Rhode Island's Unique Way Out of the Bottom Three

For many months, Rhode Island has been exchanging places with two other states for worst, second worst, and third worst official unemployment rate in the United States. February marked the milestone of Rhode Island's breaking free from the dance. The Ocean State's 9.4% unemployment rate tied with North Carolina for fifth worst, behind California, Nevada, and Mississippi (all 9.6%) and Illinois (9.5%).

But the numbers deserve a closer look.

Continue reading on the Ocean State Current...

Playing With Numbers

Baseball is a sport that is built on numbers. How many home runs a player has, how many strikeouts a pitcher has, his ERA or a hitter's batting average. Most fans understand these numbers, how to figure them out and generally what they mean. A hitter who gets a hit three times out of ten bats .300 (3/10).

Generally, the only way for a hitter to end up with a better batting average is to get more hits when he's up at bat. But what if there was another way. What if instead of having to get hits each time up, he could simply start subtracting some at bats. He decides to not count one at bat, and now he's batting .333 (3/9). What an improvement! He's a better hitter now!

Oh, that's not fair, you say? That's cheating? Ok, fine, let's go back to the 3 out of 10 thing. We're back to that .300. But now, when he goes to bat and doesn't get a hit, we just don't count those. He goes up to bat and makes an out for the next five times. Instead, we're going to just tell people that he held steady and is still batting .300. Isn't that great? In watching him, he sure hasn't looked very good, but the numbers show that he's still the same hitter. The numbers haven't gotten any worse, even though it sure feels like he's playing worse.

Does any of this seem to make any sense? If this is how baseball statistics worked, would the statistics really mean anything if we could play with the numbers this way? Of course not. Yet we still try to put some meaning on unemployment stats. Month after month, Rhode Island's unemployment numbers either hold steady or improve a little bit at a time, but it sure doesn't feel like it. It doesn't seem like there are more jobs available. But if you look just barely past the headlines, you start to see that there are fewer people even looking for jobs, fewer people on unemployment. They've either simply given up or they left the Rhode Island market and found a job elsewhere. Is that our economic strategy? Is that how we'll get the state out of last place in employment numbers? We'll just keep erasing our "outs" until eventually we're batting 1.000? At what point does this get turned around?

I guess in the meantime, our General Assembly can have twelve-hour debates on issues where everyone's mind is already made up and still not call a vote. We can submit bills on what should be the official mollusk of the state and play games with votes already cast and try some Jedi mind tricks in telling people that the vote that just happened didn't really happen. But maybe someday, we can reverse the trend and create an environment where all Rhode Islanders can find a job, instead of pushing them away to make our numbers look better. Batter up!

The Mysteries of Employment Statistics

According to a news release from the Rhode Island Department of Labor and Training (DLT), there are actually 800 fewer people employed in Rhode Island than previously thought. But that's a good thing... because even more people gave up looking for work than we thought. Recovery!

Continue reading on the Ocean State Current...

02/26/13 - A Conversation with Bruce Katz

Justin liveblogs from Brookings Institution VP Bruce Katz event with the RI Foundation.

Building It Doesn't Make Them Come

Bruce Landis had an article in the Sunday Providence Journal with the telling title, "Few, but enthusiastic, riders." The "few" are people actually taking advantage of the new length of commuter rail to Wickford. The train goes on from Providence to Boston.

Data from the Massachusetts Bay Transportation Authority show monthly rider- ship increasing from the time the station opened, April 23, 2012, to 6,000 that June. After that, the figures become uneven, plunging by a third from June to July and then shooting up, doubling from July to August. It isn’t clear why the figures were so irregular during the summer. The DOT said it couldn’t immediately explain them.

After August, the data show ridership flattening out, with between 5,000 and 6,000 people riding per month.

Continue reading on the Ocean State Current...

01/24/13 - Senate Improving Rhode Island's Business Climate Summit

Justin liveblogs from the Senate's "Moving the Needle" Summit.

December Employment: How to Feel About It...?

Rhode Island's unemployment rate dropped to 10.2%, after spending a couple of months at 10.4%, but at the same time, the Ocean State remains one of only two states above 10%. Moreover, the other one, Nevada, has made up more than a 1-percentage-point gap to reach a tie for last place.

That said, the following chart shows that employment has certainly been on the upswing. (Although, to be honest, the sudden leap continues to look peculiar, given that it suggests the state's economy is in an historic boom, whatever people's impressions might be.)

Continue reading on the Ocean State Current...

01/17/13 - RI House Economic Conference

Justin writes live from a five-hour, four-panel economic conference put on by the RI House of Representatives.

Things We Read Today (45), Wednesday

Feeling hopeful, RI?; "top priority" is shown, not stated; RI gets fatherless children first; surviving sans regulation; surviving sans net income; and surviving sans a documented framework for working together.

Continue reading on the Ocean State Current...

Zero.Zero Sales Tax: Objections and Who's Objecting

As it happens, somebody forwarded to me the following Wall Street Journal political diary entry by Allysia Finley on the same day that the Providence Journal's Philip Marcello reported that the Republicans in the Rhode Island House are considering championing the RI Center for Freedom & Prosperity's proposal to eliminate the state's sales tax.

Continue reading on the Ocean State Current...

November Employment: Rhode Island's Peculiar Growth Abates

After two months of unexpectedly strong employment growth, Rhode Island's surge abated. Unemployment held at 10.4%, leaving the state at second worst in the nation, with Nevada rapidly making up the distance, and the number 3 California finally slipping below 10%.

According to survey data released by the U.S. Bureau of Labor Statistics, the pace at which increasing numbers of Rhode Islanders say that they are working fell to about a third of what it had been for September and October, to 1,501. Meanwhile the labor force increased by 1,411.

Continue reading on the Ocean State Current...

RI Only State Losing Population Two Years in a Row

Since the U.S. Census department released its latest state-by-state population estimates, it has been widely reported that Rhode Island was one of only two states to lose population from 2011 to 2012. The other was Vermont.

However, as with the RI Center for Freedom & Prosperity’s findings in September, looking more deeply reveals that the headlines actually understate Rhode Island’s poor position.

In total, Rhode Island lost 354 people, or 0.03% of the 1,050,646 estimated to have lived here in 2011. As bad as that is, it looks preferable to the 581 whom Vermont lost, which was 0.09% of that state’s population. Two considerations smudge that silver lining.

Continue reading on RIFreedom.Org...

Rhode Island's Poor Entrepreneurial Performance

The word "entrepreneur" has been thrown around Rhode Island a lot in recent months and years. To most people, one suspects, concepts like economic development, entrepreneurialism, knowledge economy, twenty-first century workforce, and skills gap blur into a mosaic of sounds-good promises. The idea is that "they" (the folks in positions to modify public policy) are trying to do something, and this stuff has a feel of the future... whatever it might look like and however "they" might bring it about.

The first problem with chasing this star is that, largely thanks to "them," the fundamentals do not exist in Rhode Island for real economic growth to take hold. The rules that the state's various governments impose are stringent; they are constantly in indecisive flux; and as evidenced in the judges call for mediation of a statute, the folks who hold power are far too prepared to disregard the rules in the name of simply doing what they deem to be necessary or right.

The second, much more important, problem with the attitude described above is that economic growth is not something that "they" accomplish by sparking action by some class of people with ideas and insights beyond normal imagining. Economic growth is something that we accomplish — the Rhode Islanders who are already here, supporting their families and building their lives.

Continue reading on the Ocean State Current...

Town-by-Town Single-Family Home Sales, November

Single-family home sales in Rhode Island continued to edge toward equilibrium, in November, meaning that the number of sales increased at an accelerated rate, while the inventory of houses on the market continued to go down. The median sales price continued to go down, too, but its rate of decrease remained steady.

Continue reading on the Ocean State Current...

Forbes: RI = 49th "Best" State for Business

Dog bites man, I know, but national publications constantly touting how bad this state is does have an effect. That being said, if recent election results are any indication, Rhode Islanders--well, at least those who stick around--just don't really care.

Rhode Island ranks No. 49 this year, down one spot from 2011. Rhode Island has experienced the second worst net migration, after Michigan, over the past five years. Residents are leaving in search of jobs, as the recent unemployment rate of 10.4% is the second highest in the U.S. after Nevada.

Another drawback is a lousy regulatory climate. “Rhode Island has one of the worst records on labor market freedom and health insurance regulations,” says William Ruger, who co-authored the Mercatus Center’s Freedom in the 50 States study, which we incorporated into our state ranking. Rhode Island had the fifth worst regulatory environment in the Mercatus study, which looks at labor regulations, health-insurance coverage mandates, occupational licensing, the tort system, right-to-work laws and more.

Rhode Island took a public beating this year when former Boston Red Sox pitching legend Curt Schilling laid off the 300 Rhode Island employees of his video game company, 38 Studios, and the company filed for bankruptcy. Rhode Island’s economic development agency provided Schilling’s company with a $75 million loan guarantee to entice 38 Studios to move to Rhode Island from Massachusetts two years earlier. The loan was made with the idea of Rhode Island reaping jobs and tax income from the move. The economic development agency sued Schilling and several of its former members last month, but it is not expected to recoup much of the loan.

Economic Freedom? Not in Rhode Island.

To kick off a two-year planning process, the RI Economic Development Corporation under Governor Lincoln Chafee is seeking a contractor to, among other things, "analyze existing business climate reviews from the past three years, such as the Tax Foundation's State Business Tax Climate Index, Beacon Hill Institute's State Competitiveness Rankings, and Forbes Best States for Business to determine the reasons for Rhode Island's performance in these studies."

Read a little more closely, and one gets the impression that the idea is to find factors that Rhode Island could leverage without making substantial changes to the tax and regulatory policy that restrict the ability of Rhode Islanders to make their own paths in the economy:

The State intends to grow its business environment in a way that maintains high standards for development that equitably serves all our residents, protects the environment and builds on our assets. This analysis will help the State determine which indicators to improve, emphasizing those that further our standards of equitable growth as well as nurture our business environment.

Not so mushy is Rhode Island's performance on the 2012 iteration of the Fraser Institute's "Economic Freedom of North America" report.

Continue reading on the Ocean State Current...

Rhode Island's Government Payroll: Living Beyond Our Means

When a family comes to a decision about purchasing any product or service, it doesn't merely accept the seller's sense of what's reasonable. In addition to the market rate, consumers must take into account the quality of the thing they're buying as well as their own ability to afford it.

With deteriorating infrastructure, doubts about the quality of government services, and the high-profile specter of unfunded municipal and state retirement liabilities looming over the state during this current period of economic stagnation, the compensation of public-sector employees has become a subject of heated debate about fairness and affordability.

A study that I’ve just produced for the RI Center for Freedom & Prosperity shines a stark light on the comparison of the public sector in Rhode Island to the private sector that supports it financially. Using a refined methodology for collecting data, economists William Even, of Miami University, and David Macpherson, of Trinity University, find that state and local government employees here enjoy a 26.5% "premium" in total compensation over their private-sector neighbors — even after controlling for variables like education, experience, and broad job category. That compares with 18.8% for New England and 14.9% for the United States as a whole.

Continue reading on the Ocean State Current...

October Employment: Boomtime in Rhode Island?

Rhode Island's employment results, as reported by the U.S. Bureau of Labor Statistics (BLS), would surely surprise the tens of thousands of Rhode Islanders who are struggling to survive the state's continuing downturn: For the second month in a row, the Ocean State led the nation in employment growth. The state still has the second worst unemployment rate, and it is still the second farthest state from its pre-recession peak, but the gap — huge as it grew — is closing.

Continue reading on the Ocean State Current...

Inefficiency in Economic Development: Money Looking for Makers

Readers of Philip Marcelo's article, in today's Providence Journal, about restoration of the historic-structure tax credit program in Rhode Island should see some warning signs indicative of a broader flaw in government economic development:

... the national recession and a 2008 moratorium on the tax-credit program brought such projects to a near halt.

Dozens stalled or never got off the ground, leaving around $150 million in credits –– which can be redeemed to offset business and personal income taxes — still pending final approval. ...

Millions of dollars more in credits also could become available, if developers do not meet a May 2013 deadline to show some progress on their projects. (A project must be fully completed and its expenses reviewed before state officials approve issuing credits.)

Continue reading on the Ocean State Current...

Town-by-Town Single-Family Home Sales, October

Election season and other contingencies led me to miss the single-family home sales data for September, but compared with August, Rhode Island's real estate market appeared to near or perhaps finally to reach the bottom in October. For the state as a whole, median sales prices were lower in the last 12 months than in the 12 months prior, but the number of sales continues to increase, and inventory is finally decreasing.

Continue reading on the Ocean State Current...

Things We Read Today (27), Wednesday

Campaign finance & incumbents; where the buck stops for the bad economy; Obama follows Chafee on a Commerce Czar; and the storm should be a warning.

Continue reading on the Ocean State Current...

Ballot Questions for the Voters

In what's beginning to feel like a Rhode Island tradition, seven ballot questions will be posed to voters on November 6 having to do with casinos and debt. Those with a personal financial or ideological stake are making their cases, but small-government, free-market ideals should lead voters to be wary of the pitches.

Continue reading on the Ocean State Current...

An Unexplected Surge in Employment

The national political scene saw quite a stir, the first week of October, when the Bureau of Labor Statistics (BLS) reported a huge jump in employment and corresponding drop in the unemployment rate.  As I noted at the time, a large percentage of the increase was attributable to people who are involuntarily working part time, rather than full time.

More curious, though, is that August-to-September is not typically a time for large increases. The September-to-October month is the one that brings a boost in hiring. That fact is usually obscured by the seasonal adjustment by which the BLS smooths the month-to-month results in order to highlight actual trends, but the not-seasonally-adjusted chart at the above link tells the tale.

This factor appears to be in play in the state data, too, especially in Rhode Island. In nine of the last twelve years, employment has dropped in September, before seasonal adjustment.  And September has never increased by the 5,229 people reported in this year's results.

Continue reading on the Ocean State Current...

Rhode Island Economy Booming! Or Not.

According to a press release from the RI Department of Labor and Training — the last to report this data before the election — Rhode Island's unemployment rate dropped to 10.5% in September, its lowest level since April 2009.  The change was on the strength of the state's " largest monthly increase of employed RI residents since the Bureau of Labor Statistics implemented the current methodology in 1976."

Did it feel as if Rhode Island's economy took off at an historic rate, last month?

Continue reading on the Ocean State Current...

Government Debt and the Danger of Historical Growth

In today's Saturday column,Ted Nesi voices reasoning that is only possible in a society that's become hubristicly accustomed to economic growth as an inevitability:

If bond investors are offering Rhode Island the lowest interest rates in its history, shouldn't the state be borrowing more money right now? Gina Raimondo has hinted she’s thinking that way, and there are plenty of infrastructure projects that need to be done soon. Some people are opposed to any and all state borrowing, and that's fine – but if you're someone who acknowledges Rhode Island taxpayers will be borrowing money at some point over, say, the coming decade, shouldn't as much of it be borrowed as possible now, while interest rates are at historic lows and 10% of the state's workers are idle?

Continue reading on the Ocean State Current...

Town-by-Town Single-Family Home Sales, August

Checking in on single-family home sales across Rhode Island, as I did for July and 1Q12, reveals a mixed picture. Results for the state are mildly improving, but the "downward spiral index" worsened for 22 of the 38 listed cities and towns.

The downward spiral index is the sum of the three percentages given in Table 1.  The idea is that an improving market will see an increase in sales,  a decrease in inventory, and an increase in median sales price.  If inventory is dropping, that indicates that houses are selling faster than new families can put them on the market, and if the median sales price is climbing, that suggests that the demand for homes in the area is increasing.

Continue reading on the Ocean State Current...

Things We Read Today (24), Thursday

West Warwick for all; the essence of education reform; declines in people births; declines in business births; the easy street to dependency.

Continue reading on the Ocean State Current...

Things We Read Today (22), Tuesday

Economic development options, from all-government to government-dominated; the heartless-to-caring axis in politics; Southern New Englanders' "independence"; solidarity between Romney and his garbage man; the media coup d'etat.

Continue reading on the Ocean State Current...

Study Provides Positive PR Opportunity for Providence

There's always bad news to talk about around here--fish in a barrel. So when good stuff comes down the pike, we've got to be able to take advantage of it. KPMG recently did an international survey and analysis (PDF) of business tax costs around the world. Part of the survey included a ranking of U.S. cities, and the good news is that Providence landed at 15th out of 73 surveyed cities (the top three were all in Louisiana, interestingly enough). According to the Providence Business News:

KPMG compiled the ranking using total tax index, a measure used to compare tax burden by comparing the total actual tax cost in U.S. dollars for each jurisdiction.

Providence had an overall total tax index of 85.8, with 100 being the baseline. Cities with lower scores had more favorable tax structures for businesses than cities with higher scores.

Boston ranked No. 35 on the comprehensive list of U.S. cities with a TTI score of 91.9.

Comparatively, Baton Rouge, La., which ranked first on the U.S. cities list, had a TTI of 66.5 and San Francisco, which ranked last, had a TTI of 106.6.

Overall, Providence posted a 25.1 percent corporate income tax rate, a 6.6 percent rate for “other corporate taxes,” a 20.8 percent rate for statutory labor costs and a 52.5 percent total effective tax rate.

Among the U.S. cities, Providence ranked ninth for corporate income tax rate, 13th for its other corporate taxes rate, 59th for its statutory labor costs and 15th for its total effective tax rate.

The only caveat is it is unclear to me (but I didn't sleep at a Holiday Inn last night) if the study adequately accounted for state level business costs. Regardless, this is a "usable study" for Providence. Yet, the methodology and caveats are less important than the bottom-line findings. The point to be made is that the city (and state) should take advantage of this report and promote Providence as a "TOP 15 Business Friendly City" and a "Top 10 Digital Innovation City" or something like that. Finally, we have a study that can be used for positive public relations. We need it and hopefully, someone will take advantage of it.

Why Government as Business Doesn't Work, at Least in Rhode Island

For comment on the Rhode Island Public Expenditures Council (RIPEC) report on the Economic Development Corp. (EDC) in his Sunday Providence Journal article, Paul Grimaldi turned to the Massachusetts affiliate of the free-market RI Center for Freedom & Prosperity, the Pioneer Institute. While the general sentiment that CEO Jim Stergios expressed is apropos, it is unfortunately not correct:

“While Rhode Island may consider Massachusetts is doing better,” Stergios said, “the fact of the matter is Massachusetts is Greater Boston and three Rhode Islands grafted onto it.

“The high unemployment rates you see in those areas are similar to those in Rhode Island.”

Continue reading on the Ocean State Current...

Things We Read Today (21), Weekend

Bob Plain's petit four of class warfare; CA's bid for more pension fund dollars; a martial metaphor for regionalization; a downturn for the never-recovered; Coulter v. View mention of RI.

Continue reading on the Ocean State Current...

RIPEC's EDC Report Another Indication of the Question Not Asked

Yesterday, the Rhode Island Public Expenditure Council (RIPEC), a venerable Rhode Island policy "voice and catalyst" founded in 1932, released a report analyzing the structure of the state's quasi-public Economic Development Corporation (EDC) and suggesting a reorganization.  Governor Lincoln Chafee requested the report in May, following the scandalous collapse of 38 Studios, which had been the major basket in which the EDC had placed $75 million in bond-sale eggs.

Fortunately, Chafee Spokeswoman Christine Hunsinger confirms, for the Ocean State Current, that the state did not pay for the report.  That's fortunate because — despite its 62 pages of text and 73 pages of organizational charts, definitions, and other appendices — the document does little to justify any particular new economic development structure and nothing to answer the more fundamental questions about the state's worst-in-the-nation employment situation.

Continue reading the Ocean State Current...

Things We Read Today (20), Wednesday

Mainly on media culpability and the economy: RIPEC's unquestioned report; skewed polls; the president's reportorial zombies; and the reluctance to invest in the economy.

Continue reading on the Ocean State Current...

August Employment Data for Rhode Island and the Nation

Once again, the headline is that Rhode Island's unemployment rate fell another tenth of a percent, to 10.7%.  And at least it's true, this month, that employment went up instead of down.  (The past few drops in the unemployment rate were a result of people giving up their job searches, so they weren't counted in the statistics.)

But people continued to leave the state's labor force, and the employment increase wasn't exactly dramatic, giving the impression that our decline hasn't turned around, but has edged toward stagnation.

Continue reading on the Ocean State Current...

Things We Read Today This Weekend, 6

First, scroll down and read Monique's postings on Rep. Spencer Dickinson. Then...

The topics of hope and hopelessness pervaded this weekend's readings, from absurd labor rules in schools, to the likely outcome of Make It Happen, to Spencer Dickinson's insider view, and then to Sandra Fluke.

Things We Read Today, 5: Make It Happen Edition

Having done little reading while participating in the RI Foundation's Make It Happen RI conference, I used my end-of-day column for reflection.

Introducing the Concept of Agenda

A good example of the questionable utility of political debates arose during the Congressional district 1 primary debate on WPRO, last night.  Only the most plugged in voters will have any inkling of what statements are true and which are spun to falsehood — let alone the context in which the facts were playing.

Trying to square his calls for bipartisan cooperation with his attempts to make his race about a "radical Republican agenda," as moderator Bill Haberman put it, Congressman David Cicilline (D, RI) said:

The reality is that there are big differences between what the Republicans, led by the Tea Party, are trying to do to our country, and they have an agenda that is really reflected in the Paul Ryan budget passed in the House...

Continue reading on the Ocean State Current...

Rhode Island at the DNC: Illustration of a Potential Future

In a Providence Journal Political Scene article about his speech to the Democrat National Convention, Rhode Island Governor Lincoln Chafee had this to say about his experience in office:

Now I’m in a governor’s chair, trying to get the economy going, and it’s not, click, turn a switch. This is hard work and it takes time ... and the policies that we inherited [make it harder].

Continue reading on the Ocean State Current...

Against Incentivizing Cooperative Strategic Workarounds with Comprehensive Market-Driven Measurables

At the risk of repeating myself, I have to opine that one of Rhode Island's core economic challenges is the frequency of sentences like this:

To position Rhode Island to compete successfully for jobs and investments, a new public/private economic-development partnership should be designed to implement an integrated economic-development strategy that focuses on business retention and expansion, cultivates new business startups, supports a culture of innovation and entrepreneurship, develops market-driven workforce solutions to help grow the middle class, creates a robust research capability to help make better investment and policy decisions, develops a comprehensive manufacturing strategy, aligns state capital programs with economic-development strategies, develops best-in-class business information and knowledge exchanges, provides the highest level of customer service, builds on its regional economic-development assets and actively manages Rhode Island’s image and reputation in the marketplace.

(Yes, I measured.)

Continue reading on the Ocean State Current...

All of Us Are the Job Generators

Although with regret, I have to opine that former East Providence city councilman Robert Cusack misses the target in his op-ed, yesterday, suggesting a way for Rhode Island to rejuvenate its sputtering economy:

We need to identify a job generator, make the changes needed to attract those jobs and then promote Rhode Island to execute the strategy. Which job generator? The initiative that brought Fidelity to the state has worked. Financial services remains a good candidate. Now we hear of bio-science in a new “Knowledge District.” Other ideas have been put forward that capitalize on our strengths. Whichever one or two job generators we target, that decision for once should be data-driven and fully vetted, and not a hipshot. Our future as a state is at stake.

Continue reading on the Ocean State Current...

UPDATE: QDC Balks at Potential Shipper Expanding to RI

UPDATE: The original report from NBC 10's Bill Rappleye--upon which this post was based--has been pulled from the turnto10.com website. I've received clarification on a number of issues I originally brought up related to this item.

Statement:

Eimskip is welcome to bring any amount of cargo to the Port of Davisville, at any time, beginning today. No cargo vessel has ever been turned away from the Port here. We would welcome Eimskip as a customer, and have communicated that to them.

A separate matter is Eimskip’s proposal to be granted an exclusive, private lease to operate the proposed container terminal at the Port of Davisville. Their proposal included a 10-year agreement that could be ended at their option, at which point QDC would have to reimburse them for any and all improvements the company made to the Port. Further, the proposal envisioned the creation of 3 jobs (3.1 full time equivalents). This proposal was obviously unacceptable, and QDC rejected it on behalf of the taxpayers, and the other port customers.

Meanwhile, based on the recommendation of the Legislative Port Commission in February, QDC has published an RFP to seek the best possible proposal to operate the terminal at the Port of Davisville. Unlike the Eimskip proposal, the RFP calls for maintaining the Port of Davisville as a public port, open to all shipping customers under the operational control and direction of the QDC.

We remain in contact with Eimskip. Similar to every other port customer, they have told us that they will make a decision based on a number of business factors, including rates established by the QDC. These rates will be established once the RFP process is complete. As always, the Port of Davisville will be extremely competitive. Eimskip has informed us that they will make decision in the next several weeks.

Steven King, P.E. Managing Director, QDC

================================
NBC 10's Bill Rappleye reports:

Federal dollars have refurbished Pier No. 2 at Davisville and provided the state with a crane that can offload containers.

Seafreeze, which is located next to Pier No. 2, exports frozen fish.

One of its customers, a shipping company from Iceland called Eimskip, wanted to bring some of its cargo to Davisville, and the Quonset Development Corporation wanted to get involved.

"As soon as we met with the QDC they invited Eimskip to use the pier and the crane," said Geir Monsen of Seafreeze.

Monsen said discussions with Eimskip went on for eight months and included a trip to Iceland.

But the QDC broke off the discussions in June and told Eimskip there would be a formal request for proposals, and that the operation would have to be staffed by union longshoremen.

"(The deal) would have granted the private company complete control over the proposed container terminal at the Port of Davisville at very unfavorable terms to the taxpayers and other port consumers," Steven King, QDC marketing director, said in a statement to NBC 10.

