk, of why I'm nostalgic for the previous iteration of RI Future:

What should be more important in a recession in Rhode Island? Just think about it.

If you are recently unemployed in Rhode Island or facing tough times at work, can you afford a jump in your property tax bills?

Alternatively, would a Rhode Island millionaire even know if their accountant paid a little more on their tax returns.

Even a few hundred dollars of increase or decrease in a given tax bill is not what unemployed Rhode Islanders need. They need jobs. They need businesses that find their state to be an attractive place to open up shop and expand — without special deals or credits, merely because that's the way the state is structured. They need the sorts of people who have money to burn no matter the overall economy renovating homes, buying goods, dining out... being present and living their lives among us.

As for the millionaires and their accountants, the premise that we can slip tax increases by them is (I'll euphemize) poorly considered. Even so, an accountant will inform his clients if a move — often an on-paper affair, when it comes down to it — to Rhode Island would cost them thousands or millions over a certain period of time or from Rhode Island would save them the same.

A Simplistic Reaction to the Flat Tax Will Hurt the State and Cities and Towns

Everybody wants to nix the flat tax in Rhode Island:

The dispute has drawn the interest of a host of powerful players — labor unions, mayors, and a coalition of elected officials — who hope to repeal the high-profile tax break that benefits 2,267 Rhode Island taxpayers. Supporters want to funnel the savings to the cash-strapped cities and towns, which are slated to lose more than $55 million in state aid for the budget year that begins in seven days.

Municipalities think it's an easy way to get a few million more dollars. Union members think it's a way to ensure that the local and state governments that employ them will be able to make payroll. Elected officials think they'll pick up a good talking point about looking after the majority against the narrow interests of a wealthy minority. I'd suggest that all of these groups would do well to be wary of short-term thinking.

As I've followed long-term trends from both Census and IRS data, the conclusion has emerged that one area in which Rhode Island has seen positive developments is among wealthier residents. Indeed, the state income that taxpayers with incomes over $200,000 per year are claiming on their federal tax returns was up more than 50% from 2002 to 2006 — the period during which our state's tax reforms began to kick into effect. That is why Steve Peoples and Cynthia Needham's characterization is woefully incomplete:

The state will forgo an estimated $34.7 million in tax revenue next year because of the flat-tax option, according to an analysis by the State Budget Office.

In tax year 2009, the rate is scheduled to drop from 7 to 6.5 percent. If frozen at the current rate, the state could recover $12.2 million in tax revenue for the coming fiscal year, according to the governor’s budget office.

One cannot calculate the "cost" of the flat tax by recalculating returns as if it did not exist, because some percentage of returns would not exist if it were not for the flat tax option. With residents with household incomes over $200,000 contributing about $400 million in income and alternative minimum taxes every year, we're talking a huge amount of money.

Unfortunately, the relevant data from the state ranges only from 2005 to 2007, and the presentation of resident and non-resident taxes is not uniform. Nonetheless, looking at the resident returns (which are parallel to federal data addressing Rhode Islanders), one can observe that, over that period, the total income and alternative minimum tax collected by the state was up more than $5.12 million from those earning over $200,000 and up a total of $40.33 million from those earning over $100,000. The actual number of state tax returns filed by those earning between $100,000 and $200,000 increased 20.8%, and those showing income over $200,000 increased 14.2%.

This is where advocates for repealing the flat tax will point out that, while actual taxes paid by the $100,000-199,999 group increased $13.5 million (5.5%) from 2006 to 2007, those earning over $200,000 — who benefit most from the flat tax option — contributed $37.4 million (8.6%) less. Given the close proximity of the dollar amounts, one might presume that the flat tax simply gave that money away (as Rep. Scott J. Guthrie, D-Coventry, would put it). That would be incorrect.

Of that year-to-year loss, the capital gains tax accounted for $30.1 million. In other words, non-capital gains income taxes among the wealthiest group decreased only $6.5 million (1.9%) in 2007 from 2006. More importantly, the average adjusted gross income per return fell 4.3%. (I'm not sure whether that includes capital gains.) Although there were more of them, the rich, that is, earned less money to tax.

All such aggregate analyses are tricky, of course, because so many factors and considerations come into play. Advocates making the journey from their municipalities to the State House to demand those dollars that the flat tax "gives away" should recall that these are residents. They are paying property taxes on homes and vehicles. They are paying fees for everything from dog registrations to construction permits. If they leave, they take not only the income tax dollars that the state may (or may not) filter down to the local level, but also all of the revenue that cities and towns currently procure directly. Moreover, they take the money that they pay to other residents as part of the private-sector economy.

