September 20, 2014
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Return to first principles
In decline and in denial
Steve Frias

The year is new but the problems are the same for Rhode Island. For decades, Rhode Island has had a weak economy. Currently, Rhode Island has the second highest unemployment rate in the nation and is ranked as having the worst business climate in the country. Rhode Island’s most recent effort to rejuvenate its economy, the 38 Studios video game venture, turned into a debacle. Recently, Rhode Island’s elected officials have suggested Rhode Island’s economy can be rejuvenated if changes are made to Rhode Island’s Economic Development Corporation, or if gay marriage is approved, or maybe just by communicating better about the positive aspects of Rhode Island. Changes in a bureaucracy, promotion of a liberal social agenda, and the power of positive thinking will not change Rhode Island’s fundamental economic problems. Rhode Island needs to dramatically improve its business climate, which means it must significantly reduce the costs of doing business in Rhode Island.

Rhode Island politicians have long known what it will take to cure Rhode Island’s economy. In 1938, after nearly two decades that saw violent labor strikes and the flight of Rhode Island textile companies to lower cost southern states, the Rhode Island State Planning Board warned that Rhode Island’s industrial future “can only be viewed with apprehension.” As a result, an Industrial Development Commission was appointed to retain and obtain new industries for Rhode Island. In 1939, textile business leaders emphasized to this Commission that lowering taxes was fundamental to reviving Rhode Island economically. Specifically, they noted that “no businessman will long continue in a locality where his costs are high providing he can, without too much expense, move to a locality where his costs are low.” They were ignored.

Taxes rose, labor strikes were frequent, and manufacturing enterprises kept leaving Rhode Island. In response, in 1951, the Rhode Island Development Council was established, but the economy still lagged. In 1957, the Providence Journal printed a report entitled “What’s Wrong with Rhode Island?” in which businessmen criticized Rhode Island’s adverse climate and its high tax burden, with one businessman complaining that Rhode Island’s laws were “loaded with ‘snuggle the voter’ legislation that would cost us more than where we are located now, or are likely to go.” The executive director of the Rhode Island Development Council responded by criticizing the report for generating bad publicity for Rhode Island’s economic development efforts.

The years went by, taxes went up, labor strife was common, manufacturing was disappearing, and the United States Navy sailed away, so the Rhode Island Department of Economic Development was established. However, the Rhode Island economy continued to stagnate. Therefore, in 1982, the Rhode Island Strategic Development Commission was appointed to develop a plan to reinvigorate Rhode Island’s economy. This Commission was not persuaded by arguments that “we lower our taxes,” so as to “encourage investment.” Instead, it developed the Greenhouse Compact. This plan proposed raising taxes and created a commission to spend approximately $250 million in loans and other subsidies for targeted industries and specific businesses. Although Rhode Island politicians of both parties overwhelmingly supported it, Rhode Island voters overwhelmingly rejected it in a referendum in 1984 because of opposition to tax increases and fears that these funds would be disbursed in a politicized manner by a commission, which included state legislators.

Decades later, in 2010, the idea of a taxpayer-funded loan program for specific businesses was resurrected. Republican Governor Donald Carcieri and the Democratic-controlled General Assembly created a $125 million loan guarantee fund. This allowed the board of Rhode Island’s Economic Development Corporation to approve a $75 million loan guarantee to 38 Studios. Now, 38 Studios is bankrupt and Rhode Island policymakers are left to concoct new economic development initiatives and make excuses for Rhode Island’s continued economic decline.

Rhode Island has been a state in decline for nearly a century. In the early 20th century, Rhode Island was second in per capita wealth in the United States and its capital, Providence, was one of the major cities of the world. One prominent Rhode Island historian once acknowledged that “it can be argued that after 1900 it has been all downhill” for Rhode Island. To stop the decline, Rhode Island policymakers must stop being in denial.

To make the Rhode Island economy prosperous, Rhode Island must dramatically improve its business climate rating. Government should not be in the business of creating jobs or offering subsidies to specific businesses or industries. Instead, it should foster a climate that encourages all businesses to create jobs. The basic principle to remember is that business only makes a profit if it keeps its costs low, and therefore government should avoid passing legislation that increases the cost of doing business. Investors will invest their money where they can earn a good return. They do not invest in Rhode Island because of its ranking as having the worst business climate in the nation. The costs of doing business in Rhode Island must be lowered significantly, which means lower taxes through a reduction in spending and the elimination of laws that increase the cost of doing business. The problem is that to lower spending or repeal laws that increase the cost of doing business would require Rhode Island politicians to overcome opposition from organized labor and those dependent on Rhode Island’s extensive social-welfare programs, two powerful constituencies in Rhode Island.

About two decades ago, the Commission that developed the Greenhouse Compact analyzed Rhode Island’s poor business climate rating. To improve Rhode Island’s poor business climate, the Commission declared it “will not sacrifice the values which we hold as a state.” The Commission mentioned that Rhode Island’s failure to adopt “right-to-work” legislation or to reduce its level of spending on “social welfare” may mean that “Rhode Island will probably never rank among” the “top states.” Rhode Island’s politicians did not sacrifice these “values,” but they did forfeit prosperity. The decline will only stop when Rhode Island stops being in denial to the fact that its liberal economic policies have failed to create a prosperous economy.


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