"Eimskip wrote letters to the QDC and how they were looking forward to cooperating all of the users of the port including car imports and potentially any other container users," Monsen said.

Seafreeze, and a trucking company called Rhody which is also located in the Port of Davisville, said they would have invested millions and created 100 new jobs if Eimskip were to relocate to Rhode Island.

The companies have requested a meeting with Gov. Lincoln Chafee to try and sell him on the idea.

Monsen said Eimskip is also thinking of relocating to Portland, Maine and Norfolk, Va.

Single-Family Home Sales from Town to Town

I've been meaning to update the data that I collected for the first three months of 2012, based on single-family home sales data available through William Raveis Real Estate.

Upon re-reviewing the information, it seemed to me that the three-month window is sure to be erratic on a running basis. Simply as a matter of their size, a significant number of cities and towns in Rhode Island are apt to have fewer than 20 sales in a calendar quarter, so a good month (or significant sale) would throw things off considerably. Moving forward, therefore, I'll trace the rolling annual average.

The following table presents data for the twelve months ending with July 2012. The percent change columns are measured against the twelve months ending July 2011. The numbers in the pink-shaded cells are not favorable. Coming out of a recession and housing bust, a city or town should want sales to be increasing while inventory drops and median sales prices increase. That's an indication that people want to move into an area and property values are generally on the upswing.

As the table makes very clear, while no cities and towns are in the worst condition — fewer sales, higher inventory, and dropping prices — only four show full progress toward health: Barrington, Burrillville, Little Compton, and North Smithfield.

Continue reading on the Ocean State Current...

Other States Need Much More Misery Before RI Has Company

The unemployment rate for Rhode Island fell by one tenth of a percent to 10.8%, but total employment dropped by 80 people.  That's not even a "mixed picture," though.  The only reason the unemployment rate moved in a seemingly positive direction is that 471 more Rhode Islanders just gave up looking for work.

So if the unemployment rate is a positive sign, then the state's motto might as well be "We hope people leave faster than they lose their jobs."

About the best that can be said for the Ocean State is that every other state in the union lost more employment than it did, except Utah, which saw a slight gain.  That context is illustrated very well in an update to my chart showing labor force (employed plus looking for work) and employment for Rhode Island, Massachusetts, and Connecticut as a percentage of each state's January 2007 labor force.

Continue reading on the Ocean State Current...

10 News Conference - Justin and RIFuture's Bob Plain

Jim Taricani invited me and RIFuture.org owner/editor Bob Plain to sit in for 10 News Conference, this morning. The topics leaned more toward politics than policy, but we bloggers did manage to pull the conversation toward political philosophy a bit. Specifically, we discussed economic development, the RI economy, the Congressional district 1 race, and the presidential race.

Watch video and continue reading on the Ocean State Current...

On State of the State: Getting RI Involved and on Track

On the latest State of the State with John Carlevale, I discussed Rhode Island's civic scene and how residents can begin to get involved and sort through the system along with Lisa Blais, of Ocean State Tea Party in Action, and Marina Peterson, of East Bay Patriots. Of particular note, related to my habitual role as contrarian, are the discussions of whether we should want elected officials to "work together" and the relative merits of offering comprehensive solutions versus simply increasing economic freedom.

7-26-2012 What's a Citizen to Do to Become Involved? from John Carlevale on Vimeo.

08/04/12 - RISC Summer Meeting

9:13 a.m.
I was running just a hair late, but the early risers at the Rhode Island Statewide Coalition (RISC) had already jumped right in with the program for its summer meeting.

Robert Flanders just finished speaking. Some notable comments were that he believes, essentially, that there is nowhere to go but up, although "we've got to break some eggs to make a better omelet."

He then introduced the concept of the RISC Foundation as a research institution. "The goal is literally to reinvent, restructure, and revitalize Rhode Island."

Now Gary Sasse is up.

9:18 a.m.
Sasse: RI's "greatest deficit" is consistent and competent leadership.

Continue reading on the Ocean State Current...

RI Job Count Adjusted Up; Rhode Islanders Not Necessarily the Beneficiaries

After months of hearing from various sources, notably URI economist Len Lardaro, that official jobs reports for Rhode Island were inaccurately gloomy, I was thrilled, yesterday, to see Governor Chafee authorize the state Department of Labor and Training (DLT) to release new estimates.

Basically, there is a substantial lag before the federal Bureau of Labor Statistics (BLS) publishes official, verified data on the number of jobs there are originating in Rhode Island. Between publications, the BLS releases monthly estimates based on its models and smaller surveys, which it adjusts as needed when more concrete data becomes available. Using a more accurate data set, the DLT says that the jobs picture improved to 464,700 jobs in March, compared with the "official" 457,700 jobs, both measured against the March 2011 number of 459,900.

The official number shows a decrease, while the revised number shows an increase. The following chart puts the two numbers into graphical context.

It's important to note that this is not the data used to calculate labor force, employment, and unemployment numbers for the state. The above data is employer-focused, based on tax filings and survey results from employers in Rhode Island with regard to the number of employees that they have. The unemployment rate and related data come from surveys of Rhode Islanders with regard to whether or not they are working.

According to that data, the number of employed people living in Rhode Island dropped from March 2011 to March 2012 by 5,258.

Continue reading on the Ocean State Current...

The Facts Don’t Lie on Taxpayer Migration

What makes politics and policy fun is that people of good will and honest intentions can disagree and strive to change each other’s mind. Starting from one’s essential worldview, myriad stages of decisions must be made without the possibility of complete information — that is, subjectively — so persuading and being persuaded are distinct possibilities.

We can agree, for example, that we have a moral duty to help those who suffer and struggle among us. Whether government power is the appropriate tool to answer that moral call is a matter on which good people can differ (let alone the wisdom of specific programs).

What makes politics and policy frustrating is that, whether from selfish interests or personal investment in flawed ideas, participants often try to distort data points as if they are another layer of subjectivity. If public discourse and representative democracy are to function, there must at some point be a backstop of shared acceptance of facts.

A fact that I raised in a paper written with J. Scott Moody for the RI Center for Freedom & Prosperity is that federal income-tax payers have been leaving Rhode Island consistently for a decade, taking with them the accumulated equivalent of more than $1 billion in annual resident income.

Continue reading on GoLocalProv...

Talking Teen Unemployment and the Minimum Wage on the Dan Yorke Show

630AM/99.7FM WPRO has posted my appearance on the Dan Yorke show, Tuesday, in two segments. The first is the initial half hour introducing the research from the RI Center for Freedom & Prosperity and touching on some conclusions. For the second hour, Economic Development Corp. board member and VIBCO President Karl Wadensten joined us in the studio for a broader discussion.

Unemployment Down... and That's Not Good

From a Rhode Island Department of Labor and Training press release titled, "Unemployment Rate Drops to 10.9 Percent":

The RI Department of Labor and Training announced today that the state’s seasonally adjusted unemployment rate for June 2012 dropped to 10.9 percent, down one-tenth of a percentage point from the May 2012 rate. This represents the second consecutive monthly decrease in the unemployment rate and is the lowest RI rate since January 2012 (10.9%).

Continue reading on the Ocean State Current...

A Decade of Moving Next Door

I've been following taxpayer migration data for years, but in a haphazard way. A new study that I've coauthored for the RI Center for Freedom & Prosperity finally gave me the opportunity to review all fifteen years of available data from the IRS.

The picture — from the 2003 beginning of what can only be described as an exodus — is frightening. After accounting for the tens of thousands of Rhode Islanders who moved to other states and other taxpayers who moved in the opposite direction, Rhode Island lost 24,455 households, with $1.2 billion of annual income (not inflation adjusted). More conspicuously, a net 3,406 taxpayers moved right across the border, to abutting counties in Massachusetts and Connecticut, taking with them $254.5 million in annual adjusted gross income (AGI).

Continue reading on the Ocean State Current...

CNBC Rankings Shouldn't be Ignored

In light of the recent CNBC report that ranks Rhode Island last, #50, in the U.S. for being "business friendly", Bob Plain wrote this morning--under the heading of "Making Sense of the CNBC Report"--that we should "get ready for the conservative barrage that because Rhode Island ranked as the least business-friendly state we should adjust policy to appease the good editors at CNBC." Well, since I don't want Bob to be wrong (any more than usual ;), I'll confirm his prediction--and I'll start with something Bob wrote.

He continued his foray into "making sense of the CNBC report" by comparing CNBC's top two business friendly states (Texas and Utah) to the bottom two (Rhode Island and Hawaii) and asking, "Where would you rather move your business to?" And that was it. As if it is obvious that the bottom two are better places to live than the former. Well, that is pretty much a matter of taste, isn't it? But it's also beside the point.

The real question that should be posed isn't where Bob or I or just anyone would rather move to, it's where they or we would rather move a business to. Clearly, as the CNBC data shows--and they aren't exactly some little-known outlier here--Texas and Utah are two of the states whose economies and population have continued to grow throughout the decade, recession or not. Clearly, many people would rather move themselves and their businesses to these places instead of Hawaii (which is kind of a special case, isn't it?) or Rhode Island. To put it another way, people in every other state in the country can take solace in the fact that, "Hey, at least we're not Rhode Island."

Take a look at the main page of the story on CNBC's website where it lists the Top 5 and Bottom 5 plain as day. And we're sitting at the bottom for the second year in a row. Like it or not, these reports make national news and affect the perception of our state. Especially when it's a well-respected outlet like CNBC, which business leaders and decision-makers across the country rely upon for financial news and the like and whose findings will be propagated across the country (particularly in the business community and their local and national publications).

Maybe "denial" is a river in Rhode Island. We Rhode Islanders don't do ourselves any favors by continually sticking our collective heads in the sands of our beautiful beaches and believing that everyone else has it wrong when the evidence continually shows that Rhode Island is the one with a problem.

Any Rhode Islander who pooh-pooh's the CNBC story is displaying an all-too typical sort of myopic insularity endemic to the state. Newsflash, folks: Rhode Island doesn't have it all figured out while the rest of the country is crazy. But believing it, or at least telling ourselves we believe it, does serve to mitigate the need for the hard work it would take to actually change things. Including the perceptions of others.

Regardless, for those of us who really do want to change the national perception and, more importantly, the actual economic climate in the Ocean State, things like the CNBC rankings need to be taken seriously. So let's take a closer look at them:

50th in Infrastructure and Transportation - CNBC "measured the vitality of each state’s transportation system by the value of goods shipped by air, land and water. We looked at the availability of air travel in each state, and the quality of the roads." It would seem road quality killed us here.

49th in Business Friendliness - "Regulation and litigation are the bane of business. Sure, some of each is inevitable. But we graded the states on the perceived 'friendliness' of their legal and regulatory frameworks to business." No surprise.

49th in Economy - "We looked at basic indicators of economic health and growth." This is a case where our own personal, anecdotal experiences can confirm a study's findings. Right?

46th in Workforce - "We rated states based on the education level of their workforce, as well as the numbers of available workers. We also considered union membership. While organized labor contends that a union workforce is a quality workforce, that argument, more often than not, doesn’t resonate with business. We also looked at the relative success of each state’s worker training programs in placing their participants in jobs."

45th in Cost of Doing Business - "We looked at the tax burden, including individual income and property taxes, as well as business taxes, particularly as they apply to new investments. Utility costs can add up to a huge expense for business, and they vary widely by state. We also looked at the cost of wages, as well as rental costs for office and industrial space..."

44th in Cost of Living - "From housing to food and energy, wages go further when the cost of living is low."

37th in Technology and Innovation - "We evaluated the states on their support for innovation, the number of patents issued to their residents, and the deployment of broadband services. We also considered federal health and science research grants to the states."

23rd in Education - "Not only do companies want to draw from an educated pool of workers, they want to offer their employees a great place to raise a family. Higher education institutions offer companies a source to recruit new talent, as well as a partner in research and development. We looked at traditional measures of K-12 education including test scores, class size and spending. We also considered the number of higher education institutions in each state." Now we're getting to places where Rhode Island has some possible strengths to build on. My guess is that Rhode Island was boosted by high education spending per pupil and relatively lower student/teacher ratios. Another guess: they must have indexed number of higher ed institutions to population, giving RI a good mark. Test scores were most likely a drag.

23rd in Quality of Life - "The best places to do business are also the best places to live. We scored the states on several factors, including local attractions, the crime rate, health care, as well as air and water quality." A la Dan Yorke: Water. Here's where Bob Plain is shown to be partially correct. But whereas Bob seems to base the entirety of his analysis on quality of life (and living in East Greenwich cove certainly adds to one's good vibes!), CNBC only considers this as 1/10th of the overall picture.

10th - Access to Capital - "Companies go where the money is, and venture capital flows to some states more than others." While it's nice to be in the Top 10 for something, methinks that in the wake of 38 Studios we will see a lower number next year.

Instead of dealing with issues that would directly address some of the above concerns, we had a General Assembly that spent time maintaining the status quo, at best. Right now, the status quo is being the worst in the nation. Is that really where we want to be? Unfortunately, I think too many Rhode Islanders would respond, "Whatever."

Well, at least we've got the beaches and Downcity and Waterfire and Newport....

Who's Flying Now? (And Why?)

Ted Nesi posted an interesting graphic from the Tax Foundation that shows that:

Rhode Island posted the 18th-fastest growth in high-income taxpayers between 1999 and 2009.

While the total number of Rhode Island taxpayers grew by just 4% during that period, the number with adjusted gross incomes above $200,000 jumped 63%, for a net gain of 58.9% at the top end, the biggest in New England.

Vindication once again. The “flight of the earls” myth that was used as a justification to cut taxes on the elite in the middle part of the last decade is, once again, shown to be untrue.

First, even though what follows is a more robust way to look at the trend of higher income taxpayer migration, it is by no means comprehensive. It doesn't take inflation into account (though, as the Tax Foundation points out, their percentages are relative so that affect is mitigated in their analysis), which is why the relative increase in $200K wage-earning households when comparing 1999 to 2010 may be exaggerated. Additionally, the multitude of effects that the economic recession has had on wage-earners aren't adequately accounted for in this simplified manner.

I turned to the IRS's Statistics on Income data from 1999-2010 and tallied up the number of + $200K taxpayers. (Yes, I thought I'd look at 2010, too).

Further, thanks to a timeline provided by Justin, we can compare the implementation of tax policies that were meant to impact high wage earners.

2002: capital gains tax phase-out passed to begin in 2007
2006: flat tax reduction begins
2007: capital gains tax phase-out begins with 2/3 reduction; then it's frozen
2010: capital gains tax increased to personal income level
2011: Flat tax rate reduction frozen

Keeping these dates in mind, let's look at the effects on + $200K wage-earning households. In 2000 there were 9,013 such taxpayers and this dropped to 8,259 in 2001, which, if memory serves, may have helped serve as an impetus for the tax policies that followed.

In 2002, when the capital gains tax phase-out was passed (to go into effect in 2007), the number of + $200K wage-earners went up to 8,500. From 2003 thru 2005, the numbers continued to increase, from 9,252 to 10,798 in 2004 to 12,376 in 2005. In 2006 the flat tax reduction begins and the climb continued to 13,387. In 2007, the capital gains tax phase-out begins with a 2/3 reduction of the previous level and the total + $200K wage-earning households climbed to 14,737. That year the General Assembly voted to freeze the capital gains tax (so the other 1/3 reduction did not occur) and the number dropped to 13,475 in 2008 and 12,416 in 2009. In 2009, the capital gains tax was set to be increased by matching it to personal income level in 2010. The number of households earning over $200K dropped to 11,117 in 2010. In 2011 the Flat tax rate reduction was frozen and we'll have to wait to see what happened.

When looking at the data for both "upper" middle-class and (I guess) "regular" middle-class, it looks like there is no relation between these tax policies and the number of wage earners.

For myself, I've been more of a "flight of the squires" kind of guy than "flight of the earls", believing that it's the middle-class who is suffering--and fleeing Rhode Island--more than the wealthy. As the above charts show, maybe that's wrong.

What I think this does show, however, is that there is a link between capital gains and flat tax policies and the impact they have on the number of high wage earners. During the time that these taxes were reduced, the number of + $200K wage-earners increased. After these taxes were frozen or raised, the number of + $200K wage-earners decreased.

ADDENDUM: The freeze/increase occurred before the economic downturn of 2008/2009 and, it looks like, the "earls" were already fleeing. It also looks like a lot of the "earls" became, um, "counts"(?), as the number of upper middle class wage earners seems to to be continually increasing, perhaps because some earls stayed in RI but dropped an income category. Also, the upper middle class is also being continually refreshed by regular middle class wage-earners moving up. In other words, it's important to remember that these classifications don't necessarily cover the same households.

UPDATE II: Port Developments

Last month I expressed my approval of progress being made to further develop the port of Davisville and Quonset Point. However, I also explained my philosophical opposition to paying for port improvements, ie; dredging, via a bond instead of from the general revenue. However, I subsequently learned that I was mistaken when I thought the bond was being proposed outside of the 2012 budget. I explained my error in a follow-up post, but also noted that a bond is still a bond:

Whether a bond is passed as part of the budget, via a referendum or in a separate piece of legislation, my original contention remains: Though I understand the philosophy of spreading debt out over X number of years, I'm critical of the bond avenue because I believe that we are asked to fund too many bonds to pay for items that should be paid for via appropriation from the general revenue, not as loans with interest. If the dredging was funded through a regular appropriation, the $7.5 million worth of work would cost $7.5 million, not $9.1 million. I also understand that we can't appropriate everything on the bond wishlist using today's funds, but that's where setting priorities comes in.

...this is not a general obligation bond, but a revenue bond which will be financed completely with payments from port users and QDC revenues. There will be no direct cost to the taxpayer.

The bonds or loan agreements issued pursuant to this article will not constitute the indebtedness of the State, and required payments will be derived from Corporation revenues. The Corporation has identified several sources of revenue to contribute to this debt service, including increasing the tariff on dockage from $3.00 to $6.00 per foot ($243,750 annually), increasing the tariff on wharfage from $3.00 to $6.00 per vehicle ($160,000 annually), and contributing $507,456 annually from operating funds. The authorization for this debt applies to bonds issued within one year of the passage of the resolution.

So, in the end. I learned a few things and my philosophical wariness was displayed and addressed. Consider me an unqualified supporter now.

Why RI Is Driving Out the Hushions

Jennifer Hushion submitted an op-ed to the Ocean State Current explaining why the City of Cranston and the state of Rhode Island are pushing her family toward the door:

The economic climate in Rhode Island — and specifically Cranston — is why we are considering leaving. It’s not that we are necessarily against higher taxes; we are against higher taxes when we receive so little in the way of services. Even more important to us than our current situation is the outlook for the future. Unfunded pension commitments and budget deficits are burying Cranston, and my family only sees the situation getting worse. ...

I can understand why one might think that those who make over $250,000 are 'rich.' We have worked very hard and are grateful for what we have, but the math is undeniable. Spend 30% of taxable income on private education because of local schools’ inadequacy, pay another 10-15% in state property and income taxes, put another 15% away for a retirement that is slipping away, and being “rich” means driving an 11-year-old car and postponing badly needed household repairs.

UPDATED: Port Developments

Last week I commented on the good news "that there is movement in the Legislature--specifically a commission headed up by Jamestown Rep. Deborah Ruggiero--to develop Quonset/Davisville as a short sea shipping port."

To accomplish this, dredging of the harbor would be necessary. According to the story from the ProJo, "The commission recommended that the state issue $7.5 million in revenue bonds to pay for the dredging." In reaction to this, I wrote:

So...we're going to have to go the bond route. Of course, we don't have to go that way. There's a remarkable vehicle that could be used to fund the dredging that wouldn't require the state taxpayers taking on more long term debt: It's called the State Budget. Of course, that may require re-prioritizing expenditures and the like. I guess we can't have that.

Quonset Development Corporation Revenue Bonds

This article authorizes $7.5 million in debt for various capital projects including, but not limited to, harbor, pier, port, channel, dredging and other costs related to the Davisville Piers Improvements Project at the Quonset Business Park. Total debt service is not expected to exceed $911,200 annually and $9.1 million in the aggregate, based on an average interest rate of 4.0 percent and a 10-year maturity.

The bonds or loan agreements issued pursuant to this article will not constitute the indebtedness of the State, and required payments will be derived from Corporation revenues. The Corporation has identified several sources of revenue to contribute to this debt service, including increasing the tariff on dockage from $3.00 to $6.00 per foot ($243,750 annually), increasing the tariff on wharfage from $3.00 to $6.00 per vehicle ($160,000 annually), and contributing $507,456 annually from operating funds. The authorization for this debt applies to bonds issued within one year of the passage of the resolution.

Whether a bond is passed as part of the budget, via a referendum or in a separate piece of legislation, my original contention remains: Though I understand the philosophy of spreading debt out over X number of years, I'm critical of the bond avenue because I believe that we are asked to fund too many bonds to pay for items that should be paid for via appropriation from the general revenue, not as loans with interest. If the dredging was funded through a regular appropriation, the $7.5 million worth of work would cost $7.5 million, not $9.1 million. I also understand that we can't appropriate everything on the bond wishlist using today's funds, but that's where setting priorities comes in.

Setting aside my philosophical qualms, thanks again to Rep. Ruggerio for the clarification and, more importantly, for taking leadership on this item.

Port Developments

I think it's good news (and about freakin' time!) that there is movement in the Legislature--specifically a commission headed up by Jamestown Rep. Deborah Ruggiero--to develop Quonset/Davisville as a short sea shipping port. Imagine: taking advantage of our geography and greatest natural resource for possible economic gain! There are some hurdles ('allo Guvnah!)

The commission found that there was little statewide coordination of the maritime trade economy, and suggested that the governor appoint a port economic policy ombudsman to take on that role.

The ombudsman would chair a Rhode Island Port Marketing Collaborative, which would seek out business and development opportunities for the state’s ports.

A spokesman for Governor Chafee said the governor received the port commission’s report Tuesday afternoon and would not comment until after he had studied it.

The port commission urged the General Assembly and the state’s federal delegation in Congress to ask the U.S. Department of Transportation to designate Rhode Island ports as “destination ports” in the U.S. Department of Transportation’s Marine Highway System. That’s a federal program started in 2010, designed to move freight along the coastline and waterways, relieving highway congestion.

Ruggiero noted that New Bedford is already on the Marine Highway map, but Rhode Island’s ports are not. “New Bedford had an advocate, while the State of Rhode Island did not,” she said.

She said Rhode Island’s location should give it an advantage in short sea shipping.

The port commission also recommended that the state fund what Ruggiero called “maintenance dredging” at Davisville and in the shipping lane extending from Davis ville to Jamestown/Conanicut Island.

The commission recommended that the state issue $7.5 million in revenue bonds to pay for the dredging.

While federal funds could be used for the dredging, the port commission said that could mean a wait of between 5 and 10 years before funds could be appropriated.

What’s more, since Davisville hasn’t been dredged since the U.S. Navy did it in 1977, the port is exempt from a federal Harbor Maintenance Tax.

Davisville is the only commercial port on the East Coast without the tax, which gives it a commercial advantage that is important to its growing auto-import business.

Farmer Explains Why Tax Rates Matter

In the debate about higher tax rates for "the rich", Missouri farmer Blake Hurst thinks something is being overlooked.

It’s obvious that the Obama administration does not believe that tax rates on investment are a factor in investment decisions, or that marginal rates on real income affect how hard and how much people work....In all the arguments over incentives and tax fairness, there has been little mention of, well, cash. I’ve read long, learned dissertations on work effort, impassioned pleas for incentives to encourage a rekindling of animal spirits, and exotic calculus in service of whatever agenda an economist possessed before the study was undertaken. But cash is rarely mentioned.

As a small businessman, I can’t argue that I worked harder or longer the year after the Bush tax cuts were passed. I would imagine that my effort was pretty much the same as the year before. The same goes for my investment plan. I invest everything left after living expenses and taxes, no matter what the capital gains tax rate is. I have no plan to sell my farmland or my business. Like Warren Buffett, I’m not selling, so the tax rate on any expected gain doesn’t matter to me.

The only question that matters to the growth of my business is this: how much cash does the tax man leave me?

When we expanded our farm recently by purchasing a neighboring place, the lender required at least 35 per cent of the purchase price as a down payment. That would be cash. It mattered not the capital gains tax rate, the cost of capital, the expected return, or what Obama considers fair. Business is hard and cash is king.

My wife and I had built the cash reserves necessary to make that down payment on our new farm over a period of years–years, interestingly enough, when the government taxed business and investment income at rates far lower than those envisioned by the present administration. With higher tax rates, it would have taken me many years longer to build the capital necessary to expand my business....My family businesses don’t add much to the overall economic prosperity of our nation. They’re small, not terribly profitable, and are hardly giant engines for job creation or on the cutting edge of innovation. They do, however, employ nine family members throughout the year, with another dozen or so employees during the busy season. Without sensible tax rates on both labor and capital, we can’t build the equity we need to expand in good times and survive the bad times. That’s why tax rates matter.

New Education Funding Formula Contributes to Increases in State Aid

Dan McGowan at GoLocalProv has a story on how Governor Chafee's budget sends more money to the cities and towns.

A GoLocalProv review of the Governor’s budget plan shows Barrington, East Greenwich, Lincoln, Cranston, Scituate and North Providence will all receive at least 16 percent bumps in aid, with Barrington and East Greenwich – two of the wealthiest communities in the state – getting 38.2 percent and 36 percent increases, respectively.

In total, 15 communities will receive at least ten percent increases and Providence, which receives by far the most state aid of any city or town, will get a 9.5 percent increase in aid.

Additionally, GoLocal didn't include school aid for a couple cases where communities share a school district--Exeter/West Greenwich and Bristol/Warren. With the exception of Portsmouth, these four communities are the only ones experiencing an overall decrease in aid. Based on the new funding formula, these towns will be receiving less education aid, which makes their reduction in state aid even more than that indicated by GoLocalProv.