For some general and rough perspective, consider this: The number of tax returns showing income over $200,000 increased 14% from 2005 to 2007. It will only have to decrease by about 7% for repeal of the flat tax to be a revenue wash for state income tax alone. If we broaden the group to those over $100,000, the increase from 2005 to 2007 was 19%, and only a 3% loss of the current number would cancel out the estimated tax revenue gain.

Rhode Island is already turning away from the path toward a vibrant economy in a vain attempt to ease short-term pain — which is to say that it is continuing on its path to collapse. Let's not expedite the process.

What Rhode Islanders Ought to Be Thinking About

It is, of course, a matter of concern — a travesty — that Rhode Island is tied for third worst among states when it comes to unemployment. The fact on which its residence should think hard, though, is Rhode Island's position relative to its fellow New England states:

Not only is Rhode Island worst among its neighbors, but it stands a good distance on the other side of the national rate. New Hamshire's unemployment is almost half of ours, for crying out loud!

Unless he was taken out of context to libelous degree, URI Business Administration Professor Edward Mazze brushes away his credibility like dandruff when he states (in reporter Andy Smith's paraphrase) that "Rhode Island shouldn’t be worrying about competing with neighboring states" because in a global economy "our competition comes from place such as Alabama — or China." Our competition for what?

I get the impression that Mazze is referring to Rhode Island as a geographical location in which businesses reside. It's not (or not only); it's a political entity relying on taxpayers to subsist and utterly failing in the governance of its people. Those people — especially the most productive and motivated of them — will find it much more comfortable a prospect to relocate within the few hours' drive that New England spans than in Alabama, let alone China.

Forgive me for saying it again and again, but we have a serious problem. Those who are supposed to be guiding our state through these rough waters have shown themselves to be utterly incompetent. The less intelligent of them behave as if they have all of the authority of a college's student legislature, and the governing principle of the more intelligent of them is scamming for their own benefit.

Another Way to Add to RI's Unemployment Problem...

... would be for the House to join the Senate in passing legislation automatically adjusting the minimum wage every year. A bill proposed by Sen. Leonidas P. Raptakis (D- Coventry, East Greenwich, Warwick, West Warwick) slithered easily through the Senate in May. A similar bill (PDF in the House is currently being held for study.

As Employment Policies Institute Senior Economic Analysis Kristen Lopez Eastlick explains, the move would hurt low-wage earners:

Decades of economic research demonstrate that there is an increase in job losses following minimum-wage hikes, particularly among vulnerable groups such as minority teens and adults without a high-school diploma. Legislation that would make minimum-wage increases automatic merely shifts these negative effects from a once-in-a-while occurrence to an annual event.

While a 25-cent increase may not seem like a lot, a business owner with 20 entry-level employees would have to absorb over $10,000 in new labor costs each year. Small businesses faced with decreasing demand would be forced to cut employee hours and eliminate some jobs entirely in order to stomach an automatic-wage hike that would take place regardless of the economic climate.

It would also hurt new-job creation by adding a cost structure for potential employers to consider before hiring new employees. Moreover businesses that don't already operate in Rhode Island would have to take the requirement under advisement, as well.

On Past Twelve

Admittedly, gut-based prognostications are easily dismissed — a bit like guesses of the number of jellybeans in a jar. In the case of unemployment trends, it's more akin to guessing the number of jellybeans that won't be in the jar tomorrow, and to be honest, I'm not sure so-called educated guesses are much more firmly based.

The news is that RI's unemployment rate has jumped a full percentage point, to 12.1%, which makes my standing ballpark of 14% more plausible, as the experts ratchet theirs up to 13%. Thanks to the General Assembly's predictable, but disheartening, failure to release a budget, as opposed to an instructional pamphlet on prayer-based juggling, I'm adjusting my prediction, as well. President Obama solidified Rhode Island's likelihood of 14%, I'd say, and the General Assembly has done the extra work, lately, to drive it over 15%.

The disclaimer is that we're in uncharted territory, here, and the unemployment number may not cease its rise for the foreseeable future. This is particularly concerning:

The national unemployment rate also rose, from 8.9 percent in April to 9.4 percent in May. Unemployment in Massachusetts grew slightly during the same period, from 8 percent in April to 8.2 percent in May.

Even putting the concrete effects of the state budget aside, its huge power to demoralize puts a new, brighter light on the single-digit unemployment rates of elsewhere for ambitious workers and employers.

And the Budget Discussion Begins

Monique and Matt had a somewhat extended discussion of the beginning of the budget debate on the Matt Allen Show, last night. Another year of the wrong focus in the General Assembly, enabled with one-time revenue. You can be sure that we'll have much more to say as the days and weeks pass. Stream by clicking here, or download it.

I figured it out!

The budget summary that Marc posted last night caught my eye:

Overall spending is up 12 percent from the $6.92-billion state budget approved by lawmakers for the current fiscal year. But the general revenue portion is down, roughly 10 percent, from the $3.28 billion originally approved for the current year.

I'm tempted to dwell on that slippery phrase "originally approved for the current year," pondering what the decrease (or increase) is for the new budget as compared to the supplemental-adjusted version for this year. Instead, I'll move on to superimpose this from the article on state revenue that I posted earlier:

Altogether, Rhode Island’s general revenues fell by $405 million, to $2.486 billion, for the 11 months through May 31, according to a report issued Monday by the state Department of Revenue. ...

Paul L. Dion, chief of the state Office of Revenue Analysis, said that, for technical reasons, a revision will be made that will end up boosting total general revenues by about $50 million.

So the general revenue budget fell roughly 10% to $2.952 billion, but actual revenue over the past year has fallen 14% to $2.486 billion (or, with the $50 million adjustment, 12% to $2.536). So not only is the General Assembly doing nothing to stop state revenue from decreasing, but it isn't even keeping expenditures' pace with revenue as it's lost.

So maybe the strategy is really to drive us complainers out of the state. How blissful all will be then! Just spending each year's unpredicted windfall without the painful noise from taxpayers. On next year's agenda: A memories tax for anybody who's ever lived in Rhode Island (pension-bearing public-sector union members exempted, of course).

The Wrong Leaders Applying the Wrong Strategy at the Wrong Time

So, state government revenue has an even more giant hole than expected:

Altogether, Rhode Island’s general revenues fell by $405 million, to $2.486 billion, for the 11 months through May 31, according to a report issued Monday by the state Department of Revenue. ...

Among the revenue report’s findings:

•The state's personal-income tax generated about $798.6 million, a decline of $157.1 million, or 16.4 percent.

•Collections from Rhode Island’s sales-and-use tax totaled $747.7 million, a drop of $27.9 million, or 3.6 percent.

•Transfers from lottery operations totaled $279.6 million, down $16.9 million, or 5.7 percent.

•Money collected through fees, fines, penalties and other "departmental receipts" totaled $233.6 million, a drop of $57.6 million, or 19.8 percent.

•The state's general business taxes generated $208.3 million, a decline of $26.4 million, or 11.2 percent.

And yet:

"Overall, we’ll see that many of the programs the governor cut have been restored [in the General Assembly's budget]," [Finance Committee member Elizabeth] Dennigan [D-East Providence] said, specifically citing the state’s prescription drug program for the elderly known as RIPAE, funding for nursing homes, money for the developmentally disabled, dental coverage for low-income adults and children’s breakfast programs.

Further, [Rep. Thomas] Slater [D., Providence] noted that plans cut 7,800 people — including 5,000 children — from the state's welfare rolls in two weeks have been delayed, although he couldn't say for how long.

And cities and towns, which depend on the state for more than $1 billion each year, may not lose as much state funding as they feared.

Several Finance Committee members said they expect to cut $55 million in general revenue sharing, as the governor had proposed, but no more.

How are legislators accomplishing this magic trick?

"Obviously, everything is still fluid," said Senate Finance Committee Chairman Daniel DaPonte. But "the gas tax has to be part of the equation." ...

Lawmakers are expected to eliminate Rhode Island's preferential treatment of capital gains, according to another Finance Committee member, Elizabeth M. Dennigan, D-East Providence, referring to the break for taxpayers who profit from the sale of stocks, bonds and other such investments. ...

Governor Carcieri has consistently warned Democratic legislators against rolling back the tax breaks enacted in recent years. And despite massive budget deficits, he pushed for new tax cuts.