In years past, the perception in the Legislature (and, probably, in the general population) has been that Barrington and EG didn't "need" more aid. Conversely, the old system failed to account for population and demographic changes that have occurred in some communities--Bristol and Warren, for example--by continuing to send the same or a little more money every year while, for instance in the case of Bristol/Warren, the student population continues to go down. Well, a comprehensive funding formula takes out such "gut feel" factors. We'll see how this plays out: To some, the new funding formula may not be "fair", but it is equitable.

There's the "Business Community" and There's the Business Community

In Rhode Island, class differentiation has a high degree of overlap with insiderdom — perhaps because people who aren't insiders don't see as much value in remaining, so they've filtered out. In that context, comments from one representative of the "business community," offered in an article about Governor Chafee's promise of "painful cuts" — are disconcerting:

"I think all of us in the business community expect some level of pain," said Colin Kane, a developer who is a principal of Peregrine Group LLC in East Providence. "I'm not going to call it pain. I'm going to call it commitment — and sacrifice — toward making the state fiscally responsible and functional."

Reporter Tom Mooney doesn't bother to point it out, but Kane is also Chafee's appointee to head up the commission overseeing the conversion of the land formerly covered by route 195 in Providence, so he's clearly in the upper tier of insiders. He goes on to say:

And, he said, "I do believe that the public is prepared and willing to make a reasonable sacrifice if indeed they do see a future of getting us below [an unemployment rate of] 10.8 percent."

"I pay a lot now. I suspect I will pay a lot later," said Kane. "Let's face it. Last year in Providence our property taxes on commercial [property] went up 25 percent. So we’ve made the sacrifice... Does it cripple? Yes. But we're still alive."

Business survival may be adequate for people who are already financially set, who already have the added perks, locally, of power and influence. But maintaining the status quo is not going to turn things around. As another article on yesterday's front page points out, Rhode Island has continued to bleed jobs. The most optimistic thing that can be said is that job creation was just barely positive for 2011, after losses for almost the entire second half of the year.

It isn't enough for Rhode Island to temper its tax increases to keep people like Kane afloat. Any increases at all, at this point, will kill start ups and continue to discourage new businesses from migrating here, while persuading others to continue leaving. Every penny of Rhode Island's pain has to come through reductions in government spending, taxation, regulations, and mandates, because what's needed isn't a painful solution, but a liberating one — one in which the economy grows rapidly enough to overcome the truly horrid decisions of insiders past.

Sympathy for Zimbabwe

Tyler Dorden's point, with his post about trying to send money to his friend (actually named Time) in Zimbabwe is that the United States strangles business with meddling. In this case, he suggests, it does so by requiring Western Union to layer on burdensome precautions before allowing people to transfer money there.

I don't know the background of the policy well enough to say whether the imposition is worthwhile. Judging from the questions that Dorden reports Western Union having asked, it appears to be both an attempt to stifle Internet scams and a form of mini sanction against the nation's ruler, Robert Mugabe.

More compelling than that argument, though, is the description of Time's background. The proportion may be very imbalanced, but I couldn't help but think of Rhode Island when I read the following:

By the time he was 15-years old, Time could see the writing on the wall. Mugabe had all but destroyed the market and private property rights, and Time knew there would be absolutely no prospects for him in Zimbabwe.

How many people, especially young Rhode Islanders embarking on the working phase of their lives, have made the same decision about this state? I know I've heard the advice suggested frequently, in multiple contexts and with an air of plain common knowledge.

Trillo's Flawed Government Theory

I don't relish the observation, but it seems to me that Rep. Joe Trillo (R, Warwick) is displaying an unhealthy political philosophy in his quest for a Quonset casino:

"It would have to be bigger than Foxwoods, bigger than Mohegan Sun, otherwise it's not going to work," he said. "To just go with a regional casino, it won't be able to compete."

Trillo also envisioned a scenario in which a single operator would buy and run the privately-owned Twin River and Newport Grand, and the new Quonset Point casino. Asked if he had been approached by anyone interested in making such a major investment while the Mohegan Sun struggles financially, Trillo said an emphatic no: "I have purposely stayed away from any casino operators."

It's well and good, if true, that Trillo is avoiding the corrupting influence of those whose money would be necessary to make his vision a reality, but of itself, a vision of such scope and specificity is not an appropriate basis for government action. It isn't the job of elected officials to decide what sort of business on what sort of scale for what sort of market their area ought to have and then go about developing it.

Government should stick to ensuring that the marketplace remains competitive, broadly, and that its policies are not hindering the people from pursuing activities that, within limited boundaries of order and cultural integrity, they believe will be profitable and beneficial.

Big Finance Likes Totalitarianism, but Democracy Requires Hard Lessons

I'll admit that I don't have much new to say about the continuing activities of the state-appointed budget commission now ruling East Providence:

The state-appointed budget commission overseeing the city's finances convened for the first time Wednesday, chose Michael O'Keefe, a former state budget director, as its president, and established its first priority: improving the city’s cash flow.

Essentially, that means debt; the city needs $10 million in tax anticipation notes, and the lowering of its rating to "junk" will make that "more difficult and expensive," as O'Keefe puts it. It all comes back to government debt and charming investors. We've discussed previously that the municipal takeovers are meant as "a statement to Wall Street," and the point merits continued emphasis. What Wall Street likes about state-imposed budget commissions is that they open the door to options that might benefit civic units as economic entities, but not necessarily as self-determinant civil societies. The state can take money from other parts of the state to hand to struggling cities and towns; it can impose taxes on local residents without fearing democratic reaction; it can change policies and, ultimately, contracts to address shortfalls.

At bottom, the problem is that the way in which the state determines a preferred mix of these solutions will depend on the influences on it. That means not only special interests, like organized labor, but also the general priorities of the class of people who occupy the state's bureaucracy and elected positions. The people who actually live in a city or town are not likely to rate very highly, and voters in other cities and towns are not likely to pay all that much attention.

I'd suggest that a healthier solution — in the long term, and with an eye toward effective democracy — would be to let a city or town run out of money. Let it reach the point at which it cannot provide services or pay employees. Or, alternately, that it must raise taxes and impose fees almost immediately. If we're to be a self-governing people, we have to experience, together, the consequences of incompetent leaders and bad decisions.

Of course, if people start learning such lessons on the small, local scale, they might begin applying them at the state and national levels. And we couldn't have that, now could we?

Killing the Weak as Recovery Strategy

Reading about Rhode Island's effort to return its unemployment fund to solvency in yesterday's Providence Journal, I got the impression of a system so counterproductive that only government officials could conceive of it (and getting worse):

The employers' payments are determined by the number of former workers qualifying for payments; those paying the highest taxes now will pay even more.

...

Employers will now be split into two categories and pay unemployment insurance taxes based on two taxable wage bases. Most employers will pay a tax calculated with a wage base of $19,600 — a 3-percent increase over last year's base of $19,000.

But those employers whose taxes are calculated at the 9.79-percent rate because they have the highest number receiving benefits will have a wage base of $21,1000. That's intended to offset the large drain these employers exert on the unemployment fund...

It's funny: When children are poor, we don't tax their parents more because their kids are a drain on the system, yet when the economy turns sour, we tax the hardest-hit businesses most. That'll teach them! No doubt, as they begin to recover to profitability, they'll be that much more reluctant to hire new employees.

And call me cynical, but splitting the "wage base" looks like an elaborate way to avoid having the high-end tax break the 10% barrier. Taken together, these two points illustrate well how the government in Rhode Island perceives businesses — not as partners, allies, or patrons, but as a "them" that has money to take.

Removing Pension Dollars from the RI Economy

Union reps and pension testifiers have been arguing that reducing pensions will harm the local economy. Using the RI Center for Freedom & Prosperity's pension database, though, I've looked at some relevant numbers, including the fact that the state sends $142 million in public pension payouts out of state.

Running the State as a Giant Corporation Is a Bad Idea

Part of what bothered me about Governor Chafee's "findings" in Pittsburgh was the broader economic strategy whereby the state government tries to run Rhode Island like a giant corporation — picking preferred industries, backing particular players (as if they are subsidiaries), and trying to shape available public resources (such as the I-195 land) toward a specific vision. That's the impression also given by a recent article in which Monster Mini Golf founder Christina Vitagliano complains about Rhode Island's handling of businesses:

... even a glowing skeleton doesn't make Monster Mini Golf a biotech company, and Vitagliano said her firm doesn't fit in with the state's plans to create a "knowledge district" of life science and high-tech companies.

"No one knows we're here," Vitagliano said. "I'm not a pharma company, I'm not a medical-device company, I'm not Curt Schilling. There has been zero help from anyone."

She said that's a stark contrast to her experience in Las Vegas. "When you walk into City Hall in Vegas, they welcome you with open arms. It's a very pro-business, proactive city."

Who in government would have gone in search of a black-lighted mini-golf company as an economic development project? Mr. and Mrs. Vitagliano had a unique vision, they chased it down, and it's been a success. That's real entrepreneurship, and government — with its vested interests, direct line to bar-raising regulation for big-rolling incumbent organizations, and access to NIMBY politicians and constituents, alike — is ill suited to encourage it.

The best strategy is simply to get government out of the way.

RI Needs a Strong Economy to Keep Bank of America

In his Sunday Providence Journal column (not online), John Kostrzewa worries that Rhode Island officials aren't doing enough to ensure that looming cuts in Bank of America's workforce don't come out of our local economy. He suggests that they're waiting for a more opportune time and insists that they can't afford to do so.

But the persuasion that he suggests is built upon a big threat:

... the state kept an average bank balance of more than $35 million at Bank of America during the fiscal year that ended June 30. Some federal receipts flow into a general fund account at the bank. And Bank of America is a senior bond underwriter for the state and assists in the marketing and sale of state bonds.

All of that work doesn't have to go to Bank of America. It could go to other institutions that make commitments to add jobs.

Rhode Island may or may not have the financial leverage to bully the bank. Considering that BoA is looking to save $5 billion per year in personnel costs, the numbers in play may be out of Little Rhody's league, even with the combined threat of lost business and promise of the state's famous big-shot handouts.

Just under two years ago, the Bank of America branch on Main Rd. in Tiverton closed down. A manager, there, told me that the branch was profitable, but that the lack of small-business prospects in the town erased the justification for maintaining a presence here. Although the scale is much smaller, Tiverton's experience suggests a better way forward for Rhode Island.

My mind turns to a CNBC analysis from June of this year, in which Rhode Island managed to be dead last on a list of Top States for Business. In three of the ten subrankings — workforce, technology & innovation, and access to capital — the state stood right on that middle line of mediocrity. It did a little bit better in education and a little bit worse in quality of life. That's half of the rating's factors. With the other half, we're bottom ten material: cost of doing business, infrastructure & transportation, economy, business friendliness, and cost of living.

If Rhode Island wants to halt its slide into backwater and change its status as the Northeast's Mississippi, the government is going to have to focus on making the state a more attractive place to do business. Rather than one-time giveaways, the state has to lighten up on its taxes and regulations and improve its infrastructure — while decreasing the cost of living and doing business.

Evidence that Rhode Island is serious about turning itself around — and fast — would do more to persuade BoA CEO Brian Moynihan that it's worth staying here than would threatening letters from every single elected and appointed official from local water authority up to Speaker of the House. Unfortunately, our current governor and General Assembly, Providence's current mayor, and (all evidence indicates) the state's electorate, itself, lack the will to do what's necessary.

How a State Buries Itself with Wind and Overreaching Government

Rhode Island had to have a speculative wind project. The General Assembly and former Governor
Don Carcieri effectively castrated the regulatory body that oversees energy policy and forced through the Deepwater Wind agreement that will raise energy costs for all Rhode Islanders in order to guarantee the company profits. Of course, those who use more energy, such as substantial manufacturers (and employers) like Toray Plastics are affected more.

Not to worry, though. Taxpayers can be tapped, yet again, to subsidize green energy:

The Economic Development Corporation board on Monday unanimously approved giving Toray Plastics (America) Inc. $1 million in energy-assistance grants that will pay about half of the company's costs to install 1,650 solar panels at its Quonset Point facility.

The investment of state and federal money is not expected to bring any additional jobs to Rhode Island, company President and CEO Richard R. Schloesser said before the meeting, adding that the solar project is "strictly for the environment — renewable energy."

That won't be all, though. You'll recall that, in its zeal to leap into the wind energy business, the government of Rhode Island explicitly called for energy distributor National Grid to ensure a profit for itself and for green-energy suppliers like Deepwater Wind by charging a premium "to all distribution customers through a uniform fully reconciling annual factor in distribution rates."

With Toray implementing a government-subsidized system to supply some of its own energy, it will be paying a smaller share of that "uniform fully reconciling annual factor," which means that everybody else will be paying more.

This is how a government can bury itself and the people it represents while attempting to react to the negative consequences of poorly considered policies, and Rhode Island's manner of governance is practically defined by this short-sighted dictate-and-dig methodology.

Come to Rhode Island... Just Not for Long

I hate to be so negative... I really do... but isn't it just too perfectly Rhode Island that the geniuses guiding the state would come up with this as an advertising slogan:

The judges like Team 5's idea about unpacking Rhode Island. But they choose another slogan and marketing plan for the winner: "Rhode Island: It's so small you can do it all."

"Every school kid knows one thing about Rhode Island — it's small. So we asked, what's good about being small?" said winning team member Alec Beckett, a creative partner with NAIL Communications.

So small I can do it all? You mean, like in a long weekend? How much can there be to do in the state if I can do it all in a single vacation?

Maybe "Rhode Island: It's all within reach," or something. That way ads can refer to proximity without implying limits on activities. They can also play on the words to imply cost savings over trips to locations farther away.

Gimmicks Won't Spark Business Activity

The Economic Development Corp. is limited in the scope of the activities in which it can engage (and its board members are appointed by local politicians), but I didn't want to let this article slip through the cracks as I catch up with things because it so well illustrates the futility of usual practice in the face of Rhode Island's problems:

... Businesses are fighting over space in Massachusetts, prompting Babineau to tell those people to take a look at Providence.

"And they said, 'Really? We didn't know,' " Babineau said. "I said, 'That's our fault.' "

Board members kept returning to that idea. Daniel Sullivan Jr., president and CEO of Collette Vacations Inc., said the EDC and state must market and sell what Rhode Island offers. Referring to Babineau's encounter, he urged, "We've just got to get in front of them."

Somehow, I don't think businesses would be flocking to the worst-bar-none business environment in the United States but for the failure to market to them and hold conferences. At this point, the EDC's singular focus should be... let's say... educating Rhode Island's political class about the damage that it has done and continues to do to the state.

Letting the Spinners Get Away with Economic Baloney

It's getting kinda hard to take the spin that permeates economic reporting. Reporter Kate Bramson and her headline writer mainly adopt RI Department of Labor and Training Director Charles Fogerty's line that the statistics show "slow, steady progress." The headline and lede are, "Rhode Island unemployment dips slightly, to 10.8 percent, Still, 10.8% an improvement over numbers for December," and the story deepens with this:

Job growth in Rhode Island is one of the positive trends in the first half of the year. Although the number of jobs dropped from May to June by 1,500, Rhode Island had 4,200 more jobs in June than in December. That six-month growth is an increase of 0.9 percent -- which Fogarty said is "outpacing the nation."

A quick glance at the accompanying table, mostly taken from the U.S. Bureau of Labor Statistics' page for Rhode Island unemployment, shows that, while the number of unemployed Rhode Islanders dropped by 4,891, the number of people working also dropped, by 5,362. That is, the overall labor force shrank by 10,153 and hasn't been this small since September 2009.

As for the increase of "jobs based in Rhode Island" since December, a closer look at the month-to-month statistics (which are all that are easily found) suggests that the uptick is mainly in construction and accommodation and food services, which can be expected to increase in Rhode Island this time of year.

Rhode Island: The Business Underdog (of our own making)

Toray has been in Rhode Island for over twenty years. They are looking to expand. They also have a facility in Virginia. The Rhode Island facility is bigger, but the costs are higher. Virginia looks pretty good. #50 business friendly Rhode Island is now competing with #1 business friendly Virginia to woo a business it already has.

[Toray CEO Richard] Schloesser is looking to make his decision by the end of the year, said he’d prefer to expand here. But he’s concerned about the cost of doing business in Rhode Island. “It’s a very expensive state to do business in,” he said....One of Toray’s big concerns is energy. The company is the largest consumer of electricity in the state, and it went to court to appeal the power-purchase agreement between National Grid and Deepwater Wind, which plans to build wind farms in the waters off Rhode Island. Toray contended the agreement would drive the price of power too high.

In an interview last week, Schloesser said the court’s decision will have “some impact” on the company’s expansion plans.

On Friday, the Rhode Island Supreme Court upheld the power agreement, ruling against Toray and fellow plaintiff Polytop Corp. Schloesser could not be reached for comment Tuesday....[Earlier] Schloesser said he is worried about the long-term economic climate in the state. He said some of Chafee’s tax proposals, particularly a 1-percent tax on manufacturing equipment, could have been a deal-breaker for Toray. But that idea never made it through the General Assembly.

“We’d like to have the expansion here, but we have questions about what will happen to the state. Is this going to be a good place to do business in the next five years?”

[EDC Executive Director Keith] Stokes aid Toray might be able to qualify for tax credits under the state’s provisions for manufacturing research and development, and another for job creation. He said officials from the Quonset Development Corporation have also been involved in the discussions about land acquisition.

“Companies are making their decisions based on costs,” Stokes said. “It’s not lifestyle. It’s not loyalty. It’s costs.”

Stokes said certain costs –– utilities, health care, land and taxes –– are higher in Rhode Island than in other states. What the EDC is trying to do for Toray, he said, is come up with a package to make Rhode Island cost-competitive....Stokes said that in a perfect economic world...[r]ather than a whole set of incentives and inducements, Rhode Island would be better served by a lower corporate-tax rate, a stable budget and a predictable business climate.

But, said Stokes, we’re not living in that perfect world. Stokes said that when it comes to economic development, keeping existing companies, particularly an expanding company, is even more important than luring new ones.

Stokes said the incentives under consideration for Toray are not “deals,” but ways of compensating for the higher fixed costs of doing business in Rhode Island.

Evolving Arbitration

Sam offers Fred $10, but Fred wants $30. To solve the problem, they call in their buddy, "The Arbitrator", who decides $20 is fair. Sam pays more, Fred gets more.

The next week, Fred asks Sam for $30 again, but Sam says he's only got $13 in his wallet. Fred says Sam is holding out. They go to The Arbitrator, who says Sam isn't holding out, but he should check back at the house and he could probably come up with more than $13. To be fair, The Arbitrator says Sam should give Fred $17.50.

The next week, in anticipation of the request, Sam offers Fred $10 and explains that's really all he can afford, assuming he gets paid next week. Fred still wants $30, but says he can live with with $20 so long as Sam kicks in an extra $.30 a week to help him buy a pack of gum. They turn to The Arbitrator, who thinks Fred is asking a bit much, given Sam's current financial situation, but in the spirit of cooperation agrees that Sam could handle $12.50 along with the $.30 per week.

Then, The Arbitrator says from now on, he'll take the last best offer from each of them and pick one.

Sam prepares for Fred's next request. Based on past precedent, the Arbitrator has never awarded exactly what either of them has proposed before, but "compromise" always results in Sam paying more than he offered. Sam assumes he'd better build a compromise-type number into his next offer so that it has a realistic chance of getting picked. As usual, Sam expects he'll have about $10 in his wallet when Fred comes calling, but he scrapes together a few more bucks--some from his kid's allowance--knowing that, based on past transactions, Fred will want more and will get more--he always has.

When the time comes, Sam offers Fred $15 and the $.25 gum subsidization and crosses his fingers. Fred asks for $20 along with $.30 per week for gum--the price has gone up. The Arbitrator looks at both offers. The price of gum has gone up and Sam and Fred are only $2 apart as far as the main nut. Besides, Winston, their friend from East Greenwich, has been loaning their other friend James $25 regularly since last year and Sam makes almost as much as Winston. And Sam has always managed to come up with more than his original offer.

The Arbitrator sides with Fred.

Sam moves out of state.

Fred walks up to Winston...

Last Again, Naturally

CNBC has ranked Rhode Island as the least business-friendly state in the country. #50. Dead last. I know the yabuts will be out, but--to coin a phrase--"perception is reality" and when a business channel reports that your state is the worst, well, what do you think the business people watching that channel are going to come away with? The rankings are here and were derived following this method:

This year’s categories and weightings, for a total of 2,500 points, are:

* Cost of Doing Business (350 points)
* Workforce (350 points)
* Quality of Life (350 points)
* Infrastructure & Transportation (325 points)
* Economy (300 points)
* Education (225 points)
* Technology & Innovation (225 points)
* Business Friendliness (200 points)
* Access to Capital (100 points)
* Cost of Living (50 points)

The Long Reach of Educational Inadquacy

Here's a little nugget of insight that deserves broader comment. Apparently, Rhode Island is having a difficult time filling the open position of Director of Health:

In a phone interview, [former director David] Gifford said that a number of prospective applicants had contacted him with questions. The salary, he said, is an issue, but not the top one.

Instead, doctors considering moving their families from out of state were concerned about the quality of public education in Rhode Island, which some found to be below par, he said.

No doubt, progressives will be chime in to declare this as evidence that people don't migrate on the basis of taxation, but that would be a distraction. The point that must be understood is that progressive policies — educationally and as a matter of civic structure — have brought us to this point. On the educational side, the emphasis of public schools has shifted toward catering to disadvantaged and challenged students to the detriment of the broader mission, and curricula have been politicized both in the content and in the amount of time that schools spend concentrating on what might be termed institutional parenting (the focus being on imparting self esteem and teaching behavior).

More significantly (and harming Rhode Island disproportionately to its competition) is the structure of the system. Centralization toward an educational bureaucracy has left municipalities less able to address the communities that they actually serve, and the unionized workforce, with the advantages that it has secured through hardball negotiations and state-government advocacy, has driven up the cost of public education to the degree that programs must be cut and schools operated inefficiently.

The pervasiveness of that problem can be observed by expanding the above quotation by another paragraph:

Additionally, continual funding cutbacks will make it hard for any director to take on new initiatives.

As a small-government type, I don't take it to be inherently a bad thing for government departments to be constrained in that way. The point is worth making, though, that limits in what they can do and the ways in which they can experiment to become more effective and efficient are sure to be imposed when an ever-growing portion of their budgets must go to labor — both current and retired.

Zero-based budgeting

Looking at RIPEC's state budget projections, Ted Nesi explains how a "budget on autopilot" is untenable no matter what the entity--towns, cities, states, the country. You can also read "autopilot" to mean "assumptions." Yet, the assumptions built into these budgets--3% raises, increase in program costs, etc.--aren't even enough to cover the rate of growth, which far outpace the ability to tax (or "generate revenue").

Nesi provides a nice pie chart showing that 52% of the growth in the budget since FY2002 is from social services and 17.7% of the growth comes from increasing personnel costs (while the growth in personnel costs--particularly in a good economy--are probably about what we'd expect to see, keep in mind that the state workforce has shrunk). Meanwhile, as we well know, aid to cities in towns--ie, money that towns send to cities, some of which filters back to them--has been reduced by nearly 3%, which isn't a lot in the big picture, but hurts each community acutely.

Given our current straits, perhaps it's time to implement zero-based budgeting instead of the current practice of "last year + (at least) 3%". Start fresh. Look at what we spend our tax dollars on and (re)prioritize: infrastructure, economic development, providing important services at reasonable cost, etc. Now, it takes a lot of work, so perhaps we could do a zero-based budget in the first year of each new governor term and then baseline from there. It's an interesting concept, but the chance of it getting implemented is, well, zero.

Now for some good news: TACO Expands

For good reason, it's easy to focus on the bad around here. But there are positive signs every now and then. As reported by WPRO, TACO, Inc. has gone ahead and broken ground on a new expansion: the "Innovation and Development Center". Obviously John Hazen White Jr., owner of TACO, is confident the budgeted costs won't increase from any tax law changes. The purpose of the expansion is important to note. Companies--manufacturers in particular--used to rely heavily on institutionalized training/apprenticeship programs.

For instance, my father was accepted to the General Electric Apprenticeship program back in the late '60s, where he learned how to do things the "G.E." way. To be sure, many companies have continued such programs, including TACO, but I think they were de-emphasized as more kids received college degrees or went to technical schools to learn skills. I wonder if the new expansion is a sign that TACO will re-emphasize getting prospective employees in-house quicker to learn the "TACO way."

Now It Costs More to Borrow

Whenever a rating agency lowers their estimate of the ability of a state to pay back its bonds, the interest rates the state pays go up. Moody's just lowered its rating for Rhode Island.

Moody's Investors Service has downgraded the outlook on Rhode Island bonds to negative from stable because of "the potential impact of rapidly escalating pension costs on the state's ability to increase its liquidity margins, diminish its reliance on one-time measures to balance its budget and reduce its debt burden."

Moody's added, "The state's pension costs are set to double in two years by an amount that roughly offsets its budget reserve account, raising the likelihood that it will continue to face significant budgetary pressures..."

For his part, Governor Chafee recognizes this and is trying to find ways to get off the transportation bond wagon. Unfortunately, his ideas revolve around paying tolls or mileage taxes. That's a non-starter, too. Just like his call to add more workers to the DMV. Maybe we should make Twin River a full-on casino and devote some of that revenue to transportation. Or we could just re-prioritize the state budget--baseline it--and go from there. Doubt that will happen.

Body of Proof That Tax Increases Aren't the Way to Go

Many Rhode Islanders aren't completely sold on the economic benefits of giving away tax credits to TV and movie productions, and some of those who are seem to think the benefit has more to do with notoriety. Still, it's reasonable to count this as high-profile evidence of the effect of attempting to solve the Rhode Island government's financial problems through revenue increases, rather than spending reductions:

ABC-TV has received approval for a $7-million tax credit for filming "Body of Proof" in Los Angeles, the director of the California Film Commission tells the Los Angeles Times. ...

"They have indicated they are moving the show, and will start filming in Los Angeles in mid- to late July," Amy Lemisch, the film commission's director, told the Times in a story published Tuesday. ...

Network TV series like "Body of Proof" can qualify for California's film-tax program only if they are moving to California from another location, the Times said. The show also received tax credits in Rhode Island during its first season, but Governor Chafee's proposed budget — now under discussion in the General Assembly — calls for eliminating the credits.

Even a casual observer of the entertainment industry can assume advantages to setting up shop in California, beyond tax credits, and it's not improbable that the operation came to Rhode Island for a season to test the TV audience and then move to California as an "moving" operation, per the rules of CA's tax credit. Still, the possibility of finding its RI credits evaporating couldn't have done otherwise than eased the decision. More importantly, that it's such an obvious thing for observers to consider as a possible reason illustrates how obvious such factors are for decisions being made across the economy.

Cultural Economic Potpourri

OK, so I'm aggregating a bit, but just today we've had all sorts of cultural economic news. Providence is going to host a professional video game tournament in November (where was this when I scored so high on Donkey Kong on the Atari that the sprites started quivering!) that will bring in 16,000 spectators. (Advice: stock up on Mountain Dew and other snacks and sell them streetside for a quick buck~ahem, with all the proper licensing of course....).

Then we have the U.K. Telegraph calling Providence "New England's coolest city". This seems based largely on the prominence of RISD and it's alumni, especially for the foodee culture. I loved the observation that, "Like Rome, Providence congregates around seven hills." Never thought of that.

Finally, the news is that RI-filmed TV show "Body of Proof" has been renewed--but it won't be filmed in Rhode Island anymore. Phew. Call me a typical provincial Rhode Islander, but now I won't feel as obligated to watch it. Another hour freed up. (Well, more like 40 or so minutes, I DVR everything).

Economic Passivity in Rhode Island

At first, I was just bothered by the passivity evidenced in the first sentence of the following paragraph:

Because Rhode Island's economy is interconnected with the regional and national economies, the slowdown in the national economic recovery in the first quarter of 2011 affected Rhode Island, according to the [Bryant University-RIPEC] report. The U.S. Gross Domestic Product increased at an annualized rate of 1.8 percent in the first quarter, compared with 3.1 percent in the fourth quarter of 2010.

Why should it just be assumed that Rhode Island will follow the national trend?

But then, I reread the first paragraph of the article:

Rhode Island's economy expanded 1.9 percent in the first quarter of 2011, sustaining about the same rate as in the last two quarters of 2010, according to an economic index to be released Monday.

So, the national growth is actually down significantly from the last quarter of 2010, while Rhode Island's anemic growth is about the same as it was during the last quarter of 2010. Do we only follow the national economy when it's bad to do so? Or were we really expecting a huge non-national surge in our state that was dragged down?

Whatever the case, I still think we need to cut taxes, slash regulations, and eliminate mandates in order to set our state free of economic shackles — whether of our making or the nation's.

Left Holding the Bag

The ProJo headlines the $9.4 billion pension liability, but also mentions the $2.4 billion health care liability. That's $11.8 billion in money owed to state and municipal retirees (some of which is funded). They try to soften the blow explaining that an 80% funding level "is considered healthy" for pensions. So that makes it about a $7.5 billion pension obligation (if we include health care--assuming the 80% "rule" applies--the overall would be $9.4 billion). Yes, some pensions are partially funded, but it's still not good.

Most of Rhode Island’s pension plans fall short of the 80-percent funding level, a gap of more than $5.7 billion. Of the 155 plans, more than 100 are less than 80-percent funded.

The 37 plans run by municipalities are in the worst financial shape, with 32 of them not reaching the 80-percent level.

Historically, pension contributions to the locally run plans have often been shortchanged in favor of other municipal services –– such as education, public works and public safety –– when money is tight.

For all of these broken promises were made by politicians who continued and continue to be re-elected. 70 years of Democrats have done this to you, Rhode Island. That's the truth. Don't blame the odd Republican Governor or occasional Republican Mayor for this. It was the Democrats in the General Assembly, on the Town and City Councils, on the "non-partisan" school committees who made these broken promises. This is what letting yourself become beholden and brainwashed into thinking that one party--the party of the "little guy"--would look out for you.

You elected them because they promised you a "good deal". Now you and your kids and grand kids and Rhode Island taxpayers and their kids and grand kids are all left holding an empty bag full of broken promises. All because elected officials, almost all of them Democrats, told you what you wanted to hear and you believed them. It's worked out for them. How's it working out for you?

Still Underpreparing for Pensions

So, Rhode Island League of Cities and Towns Executive Director Dan Beardsley is warning of the large dollar amounts that state and local taxpayers are going to have to begin paying if the state Retirement Board approves actuarial recommendations:

The Retirement Board, which is chaired by General Treasurer Gina Raimondo, is set to vote Wednesday on whether to accept the new numbers — and the higher annual funding they will require. "My vote's going to be the toughest vote I've ever had to cast in my 20 years on the Retirement Board," Beardsley said.

You'll recall that the board recently voted (pretty much along a union/non-union line) to lower its predicted rate of return on pension investments from 8.25% to 7.5%. Personally, I'm with Konrad Steuli, of Sunderstown, in wondering if even that's appropriately realistic:

... while talented state General Treasurer Gina Raimondo deserves credit for lowering, for planning purposes, the assumed rate of return for pension fund investments from 8.25 percent to 7.5 percent (net of inflation), the latter is still a “junk bond” level of return, and maybe worse.

In other words, we are still kicking the can down the street. Who gets that kind of a return for an appropriately safe investment loaded with the retirement expectations of Rhode Islanders?

As the Providence Journal reported even 7.5% is well above experienced returns, which were 2.47% for the past decade, 6.23% for the past 15 years, and 7.13% for the past twenty years. Surely, we are all hopeful that the American economy will recover and return us to the prosperity to which we've grown accustomed, but given the numbers, it would seem that we'd have to see that and more for our pension system even to come within range of plausibility.

No Business like Non-Profit Business

Over the weekend, the ProJo editorial board pointed to the apparent dichotomy of non-profit organizations enabling their directors and board members to profit with significant sums of money:

Recently, Blue Cross Blue Shield of Massachusetts parted ways with its chief executive, Cleve L. Killingsworth, but not before handing him an $11 million severance package. Bay Staters rightly howled; an investigation by Atty. Gen. Martha Coakley is now under way.

Amid the uproar, however, another questionable practice came to light. Blue Cross and other nonprofit health-care insurers have been paying their board members — and well. Last year, annual payments ranged from around $20,000 to more than $80,000 per board member, according to The Boston Globe. They are, in effect, subsidized by taxpayers. In almost no other charity in the state are board members paid at all. In fact, the tradition is for members to contribute money of their own to the organizations they serve. Usually, it is regarded as an honor to “give back.” And, truth be told, members benefit financially, if more indirectly, from the personal ties they cultivate with fellow local movers and shakers on boards.

Whatever happened to just plain knowing better? Amid the search for personal status and enrichment, the purpose of nonprofit organizations seems increasingly lost. This is especially ominous in health care, where rising costs are a signature domestic crisis of our time. Yet nothing can change if attitudes do not change first. The sense of entitlement that has developed among some health-care insurers urgently needs reversing.

ADDENDUM: Of course, we don't have to rely on just the ProJo. Last month, WPRI's Ted Nesi confirmed that the board of BCBSRI is not compensated.

CEOs Grade the States

Yeah, I know, who cares what a bunch of rich CEOs think. Anyway, fwiw (h/t Ted Nesi):

Business leaders graded the states on a variety of categories grouped under taxation and regulation, workforce quality and living environment. “Do not overtax business,” offered one CEO. “Make sure your tax scheme does not drive business to another state. Have a regulatory environment and regulators that encourage good business—not one that punishes businesses for minor infractions. Good employment laws help too. Let companies decide what benefits and terms will attract and keep the quality of employee they need. Rules that make it hard, if not impossible, to separate from a non-productive employee make companies fearful to hire or locate in a state.”

Not surprisingly, states with punitive tax and regulatory regimes are punished with lower rankings, and this can offset even positive scores on quality of living environment. While state incentives are always welcome, what CEOs often seek are areas with consistent policies and regulations that allow them to plan, as well as intangible factors such as a state’s overall attitude toward business and the work ethic of its population.

First, here are the actual stats:

43rd - % GROWTH 2005-09
43rd - % 2005–2009 GROWTH IN TERMS OF NATIONAL AVERAGE
23rd - UNEMPLOYMENT RATE %NOV. 2010
23rd - COMPARISON WITH NATIONAL UNEMPLOYMENT RATE %
39th - DOMESTIC NET MIGRATION RATE PER 1,000 (2000-2006)
48th - DEBT PER RESIDENT $ ($8,716)
40th - STATE AND LOCAL GOVERNMENT EMPLOYEES PER 10,000 RESIDENTS (ranked lowest to highest - 510.84)
46th - STATE-LOCAL TAX BURDEN
45th - STATE-LOCAL TAX BURDEN COMPARED TO NATIONAL AVERAGE (9.8%)

Then are the ratings by CEOs (ie; their perception of RI):

47th - TAXATION AND REGULATION
41st - WORKFORCE QUALITY
41st - QUALITY OF LIVING

Basically, it looks like our unemployment rate and low gov't employee/10,000 residents got us "up" to #35, because every other statistic is pretty much what we expected it to be. Finally, here is how Rhode island and the rest of New England compare in the eyes of the CEO's (it's not good for RI):

TAXATION AND REGULATION
New Hampshire (6th)
Maine (38th)
Connecticut (42nd)
Vermont (43rd)
Massachusetts (46th)
Rhode Island (47th)

WORKFORCE QUALITY
New Hampshire (6th)
Connecticut (26th)
Massachusetts (27th)
Vermont (37th)
Maine (40th)
Rhode Island (41st)

QUALITY OF LIVING
New Hampshire (8th)
Vermont (29th)
Maine (34th)
Connecticut (36th)
Rhode Island (41st)
Massachusetts (43rd)

Yay, we beat someone! Regardless, the stats aren't important. It is the perception. We need to change that perception so corporate decision makers will change their minds. We can't just say it or believe it to make it so. We actually have to do something.

Sleepy Public Construction Methods

I've had occasion to drive through the construction site of the new Sakonnet River Bridge in Tiverton quite a bit, lately, and no matter how many times I see it, I never fail to be impressed with the structural inefficiency of the work habits. The other day, I saw three employees gabbing over two who were doing masonry work while two stood nearby to direct traffic in those infrequent instances when a construction vehicle had to cross the sparsely traveled back road and a police officer sat in his car. One wonders if that's where WPRI reporter Tim White's latest catch got the idea that it'd be just fine to sit in his car to eat, read, and sleep for three or more hours per day:

That dozing fellow is Department of Transportation engineering technician Kevin Coulombe, who is responsible for inspecting road and bridge materials. White notes that Coulombe oversaw the Barrington Bridge project "which was $11 Million over budget and took twice as long as expected."

According to Transparency Train, Coulombe's 2008 salary was $50,712, so clearly he's no Stephen Iannazzi. Perhaps if he actually works his full six hour day (or whatever it is) he can reach that high level of extreme competence.

But Who Dropped the Anchor?

RI General Treasurer Gina Raimondo uses an apt metaphor to describe the significance of the state's public pension problem:

"If you remember one thing from me this afternoon, remember this," Raimondo said, speaking bluntly: "fixing this state's pension system is not an issue, it is the issue. Our state retirement debt is an anchor holding our state back and preventing our growth into the future."

She goes a bit far, to my mind, in that state and municipal governments have sunk myriad anchors over the year — of taxation, regulation, mandates, and so on. Pensions are notable because they provide a stark dollar amount of looming debt. How much the state has lost in economic activity because its policies are constructed to pool power in the hands of a few narrow classes (mostly related to tax-revenue-related employment in one way or another) is not so easily calculable.

Perhaps out of political calculation or perhaps because she's not ready to begin discarding the worldview that her progressive supporters recognized in her, Raimondo leans quickly away from the larger problem underlying the state's pension difficulties:

She acknowledged the challenge is complex and emotional. "I am extremely sympathetic to our state employees and our teachers. They did everything they were told. They have paid into the system as they were told. They have worked hard faithfully every year. It's not their fault. And we should not blame employees. The fault is that the system was designed poorly. And if you're looking for a culprit, I believe that culprit is politics."

For some 30 years, she said, elected officials extended benefits for retirees without putting enough money aside to pay for them.

Let's not soft-pedal this. Among the "everything they were told" was voting for particular candidates for political offices at both the state and municipal levels and engaging in such activities as strikes and work-to-rule in order to foster an environment favorable to their side of negotiations. (Indeed, the number of politicians who have been union members over those 30 years is probably too high to count.) With only so much they could give away to labor in the open, those friendly politicians gave away money that wouldn't come due for years to come.

The culprit may be politics, as Raimondo insists, but it has been a politics dominated by and consciously perpetuated by employees and their unions. The current crop of such politicians cannot ignore the pension problem much longer (despite the hypnotic cooing of union propagandists), and although it's possible that they'll change what needs to be changed without naming it, that outcome isn't very likely.

The Young and Unemployed

As the old song goes, the children are the future, and in discussing the effects of our graying workforce, John Kostrzewa worries about Rhode Island's:

Eleven percent of the 107,108 people ages 22 to 29 who lived in Rhode Island in 2008 moved out in 2009. That's 11,200 young people.

The numbers are even scarier when you break out college educated Rhode Islanders.

One in five who were here in 2008 had left in 2009, largely because they couldn't find a job.

Kostrzewa's mainly addressing the effects of our long-running downturn, but since I arrived in the late '90s, it's been the common wisdom in Rhode Island that young adults had to leave to find opportunity. The Great Recession just exacerbated what was already a problem, and as factions fight over slices of the public pie and beneficiaries demand that the pie be expanded through taxation, necessary priorities come into stark relief.

After all, what's the point of Rhode Island's generous "investment" in education if the products of our efforts — highly educated young adults — simply leave? Increasing taxation and making it harder to do business in the state in order to prop up an inefficient educational system of questionable quality has the steps backwards. The state has to reorder its priorities, and the people who make public decisions (and those who pull their strings) are manifestly disinclined to do so.

Commenting to my morning post, yesterday, Dan offered a compelling simile:

Fixing Rhode Island's cyclic financial problems at this end-game point in time is like trying to remove a horned toad that has inflated itself in crack deep between two jagged desert rocks while it bites and hisses and squirts defensive blood at you out of its eyes. Any herpetologist knows that once it has retreated in there, it's too late and it's time to move on to another location. Lots of other states to choose from in the United States.

Or, as Mark Patinkin put it, while explaining that RI's elected leaders have to do what's necessary, even if it means the end of their political careers:

One can say many public employees — especially those doing risky jobs like cops and firemen — deserve such pensions. Even I think they do. But sadly, we are past the point of talking about "deserve." We're in the realm of "afford."

Pensions are only a heavily bleeding part of the wound. Rhode Island has to make subjective notions of fairness and desert secondary to functional possibility. Social services have to be curtailed; the education system has to stop being managed under the assumption that more money means better results; and regulatory manacles have to be removed from businesses, even if it means that the state no longer micromanages everybody's safety and, yes, even if it means that people get rich.

Local Governments Founded in Deception

One can't call the vote "party line" because Rhode Island's Pension Review Board is technically non-partisan, but as Marc observed on Wednesday, the vote to bring investment estimates closer to what the pension fund has actually been earning nearly fell along what might be called a "union picket line" vote. Basically, the question was about whether to give Rhode Islanders a better sense of just what their elected officials have promised, and that's not a reality that the unions want the public to face.

The perspective of one public figure who often falls on the other side from the unions is very interesting:

With school districts now facing a $55.5-million hike in pension costs in 2012-13, beyond the increases they were already expecting, Tim Duffy, executive director of the Rhode Island Association of School Committees, said: "I don't know how local government is going to continue to exist, given all the financial stresses."

If it's true that the pension promises of government amount to a self-inflicted and fatal wound, maybe local officials should lead the way in accepting reality, especially school committees. That's going to mean completely rethinking the way in which they structure compensation. Like countless private-sector organizations, families, and individuals, they're going to have to begin doing much more with much less. If that's an impossibility, as Duffy seems to imply, then local government is a failed experiment, anyway.

RE: Paying the Pension Piper - Board Approves ROI Assumption Reduction

Earlier today, the pension review board was presented with an actuarial study concerning the RI Pension system. After the presentation, the board voted 9-6 to reduce the assumed rate of return on pension investments from 8.25% to 7.5%, which was the figure recommended by the study. The ProJo has the roll call:

• General Treasurer Gina Raimondo, serves as chairwoman YES

• Richard A. Licht, state director of administration YES

• Thomas A. Mullaney, associate director of the state budget office, designated by the state budget officer YES

• Daniel L. Beardsley, president of the R.I. League of Cities and Towns YES

• Four public appointees -- two by the governor and two by the state treasurer, all subject to Senate approval (years in parentheses represent when terms expire)

Gary R. Alger (2011) YES

Frank R. Benell Jr. (2013) YES

M. Carl Heintzelman (2011) YES

Jean Rondeau (2012): YES

• Two active teacher representatives; Finelli serves as vice chairman

William B. Finelli YES

John P. Maguire NO

• Two active state employee representatives elected by working teachers union members

John J. Meehan NO

Linda C. Riendeau NO

• Louis M. Prata: active municipal employee representative elected by working union members NO

• Two retiree representatives elected by the plan retirees

Roger P. Boudreau NO

Michael R. Boyce: NO

Paying the Pension Piper

Consultant's hired by General Treasurer Gina Raimondo will present their findings to the state retirement board today (report here - PDF). Their findings are grim if unsurprising, as reported by the ProJo. There are some basic structural problems:

The state pension system is based on three basic sources of funding: employee contributions, employer contributions and the volatile stock market. Because the employee contributions have been locked in place at 8.75 percent of pay for state employees, and 9.5 percent for teachers since 1995, taxpayers have been required to pay more and more each year....

The state adopted the 8.25-percent assumed rate of return on its investments in 1998, over the strenuous objections of then-Treasurer Nancy Mayer, who denounced the move as “amazingly irresponsible” in a volatile economy.

The actual market return averaged 2.47 percent over the 10 years that ended on June 30, 2010.

[T]he gap between promises made and money available to pay for them is at least $1.4 billion bigger than previously believed.

• The required taxpayer contribution toward state employee pensions would shoot from 26.55 percent of payroll to 36.34 percent which, in dollars, would mean the difference between $182.5 million, with no change in assumptions, and $246 million.

• State and local contributions to teacher pensions would increase, at the same time, from 26.21 percent of payroll ($282.8 million) to 35.25 percent ($375.3 million).

At those levels, the required taxpayer contributions would be more than $100 million higher, within a year, than the $358.7 million that Governor Chafee anticipated...

1. Decrease the price inflation assumption from 3.00% to 2.75% per year.
2. Decrease the assumed net real return on investments from 5.25% to 4.75% per year. Combined with #1 decreases the nominal assumed investment rate of return from 8.25% to 7.50%.
3. Based on #1, change the COLA assumption from 2.50% to 2.35% for Schedule B retirees.
4. Modify the service-related components of the salary increase rates for both state employees and teachers; also change the wage inflation assumption from 4.50% to 4.00%.
5. Decrease the payroll growth rate from 4.25% to 3.75% for both state employees and teachers.
6. Improve the mortality assumption for active, and retired members, including the addition of
an assumption for ongoing future improvements in life expectancy. Also improve the
mortality assumption for disabled retirees, and lower pre-retirement mortality.
7. Make slight changes to the rates of disability for active male state employees and all teachers.
8. Make no change to the retirement rates for state employees or teachers.
9. Make no change to the termination assumption for state employees. Slightly increase the termination rates for teachers.
10. No change to the percentage of members that are assumed to be married.
11. No change to the actuarial cost method or the method for calculating the actuarial value of assets.
12. No other changes are recommended for any of the other actuarial assumptions or any of the actuarial methods.

ADDENDUM: Ted Nesi has some thoughts from Governor Chafee on pensions.

Block Willing to Help

I heard a little bit of Ken Block this morning on the Helen Glover Show explaining how he was willing to help the state reduce the fraud, waste and abuse in its social services programs. For free. According to Ian Donnis, Governor Chafee is "receptive" to the offer.

Duh.

Tell me, how often does someone with a track record of finding savings offer to help for free? OK, OK. In all fairness, Block hasn't formally offered his services yet and will do so at a public hearing later this week.

The Top-Down Model of Economic Development

It's possible that all of the corporate executives on the Economic Development Corporation's board wouldn't dream of allowing their own companies' interests affect their prescriptions for the state's economy. It's even more possible that state government will treat the board's activities as a nice show to prove that everybody's really, really interested in turning Rhode Island around. Still, this makes me nervous:

EDC Executive Director Keith W. Stokes, who previously served on the board for 15 years, commended the board and gave Chafee credit for its new direction.

"This is unique," Stokes said. "This is the first time that the EDC will be driven by the board ... and that in itself is going to have an incredible value because these men and women — they're the eyes and ears of the business leadership."

Well, they're the eyes and ears of Collette Vacations Inc., Ximedica, CVS Caremark Corp., Betaspring, VIBCO, and Banneker Industries, anyway. Whether they'll recommend steps that would make it easier for start-ups or immigrating businesses to compete with their companies remains to be seen.

Finding a Way to Build the Tax Wall

Rhode Island's aristocracy chose to believe in their own power to impose taxes rather than the power of economic incentives, and some don't like the result:

State Rep. Raymond Gallison, D-Bristol, says local businesses are losing revenue that could help the state's financial situation, while the state itself has not generated any new revenue from the law, according to the Chafee administration.

Large online retailers such as Amazon.com and Overstock.com cut ties with local companies and individuals immediately in response to the state law. In effect, the companies absolved themselves of the responsibility of collecting the Rhode Island sales tax, but they also denied local affiliated businesses vital revenue, he says.

Of course, the preferred solution is to turn to state government's big brother to help with the bullying:

Governor Chafee, state Senate President M. Teresa Paiva Weed and House Speaker Gordon D. Fox are urging the state's congressional delegation to pursue national legislation that would require online retailers and other remote sellers to collect state sales taxes.

You'd think they'd learn that increasing taxes is increasing taxes, and consumers and the economy ultimately pay the price. eTailers aren't forcing their sales upon Rhode Islanders, and there are reasons Rhode Islanders turn to them and are willing to delay their gratification to buy goods online.

Elected officials should devote their energy to helping brick-and-mortar companies counteract those reasons rather than seeking to build economic barriers in everybody's way.

Block Edges Toward the Border

It seems as if Rhode Island's current government is pushing Moderate Party founder and gubernatorial candidate Ken Block toward an extreme:

Every year at this time, my accountant looks me in the eye and says I'm nuts to own a business in Rhode Island. ...

A 6 percent hit to my bottom line is more than enough to cause me to move my software business out of the state — as fast as humanly possible, taking more than $100,000 in state and local taxes with me when I move a few miles across the border.

I suspect that Mr. Block is far from alone, among those who've striven to improve Rhode Island's governance, in his growing sense of opposition's futility and willingness to turn from fight to flight. Certain groups may find that to be a positive development; most should not.

Still, one cannot touch on this topic without noting that, as Chafee was the far-left independent candidate, many voters treated Block as another choice on the center right. It's reasonable to suggest that, but for the 6.5% of the vote that Block drew to himself, Lincoln Chafee would not now be our governor. In that regard, Ken is fortunate that he has the resources to escape what he helped to bring about, should he so choose.

Lamenting Taxes While Endorsing Taxers

The Providence Journal editorial board is right, of course, to speak out against Governor Chafee's proposed expansion of sales taxes:

This is not a matter of greed; for many businesses, it is a question of survival. Small businesses are the job engines of any economy, and when they are wiped out, jobs disappear. Rhode Island's years of suffering one of America's worst unemployment rates should have taught that lesson. ...

Taxing manufacturing machinery and equipment, which Mr. Chafee wants to do, seems especially shortsighted --- which is why 33 states, including Rhode Island, currently do not do it, Mr. Sasse notes. Encouraging productivity and innovation ultimately pays off in more jobs and higher tax revenues.

I convey the thought only half seriously, but I did wonder whether the Projo should make a habit of mentioning — disclosing, if you will — that its product will face a new tax, as well.

More broadly, the editorial is an excellent example of the paper's tendency to treat issues as if they can be constructed to generate the perfect political regime (from the writers' perspective). That is, the Providence Journal is an establishment entity, in Rhode Island, and its endorsements and policy advocacy have helped to bring Rhode Island to its current circumstances.

Hopefully those who are coming to see the folly of the Chafee Way will follow the logic back to other aspects of RI governance and politics that preceded his election.

If Not for the People, RI Would Have Fewer People

Perhaps it's a function of idealism, but the continual penchant for racism in our country wearies me. By racism, I mean the division of people into racial groups and inclination to treat them as separate communities:

Without the 39,835 additional residents who identified themselves as Hispanic, Rhode Island would have lost 35,587 people from 2000 to 2010. That would have joined the Ocean State with Michigan, the only state to lose population in the 2010 census. As it was, Rhode Island ranked 49th in population growth, gaining 4,248, or 0.4 percent. ...

Hispanics officially became the majority population in Central Falls, while Providence grew closer to that status. If separated, Providence's Hispanic population of 67,835 alone would be the fifth-largest city in the state.