The Assembly appears to have ignored those arguments, according to fellow Finance Committee member Laurence W. Ehrhardt, R-North Kingstown; the state budget excludes the governor's proposal to eliminate Rhode Island's corporate income tax or raise the value of estates subject to Rhode Island's estate tax. ...

Meanwhile, Senate leaders have sketched the likely shape of a pension-cutting package aimed at shaving anywhere from $45 million to $60 million off the taxpayers' share of the annual cost for the retirement benefits given state employees and public school teachers.

Considering that the changes that ought to be made to pensions would save considerably more than that, one can reasonably say that the General Assembly is continuing its short-sighted strategy of relying on taxes (backwards-looking is more accurate). Once the budget is officially released and then passed, sit back and watch as revenue declines even further, when gas taxes that businesses pay are passed on to consumers, as consumers take the gas tax money from other expenditures, as both groups take their business across the borer, as capital investments in Rhode Island decrease, and as businesses continue to decline to settle here.

Trillo Talks

In the wake of business leaders explaining that they are "wary of heavily unionized states" like Rhode Island (like it or not, that's the perception, folks) and the new report from RIPEC explaining that State-level mandates are damaging to Rhode Island's cities and towns and economic development, Rep. Joe Trillo (R-Warwick) offers up his own 6-point plan:

To return to prosperity, some fundamental changes must be embraced and supported by taxpayers and politicians alike.

First, to lower both municipal and state operating expenses, public-employee unions must be held at bay and their interests must be placed second to the greater interests of the state, its cities and towns and the taxpayers.

Second, there must be some regionalization of services, including but not limited to police, fire, schools and highway departments, while still preserving the individual identities of each of the cities and towns.

Third, Rhode Island, which is currently at a competitive disadvantage with our neighboring states, must make its tax burden the lowest in New England, so as to appeal to business and to foster job growth.

Fourth, Rhode Island is in the midst of a financial crisis, and it must begin to operate accordingly. It must function like a business that is in Chapter 11. The General Assembly has the power to provide mayors and city and town managers with the authority to cut costs and make fundamental changes to the labor laws that have favored the unions, but will they have the political courage to do so? Will their constituents demand nothing less?

Fifth, the powers of the many school committees must be reduced. They should not be allowed to negotiate with unions nor should they have the authority to approve school budgets, which in many cases can be up to 80 percent of a city or town budget. Instead, those powers should be vested with mayors, administrators or city and town councils.

Sixth, with all of the above in place, the Rhode Island Economic Development Corporation should focus its efforts on recruiting companies with well-paying jobs and marketing Rhode Island to them.

AR's Optimism That It Doesn't Have to Be This Way

Andrew presented the question, in studio with Matt Allen last night, about whether Rhode Islanders believe that their state must always be at the wrong end of every list (especially those that are economic in nature). Stream by clicking here, or download it.

Rhode Island is Among the Worst in a Bad Economy

Does the release of yet another set of statistics showing how badly Rhode Island is doing economically still count as news? The answer, unfortunately, is yes, as Rhode Island still manages to find its way to the bottom of the pack when states are ranked in terms of their economic performances, a measure which takes into account the nationwide slowdown.

Yesterday, the US Bureau of Economic Analysis released its initial state-by-state gross domestic product (GDP) figures for 2008. While growth across the country was slow, just 0.7% above the previous year, 37 states still managed to show positive economic growth of some kind. Rhode Island, however, was one of 12 states showing negative economic growth, with its gross state product of shrinking by 0.9%, the 5th worse change in state GDP in the nation.

The negative growth cannot be blamed on our location. Of the six New England states, Rhode Island ranked last in GDP change, with 4 of the states showing positive growth (Massachusetts leading the way, at 1.9%).

Consider the above data to be a Rorschach test about what you believe the source of Rhode Island's troubles to be. Do you look at the above figures and say, well when the nation is doing badly, it's inevitable that Rhode Island will be doing even worse, so there's nothing we can do (a symptom of what I believe University or Rhode Island Economics Professor Leondard Lardaro would call an endogenous view of Rhode Island's troubles) -- or do you look at the figures and think that they point to a need to fix something in Rhode Island that's broken?

A Thirteen Member Scapegoat

Barring the inconceivable possibility that it will be empowered to change the policies that overburden the Rhode Island economy, the Economic Development Corporation will continue to function mainly as a scapegoat for the elected officials on whose conscience the state's condition ought to rest. If anything, Senate President Teresa Paiva Weed's legislation appears to go in the other direction:

... the bill did not follow the panel's advice to give the governor greater flexibility in appointing EDC board members.