And so on. The thing is: they are not separated. The population did not decrease by 35,587. What is it we should determine to do differently based on this information? Should it become an outrage that Central Falls doesn't have a majority Hispanic government? Or, from the other side, should we treat "Hispanic" as a synonym for "immigrant" and panic at the loss of native-born Americans from our state?

The detriment arises from the mixture of these perspectives, such that assumptions are made about a group and then notions of how society should be arranged are imposed under those assumptions. The insinuation is that Hispanics have unique needs and points of view, and if those qualities aren't reflected in the political order, then some sort of under-representation must be to blame.

Personally, I find this bit of Census news to be more relevant, and definitely distressing:

In 2000, 247,822 children lived in Rhode Island, according to the Census Bureau. That was 23.6 percent of the state's population of 1,048,319.

By 2010, the number of children had dropped 23,866 to 223,956, or 21.3 percent of the state's slightly larger population of 1,052,567.

Unless one wishes to suggest that we were in the midst of a baby boom in 2000, the decrease in children is an indication of a waning society. Of course, it isn't necessary to turn to demographic statistics to discern that about Rhode Island.

Thinning the Fuel Won't Create Efficiency

My Patch column, this week, defines the target population of Rhode Island's recent and proposed tax changes and offers a brief economics lesson to suggest that the apparent strategy is perhaps not the best:

The consequence, overall, is that Rhode Islanders who've invested in property have seen local taxes climb inexorably. Last year, the real cost of those investments increased courtesy of the income tax change. Meanwhile, the tax bite resulting from their efforts to improve their financial positions broadened, and now they'll be rewarded for modest spending habits with a new sales tax targeting essentials. The harm is exacerbated if they've had the audacity to reproduce, thus creating larger families requiring more of life's basics.

In short, with Rhode Island's economic recovery barely detectable, and scarcely felt, the state is turning the screws on home-buying parents who are striving to build their futures. The tendency may satisfy special interests, by protecting government handouts and special deals, and it may comfort politicians, inasmuch as busy families are less able to be politically active, but it is economic suicide.

Watching the Wheels Go Fruitlessly Around

Is it me, or does neither Allan Tear's list of necessary attributes to grow RI's economy nor the differently emphasized suggestions of John Simmons leave much room for optimism? Here's Tear's list, with my brief thoughts:

• "Access to talent." It's long been known among RI's young that they must leave the state to find opportunity.
• "Quality and costs associated with public education." We were making some advances in this area, but our new governor was in some sense elected to end them, and he appears to be complying with that mandate.
• "Personal taxes." The last fiscal year ended with a bit of reshuffling that disguised the fact that Rhode Island's been backsliding on income tax reform for several years.
• "Effective government." No comment necessary.
• "Indirect costs, known as the 'hassle factor'." I'd characterize this as one of Rhode Island's specialities (in a bad way), particularly in the way the government spreads around bureaucracy so as create pools of political power.

Simmons is a bit more traditionalist in the list of things that RI does badly:

John Simmons, executive director of the Rhode Island Public Expenditure Council, rattled off Rhode Island's rankings: 44th by the Tax Foundation; 45th by the Small Business and Entrepreneurship Council; 49th by CNBC; 50th by Forbes, which another presenter said had moved the state up to 49th in its most recent ranking; and 39th by Chief Executive Magazine. The business-backed RIPEC monitors government spending.

Those rankings take into account property taxes, unemployment taxes, a state’s regulatory environment, economic climate and transportation, Simmons said. However, Tear said the traditional barriers to doing business here --- energy and labor costs, site availability and permitting --- aren't barriers for the kinds of businesses he's helping grow.

Rhode Island's only hope for real recovery is for the economy to grow so healthily across the rest of the country that our little backwater can't do otherwise than follow it. Unfortunately (though predictably), national policies aren't conducive to healthy growth of anything but government, and (less predictably) international events are ensuring that there's very little margin for economic error.

The Governor's Faith That You Don't Matter

Here's an interesting tidbit from Ed Achorn:

I asked Governor Chafee last week whether he, or anyone in his administration, had done an analysis of the number of jobs that his tax hikes would cost the state, since many financially stressed Rhode Islanders would respond by traveling the short distance to neighboring states for goods and services.

After three rounds of spin by Mr. Chafee and his aides, I finally got the governor's answer on the fourth try:

"No."

The loss of such private-sector jobs seem to be of little concern.

To take the charitable view, it might just be that Chafee and his administration lack the competence to ask and answer such difficult questions. It's much easier to simply calculate a tax as if it will have no effect on the behavior being taxed. One would think, though, that some effort might have been made to figure out what incentives would be created by the new taxes and what ripples would therefore be likely.

Be that as it may, government budgeting isn't ultimately a matter of predicting revenue and planning expenses on its basis. Rather, it's ultimately a matter of making the books appear balanced to conform with the law and adjusting later when financial reality gives the politicians excuses to act. In the case of the current governor, it seems likely that, when revenue doesn't increase as much as he expects and when his meager and vague cuts and efficiencies don't produce the predicted savings, he'll seek to increase taxation yet again. More of that shared sacrifice... meaning that taxpayers share the sacrifice among themselves to support government.

The Biggest Tax Increase... and on Whom?

Here's a point worth restating throughout the current session of the General Assembly (emphasis added):

By broadening the general sales tax and levying a new 1 percent tax, Chafee's budget would raise about $165 million in new tax revenue — even after taking into account the drop in the general sales tax rate. That would be one of the biggest tax increases in state history — if not the biggest, according to Gary S. Sasse, former state revenue director and now distinguished professor of public policy at Rhode Island College.

Whether Governor Chafee's manages to improve the state's ranking when it comes to taxation schemes, his solution to balancing the state's budget is to raise taxes on a population that's already heavily taxed. And it's not a neutral increase; there's a shift in burden involved. Consider (emphasis added):

Rep. Thomas Winfield, D-Smithfield, said that when he stopped for coffee at Fast Freddie's, in Greenville, a crowd of angry people objected to applying sales taxes to such a long list of items. When asked how he'd respond to the Fast Freddie's crowd, [Chafee Director of Administration Richard] Licht said that lowering the sales tax rate from 7 percent to 6 percent would save people money on big-ticket items, so they'd "pay a little more for their haircut but they'll save on their car."

Frankly, my family can no longer afford "big-ticket items." Chafee's revenue increase, in other words, leverages my basics to subsidize somebody else's luxuries. Would it be too cynical to discern the policy's hidden objective as making sure that Rhode Islanders have nowhere to hide from the taxman, even during times of economic hardship?

Yea or nay, the effect is once again that Rhode Island would turn the screw even more tightly on those who are struggling to get by and striving to advance.

Deficit Hawk... Not So Much

Sadly, whatever else they might say, people seem to believe Governor Lincoln Chafee's characterization of himself as a deficit hawk. Indeed, following a press briefing from State Budget Officer Thomas Mullaney, which Ian Donnis mentions here, Ted Nesi put up a post titled "Chafee's budget shrinks Carcieri's long-term deficits." And indeed, although Nesi's accompanying chart shows Chafee's deficits increasing over time, they appear to be about a quarter-billion dollars below what Carcieri predicted for the same years.

Of course, as Nesi writes:

... the easiest way to eliminate the deficit isn't through tinkering with revenue and expenditures — it's through healthy economic growth. A growing economy simultaneously boosts tax revenue as employment increases and profits rise while easing demand for social safety-net programs like jobless benefits.

In that context, it's worth noting that Governor Carcieri's last five-year forecast assumed "that recovery in the Rhode Island economy does not take hold until FY 2012, while Chafee's version assumes "that recovery in the Rhode Island economy started in FY 2011." Consequently, Chafee assumes revenue growth of 3.1%, while Carcieri's budget forecast put revenue growth at 2.1%.

So, some of Chafee's hawkishness is facilitated by a sunnier outlook. Carcieri predicted the income of Rhode Islanders to grow at a rate of 4.1% and employment at 2.3%, while Chafee expects 4.4% income and 2.5% employment growth.

Of course, Chafee isn't just sitting still and letting revenue increase because Rhode Islanders are making more money; he's raising taxes. If we compare the amount that Chafee is decreasing the "Carcieri deficits" with the amount that he's proposing to increase taxes over the same period, we get the following:

In the first year for which both forecasts offer data, 77% of Chafee's deficit reduction derives from new revenue, 74% from tax increases alone, 61% from a sales and use tax increase. By the end of the four year span, tax increases will represent 136% of the deficit reduction. In other words, our deficit hawk is finding taxpayer money to be such attractive prey that he's using it to grow expenditures, even as he allows deficits to grow year after year.

Indeed, over the latter four years of his forecast, Carcieri expected deficits to grow by 48%, while during the latter four hears of his own forecast, Chafee's deficit will grow by 227%. And that's assuming he gets all of the concessions that he's looking for from labor and the General Assembly and that his tax increases perform as well as expected. In summary, Chafee moved the economic recovery up a year and increased taxes, and still his deficits catch up to Carcieri's at a rate of approximately $40 million per year.

Naming the Broader Tax Base

Matt and I talked budget and a "broader tax base" for Governor Chafee's sales tax on Matt Allen Show, last night. Stream by clicking here, or download it.

The Line of Awareness Crossed Too Late?

If the Sunday Providence Journal is any measure, commentators as a class have moved toward greater concern about the effect of Rhode Island's stacked public-sector deck. From Froma Harrop to Julia Steiny to Mark Patinkin. Here's an interesting bit from Patinkin's offering, which imagines the Starship Enterprise reaction:

"But things seem more peaceful and stable than Planet Wisconsin, which I heard was in upheaval over budget issues."

"Au contraire, Captain. The unfunded pension liability in Wisconsin is $252 million. Here in Planet Rhode Island, the state treasurer herself puts it at $5 billion or more. That's 'billion' with a 'B,' Captain." "Impossible, Spock."

The main difference is that peculiarities of Rhode Island politics filled all of the important policy-making seats in the government with people who have proven themselves inclined to ignore problems for as long as possible in order to maintain the status quo. We're already in worse condition than states that are taking steps to solve their budget problems, and we're digging in for a while longer.

The Shape of the Governor's Solutions

Governor Chafee isn't giving many clues as to the decisions that he's making as he builds his budget proposal, but some statements that he has been willing to make are telling with regard to his approach, to say the least:

Chafee did describe some specific priorities. He supports proposed federal legislation that would help the states to recoup taxes on sales over the Internet, he said.

As he has since he was mayor of Warwick, Chafee called for the federal government to reimburse state and local jurisdictions for the cost of such mandatory programs as special education.

The governor acknowledged that he’s had "limited success" since the 1990s in seeking federal financing of the federally required school programs. But Chafee said he will keep asking for the money. "I'm going to be like a terrier with a bone," he said.

How apt the dog analogy is. Apart from begging for table scraps from the federal government, raising taxes is a bit like sneaking up and snatching sandwiches from unsuspecting children's hands, a maneuver that many a domestic canine has mastered.

I'd love to be proven wrong, but one suspects that there will be no difficult decisions made by this governor. He'll govern under the same principles of short-sighted budgeting, irresponsible spending, reliance on hand-outs, quick fixes, and illusions that have brought Rhode Island to its current state.

Rhode Island in Top 10 for Public/Private Pay Differential

From USA Today, which took a look at compensation (salary+benefits) differences between the private and public sector in each state (using U.S. Bureau of Economic Analysis numbers), Rhode Island is in the top ten for total compensation for public employees:

Where RI really "shines" is the gap in the average compensation between public and private employees:

That's a pretty substantial gap and, it would seem, indicative of an imbalance, wouldn't you say?

ADDENDUM: For the heck of it, here's the New England breakdown:

RISC Meeting Spawns a question: What's the Real State of RI Fisheries?

The Rhode Island Statewide Coalition held its annual meeting yesterday. As the ProJo reports, the focus was on the economy and included guest speakers Leonard Lardaro (URI Economics professor) and a former New Zealand parliament member Maurice McTigue.

McTigue...gave examples of how his country made major internal changes to turn the tide on years of debt....[He]...told the audience that one of the ways his country got out of debt was by using its natural resources. He said New Zealand used long-term contracts to get commercial enterprises such as lumber companies — whether locally or from abroad — to become invested in the country’s economy.

He also described how it tossed out old bureaucracy and completely overhauled its education system by having individual schools governed by boards of trustees consisting of people elected only by the parents of children who attend the schools.

The arrangement led to accountability and better education, he said.

McTigue said that after making difficult changes, his country went from decades of not having balanced budgets to years of posting surpluses.

“Most of us here have had to live with the exact same income we got four years ago,” he said. “If we can do it, why can’t the government?”

It should be obvious what the Ocean State's greatest natural resource is, right? The Bay. Water (or "Waaatterrrr" a la Patrick Kennedy). The shipping/port issue debate comes to mind immediately, but I want to go beneath those waves and focus on our fisheries. Basically, maximizing our fishing industry responsibly is something that needs to be studied. But I'm no expert at all and confess to being naive as far as the state of the fisheries.

In 2008, shore fisherman started expressing their worry that our striped bass population was in decline. Some thought this was the "canary in the coal mine", but the Atlantic States Marine Fisheries Commission maintained that all was well with stripers. Fishermen didn't agree with each other, either (though I'm pretty sure that's not surprising!). Shore fisherman continue to believe that stocks are declining, citing a scarcity of "schoolies". However, apparently teen stripers and some of the big boys are still plentiful. There are also concerns that commercial fishermen down the coast (Maryland, for example) are wreaking havoc on our stocks.

Now there are also concerns about the Southern New England lobster industry and plans are in the works to reduce the allowable catch by between 50-75%. That would be a death blow to many, many lobstermen, who point out that they are older and basically the fleet is going to "age out" eventually anyway, so drastic cuts aren't needed.. Apparently the drop in catchable lobsters is attributed to "warming water temperatures, shell disease and an increase in predators such as striped bass and dogfish." An increase in striped bass. See my confusion? One fishery is shrinking because of an increase in the population of another species that is also shrinking. Or is it?!

By the way, I never knew that squid fishing was the most valuable fishery around here. Calamari anyone?

When the Numbers No Longer Add Up

The timing of Wisconsin's contribution to the era of global protest coincides profoundly with a new report on pensions from the Rhode Island Senate:

The new report also factors in the cost of other post-employment benefits, which cities and towns, as well as the state, have only recently begun to show on their accounting statements. With those costs added to the pension costs, whether state-managed or locally managed, the annual payments needed to keep pace with current and future retirement benefits begins to eat up a significant portion of some local tax levies.

What sorts of numbers are we talking about?

While the unfunded liability for locally managed pension plans totals about $2 billion, the unfunded liability for other post-employment benefits totals another $2.4 billion, according to the report. This does not include the millions of dollars in retirement obligations that cities and towns share with the state for teacher pensions.

From the sampling of numbers reported in the Providence Journal, there appears to be significant variation from municipality to municipality, but the average city or town would have to devote about one-quarter of its annual budget to support employees who are no longer working. Pawtucket, Central Falls, and Johnston would need 59%, 57%, and 47%, respectively. And, again, that's excluding payments that the state subsidizes.

Keep in mind, too, that government continues to operate and to grow. This is an after-the-fact payment to those who've already retired.

The Wrong Starting Point for Economic Development

The advice is wise, I'd say, for states to focus on economic development activities that benefit a broad range of businesses, rather than one or two big catches, but the experts in the field begin from the wrong perspective:

Creating sustainable new jobs is complicated, and states will need help from the federal government, says Robert D. Atkinson, president of the Information Technology and Innovation Foundation in Washington, D.C., who in 1996 was the first head of what was then the Rhode Island Economic Policy Council.

"First, the idea that states can fight and win the competitiveness battle on their own is simply wrong," Atkinson says. "Unless Washington gets in the game, it will be very hard for states to grow their economies."

Indeed, the economy is so complicated that it is folly to place its operation in the hands of politicians and bureaucrats. The more responsibility and risk can be distributed to individuals whose livelihoods depend on their being able to work and expand, the better.

The false starting point is the notion that government operatives "create sustainable new jobs" at all. At best, they help or hinder private citizens in their efforts, and by meddling they are more likely to hinder them. The article centers around a solar panel plant that recently left Massachusetts for China, thus illustrating the point: extra incentives and breaks offered to Evergreen Solar had to be forcefully withdrawn from the economy, somewhere, and now, in effect, they're going to China. Moreover, the hip ambiance that's been painted on green technology surely jaded Massachusetts officials' judgment, with the end result that opportunities, considered as broadly as possible, were constrained.

In other words, the policies that drained money and effort for the benefit of a company playing in an industry that every state and nation is eying as the wave of the future should have been refocused to lighten the burdens of taxes, regulations, and mandates.

The closing moral of the linked article is that public negotiators should "write a good clawback," so that they can force companies to repay taxpayer contributions, should they depart, but that misses the larger lesson — namely, that policymakers should stop pretending to be economic masterminds.

Avedisian's Pension Plan and Continuing Problems

I noted that Warwick Mayor Avedisian was offering up a pragmatic, if typical, pension reform plan in that it dealt with reforms for future pensions. Avedisian took to the pages of the Providence Journal to explain his plan, but, as Ted Nesi notes, Avedisian tries to get away with shoving the past pension problems aside.

In the 1950s, 1960s, and for most of the 1970s, the City of Warwick did not properly fund its pension plans and make the necessary annual contributions needed to keep them solvent. Some years the city would make proper contributions and in others there would be no contribution beyond the actual benefits paid out. To be exact, if pension payments totaled $500,000, the city leaders funded that amount to pay pensions....in Warwick, the biggest unresolved issue are the[se] original police and fire pension plans. Today, they are funded at only 27 percent of what is needed. So, while people can suggest that the city has failed to do what is right, they instead should be asking the original creators of the pension systems why there was no leadership when the plans were created. Had even a small amount been contributed annually in those years, the unfunded liability today would be very small.

The question, then, is what Warwick is going to do about the $200 million gap between its pre-1971 plan’s assets and liabilities. It’s plans like those which the Rhode Island League of Cities and Towns’ Dan Beardsley suggested to me the other day could be the source of litigation as cities unable to fund them move to take away benefits promised in the past....I suppose we could call up Raymond Stone or Horace Hobbs to ask why they failed to make pension contributions in the ’50s and ’60s. (Actually, we can’t; Hobbs died in 1999, Stone in 2004.) But that’s not going to yield a solution to Warwick’s $200 million pension gap.

Avedisian and his fellow mayors may have inherited this problem – but it’s still theirs now.

Pension Reform in Johnston

Out of necessity (ya think?) they're reforming pensions in Johnston. Stephen Beale reports on why:

One of the biggest problems is with disability pensions. Out of 71 retired firefighters, 34 of them are on a disability pension, earning two thirds of their salary tax free. During the tenure of former Fire Chief Victor Cipriano, 15 firefighters retired—and all 15 went out on disability pensions. Even Cipriano himself went out on a disability pension, earning more in retirement last year than he did while working.

To put the numbers in perspective, just 8 percent of the firefighter pensions in New York City are disabilities. In Johnston, the disability rate is above 40 percent. “Those are unusual numbers,” Rodio said.

Rodio has estimated that 25 firefighter disability pensions are in violation of not one, but two state laws—one that says a retiree cannot earn more than he did while employed by a city or town and another that says those tax-free disability pensions needed to be approved by the state retirement board.

A police officer or firefighter who retires on a disability but gets another job will be considered partially disabled and can receive only half of their salary, rather than two thirds.

The ordinance also goes out of its way to define salary as base pay—excluding overtime pay, holiday pay, and other benefits from being used to calculate a disability pension.

In the future, a police officer or firefighter applies for a disability will have their case reviewed by three doctors—two of whom must confirm that the person is actually disabled. Once the disability pension is approved, a retiree has to undergo an annual physical and submit a sworn statement documenting how much they have earned for the year.

WRNI - Raimondo Says Pensions Can be Cut

WRNI's Ian Donnis reports:

State Treasurer Gina Raimondo says she doesn’t believe current pension recipients are legally shielded from possible cuts to their pensions. She outlined her view during a taping today of WRNI’s Political Roundtable, which airs tomorrow at 5:40/7:40 am. Scott MacKay asked Raimondo, as a lawyer and financial expert, whether pensioners currently receiving an annual pension of $80,000 or $90,000 have a property right to their pensions. “If push comes to shove, what happens?” MacKay continued. ”Do we go the United Airlines situation, where they take a haircut?” Here’s how Raimondo responded to the question of whether pension recipients have a property right: “I don’t believe so. That hasn’t been established in law, and I don’t believe they do.”

...Raimondo blames a piecemeal approach. “The reason we’re in this mess” she says, “is because every year we chink away at the problem — let’s tweak the COLA a little bit, let’s tweak this, let’s tweak that. We got to do the whole system. This is not about taking benefits away. This is about securing retirement security for everyone . . . . It is a fallacy to think that those benefits will be there if we don’t fix this system. And the system that we have today calls for a billion dollars to come out of the budget in about 10 years to pay these benefits. I cannot look in the eye of a state worker and promise that that will be there.”

Desires as Economic Development

Reacting to Governor Chafee's mention of it, Ed Fitzpatrick has read Richard Florida's book proclaiming the importance of tolerance to the economy and expresses, it seems to me, an appropriate skepticism regarding causation and correlation:

"My research finds a strong correlation between, on the one hand, places open to immigrants, artists, gays, bohemians and socioeconomic and racial integration, and on the other, places that experience high-quality economic growth," Florida wrote. "Such places gain an economic advantage in both harnessing the creative capabilities of a broader range of their own people and in capturing a disproportionate share of the flow."

I believe it was Snooki who first said: Correlation is not causation. In other words, just because there is a "strong correlation" between tolerance and economic growth doesn't mean tolerance causes economic growth. Perhaps that is a point both Chafee and his critics gloss over.

As I suggested a few weeks ago, it seems to me that urban areas, especially with high concentrations of colleges, are likely to attract creative types regardless of an Nth degree of tolerance for them. Indeed, one might suppose that a region experiencing "high-quality economic growth" might generally attract people who are different from the native population.

In any event, even if "tolerance" deserves its place as one of three economic legs (talent and technology being Florida's other two), that doesn't mean that it is the one on which Rhode Island is deficient. Personally, I'd put aside the "three Ts" as an interesting post facto analysis with only indirect influence on Rhode Island's economic health and focus, instead, on the more specific metric of economic freedom as indicated by taxes, mandates, and regulations.

Local Food: Where's the Fish?

Rhode Island's "buy local" food movement has had some success:

The resurgence of farms and farmers' markets has brought local, fresh produce to thousands more Rhode Islanders in the past few years....“The miraculous comeback of Rhode Island farming,” said Division of Agriculture Director Ken Ayars, "is due in large part to efforts like the statewide Buy Local campaign, establishment of harvest cooperatives like Rhody Fresh milk, organic and good agricultural practices certification schemes and the annual Rhode Island Agriculture Day.”

Noah Fulmer, director of Farm Fresh Rhode Island, an organization that runs eight farmers’ markets in the state, highlighted the need for more direct-marketing venues for seafood.

“What’s missing at farmers’ markets,” Fulmer said, “is seafood from the Ocean State. People are asking ‘Where’s the finfish? Where can I get fresh seafood?’ We don’t have an answer for them right now. It’s an opportunity that’s waiting to be taken.”

Currently, most of the seafood landed in Rhode Island is sold to distribution companies who ship it around the world. Department of Health regulations make it difficult — and expensive — for fishermen to sell their catch directly to the public.

[E]stablished seafood companies caution that local marketing of Rhode Island seafood challenges the basic laws of economics. Export Rhode Island-caught seafood, they say, is more profitable than selling it locally.

Christopher Joy of SeaFreeze, a fishing and distribution company in North Kingstown, explained, “If it’s too expensive, it’s because others are willing to pay more for it.”

Similarly, Eric Reid of Deep Sea Fish, a Narragansett-based seafood distribution company, said it is more profitable to ship Rhode-Island-caught seafood out of state while bringing in cheap fish from abroad. Rhode Island customers, he said, prefer low prices. “Simply put,” he said, “it’s a math problem.”

In the coming months, fishermen and their allies may try to alter this equation by building demand for local seafood in Rhode Island. Locally landed fluke, sea bass, scup and stripers may soon be available at a farmers’ market near you.

Nesi: Washington Cuts Will Squeeze Rhode Island

WRNI's Ted Nesi explains how RI has become over-reliant on the Federal Government for budget dollars:

[T]he share of Rhode Island’s state budget paid for by the federal government has jumped from 28% to 37% since the recession began; over the same period, the share paid for by state tax revenue (the ol’ General Fund) fell from 49% to 37%.

Put another way, state funds are covering $2.94 billion of Rhode Island’s budget this year while federal funds are covering $2.90 billion. In a $7.9 billion budget, that’s basically a rounding error – Rhode Island is leaning heavily on Washington to balance its books.

Rudderless Rhode Island: National Perception is Reality

Steve Malanga at RealClearMarkets gives us the national perspective of what's going on in Rhode Island (h/t Jim Hackett via Facebook):

Tucked in between Massachusetts and Connecticut and overshadowed in Northeastern political discussions by states like New Jersey and New York, Rhode Island is barely noticed these days.

Still, the Ocean State bears watching. Its fiscal problems are, relative to its size, among the worst in the country. And the reform agenda (if you can even call it that) of its new governor, Lincoln Chafee, elected with union support and with only a plurality of the vote, is among the tamest in the nation. In Rhode Island we may get to see how the union version of fixing a state's problems via tax increases and the barest of reforms of government spending and employee entitlements works.

Though smaller than its neighbors, Rhode Island very much bears the stamp of Northeastern politics and governing. It has the third highest level of public employee unionization in the country, 64 percent, behind New York and Connecticut. Its government is among the top 10 in the nation in per capita spending and in the tax burden it imposes on residents, plus the state has one of the least attractive business environments....

Rhode Island's long-term obligations compare unfavorably with just about any other state, and that's saying a lot....

the Daily Beast recently ranked Rhode Island the state most likely to go bust...

Moody's...ranked Rhode Island among the most troubled states on a variety of metrics...

A recent audit revealed that Rhode Island's biggest city, Providence, has been spending more than it budgets throughout the recession and depleting its reserve funds in the process, to the point where the city is almost out of cash....

[A]nother city, Central Falls, is insolvent thanks to $32 million in promised post-retirement health-insurance costs for its employees plus $48 million in pension obligations that the city can't meet on its own....

The burden this spending places on the private sector is significant. Rhode Island is not a state where businesses are investing in the future. An analysis of private sector investment several years ago by the Rhode Island Public Expenditure Council found investment per employee was among the lowest of any state, 30 percent below the national average. And while the state ranks only 20th in average private sector wage per worker, it ranks 4th in public sector pay.

What Should Be and What Will

John Kostrzewa makes a number of excellent points in a recent column:

[Two economists'] forecast is important because there is an argument making the rounds in City Halls and at the State House that the recovery of the economy will eventually pull city and state finances back from the brink of disaster. The thinking is that an improving economy will bring in more tax collections to pay for the services and employee benefits that elected officials have approved over the last few decades.

It's not going to happen.

The financial hole dug by city and state leaders is so deep and the improvement in the Rhode Island economy is so shallow that the crisis can’t be solved by waiting it out.

Rhode Island's economic difficulty has been building for decades, at least. Perhaps because world events and prosperity led voters to take their eyes off the budgetary ball, or perhaps because compounding policies finally reached the cliff, over the years since the turn of the millennium, the government excess has become impossible to ignore. Indeed, Rhode Island's annual deficit problem began in the midst of the housing bubble; its taxpayer flight began earlier; and there's no reason to believe that either trend will reverse just because the rest of the American economy brings a rising tide.

The other day, Ted Nesi noted that, at its current rate of job growth, Rhode Island won't return to its employment peak until the year 2045. As I've been warning, the recovery of employment and economic opportunity elsewhere could accelerate RI's relative deterioration.

Kostrzewa does make one point, though, about which I'm skeptical:

That makes 2011 the bellwether year when public officials, pushed by taxpayers, have to prioritize which services they want to provide and how to restructure government, whether through consolidation or regionalization, to pay for them.

The note in the margin of my newspaper reads: "Wanna bet?" Kostrzewa has described what has to happen, but nobody should expect that it will. We have the wrong government policies in place (taxes, mandates, regulations). For the most part, we have the wrong people in public office (the new governor worst among them). And increasingly, we have the wrong electorate (heavily constituted of people dependent on government, in one way or another, and insulated by government policies). What we're more likely to get are policies that, like last year's tax "reform," have the sound of positive change but do not resolve structural problems and potentially make them worse.

Yes, we all have to ring this bell as frequently and loudly as possible, but we should brace ourselves for even rougher roads ahead.

Two Post Facto Responses on Felner's Behalf

This episode of Newsmakers makes me wish I'd been there... or had had a means of communicating suggestions to Bill Felkner of the Ocean State Policy Research Institute:

Newsmakers 1/28: Stokes, Felkner, Sgouros: wpri.com

For one thing, in attempting to present the other side, Tom Sgouros (whom Tim White bills as a "progressive economist") holds on to the precise representations of the data as if holding on to the tail of a magic newt. Unfortunately, Sgouros, himself, is not precise:

What the IRS reports is how many people moved and what they earned in the places where they lived after they've moved.

Actually, the adjusted gross income data measures that money claimed on the tax returns of people filing outside of Rhode Island who, the previous year, had filed their federal returns from within Rhode Island (or vice versa for those who moved here). In other words, pretty much by definition, some of that income was earned in Rhode Island; for taxpayers who moved after the tax year for which they're filing (between New Year's day and tax day), all of the money claimed was earned in Rhode Island, or at least while Rhode Island residents.

Alone, that doesn't answer Sgouros's objection that migrants aren't necessarily taking their jobs with them. It does, however, emphasize the lack of parity between those coming to Rhode Island and those leaving. Put directly, it shouldn't be a comfort that people who want to make more money have to leave the state, even if they leave their lower-paying jobs behind.

Another point, which panelist Arline Violet considers to be a "fatal flaw" in OSPRI's report, derives from the Poverty Institute's response to it: namely, that, whatever the relative incomes, if those leaving are replaced by people arriving, then their property taxes are covered, because somebody buys their houses. But the fact is that, on a net basis, Rhode Island isn't importing taxpayers at the same rate as it's exporting them. More importantly for this discussion, though, is that property taxes aren't the only revenue that Rhode Island governments extract from Rhode Island residents.

According to the Rhode Island Public Expenditures Council, about 22% of tax revenues to state and local governments, in Rhode Island, come from individual income taxes. Moreover, if the question is the effect of shifting demographics, Violet and the Poverty Institute's point isn't a "fatal flaw," it's irrelevant. People who make more money pay more in income taxes; that they pay the same amount in property taxes (presumably) doesn't change that fact.

Indeed, if they make more money, one can assume that they're more likely to improve upon their properties or build new houses (increasing value and therefore taxes) and to spend more in discretionary income (increasing economic activity and sales taxes).

One Anecdote of Many

Sure, we hear counter-arguments all the time, around here, but Michael Miale of Johnston offers an evidential anecdote that certainly captures the impression of many:

[After listing close friends and family,] I then refined the list further into two categories: those who have left the state within the previous 12 months, which is 8, and those who are going to leave in the next 12 months, which is 3, totaling 11 family units leaving the state. That means 52 percent of my immediate family and close friends have left or are in the process of leaving the state of Rhode Island.

Those numbers cannot be refuted by anyone. They tell me all I need to know about the state of the state of Rhode Island.

What would be fascinating, although likely impossible, would be a broad sampling of these and opposing anecdotes in order to discern characteristic commonalities and differences between the "yes-flight" and "no-flight" observations. I'm sure Anchor Rising readers have their own speculations.

Some Hot Air in the Green Economy

Speaking of the suspicious structure of the "new economy"... the economics of wind have come under some scrutiny, lately. Specifically, the project being questioned is Portsmouth's windmill:

Because the setup was considered net metering under state law, National Grid never negotiated a power purchase agreement with Portsmouth. An agreement would have been reviewed by the PUC, which could have rejected the selling price.

Instead, state law required National Grid to buy the power at a prescribed rate that is higher than what the utility pays for power from other sources, such as natural gas-fired power plants.

Portsmouth sells its power to National Grid at the exact price the utility charges the town and other customers in the same rate class. It’s a retail rate, not a wholesale rate. The bundled price includes the actual cost of energy, along with other charges for distribution, transmission and transition. ...

That left the town a net income for the period of $257,075 — money it could use to pay its energy bills or any other line item in the municipal budget.

In other words, the state government forced the energy company to pay extra money for Portsmouth's wind energy, which it will pass on to other clients, thus shifting money from the private sector into the Portsmouth government's coffers. One suspects that much of the emphasis on "green technology" — especially that emphasis coming from the public sector — is built around similar schemes.

The Knowledge Economy Does Not Offset a Bad Economy

It seems as if, whenever I cite economic trends in Rhode Island, as I've been doing all this week, commenter Russ chimes in regarding studies of the "new economy" or "knowledge economy" by the Kauffman Foundation, as he did here:

According to the 2010 Kauffman State New Economy Index Rhode Island ranked 8th nationally in the "Migration of U.S. Knowledge Workers." RI ranks well in that category year after year, despite how much some here seem to wish it were not so.

First of all, importing "knowledge workers" is hardly a trump card if the overall migration trends are still outward (which they are) and the folks leaving still have higher incomes than the folks coming (which they do). Second of all, as I've pointed out before "knowledge economy," in this context is in some regards a stand-in for "taxpayer subsidized," with revenue coming from the government and tax-exempt organizations and going to government and tax-exempt organizations.

Look to the Kauffman study that Russ mentions (PDF. Rhode Island may rank well in "migration of U.S. knowledge workers," but it's #31 in "immigration of knowledge workers." It's 47 in "manufacturing value-added," 30 in "high-wage trade services," 48 in "export focus of manufacturing and services," 48 in "fastest-growing firms." We rank 16th overall.

That "fastest-growing firms" number is important. Rhode Island ranks 33rd in "industry investment in R&D," but it ranks 5th in "non-industry investment in R&D." That is, investment in Rhode Island means "federal, state, university, and nonprofit investments in R&D." We're not, in other words, living in a hub of economic activity in the "new economy;" we're a small state with data skewed by a military base, a bunch of colleges, and a burdensome government structure. Governments must draw the revenue that they invest from somewhere else (the private economy), and they spend it less efficiently.

Looking at overall "new economy" ranks, Rhode Island's 16th place is above the midpoint, to be sure, but Massachusetts is #1 and Connecticut is #5. In other words, Rhode Island represents a relatively dark spot in a nation-leading area, and we rank as highly as we do mainly on the strength of government taxing and spending. As the report states, "non-industry investment in R&D" represents only a third of "industry investment in R&D." The better strategy, therefore, would be to shift the local emphasis from an economy that takes money from some, under threat of imprisonment, to an economy in which people exchange dollars because they see opportunity in doing so.

Who's Leaving and What the Legislators Are Doing

Last night, on the Matt Allen Show, I mentioned my work on population trends and Andrew's work on legislation. Stream by clicking here, or download it.

Once again, I didn't go into the sales pitch, but please email or call (401-835-7156) me to pledge financial support — as subscriptions, donations, or advertising — for 2011 to help us create a full-time job within Anchor Rising.

So What's the Answer?

On Monday, I presented the growth trends among different income groups in Rhode Island. Tuesday, I dipped into the state income taxes that they've paid and the numbers of taxpayers leaving the state. And yesterday, I looked at the trends of each income group to get a sense of where the shifts are occurring.

So who is actually leaving the state?

I hastily wrapped up yesterday by noting that Census data shows there to have been an increase of 25,274 households claiming income of $100,000-$199,999. According to the IRS, 16,426 of them are directly attributable to an increase in joint tax returns. That leaves 8,848 households, which would equal 17,696, if they were all two-income households filing separately. (I'm not saying that they are, just illustrating the maximum of what I believe to be the trend.) As it happens, the increase in non-joint tax returns with $50,000-74,999 in income over the same period was 17,912; very close. It's interesting to note, as well, that the increase of joint returns among those making more than $75,000 could (as a hypothetical maximum) account for 72% of the losses in joint returns with income below that number.

The picture that begins to emerge is of older, more-established, working-to-middle-class households selling their homes at large enough profits to rocket them up the income scale for a year, with younger households — still single or still filing separate returns — partially filling the gap. Consider that the Census's American Community Survey shows 12,472 fewer Rhode Island households overall in 2008 than 2003, but the IRS shows an increase in tax returns of 12,646, with the growth entirely among categories over $75,000. Yet, IRS migration data that tracks actual taxpayers by their social security numbers shows large losses of taxable income as thousands of taxpayers move away each year, 17,221 of them from 2003 to 2008, bringing with them higher incomes, on average, than those who move in.

The increase in returns, that is, derives from people who were already here, and those leaving had greater wealth. Some of the former are likely to have been young adults graduating from high school and college, but living with their parents and (perhaps) not counting their income as part of the "household" total.

In the trend that I'm suggesting, many of those who've sold their houses have simply left rather than returning to their previous income brackets. Meanwhile, those who've arrived had to over-leverage debt to afford the houses in which they'd invested, leaving many of them underwater and foreclosing when the market took a dramatic downswing.

This narrative ties in very well with a study that the Ocean State Policy Research Institute is releasing today that looks at the data from a slightly different angle. OSPRI focused more on the policies and qualities of the states with which Rhode Island has exchanged residents. Not surprisingly, "people move to states where the weather is warmer, taxes are lower, union membership is lower, population density is lower, and the cost of housing is lower." Moreover, "the most significant driver of out-migration is the estate tax."

I've long argued that the people leaving the state are families in the beginning of their careers who need greater opportunities for advancement, families in the middles of their careers who have turned their attention to the need to advance more quickly as they head toward retirement, and retiring families who need to make their dollars go farther. Meanwhile, improvements in the tax climate for wealthier residents and those investing in the state helped Rhode Island to maintain and grow its base of wealthy individuals while making property a worthwhile investment for families able to handle some years of the opportunity cost that Rhode Island imposes on its working residents.

To some extent, the shift could be a healthy one, assuming that younger families (1) work more cheaply and (2) are willing to put more productivity into the economy in order to advance. However, Rhode Island can't continue to stifle them with mandates, regulations, and taxes, and the state government can't afford to continue losing taxable income based on migration patterns.

Unfortunately, the state has recently been moving in precisely the wrong direction, and Governor Lincoln Chafee and House Speaker Gordon Fox and Senate President Teresa Paiva-Weed's General Assembly promise to continue that error. Arguably, beginning to phase out the capital gains tax early in the decade greased the path for the housing bubble to be worse in Rhode Island than elsewhere by decreasing disincentive to sell and increasing incentive to buy. But the state killed that policy soon after the accelerating market began to come apart — slamming on the brakes when it really needed to ease toward a more reasonable speed. Eliminating taxes on property sales would certainly have helped in that regard.

Last year, the General Assembly killed the phasing-out high-income flat tax by effectively freezing it within a larger tax reform. Worse, by increasing the standard exemption at the expense of those who benefit from itemization (because they've bought property, had children, and invested in their careers and businesses), that tax reform shifted the burden precisely toward Rhode Islanders who are striving to build families and advance in their careers. In addition, as OSPRI's report explains, 2005 changes in federal law led Rhode Island to create an estate tax, and "only two other states have a more punitive" one.

So, older members of "the productive class," as I call upwardly mobile working and lower middle class families, may now be stuck in Rhode Island, unable to sell houses that they're counting on for nest eggs and facing a large tax penalty for selling them. However, the need to find a more hospitable environment in which to advance and retire has not changed, and they're staying put in the jobs they have, blocking the early-career advancement of younger residents. In addition, the policies by which Rhode Island stifles entrepreneurship and innovation are locking the economy in place — the mandates, regulations, and taxes, of which Governor Chafee's proposed sales tax increase (and other policies to expand its reach in one way or another) is a fine example, as is legislation to require registration and insurance among landscapers.

If my interpretation is correct, the data to be released in coming years will not be cause for optimism, to say the least.

Tomorrow, I'll address a study that some folks cite (notably Anchor Rising commenter Russ) as evidence that Rhode Island has a booming "knowledge economy" and show how, even in the positive light, it's possible to see how detrimental the state's governing mindset can be.

Up and Out, or Just Out?

Yesterday, I presented two facts:

• Every year, from 2003 to 2008, thousands of people who had filed tax returns from Rhode Island filed them from somewhere else. Subtracting those who moved in the opposite direction, during that five-year span, the state lost 17,221 taxpayers.
• Because those leaving have typically had higher average incomes, the state has lost hundreds of millions of dollars, on a net basis, in taxable incomes — $915,863,000 to be exact, from 2003 to 2008.

Nonetheless, on Monday, I showed that, for most of that time span, wealthier taxpayers increased at a healthy rate. So who is leaving the state? The following charts show trends by income bracket, using IRS and American Community Survey data.

Sticking to the years for which I have data from both sources, the number of households earning below $50,000 decreased by 38,335 from 2002 to 2008, while the number of tax returns decreased by 19,353. For the range of $50,000-74,999, the corresponding numbers were 15,740 and 6. Noting that my migration data is shy a year, with 17,221 tax returns directly attributable to out migration from 2003 to 2008, it 's tempting to suggest a direct flow of this group out of the state.

However, those losses correspond with a 44,910 increase in households earning above $75,000, accounting for all but 9,165. For tax returns, the numbers are a 31,841 increase above $75,000, for an overall increase of 12,482. Considering that those leaving the state have had a higher income than those arriving, it can't be the case that Rhode Island is importing wealthier residents.

And anybody who's been living in Rhode Island will find a dramatic shift toward wealth to be a surprise. Indeed, Phoenix Marketing data of millionaire households shows the increase in millionaires to be relatively small. My suspicion is that, given the housing boom, the shift has more to do with the sale of houses — with people in the upper-working to lower-middle class range selling their homes, often leaving thereafter. The phasing out of the capital gains tax would have created incentive both to sell (because able to keep more of the profit) and to buy (because property in Rhode Island would be taxed at a lower rate, perhaps 0%, when sold).

Call it an "up and out" trend. Each year, until the end of the decade, the number of one-year-only "rich" people amounted to more than those who returned to prior income levels or left the state.

One puzzle in the numbers arises from the difference between Census household data and IRS return data. Why did the number of households between $50,000 and $74,999 (what I'm calling "lower middle class") decrease while the number of tax returns remained pretty much the same? One possibility is that people joined their incomes for the household results but filed separate returns. A look at just joint returns suggests that as a factor:

Turning to the Census data, households earning between $100,000 and $199,999, for example, increased by 25,274 (2002-2008), with 16,426 of those directly attributable to an increase in joint returns. That leaves 8,848 households, which would account for 17,696 tax returns if they all paired up.

Unfortunately, I've run out of time, this morning, so I'll have to draw the threads together later.

(The next post in this series is here.)

Giving Away the Store, or Maintaining a Base?

Yesterday, I showed that the number of high-income tax returns increased every year in Rhode Island from 2002 to 2007. In fact, the rate of growth among taxpayers in every income category above $50,000 was greater in Rhode Island than in its neighboring states through 2004, when things began to change.

During the decade, Governor Carcieri and the General Assembly enacted various tax reforms, agreeing to phase out the capital gains tax in 2002 and beginning a stepped reduction of an alternative flat tax in 2006. Of course, during this same period, especially the latter part of the decade, the state government faced massive budget deficits year after year and used one budget gimmick and one-time fix after another to muddle through.

The question arises, therefore, whether the tax reforms needlessly gave away money that the state could have used (although it never came close to equaling the deficits) or the tax reforms were a positive influence despite larger problems. I'm not sure that it's possible to collect enough data to declare the question answered, but today, I'll add some charts to the mix that I believe continue to point in the direction of my thesis: that tax policy helped Rhode Island to maintain and increase its base of wealth, which could have been a spark of capital for entrepreneurs and other producers, but heavy regulations, mandates, and taxes stifled growth and motivation among "the productive class," which therefore didn't act as kindling to get Rhode Island's economic fire going.

The following charts, drawn from this data, show the amount of state income taxes claimed on IRS tax returns for those filing in Rhode Island, Massachusetts, and Connecticut, respectively:

Once again, it appears that the dot-com bust that began the millenium did not affect Rhode Island as deeply as it did Massachusetts. From that footing, with the implementation of the capital gains tax phaseout and a reduction of the state's nation-leading top tax bracket on the horizon, Rhode Island led the three states in the rate at which it increased the revenue drawn from the upper brackets. The numbers throughout the decade are as follows:

During the early part of the decade, Rhode Island led in the rate of increase of wealthy taxpayers, although that healthy development for the state overall did reduce the rate of growth in revenue that the government drew from them. Tax policy, however, wasn't to blame for Rhode Island's slowed growth during the latter part of the decade. Something else was, and I'd argue that the improving attitude of the government toward taxation prevented Rhode Island from doing worse, comparatively... until that attitude started to change in a vocal way during and after the debate over the flat tax.

The IRS also provides taxpayer migration data, which compares the location from which every American files his or her return to his or her location the year before. The years shown for migration are those in which the returns were filed, which means that the taxpayer moved during or just after the tax year (which is what the years used thus far in these posts have referred to).

Not that it matters; Rhode Island's loss of taxpayers has been consistently between 2,000 and 4,500 for the entire decade:

The bars at the top of the chart show the migration of actual people, and the line at the bottom shows the net loss of taxable adjusted gross income. That is, from 2003 to 2008, after subtracting the incomes of people who came to Rhode Island, former Rhode Islanders took with them almost $1 billion in income. With the exception of the two years that the revenue loss moderated, the average adjusted gross income of those leaving was greater than those arriving:

In the past, I've looked at the data of migration to counties abutting Rhode Island on the theory that such people aren't leaving the region but, rather, wanted to stay within work-and-play reach of Rhode Island:

The image that emerges is a pull of wealth away from Rhode Island. The fact that the wealthy were increasing in number, within the state, suggests that they continued to find Rhode Island to offer a friendly environment. Some other income range must account for those thousands of lost taxpayers, and I'll take a closer look in that direction tomorrow.

(The next post in this series is here.)

Trends of the Decade

Three critical considerations tend to get lost in debates about population and the ways in which it flows and changes over time. The first is that large trends trump. A tax break isn't going to prevent a global economic hurricane from rearing its head in one state while devastating the next one over; there will surely be differences in how the states weather the storm, but the storm will appear in statistical results for both.

The second is the complexity of the numbers. As the income brackets shift within a state, the reasons for each individual change will span so many categories of information that a thorough picture becomes impossible to paint. Marriage rates, tax policy, welfare policy, different markets, employment, and on and on will affect the results. When multiple states are on the table, the number of policies and trends is that much greater. As far as I know, nobody has undertaken a study to break regional changes down to the percentage effect of every demographic shift, and even then assumptions would have to be made which individuals move to which categories.

The third factor that tends to get lost is that the effects of public policies don't just splash into the society on the day that they are signed into law. The debate leading up to passage of a law will affect people's behavior, as will the perceived likelihood that a particular policy will survive the political winds. Taxpayers (to limit the field) will respond to changes in the law, but they'll also respond to a general sense of a state's direction. Meanwhile, laws can either betoken additional reforms in the same direction, or they can make it to the governor's desk with the impression of having barely little chance of resisting repeal or efforts to undermine them.

In any event, what those with a specific interest in the health of a particular state must do is to assess the condition of the state and determine what effect policies have had, or will have, from the baseline of what would happen in their absence. If the widget industry is in decline, tax breaks for widget manufacturers will preserve their jobs to some extent, even if they cannot prevent the trendline from drifting down.

Such are the thoughts that came to mind upon viewing the following set of charts, which will probably take me multiple days to roll out, and which update previous posts here, here, and here.

Each data point in this chart (based on this data) represents the percentage change in the number of IRS tax returns claiming an income range from the previous year. Thus, in 2004, the number of tax returns showing $200,000 or more in adjusted gross income increased by 16.7% from 2003; from 2004 to 2005, the change was 14.6% — still a large increase, but because the rate of change slowed, the graph shifts down. The red lines show tax returns filed from Rhode Island, blue from Massachusetts, and green from Connecticut. The smaller the dash marks of a line, the lower the income bracket.

Because the highest bracket is the most controversial, because it is most affected by Rhode Island's constantly churning tax policy of the last decade, and because it results in about 40% of all income taxes to the state, the solid lines are of greatest interest. And as is clear, all three states began the decade with losses of such taxpayers (likely because of both migration away from the region and a loss of wealth associated with the dot-com bust). In 2002, the year that Rhode Island began to phase its capital gains tax toward zero percent, we were the first of the three states to show an increase in wealthy households, and we led the three states until 2005.

At that point, our state was in the midst of a series of budget-deficit years to which our elected officials responded with one one-time fix after another. The General Assembly enacted the flat tax phase-out in 2006, but whereas the capital gains change promised to make investments made in and from Rhode Island more valuable (because less taxed) over time, the flat tax phased out gradually and required calculation against the benefits of itemizing and capital gains income. In 2006, the flat tax offered an 8% rate (as opposed to the regular 9.9%) and decreased 0.5% each year.

In any event, as the final years of the decade wore on and brought economic crisis, it became increasingly clear that lawmakers would backtrack on tax reform, and by 2008 Rhode Island led the region in loss of wealthy taxpayers. The capital gains tax phaseout disappeared in 2009, and the flat-tax alternative was frozen by the larger income tax overhaul last year.

An alternative narrative would be that Rhode Island recovered more quickly from the dot-com bust at the beginning of the decade because it had benefited less from the corresponding boom. Then, with so much waterfront property, the state experienced the ups and downs of the real estate bubble more profoundly than its neighboring states.

As this post began by noting, this type of data is subject to interpretation, and given data related to taxpayer migration as well as trends indicated by tax returns and Census data, I'd argue that my long-running explanation still stands: Favorable changes in income tax policy have helped Rhode Island to maintain and grow its base of wealthy residents. Unfortunately, though, heavy regulations, mandates, and taxes overall have not allowed the economy to capitalize on that available economic spark. The "productive class" — my term for the upwardly mobile upper-working to lower-middle class range — has not effectively acted as the kindling to turn that available money into economic growth.

Thus, Rhode Island has been more vulnerable to the mobility of the wealthiest Americans and has not fostered an environment of long-term advancement for the motivated workers and entrepreneurs who will willingly add hours of labor to the economy. Inasmuch as my own quest for upward mobility has not yet borne the fruit that would allow me to continue with this topic, today, I'll have to take up the specifics of taxpayer migration data tomorrow morning.

(The next post in this series is here.)

Rhode Island, by Example

Further to my point about a new political wave starting local, the landscape of Rhode Island politics stands as a stark example and testing ground:

... while the state has been trying to work through the desperate finances of its smallest city [Central Falls], it has also been working with three other economically distressed communities — North Providence, Pawtucket and Woonsocket.

And there is growing concern that other communities, also trying to cope with cuts in state aid and rising costs for salaries, benefits and pensions, may also be on the brink of being unable to pay their bills.