The review panel had said members should be "selected based upon their skills, their passion for economic development and their willingness and ability to help drive change, not because they represent a particular constituency, group or geographic area."

The legislation, however, retains a slot for a labor leader and a seat for a small-business owner. The legislation specifically says that "the membership of the board shall reflect the geographic diversity of the state," and it adds a requirement that one board member represent the state's higher-education institutions.

So, the group will be enlarged to thirteen members and designed to represent various points of view, rather than develop a point of view of its own to pursue. Moreover, not mentioned in the Providence Journal article is the fact that the legislation (PDF) also modifies the General Assembly's permanent joint committee on economic development in such a way as to reduce the minority party's representation by two seats and to give the committee new powers and explicit authority to oversee the EDC.

Considering that the EDC executive director would be made a member of the governor's cabinet, it's a little surprising that Governor Carcieri isn't expressing reservations — not the least that legislators are slipping into their habit of violating the intent of separation of powers.

Celebration of the Majority's Jeering

Fully expecting scurrilous attacks that deliberately miss my point, I was going to put this one aside, but it nagged at me at periods throughout the day, as I constructed a client's two-flight deck stairs, so here it is: Am I alone in finding there to be something discomfiting about the Providence Journal's making this a front page story?

Hundreds of Rhode Islanders turned out on street corners Friday in opposition to the anti-gay, anti-Jewish message of a tiny group of demonstrators from Kansas. ...

Various counter-protesters chanted — "Go Home" or "Gay is the Way" — and for a short time the shouts unified in obscenities.

The Westboro Baptist Church crew is certainly deserving of jeers, but there's an aftertaste of mocking the infirm to this episode, and a belch of moral preening in making it the stuff of newspaper celebration. Is this really the sort of lesson that we want to teach our young? The Phelps family has absolutely no power but that of controversy; students and others amassing by the hundreds to oppose them is nothing if not safe (one could call it sport, even). And for their public display of the clear majority opinion in the state, they've been rewarded with just about the highest-profile reinforcement that Rhode Island has to offer.

Now, I am absolutely not saying that the counter-protesters should not have participated, and I'm not disagreeing with their general statement. What made me decide to post on this topic, however, was my total certainty that I'd have precisely the same reaction if the "tiny group of demonstrators" were of the left-wing-nut variety and the counter-protesting majority were right-leaning. Promoting such displays of force against minority viewpoints is a precarious principle, even when that minority contributes nothing to the public debate.

Airport Expansion Details

Paul Edward Parker's story in today's Projo on the Green Airport runaway expansion and the very good accompanying map mention only the expansion to the Southwest that will force a relocation of Main Avenue (Route 113) in Warwick. Only 11 homes will be required to move, but a number of others will be close to new runway lights and/or within a loud engine-noise area.

However, Dan Jaehnig's story from WJAR-TV (NBC 10), as well as the environmental impact statement available from the Projo website, mention a second phase of the expansion, where the section of Airport road that intersects with Post Road (near the old Ann & Hope, to give the location in the traditional Rhode Island way) will also be relocated, not as much as some of the other proposals had called for, but still forcing a number of businesses to move.

As best as I can tell from the Channel 10 story, Republican headquarters in Warwick will not get bulldozed as part of the current expansion plan. At least not in the construction-industry sense.

Can Anything Stop RI's Unemployment Rate Escalation?

This month's iteration of a grim series of headlines:

R.I. jobless rate: 11.1%

Unfortunately, the series finale doesn't appear to be likely any time soon:

A group of economists testifying at the State House in early May projected that Rhode Island's unemployment rate would peak at 12.3 percent in 2010. One of the economists was Andres Carbacho-Burgos, of Moody's Economy.com. In a phone interview Thursday, Carbacho-Burgos said Rhode Island's rate of job loss should begin to slow soon, and there might even be some slight job gains, perhaps 5,000 jobs, toward the end of next year. But real improvement probably won't take place until 2011, he said.

Yup, that says 2011, as in two more years of job declines. As in a forty-month run of losses.

Of course, the wrong moves in state and local government could exacerbate the problem. Yesterday's headline was that our rate of population loss has slowed, probably because Rhode Islanders are trapped and see no significant improvement of their odds elsewhere. Imagine the change in that dynamic when the state lags the national recovery, as is widely expected.

By contrast, if the General Assembly were to take some bold steps designed to attract businesses and give current managers, owners, and consumers confidence in the state's future, Rhode Island could actually lead the recovery. Part of the advantage of being so low is that it takes much less to advance.

The Rhode Island Economic Story

In the second paragraph of the following quotation we see why Rhode Island will find another bottom to hit as the rest of the country recovers economically (hopefully):

"With the exception of the tax proposals, I'm not sure what else has been put on the table," [Department of Administration Director Gary Sasse] said. "If you don’t change our economic climate, deficits are going to get worse, and you're not going to sustain the investment in services we're currently making ... I think if we make decisions now to position ourselves we could take a quantum step to improve our competitiveness.”

But Sasse’s position was largely drowned out yesterday by a chorus of opposition, which included an economist from the Federal Reserve Bank of Boston.

The article doesn't explain the reason that a Boston bank VP was at the hearing, but it's mainly the chorus that's of interest — drowning out the soft-spoken voice attempting to explain that the various interest groups are going to lose the things that they're seeking to protect if we don't take action.

These Are Silver Linings?

According to Benjamin Gedan's story in today's Projo, the "Current Conditions Index" compiled by URI Economics Professor Leonard Lardaro, a combination of 12 different indicators that measure the strength of the Rhode Island Economy, reached a value of zero in March for only the fourth time in its history. The index is down from a value of 8 in February. Any value below 50 indicates an economy in recession. The Current Conditions Index hasn't been above 50 since July of 2007.

However, according to Professor Lardaro himself, the news might not be all bad; we might be about to start a recovery…

Twenty-one grueling months later, Lardaro said he is now expecting to see a “growth bounce.” The recovery, he said, although unlikely to be rapid, will be helped by the federal stimulus, which Governor Carcieri says has done little to spark economic activity in Rhode Island.

“We’re still in a very serious recession here,” Lardaro said. But, he added, “you’ve got to look at momentum.”

“We’ve taken such a beating, for such a long time, things are finally leveling out,” Lardaro said. “We’re not in a recovery. We’re starting a process of a recovery.”

Although 7 of the 12 indicators worsened compared with a year ago, the same number either improved or were stable compared with February. Loses in government jobs slowed; permits for new houses shot up with the annual rate rising to 518 from 297; and the labor force did not register a major decline, meaning that fewer unemployed residents are abandoning their job searches.

The state’s jobless rate, although still devastatingly high, held steady at 10.5 percent in March, “a big moral victory,” Lardaro said.

How Economic Development Should Work

Brian Bishop takes up the appropriate call to government when it comes to economic development: just get out of the way.

The last thing we need is a government-run Chamber of Commerce, a retread bureaucracy of fortune tellers picking winning businesses or sectors that will be offered state loans and regulatory absolutions. Rather, we should attract new businesses and nourish existing businesses with the level playing field of a better business environment.

You might think this is a time when we need an economic development agency more than ever. It’s not a military secret that Rhode Island is among the nation’s leaders in unemployment, a key indicator of a low-performing economy.

But it is also not a secret why. Corporate and personal income taxes are high, estate taxes are repulsive, energy costs are high, our education system produces a labor force with below-average skills, our legislature has empowered unions over management, our roads and bridges are in worse shape than other states’ at higher costs, our regulatory environment is stifling, and this all takes place in a good-ole-boy environment that breeds, at minimum, a perception of corruption.

In other words, our policies make us unattractive to business, and when you look at these problems you realize they are not to be addressed by the EDC. This systemic hostility to economic growth is brought about by the legislature and all the other departments of state government. These are the arenas where change must take place.

Of course, Jim Beale raises salient questions as we move toward implementation of necessary changes:

Does anyone believe that the Rhode Island General Assembly will enact the major structural reforms necessary to put this state on a new course — a path to prosperity for everyone instead of just their favored special interests: the public-employee unions, their relatives' state jobs, and the Poverty Institute constituency?

Does anyone believe that absent such reforms — and therefore regime change in the General Assembly — that Rhode Island will not continue its decades-long economic decline?

Municipal Increases Are Mainly Pay and Benefits

This story on the likely decreases in state aid to municipalities appears to break apart two categories of spending that are very closely related (emphasis added):

Indeed, the numbers suggest that municipalities have largely avoided the budget cuts that swept across state government in recent years, according to a report to be released this week by the Rhode Island Public Expenditure Council.