The backroom operations and self-dealing maneuvers of public sector unions have created an unsustainable structure, not only in the direct taxpayer costs that they impose, but also in the degree to which they hinder the progress that Rhode Island has to make, as in our shoddy public education system. Worse, it is exceedingly unlikely that the new governor and the General Assembly are going to take the sort of actions that they would have to take to turn things around, following my mantra of mandates, regulations, and taxes. Even if a reform impulse were to strike the state's leaders, the establishment's hand is simply too strong not to turn reforms their way by legerdemain.

Policies must change at the town level, and new, less corruptible, leaders must be found and nurtured through the system.

Sadly, the Propagandist Can't Be Ignored

Look, Pat Crowley of the National Education Association Rhode Island is a paid union hack. One knows what his conclusions will be simply by looking at his job title. He allows no illusion that he will say anything other than what he thinks will benefit his employer, whether true or not. If read at all, his public writings should be studied as examples of propaganda.

Consider his latest missive, which (I suppose) the Providence Journal had no choice but to publish. Crowley attacks people whom he says are making a "Flight of the Earls" argument — that rich people are leaving Rhode Island — notably Ed Achorn and (although he can't bring himself to say so) me. The first disingenuous aspect of his argument is that the people to whom he points aren't actually saying what he suggests. Anybody who reads Anchor Rising knows that I've been referring to the "productive class" (upwardly mobile working and middle class families) as those leaving the state, and Ed Achorn has been making similar arguments, at least in the several years since I first posted my related research (see here, here, and here).

Unfortunately, respectable journalists continue to take Crowley as a serious participant in intellectual discussion, which leads them to some pretty egregious and misleading errors. WPRI blogger Ted Nesi, for example, writes in response to Crowley's op-ed:

Projo columnist Ed Achorn says wealthy Rhode Islanders are leaving the state in significant numbers because of high taxes. NEARI official and Rhode Island's Future contributor Pat Crowley says that's dead wrong.

Follow Nesi's link to what Achorn says, and one finds this:

The flight of the middle class is an ominous trend. It puts downward pressure on housing prices, eating away at a key source of most families' wealth. It drains our state of precious human capital, as educated people who could contribute greatly to charity, civic culture and the tax base head elsewhere for opportunity. It costs jobs, as businesses shut down or move.

Even in Crowley's fever swamp, the middle class isn't "the wealthy." Media professionals risk their credibility when they allow a union mouthpiece to summarize the arguments of his opposition.

But one needn't read Achorn's article to have reason to suspect that Crowley is up to tricks. For one thing, Census data showing total population at 10-year increments for the past half-century have only tangential relevance to the question of whether a particular demographic group is leaving the state. Decade-long windows also don't allow much opportunity to align trends with actual policies. Since the last time the Census came to town, for its year 2000 count, Rhode Island has enacted and done away with phase outs of capital gains taxes and an alternative flat tax. One must look at year-to-year data for such a purpose.

When Crowley does look at year-to-year data, he has no choice but to become anachronistic:

In 2005, there were 11,913 people with incomes over $200,000 a year. By 2008, the number climbed to 12,515. Taxpayers in the $100,000 to $200,000 range grew from 41,817 to 51,904 in the same period. This was the very same period of time The Journal was editorializing that these high-income taxpayers were fleeing the state, and calling for action to keep them here. Action was taken, and we are paying for it with budget deficits.

Actually, no. To the extent that people were arguing that "high-income taxpayers were fleeing the state," it was prior to these years. The capital gains tax phase out was enacted in 2002, and the alternative flat tax made it through the legislature in 2006. Rhode Island's annual budget deficits far precede "the very same period of time," and during the years 2002-2007, the amount of state income taxes that "the rich" have paid has increased in a steep upward slope.

In other words, the increase in wealthy taxpayers that Crowley cites corresponded with the very policies that were supposed to have that effect. Now, in response to the lies and political activity of Crowley's crowd, those policies have disappeared and, not-so-ironically, leftists and unionists are promoting the effects of the policies as evidence that they were not needed.

The sad thing is that Crowley's essay is clearly a political strategy. Later this week, the Ocean State Policy Research Institute will be briefing legislators on a report addressing taxpayer migration, going fully public with the report next week. In the meantime, on Monday, I'll be posting my updated research. As Nesi illustrates when he blatantly mischaracterize's Achorn's argument and places it in balanced opposition to Crowley's propaganda — as if the two sides should be considered equally credible — the tendency will be to see our statements in terms that Crowley has set.

Anybody observing with an unjaundiced eye can begin to see why Rhode Island is in its current predicament.

Letting the Scam's Legislative Architect Run the Budget

Here's a worrying tidbit about a frontrunner for the open House Finance Committee chairmanship in the General Assembly:

[Rep. Helio Melo (D, East Providence)] is the current deputy Finance Committee chairman, and House leaders signaled their confidence in him by letting him take the lead on last year's big end-of-session, income-tax overhaul.

I suppose that the experience ushering into law a reform that took Rhode Island's tax policy in the wrong direction while making it appear to do the opposite will be a valuable point of reference when making the state's budget appear to be balanced when there is no way it could be.

Starting Up to Capture Talent Flow

The fifth Dear Mr. Chafee column on Ted Nesi's blog, by technology consultant Allan Tear, sounds really good, but I don't know that it contributes all that much by way of concrete suggestions for Rhode Island's advancement:

Startups. A recent Kauffman Foundation study shows that firms less than five years old — startups — have generated nearly all of the net job growth in the U.S. over the past 25 years, while established firms averaged near-zero growth in aggregate. It matters less if the startups are what we think of as "old economy," "Main Street" or "innovation economy" businesses. What matters is that we start talking about new startups and entrepreneurship as the primary engine of job creation in Rhode Island. Remember: our economic stalwarts of today — Hasbro, APC, GTECH and FM Global — were all Rhode Island startups once.

It's long been a central plank of Anchor Rising's program for turning Rhode Island around that the state should make it easier for people to start new businesses, which means reducing taxes (especially on capital investments and income that some might consider "excess"), lightening regulations, and erasing mandates that favor established players. So, in that regard, any evidence that points in that direction is welcome. That said, there's something conspicuously semantic about the study that Tear cites:

The BDS series tracks the annual number of new businesses (startups and new locations) from 1977 to 2005, and defines startups as firms younger than one year old.

The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs.

Further, the study shows, job growth patterns at both startups and existing firms are pro-cyclical, although existing firms have much more cyclical variance. Most notably, during recessionary years, job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle.

Basically, when companies are brand new, they hire. Then they reach stasis, begin to fail, or continue to grow, with the net effect being stasis, depending largely on how well the economy is doing in general. It probably oversimplifies matters, but one can easily imagine that, when times are good, capital investment exists to encourage employees to break off on their own, and when times are less good, more folks are forced (or willing) to jump ship and start new companies, accepting less money, thereby keeping the number of startup jobs stable.

Whatever the case, Rhode Island should definitely revamp its policies with an eye toward the perspective of job creators. Inasmuch as new businesses turn into established businesses, though, the state clearly cannot shift in such a way as to strangle them when they pass the one-year mark (or the five-year mark). In other words, Tear's dislike of clichés notwithstanding, the state just has to improve its businesses climate.

Back to Tear:

Talent Flow. As a state that feels like we've lost much in the past few decades, we are obsessed with holding onto what's left, and that is doubly true when it comes to conversations about our college graduates leaving, or Brain Drain. But the most vibrant economic hotspots have a flow of talent coming and going; learning, studying, starting companies, creating art, doing research, treating patients — and, yes, often moving on. This flow benefits us immensely as a state, bringing new ideas and global expertise, and imparting an affection for and connection with the Ocean State. When we shift from talking about Brain Drain to Talent Flow, we can begin to engage the energetic and smart folks that already flow through our state, get the most from our time with them, leverage them as Ocean State alumni if they move, and create new reasons for them to stay. The 21st century economic challenge is not to attract companies, but to attract talent.

This is well and good, as long as there isn't a net loss of talent, which is what I understand "brain drain" to mean. It's also crucial that Rhode Island keep in place the structure to retain the "new ideas and global expertise" that flowing talent can bring. That means attracting companies and making the state an attractive place in which to start them. In practice, companies are collections of people, so the line between "talent" and "companies" isn't all that stark. The distinction is that the latter include the institutional structure that captures the aggregate expertise of employees, consultants, and customers. In other words, the businesses are the "we" that benefit from transient populations.

We can bat around the specific terminology that we use to discuss Rhode Island's economic policy, and if one set of words makes hip people feel more comfortable embracing ideas that we right-leaning reformers have been shouting from the outskirts all along, then it's to the better. The danger is that the establishment forces that continue to clasp the state's legs are adept at twisting buzzwords — which tend, by their nature, to imply more than they explicitly state, thereby leaving much to subjective interpretation — in such a way as to further entrench themselves and hinder the rest of us. Consider the comments to Tear's essay...

We've Already Maxed Out the Beauty Quotient

Just about every workday, I drive by the Black Goose Café in Tiverton and think about how much I love their pumpkin chai, but with the beverage priced at $4.50 a pop, except in the most freewheeling moods, I pass right by. Oh, I continue to have a positive opinion of the business, based on this one drink, but that opinion does them little economic good when I determine that my money would be better spent on milk, shampoo, or gasoline.

Something similar is at play in another Dear Mr. Chafee post on Ted Nesi's blog, wirtten by RI Council for the Humanities Executive Director Mary-Kim Arnold:

Surprisingly, the most important factors to most residents were not economic. From city to city, the top three factors that people identified were:

1. the availability of social offerings — places to meet, arts and cultural opportunities and the sense that people care about each other;
2. a sense of openness — how welcoming the community is to different types of people, including families with young children, minorities, and talented college grads; and
3. aesthetics — the physical beauty of the community, including parks and green spaces.

The study in review notes these as qualities that increase "emotional attachment," and Arnold's point is that, as governor, Chafee should "consider factors beyond the state's rankings and beyond the immediate economic data." It's a sentiment with which it's difficult to disagree; leaders should consider a broad range of factors, but the insinuation that social offerings, openness, and aesthetics should be the leading guides is disconnected from our particular time and place. (Put aside questions about the ability and prudence of government's involvement in them all.)

The Black Goose could make its cups more appealing; it could put out a big side reading, "Conservatives Welcome!"; but that won't overcome, for folks in my situation, a price tag equivalent to a meal. Just so, Rhode Island has already squandered the advantages that its residents' substantial emotional attachment provides. The premium is already too high. The great desire that Rhode Islanders have to remain in their state is what enables governance that is corrupt and overly generous to specific special interests..

In other words, just because, all things considered, love of a place will benefit its GDP does not mean that all things needn't be considered. At a certain point — which our state is already well past — emotional attachment just isn't enough, especially when a critical goal of policy has to be the attraction of new people and businesses that don't yet know how attached they could become.

Can Rhode Island Be the Exception to Foolish Consistency?

An interesting juxtaposition.

Reading around the Internet, yesterday, I came across Ed Morrissey's observation that all ten states that lost seats in the U.S. House of Representatives are majority Democrat states:

Michael Barone's analysis probably comes closest to the truth: low-tax states attract larger populations, while high-tax, high-regulatory states tend to lose people. That also works in the GOP's favor, and explains why it resulted in such a resounding win in these midterms.

Elsewhere, Dick Morris echoes the analysis:

High taxes kill states. There can be no better evidence than the 2010 Census. The states that lost House seats -- because they're shrinking, relative to the nation -- had taxes 27 percent higher than the ones that gained seats.

Of the seven states that don't have a personal income tax, four (Texas, Florida, Nevada and Washington) account for eight of the 12 seats apportioned to the fastest-growing states.

New York and Ohio lost two more seats. Other losers -- down one each -- are Massachusetts, Missouri, Michigan, New Jersey, Pennsylvania, Illinois, Louisiana and Iowa. What do they all have in common? High taxes.

But then, when one turns to local analysis, the lede of a Scott MacKay commentary on WRNI reads as follows:

Rhode Island's business and political leaders constantly focus on the state's high taxes as a roadblock to economic development. WRNI political analyst Scott MacKay reminds us that our state has an even bigger barrier to creating good jobs.

The "bigger barrier," according to MacKay's assessment, is the inadequately educated workforce, which he blames not on "the teachers, the schools and the government," but on "the culture of a blue-collar state." Before taking up that analysis, let's acknowledge that the two explanations are not mutually exclusive. The same society that tunes its priorities on organized labor and welfare, and tolerates Rhode Island's brand of political corruption, might be predicted also to place relatively little priority on actual educational achievement. MacKay declares those priorities not to be a factor, but he offers no evidence or argument as substantiation.

Instead, he offers this as the relevant evidence that the problem isn't the people who run and teach Rhode Island, but the people who live here:

The blue-collar manufacturing jobs have left but the attitudes of that era live on among too many native Rhode Islanders. The percentage of native-born Rhode Island adults with at least a bachelor's degree is only 25 percent, while 50 percent of Rhode Island residents born in other states have at least a bachelor's. What this means is that transplants are moving here to take jobs Rhode Islanders are not qualified for.

Unfortunately, I have to repeat my lament that I wish I had the time to research the statistics, but it's at least plausible to suggest that MacKay's numbers, wherever he gets them, don't really have the meaning that he attributes to them. Even if Rhode Islanders set a higher priority on educating themselves, one might expect three-quarters of those raised here to wind up elsewhere — having pursued higher education out of state and looked for work elsewhere. The same is true in reverse: No doubt, a high percentage of "transplants" to Rhode Island arrived here via the state's colleges and universities and remained. And some of them (me included) took what work the state could provide, regardless of its relation to their degrees.

It won't surprise anybody that my suggestion is just about the opposite of MacKay's. I say blame "the teachers, the schools and the government." Force the first two to reform and the last to get out of the way so that both native Rhode Islanders and immigrants to the state can pursue excellence and create the jobs that will attract RI-born graduates back. The producers will strive to raise or bring the necessary workforce here for the same reason that we all tolerate the burdensome governance in the first place: Rhode Island is a desirable place to live.

Arguably, the initial effect will be a boom in salary levels, as employers compete for workers. A longer-term effect will be a greater emphasis in that ol' blue-collar culture on the education and training that will procure the higher pay. The first step in changing the color of the state's collar is to begin governing with an emphasis on personal responsibility, risk, and achievement, which points the finger at precisely the parties that MacKay wishes to exculpate.

Toward Fighting the Usual, Expected Interpretation

This is the sort of claim that begs for a well-researched response:

"The data ... clearly illustrates the need for more affordable homes in the Ocean State," said Nellie M. Gorbea, executive director of HousingWorks. "As lawmakers convene in January, it is imperative that they fund affordable-housing programs like the Neighborhood Opportunities Program ... to immediately address the large number of families on the verge of losing their apartments or houses because they can't afford the rent or mortgage."

The basis for the claim is a HousingWorks study of U.S. Census data finding that 41.7% of Rhode Islanders pay more than 30% of their incomes on "housing costs," which is the highest ratio in the region. Unfortunately, I spent most of my blogging time, the other day, discovering that the Census's new data acquisition tool would eat up most of my blogging time.

The first thing I wondered was whether property taxes are included in "housing costs." The second thing I wanted to research was the significance of average incomes on the calculation. I know from past research that Rhode Island's income level is relatively low, by New England standards.

Both of those considerations support the argument that the last thing Rhode Island should do is to increase government expenditures. Rather, we should lower taxes across the board and lighten mandates and regulations, thereby encouraging economic activity and higher average incomes.

Were Anchor Rising a full-time gig, we would collect the necessary data and post it in the form of a report, which we would promote around local media and bring before any relevant legislative committees — not out of protection of special interests, but out of pure interest in the subject matter and the health of the state.

Down Again

Earlier this week, URI economist Len Lardaro noted the reversal of his economic index's positive trends for Rhode Island:

A slump in October in two key indicators that make up an index that forecasts the Rhode Island economy may signal that the state could be in for a double-dip recession, according to Leonard Lardaro, the University of Rhode Island professor who compiles the Current Conditions Index.

Today, we learn that the professor's index isn't the only discouraging statistic:

After eight consecutive, incremental drops in Rhode Island's unemployment rate, the November rate increased slightly to 11.6 percent, indicating the state's economy is staggering to year's end. ...

Unemployment rate: Up to 11.6 percent from 11.4 percent, the first increase from one month to the next since last December.

The silver lining is that the increase in the unemployment rate appears to have been attributable to the fact that 800 people reentered the job market. Of course, the problem, there, is that the number of employed Rhode Islanders remained the same, and the number of jobs based in Rhode Island decreased by 1,200.

Rhode Island is not at all well positioned to emerge from the Great Recession, and those leading the state are not well suited — intellectually or ideologically — to change our course.

Tabulating Rhode Island's FY2011 Federal Earmarks

For those interested, HERE is a working list of all of the earmarks contained in the lame duck FY2011 budget. I assume it will be continually updated as required (hence, the "working"). I've also broken out the RI earmarks from messr's Reed, Whitehouse, Langevin and Kennedy and you can download it HERE.

All told, according to the latest info, RI's Congressional delegation has requested $53,625,000, broken down as follows:

* Approximately $41.4 million tabbed for Department of Defense projects
* $2.65 million is tabbed for EPA--particularly wastewater improvement projects--and Parks Service projects
* $2.5 million for economic development projects (broadly defined) with money going to the John H. Chafee Center for International Business, Rhode Island School of Design and URI
* Approximately $7.12 million is going to various projects under the Dep't of Labor, HHS, & Education.

Whose Taxes Will Change How

This Neil Downing article points to an egregious error in the waning year of Governor Carcieri's time in office (emphasis added):

... the amount of Rhode Island income tax withheld from your pay will change because of massive changes to the state income tax law enacted in June. Employers will have to withhold more in tax for some workers, less in tax for others. ...

... the new law lowers the top tax rate to 5.99 percent from 9.9 percent, increases the standard deduction amounts for most taxpayers and eliminates the option to itemize deductions.

As I've explained, before, the central act of the new law was to freeze the flat tax where it already was. Folks who pay attention only a little bit may be lured by the elimination of that 9.9% red mark, but those who take the time to understand the upshot (especially those affected by the change) should realize that what was actually eliminated was a pending decrease in their tax burden.

The second act of the law was to transfer wealth from folks who do those economically active things that create deductions — such as buying local property and spending money on careers and businesses. Downing reports that the changes in paycheck withholding will be "slight," but what's "slight" on an individual basis is massive in aggregate.

Downing also explains the coming increase in TDI taxes and federal withholding amounts. Layer in there the tax increase if U.S. House Democrats foil the tax-cut extensions. Our state and nation could wake up in January 2011 with one pounding hangover.

"Body of Proof" Flips Paiva-Weed on tax credits

The upcoming, filmed in Rhode Island, ABC show Body of Proof (starring Dana Delaney and Jeri Ryan) was feted at the State House today. Both Delaney and Ryan extolled the virtues of the Ocean State while executive producer Matt Gross explained that it was the tax credits that brought the production to Rhode Island:

"Having produced ten feature films and 200 hours of television all over the United States and out of the country, I can tell you this has been my best experience to date," said executive producer Matt Gross. "The state supports the needs of production like no other I have ever been to."

Gross credited the film and television production tax incentive -- which provides a 25 percent transferable credit for all related spending in Rhode Island -- with drawing the project to Rhode Island.

The production has generated more than $30 million of revenue in Rhode Island and has led to the creation of about 170 (temporary) full-time jobs, said State senate president Teresa Paiva Weed...."I was one of the skeptics when the film tax credits came out ... but have come ... to be a real believer because we now know that it works," said Paiva Weed. "A recent study showed that the film tax credit generates $8 for every $1 of investment from our state. And I don't think there's a better investment that also builds on our tourism industry."

Questions about the EDC's Loan to Trainor

I note a couple things from the ProJo story about Chafee spokesman Michael Trainor's defaulted loan from the RI EDC.

1) Trainor and his partners approached the RHODE ISLAND EDC for a loan for a business based in CONNECTICUT.

2) The business plan centered on the purchase of three companies in the south that would make hurricane shutters, which would be then distributed in the Northeast. Got that: manufacturing jobs in the south, sales jobs in the Northeast...out of Connecticut.

Then the company went bankrupt and Trainor and his partners still owe the EDC around $250k.

In the meantime, we heard Trainor, acting as Chafee's mouthpiece, being critical of the deal that the same EDC gave to Curt Shilling's 38 Studios. Hypocrisy? Not according to Trainor:

“The state handed him $75 million in loan guarantees without any personal obligation,” Trainor said. “I’ve had to place myself in bankruptcy.”

I know businesses fail, especially lately, and I'm certainly not criticizing entrepreneurship. Obviously, the scale of the Trainor and 38 Studios deals are much different (millions vs. thousands), but at least 38 Studios is actually coming to RHODE ISLAND and hiring RHODE ISLANDERS.

So, given some of the facts surrounding Trainor's company and the EDC loan, I've got some genuine questions. 1) How often do non-RI companies get RI EDC loans without showing they are going to employ--or even be based in--the state? (Was that indeed the case in this deal or were there promises of RI-based sales staff or the like?). 2) Is just being a Rhode Islander (who may know the right people) good enough to get a loan? Basically, I'm not sure we've really gotten the whole story of how the EDC operates.

When Marketing Isn't a High Priority

A familiar theme pops up all over the place, if you're looking for it. Consider the advice of consultants that the tourism division of the Economic Development Corporation (EDC) hired to help Rhode Island with its efforts in that area:

The consultants learned that 70 percent of the state's visitors come from just five states — Connecticut, Massachusetts, New Jersey, New York and Pennsylvania. However, of 1,100 people they surveyed, respondents were more likely to associate destination themes like "charming, quiet, peaceful, relaxing and friendly" with other states that compete for the same visitors.

Rhode Island may be losing visitors to places like Vermont and Maine, the consultants said, because other states spend far more to promote their own tourist attractions than Rhode Island does.

With a tourism budget of $720,000 annually, Rhode Island spends less than 10 percent of what the average state spends promoting tourism, says Mark G. Brodeur, director of the state's tourism division. That average, he says, is $11 million.

I'm not convinced that public resources are best spent on marketing campaigns, and I'd point out that Rhode Island has only 17% of the population of the average state. The reality is, however, that even if we adjust the perspective to say that Rhode Island should be spending twice as much (rather than ten times as much) on tourism, the state already taxes its residents too vigorously. We cannot fund such things as tourism marketing, because we're spending too much money on other things — like labor costs, giveaways, and the support of public corruption.

As with the higher education crowd, it's all well and good for economic development advocates to ask for more money, but we really need them to be making the case that they deserve the money more than other recipients of public largess.

Golden Geese, Living and Dead

A quick Google search of his name suggests that he might, but I wonder how many people who agree with Shane Gaudet's view on taxing nonprofits would apply that argument to such things as corporate and income taxes for high-income Rhode Islanders:

The nine nonprofits listed in the story employ more than 20,000 people. Jobs are good, are they not? And consider the number of students who live in, or commute to, the city to attend the four private colleges, and what their presence means for business. Did the officials "factor" this in their study?

If these colleges decided to pack up and move to another city (it can be done) where would that leave Providence? I think Rhode Island's capital would be more like Detroit than a flourishing city.

The Providence Journal titled Gaudet's letter, "Golden-goose squeeze." Well, a thriving state should have multiple such geese, and Rhode Island has been squeezing them all for far too long. Gaudet urges city officials to concentrate on "ways they can cut spending" (emphasis in original). Would that more voters shared his preference.

Another Phrase for "Taxpayer Subsidized"

This group of industries seems a bit too narrow to count as a "knowledge economy" or to stand as comprehensive representatives of the value of intellectual capital. Indeed, another quality that they share would be a much better descriptor:

The knowledge economy refers to the health-care, life-sciences, research and green-technology sectors and to the idea that work, jobs and wealth are created with innovative brain power.

Especially with healthcare and "green" technology, the application of knowledge isn't much more relevant than it is in just about any industry, but what all of these sectors have in common is that they're taxpayer subsidized. Note the examples:

In 2009, Lifespan Hospitals successfully sought $49.2 million in competitive grants from the National Institutes of Health, he said. Brown University pulled in $180 million in research grants for the 2009-2010 school year, a 37-percent increase over the previous year, Hatfield said. And the University of Rhode Island got $105 million in grants, 60 percent more than three years earlier ...

Grants, if not given directly by government departments, are typically provided by tax-exempt entities, and in the cited cases, they're going to tax exempt entities. The picture accompanying the story features Providence Mayor-elect Angel Tavares, General Treasurer-elect Gina Raimondo, and state Sen Joshua Miller (D, Cranston); one wonders whether and why they're supportive of a strategy of relying on organizations that don't pay taxes to grow the state's economy.

Fortuitously, Jim Hummel's latest report expands on the broadly recognized fact that almost 40% of Providence property is currently owned by tax-exempt groups by catching retail enterprises that serve the knowledge economy as selected partners failing to charge sales tax. The immediate controversy is that the stores (including a Starbucks) are supposed to tax non-students, but even were they complying with that rule, exempting sales taxes for certain private businesses can only harm others that seek to capitalize on "knowledge economy" participants like students.

What Chafee Means by "Harmful"

I've received reader email expressing cynicism at the Providence Journal PolitiFact's release, post-election, of its finding that Governor-elect Lincoln Chafee's statement was "barely true" that "experts say the property tax 'is the most harmful to economic growth and ... the sales tax is least harmful." Indeed, Eugene Emery's article notes:

[Tax Foundation economist Kail] Padgitt referred us to a study by the Paris-based Organisation for Economic Co-operation and Development, an international agency founded to help its 33 member countries find the best economic policies.

The OECD's 2008 study of tax structures and economic growth says that when taxation is necessary, a stronger reliance on property taxes is the best method for encouraging an economy to grow, followed by consumption taxes, such as sales taxes. High corporate taxes, it concluded, were the worst when it came to increasing the gross domestic product (GDP).

The only rational conclusion to which one can come, on the question, is that it depends. Blanket statements of which tax is preferable are fatally flawed in that there are limitless number of ways in which a regional government can hinder or help its local economy, and the particular mix at any given time will have a huge effect on what tax increases are more or less damaging.

Inasmuch as Rhode Island's underlying problem is an inability to attract and retain economically productive people — to start and populate businesses — increasing property taxes should be a nonstarter. On the other hand, given the size of the state, with cross-border shopping opportunities mere minutes away for most residents (and the Internet readily accessible), increasing the sales tax will likely drive our consumer economy increasingly away. That's good for neither near-term economic growth nor the initiation or immigration of businesses to the state.

But it's nothing new to suggest that Rhode Island cannot afford to increase any taxes (or fees, for that matter). What's interesting about Chafee's statement is what I think underlies it. Local progressives, among whom Chafee clearly numbers, often declare that the property tax is "the most regressive." That's obviously questionable in comparison with a proposal to tax necessities that are currently exempt from taxation, under the law. But I'd wager that Chafee is extrapolating from that cliché that regressiveness in the tax structure is inherently harmful to the economy.

Balance Is Unexpected for a Reason

Much is being made of Rhode Island's unexpected budget balancing. Here's Kathryn Gregg in the Providence Journal:

After meeting on and off over several days, the top financial advisors to the House, the Senate and the governor, determined that revenues are running about $16.7 million ahead of expectations when the General Assembly signed off on this year's state budget last June which, when coupled with an end-of-year surplus from last year, gives the state some welcome elbow-room this year.

And Ted Nesi has more:

[House spokesman Larry] Berman credited the balancing act to higher tax revenue, lower spending, and a surplus left over at the end of last year. "It is also good sign that revenues are running slightly ahead of projections, showing that the economy is turning around slowly," he said.

Of course, the largest factor in this "good news" is the windfall of federal dollars that has helped our state government avoid the really tough decisions that it's going to have to make when that money dries up. (You know, that "stimulus" money that has arguably contributed to the continuing economic malaise.) Another factor has been the state's willingness to push expenses down to cities and towns without easing its requirements (via mandates and regulations) to spend money.

That said, this is a prime example of an issue that frustrates me with regard to my tight schedule. My gut's telling me that there must be more — perhaps having to do with tax code changes that effectively raised taxes on productive and economically active Rhode Islanders. An article that Projo reporter Neil Downing published today supports that conclusion:

For example, the total amount of personal income tax withheld — mainly from paychecks — increased by 7 percent for the first four months of the fiscal year, and by 9 percent in October alone, said state Tax Administrator David M. Sullivan. Those figures indicate that more people are working, he said. (The state's unemployment rate, while still high, has been gradually dropping in recent months.)

But some other figures suggest economic softness in some spots.

For example, cumulative personal income-tax collections came to $322.6 million, up 4.8 percent compared with the same period a year ago. But that was largely on the strength of increases in the first three months of this fiscal year. In October, personal income-tax collections slipped 4.8 percent compared with the same month a year ago.

The parenthetical note about the slowly decreasing unemployment rate misses the point that fewer people are actually working. Folks are just giving up their job searches, driving down the rate of people who are trying to be employed, but aren't. The summer boost in income tax withholding could have indicated a real jump in summer tourism income, or something similar, but it also could have included a boost in withholding based on changes in tax credits and deductions that the General Assembly had recently passed.

News consumers are used to getting the tailored pronouncements of government officials, perhaps mixed by journalists (working with limited space) with a couple of broadly stated opinions from opposing factions. What we need is to see the numbers dollar-by-dollar and aligned with specific policies and decisions.

A Sign of Things to Come

Rhode Islanders should expect more of this:

It may be a sign of a bad economy, but some businesses are balking at a plan to charge fees for placing business logos on the blue highway signs at exits for food, gas and lodging. ...

The $1,200 per-sign fee, which went into effect on Nov.4, applies to any business posting a logo on a highway sign; state transportation officials have since proposed a reduced rate of $300 a year per sign for the 72 businesses that already have permits to post their logos on the highway signs, according to Rocchio.

The businesses paid to install the signs, and now the Dept. of Transportation wants them to pay fees (1) just in case they are knocked down and (2) to hire enforcement bureaucrats to catch any such businesses that aren't complying with regulations having to do with handicap access and public availability of bathrooms and phones. In short, it's another way for the government of Rhode Island to squeeze benefits.

DOT Managing Engineer Robert Rocchio magnanimously points out that "no state or federal regulation requires" the signs to exist (in the Projo paraphrase), and the new fee matches that charged in Massachusetts. Rocchio misses the point: Each state must figure out its mixture of charges and benefits, and the relevant question at any given point is which direction it's heading. This is a new imposition on productive Rhode Islanders who need to lure every through-state driver they can to boost our local economy.

As I began by saying, we should expect more policies like this. Rhode Island's "leaders" have no new ideas, and Rhode Islanders keep electing them to office.

Mo' Money by Default

Marc's already splashed into the political hay of the issue, but we should take a moment to look more directly at the raises received by Rhode Island's top office holders:

The salaries go up only once every four years and when they do, they reflect the Consumer Price Index for the Northeast region for the previous four years.

Translated: the annual salary paid the governor is going from $117,817 to $129,210 on Jan. 11 and for the attorney general, from $105,416 to $115,610.

At the same time, the salaries paid the lieutenant governor, treasurer and secretary of state are rising from $99,214 to $108,808 annually.

We could have the debate about whether the amounts are justified. In some cases — especially lieutenant governor, the answer is, "surely not." In other cases, such as governor, the amount is nowhere near what a comparable CEO could expect. That said, the numbers are more than enviable from the lowly position of many of us.

But the question of automatic increases is the rub. Such offices differ from the private sector in that the candidates for office run in an election; they don't, as in the private sector, negotiate with their employers-to-be. It's reasonable, therefore, for the government to have a standard, nearly apolitical, formula that keeps the compensation reasonable no matter who wins the office.

That said, it'd be a rare Rhode Islander who'd claim that the state's economy has improved by 9.67% over the past four years, and rarer still would be those stating that the government's ability to pay its officers more has increased. During times of recession, the General Assembly should pass statutes postponing all raises until Rhode Islanders have felt the return of economic health.

Of course, in our current circumstances, that might represent a permanent moratorium on raises.

A Voice on the Other Side of the Wall

Erstwhile commenter and Rhode Island escapee Dan has left the following comment:

Hello, everyone. This is my first time commenting since I moved out of Rhode Island, and it may be my last.

Just stopping by to report that since I left the morally and economically bankrupt Democratic hellhole that was my home for 25 years, I have been far happier and more successful. I have a great new non-union job with a great boss, which for some odd reason doesn't pay me minimum wage with no benefits, defying all progressive logic. I feel like a great weight has been lifted, like I'm not being robbed and insulted everyday by those who run my government. It's an amazing and empowering feeling.

In my current state, taxes are low and are spent responsibly on public works that people actually enjoy like trees, benches, and working fountains. The people are friendlier down here. Unemployment is lower and unemployment benefits are lower. There is a pride in working and personal responsibility that I never felt before in RI.

It is a right to work state, so I don't hear much from teachers unions anymore. I'm sure I don't have to mention that we blow RI out of the water in quality of education, not a coincidence. Police are paid reasonable salaries and mostly just leave people alone. Firefighters are volunteer. Sales tax is a whopping 4%. Not much corruption, or they do a very good job hiding it.

I urge each and every one of you to leave the fool's errand that is RI as soon as you are able. Every day you stay in RI, you are voting with your actions for the Marxists and criminals who run the state, doing your part to ensure that status quo. If you haven't learned by this past election that nothing will ever change in RI, well, you won't ever learn, and you'll die unhappy fighting those same old windmills.

You have 49 other states from which to choose. RI is not the best of them. Move to NH, move to VA, anywhere, just move somewhere and stop bankrolling the legal mafias in the public unions, city councils, and state legislature. If you love your family, take them with you. Friends will follow, or you'll make new friends. Get out, and do it sooner rather than later. Don't be a martyr for liberty and sanity. Do yourself a favor.

It's difficult to argue with much of what Dan writes, but two points must be made. First of all, individual taxation is the lesser of two ways in which Rhode Islanders pay for the sorry state of their government. The larger component is opportunity costs; I find it jarring, for example, to place the list of things that I can do and have done next to my itinerary of daily activities setting up tools on a muddy jobsite in order to place cement-board siding on a house in the cold and damp. On the other hand, there are opportunities in what I've been doing, not only careerwise, but experiencewise. Being a carpenter has changed me in positive ways, over the past six years, and I would never have taken this path if others hadn't been blocked by circumstances. Moreover, if the larger cost is an opportunity cost, then succeeding is still possible, just more difficult.

The first point leads to the second: it is a presumption of Dan's that one must "die unhappy" if the state does not change. As with anything, considerations must be balanced. A better job and more reasonable civic culture is not everything; note how little attention the average person pays to the latter. In fact, I do not cede Dan's assertion that the state is impossible to change, and even if it proves true, in practice, there is value and great reward in making the effort... provided one can survive economically.

The Bankruptcy Option

Given the long political, economic, electoral, etc. track record of this state, many believe that the only solution to fixing Rhode Island lay in bankruptcy. Well, if that is indeed a solution, then this post by Richard Epstein is concisely informative on the topic. Epstein explains the how's and why's, but then concludes that bankruptcy probably isn't an option.

I don’t think that full-fledged bankruptcy is a realistic prospect as of now. I think that the much more sensible approach is to side-step the bankruptcy proceedings and find ways to attack the union pension obligations directly, given their enormous size. It is odd that these days the only sacred contracts are those which the state enters into with unions for the benefit of their members.

The key question is whether it will be possible to persuade the courts that these pension agreements were the result of political self-dealing, which means that they should be set aside unless it could be shown that the state received fair value for the services rendered when it made those deals. I think that case is bold but winnable, yet only when the situation becomes truly desperate. Funding that litigation will take some bankrolling, but the corporate-law analogies on self-dealing make it pretty clear that the state legislatures violated all their duties of loyalty to the public at large when they entered into deals from which union pension funds got all the upside and everyone else got the downside. Not nice. Undoing it is the work of the next generation.

The Broke Lender of Last Resort

Why isn't it sufficient for candidates for public office simply to say, "I'll get out of the way"? Take gubernatorial candidate Frank Caprio:

A centerpiece of his TV ad campaign for weeks, Caprio's plan relies heavily on $13.1 million in new federal dollars for loan guarantees, and "moving" the $50 million that remains in the $125-million loan-guarantee program that state lawmakers created earlier this year into a new Small Business Loan Fund.

Standing in front of Moretti Salon on Atwood Avenue in Cranston, Democrat Caprio suggested a state-backed commitment of that size could be used to leverage $640 million in private loans to businesses that might not otherwise qualify, to "retain or create 14,800 jobs."

I'd trust private investors to sift through potential projects and judge the worthy more than I trust the government to do so. Investors have profit as their motive, so they look for long-term successes; politicians have talking points as their motive, so lending public money allows them to claim to have "created" jobs and, if the business fails, to offload the blame on its operators. In the case of loan guarantees, the government generally isn't even invested to the extent of putting up money that it might use for other purposes; the hit comes after the failure.

We certainly require new businesses to open their doors and begin hiring, but at this point, guaranteeing loans is just a sly way for the government to compensate for the unnecessary burdens and risks that it places on the economy through mandates, regulations, and taxes.

Lardaro on the Downswing

University of Rhode Island Economist Len Lardaro has to be the most mixed-message-sending economist in the state. He regularly appears in the local media declaring that his economic index shows Rhode Island in recovery (and has been doing so for months of the recession), yet here he comes with a doomsday warning for the next election:

On the labor-supply side, much of the current unemployment is long-term in nature, the result of jobless persons failing to possess the skills demanded by the employers who are attempting to increase employment. Economists refer to this as "structural unemployment." The result is skill shortages, even with so high a jobless rate.

On the demand side, employers have continued to find ways of meeting current product demand with fewer hours worked by their labor force than they thought possible in the past. ...

The upcoming election is more important than is generally assumed for Rhode Island, because federal bailout money will no longer be available by this time next year. Fiscally, this will force us to go "cold turkey." The resulting jolt to a fragile upturn may well force our state into a double-dip recession. The citizens of this state need to be proactive, even though our elected officials seldom are.

Don't get me wrong: I agree with Lardaro's assessment and his hinted solutions, but he would help to prime the public for this sort of revelation if he regularly accompanied his index-related press releases with a big "but."

The Give Me Mine Vote

It's pretty clear, from a recent Brown University poll that about one-fifth of the electorate in Rhode Island are in the die-hard public sector camp:

On the other hand, a large percentage — 73.3 percent — opposed raising the state sales tax, while 18.9 percent supported the idea. And 74.7 percent opposed raising the state income tax, while 19.3 percent supported the idea.

When asked about measures that would affect state employees, 46.6 percent supported unpaid furlough days, while 38.4 percent opposed the idea, and 57.9 percent supported a defined-contribution pension plan for new state employees, while 21.1 percent opposed the idea.

Basically, 20% of survey respondents want higher taxes to support the deals currently offered to public-sector employees. I can't say, of course, how much overlap there is between wanting to increase the sales tax and wanting to increase the income tax, but I'd wager that it's significant — constituting, overall, a statement of "whatever it takes." That's a significant portion — especially given its greater likelihood actually to vote and to become active before election day — but it's not overwhelming.

The route to countering that bloc will be to isolate their issues in the face of a single candidate — who, incidentally, has made it abundantly clear that he's their guy:

... during and after the Marriott Hotel lunch, [Lincoln] Chafee insisted that [Frank] Caprio’s $100 million in promised [pension] savings are illusory, because his plan "won't standup to legal scrutiny."

"It's hard to believe that a court would agree that somebody that has been paying into a certain pension fund for 30 years, all of a sudden has a new pension plan. It's hard to believe a court, beyond the fairness issue, would say that is legal," Chafee said.

Determining, beforehand, that the union's ever-present threat of expensive litigation will prove indomitable is a classic ploy of union-bought candidates for office. It simply is not difficult to believe that an objective judge would allow the state to change the terms of an insupportable pension system, at least for investments not yet made. In other words, the fact that employees have been paying into a system does not mean that they have a legal right to see that system perpetuated. Some aren't yet vested, which means that they don't even have a claim to the fruits of their investments thus far, and others can be told that different rules will apply to payments made from this moment forward.

The more extreme measure — which may yet prove necessary — would be to transfer the vested payments into a defined-contribution plan that is financially comparable, but with better terms for the state. But I don't think any candidates have gone that far.

Incentive Not to Work

In contrast to the PolitiFact about which I complained, yesterday, this one by Eugene Emery was actually informative. The statement under scrutiny was from Republican candidate for governor John Robitaille, that "Rhode Island has a very generous unemployment compensation rate compared to most other states":

By the latest measurement, during the first quarter of 2010 Rhode Island ranked second in the nation. The state paid the typical recipient 47.8 percent of the average weekly wage of $816.71. (Hawaii topped the list, at 54.8 percent. Massachusetts, by that measure, was at 37.3 percent, ranking it 29th.)

Put another way, the average hourly wage in Rhode Island during the first quarter of 2010 was $20.42. The average person receiving unemployment insurance got the equivalent of $9.76 per hour. The benefit could be as much as $13.76 an hour for an individual or $17.20 per hour for someone with five or more dependents.

Robitaille's contention is that unemployment benefits so high discourage people from going back to work once unemployed. I've actually run into that dynamic, with a new carpenter who spent most of the single day that he worked with my company telling another new guy how nice it was to be able to go fishing and such while receiving a government subsidy.

It's important to note that unemployment needn't exceed the pay rate that a potential worker could expect. It just needs to be more than he or she requires to live an acceptable lifestyle.

State Budgets, Easy to Grow....

Matthew Mitchell at George Mason University's Mercatus Center has done research showing that States will have to increase their 2009 budget cuts (average of 6.8%) to 12.3% and sustain that level of spending to pay off their debts. Rhode Island is one example he cites:

[T]he entire budget gap could have been eliminated had the state maintained 1987 inflation-adjusted per capita spending levels. Rhode Island's 2009 expenditures were $7.6 billion. If held to real 1987 per capita levels, however, the budget would have been less than half this amount: $3.3 billion. This would have been more than enough to close the state's $872 million gap. But as with other states, spending restraint needn't have begun in 1987 for the state to have avoided its budget gap. If held to real 1995 per capita spending levels, I estimate that the state would have spent $5.1 billion in 2009. Assuming revenue would have followed its same course, the difference is still enough to have avoided the state's entire gap.

Measuring the Economy by Taxation

Tax collections are up, in Rhode Island, and not a few people are happy to offer tentative suggestions that it's a positive sign for the local economy. I hope so. But still, I think it's tricky stuff to use this measurement. Consider two notes that Neil Downing offers on the data:

* The amount of state income tax withheld from workers' pay totaled about $145.5 million, up 9.1 percent from the same two-month period a year ago. In general, this suggests that more people are working, workers are earning more, or both, Dion said.

Sales-and-use tax revenue rose 3.5 percent, to $152 million. The category includes revenue receipts at the Registry of Motor Vehicles, which increased 6.8 percent, to $14.8 million. Overall, "there seems to be some pickup in consumer spending," Dion said.

Comparing this year's report with last year's iteration, the difference in total tax collections is $36 million. One-third of that ($12.1 million) comes from the increase in withholdings. This year's rate is even higher than that in FY09 (or actual year 2008), when it was $139 million. (The report for the year before is not online.)

So is our job market now better than it was two years ago, when the unemployment rate was 8.1%? According to the Bureau of Labor Statistics, 505,495 Rhode Islanders were employed as of July 2010; the number in July 2009 was 501,957; in July 2008, it was 525,562. Why is an employed population that is 4% smaller withholding an amount of taxes that is 4.5% greater? If you want me to offer a comprehensive answer to that question, you'll have to finance Anchor Rising as my full-time job, but I'd be willing to speculate that it might have something to do with changes to tax laws that reduce itemized deductions and shift the tax burden around.

Another million dollars in increased "tax" collections derives from the Registry of Motor Vehicles. And again, the amount is well above the number two years ago. Is that a sign of new car purchases? Perhaps. Or maybe it's a sign of creeping fees.

Another $2.7 million in increased collections derives from Historic Structure Tax Credit Reimbursements that weren't given this year. $2.3 million comes from fewer refunds/adjustments this year. Business received $4.6 million less in refunds and adjustments..

About the only increase that doesn't have an immediately apparent dark lining is net sales and use taxation, which rose about $3.9 million. That's a 3% increase from the year before, although it's still $2.6 million less than the year before that.

If that's what we're looking toward for hope of a recovery, we must really be getting desperate. But the larger point is that taxation isn't a reliable advance-notice measure of economic improvement.

On the Hook, One Way or Another

Local journalist Ted Nesi has moved from the Providence Business News to WPRI.com and is maintaining a column there (although they're calling it a "blog"). One sample from a couple of weeks ago has been nagging at me:

The Daily Beast is out this week with one of its link-drawing listicles — "The Most Screwed States" — and guess who they say is the most screwed of all? You guessed it — good ol' Rhode Island. ...

But those numbers are also very misleading — and more than a little bit alarmist.

Nesi's first step is to update the numbers cited in the article, which adjusts our debt-to-GDP ratio in a little bit healthier a direction. But his next point, which relates to Andrew's commentary about state bonds, seems like it must be ignoring something:

Rhode Island taxpayers are not on the hook for the state's entire $8.9 billion in debt. In fact, we're on the hook for less than half of it. The reason is because a big chunk of that borrowing is what's known as "conduit debt."

Conduit debt is basically when the state goes out and borrows money on behalf of someone else — nonprofits like Brown University or Rhode Island Hospital, or individuals via state agencies like RISLA and Rhode Island Housing. Going through the state makes it easier and cheaper for those entities to borrow money.

Reading the article, one gets the impression that the state's involvement in conduit debt is less than superficial. If that were the case, however, then why would it be true that lenders make the borrowing process "easier and cheaper" when the state is involved? Nesi should be a little more careful with his language: The taxpayer is "on the hook" but is trusting the recipients of the borrowed money to pay it back — sort of like the federal government trusted mortgagees through Fannie Mae and Freddie Mac to pay for their houses.

Just as significant is the incentive system that conduit loans set up. Particularly when it comes to organizations — perhaps, although I lack the time to confirm, including the City of Central Falls — the state's interest in the health of its sub-borrowers could lead to special arrangements with tax dollars to enable them to pay back the debt before it officially defaults to the state.

In other words, conduit debt essentially makes the borrowers quasi state agencies paying the debt through their own revenue sources — no different than fees and other revenue that state departments take in — for the term of the loan. Perhaps they shouldn't be incorporated into lists tallying annual state debt payments, for example, but it surely shouldn't be written out of consideration.

And whatever the case, for all of the adjustments that Nesi makes, he still only manages to improve Rhode Island's debt problem from worst in the country to seventh or tenth worse (depending whether one looks at income or population). Not a comfort, especially considering that we tie with the collapsing state of California.

Putting Rhode Island in Deep Water

Well, the Rhode Island Public Utilities Commission (PUC) has reached the decision that the General Assembly and Governor Carcieri all but required it to make, signing off on the expensive contract for an offshore wind farm between Deepwater Wind and National Grid:

"It will be four cents a day more," Carcieri said. "Who wouldn't be willing to spend that to invest in our economy, keep our money here instead of sending it to Saudi Arabia [for oil] and start a major new industry?"

It may be only $15 dollars per year to whatever demographic Carcieri is describing, here, but it will be much more to companies and manufacturers that require large amounts of energy. Indeed, the best the PUC could say about official complaints from two Rhode Island companies, Toray Plastics and Polytop Corp., was that "at least they didn't threaten to leave." But they did note that the increased costs would make it more difficult for them to expand in the state. That statement raises another item in today's Providence Journal:

The United States is selling fewer products around the world and spending more on cheap imported goods, an imbalance that hurts the job market at home and means the economy is even weaker than previously thought.

The trade deficit of nearly $50 billion for June is the biggest in almost two years, and economists fear that economic growth for the second quarter, which came in at a sluggish rate of 2.4 percent in early estimates, may turn out to be only half that.

"The problem is that to the extent we have a recovery in the United States, it is pulling in a lot of imported goods. That means it is not translating into production and jobs at home," said Nigel Gault, chief U.S. economist at IHS Global Insight.

Redirecting our energy dollars from the Middle East to the United States is certainly an important objective, but when the cost difference is so dramatic — with guaranteed increases year after year — it affects the activities of those who are required to pay the inflated rates. Government should not be as deeply involved in the economy as the Deepwater deal has exemplified, and I fear that Rhode Island is going to be on the bleeding edge when it comes to finding out why.

Set the Entire RI Economy Afloat

May I make a somewhat obvious point — coming from a conservative — about the recent conversation concerning tax-free boating in Rhode Island?

The tax policy has also helped the state rebuild the ranks of highly skilled boat workers, and has triggered the creation and expansion of boat yards, designers, builders and subcontractors — who specialize in such fields as electronics, sails and marine insurance, he said.

The benefits are not solely Aquidneck Island's, either; owners fly in and out of T.F. Green Airport, rent cars, dine in restaurants and attend shows in the Providence area, he said.

According to Neil Downing's article, Rhode Island is forgoing about $8.4 million dollars, out of its $7 billion budget. Can you imagine what our economy would look like if the state and local governments would forgo more? A government should be a secondary consideration (if that), in society, not the primary determinant of its economy and life. By making itself more central, governments suffocate the very people they ostensibly seek to assist.

Warwick School Committee Chooses the Tough Path

Faced with an insurmountable $13 million cut in state and local funding, the Warwick School Committee voted to freeze pay and impose a 20% health care co-pay for all of its employees last night.

Before the vote, School Committee Chairman Chris Friel stressed that these are not actions the district wants to take but it has no choice faced with insufficient funding for its budget of about $161 million for the current fiscal year, which began July 1.

He said the district did not want to cut programs that directly affect students, such as sports, gifted classes, mentoring and all extracurricular activities.

The action is in apparent violation of the School Department's contract with its roughly 1,000 teachers represented by the Warwick Teachers Union, with teachers slated to lose a 2.75 percent raise this year....The leaders of the two unions that represent almost all school employees - the teachers union and the Warwick Independent School Employees union - vowed that they will respond with swift court action.

"I feel stabbed in the back," teachers union president James Ginolfi said, noting that the first he and other union executives heard of the School Committee's plan was less than an hour before it took action in executive session.

"We listened to what they had to say and said we'd get back to you," Ginolfi said, adding that the school board is sending a public message that it has no regard for a legal agreement. "I am shocked," he said.

Put it all on 38?

States, including Rhode Island, are smart to market themselves and offer incentives to businesses. The deal with 38 Studios is coming in for praise and criticism, to be sure. Gamers have their opinions, with the optimism based on the all-star cast of gameworld creators--R.A. Salvatore, Todd McFarlane and Ken Rolston--while the pessimists basically think the game will be just one more World of Warcraft "me too" that is destined to fall by the wayside (though some think that an MMO of a different flavor--ie; not "fantasy"--is might work.

The business community is split, too, with skeptics pointing out that the funds would have been better used if spread out or at least not spent on one seemingly risky venture. Others make the point that the splash made by the deal has already caused increased business interest in RI and that there are protections to mitigate risk.

Part of the confusion probably lay in the nature of the business in question. I wonder if there would be as much reservation if this was a business that was selling or producing a tangible product? The truth is we just don't know what exactly to expect from a video game company. It's a relatively new industry and, let's face it, most of the business media and non-related business leaders around here just don't really know much about video games. So, until 38 Studios actually produces a product and the prospect of other video game companies coming to RI goes from potential to reality, we're not going to know if the deal pays off, either directly or indirectly. Until then, it's simply a gamble.

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.