Since 2004, "the increase in local government expenditures has outpaced the growth in the state general fund budget, [the consumer price index], and personal income in almost every year," the report says. "The majority of this expenditure growth has been to support education spending, which accounts for the majority of local spending; however, spending on employee benefits is the second-fastest increasing component of municipal budgets."

In point of fact, most of the increase in education spending has gone toward employee pay and benefits. Treating education as its own all-inclusive category blurs the story. And that story relates to a point made later in the article:

The governor has introduced legislation to eliminate most of the mandates. But the Democrat-controlled Assembly has been reluctant to support the Republican governor's initiatives, most of which are opposed by organized labor.

Labor has the RI system structured so well in its favor, that there isn't much by way of reform that won't disrupt its schemes to some degree. Yet, they must be disrupted, and both union members and elected representatives must soften their opposition.

Middle Class Welfare

Sometimes one is reading a news story that follows the usual script — such as presenting the hardship that the governor proposes for pregnant women "who otherwise cannot afford health insurance," in reporter Steve Peoples' phrase — when an actual fact lands in the mush like a giant crystal:

Defending the proposal yesterday before a skeptical House Finance Committee, Florio told lawmakers that the pregnant women would have other options if cut. Specifically, she noted a Blue Cross & Blue Shield private plan available for $660 per month.

"That's an option?" a concerned committee chairman Steven M. Costantino asked in disbelief.

The current state program allows pregnant women between 250 and 350 percent of the federal poverty limit — between $36,425 to $50,995 for a family of two — to buy into the state's Medicaid system for around $300 per month. In turn, all pre-natal care and post-partum care is covered.

The state, however, is left to pick up the entire cost of each birth — approximately $8,400.

According to 2007 Census data, approximately 49% of Rhode Island families are eligible for this program. (I say approximately, because the Census includes the range 3.00-3.99 times poverty level, which I divided by two for my purposes.)

I'm certainly for encouraging the development of Rhode Island's families, but after reviewing the actual numbers for calculating eligibility, Costantino's incredulity over the ability of such families to afford $660 per month cannot be taken seriously. Here are the incomes at which households hit 3.5 times poverty:

• Two people: $50,995
• Three people: $64,085
• Four people: $77,175
• Five people: $90,265
• Six people: $103,355
• Seven or more people: $116,445

Would a little perspective among our legislators be too much to ask?

The Budget Hole Rhode Island's In

Sympathy is in order for the state's lawmakers, although not of the exculpatory kind. It must seem to them that, no matter what they do, the economic dirt keeps falling in on them in the economic hole that they've dug:

Rhode Island government's budget deficits have grown by $200 million over the last six months, a massive jump that exacerbates an already-staggering budget hole and intensifies pressure on the General Assembly to raise taxes or slash state spending across a host of popular programs.

Elected officials have less than two months to close combined budget holes totaling roughly $661 million, according to projections finalized Monday by the state's top budget officials on the final day of the semiannual Revenue and Caseload Estimating Conference. The shortfall includes an unanticipated current-year gap of $70 million and a $590-million deficit for the fiscal year that begins July 1. ...

Next year's hole amounts to approximately 19 percent of Rhode Island's current state budget, excluding federal dollars.

If you add in what's become a typical mid-year deficit in the hundreds of millions, the shortfall for fiscal 2010 hovers near a billion dollars. Upwards of a fifth of the working budget is money we don't have. But hey, it's not as if nobody's seen this coming. In fact, in considering an interviewer's question about the impetus behind Anchor Rising's founding back in 2004, I recalled that our prognostications for the state made action a civic imperative.

The state is reaping what it's sown, and those who've liked the policies that got us here just fine have but one scapegoat before they must begin battling each other for the trickle of satiating largess for their unhealthy dependency:

"We are paying the price not only for national and international economic factors, but also for years of misguided decisions by our policymakers that have cut taxes for those who need cuts the least, while increasing the pressure on the rest of us," Peter Asen, spokesman for the labor-backed advocacy group Ocean State Action, said in a statement.

As satisfying as some may find the class warfare angle, the reality is that income tax revenue from "those who need cuts the least" has gone up dramatically, with $228 million more paid by those with incomes over $100,000 in 2006 than in 2002, with $156 million more coming from those with incomes over $200,000.

Cut taxes. Trim mandates. Lighten regulations. And quick.

Myopia Versus the Long View in Rhode Island

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