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Thursday, December 26, 2013

Rebuilding Rhode Island’s Economy, Part 1

Unemployment LineI am of the mind that the biggest issue facing the state right now is the sluggish economy.  I know many share this belief.  

With that in mind, I will be focusing my (unfortunately limited) time writing specifically on creative strategies to improve Providence’s and the state’s economy, and thinking about it from the perspective of the upcoming gubernatorial and Providence Mayoral campaigns (i.e., what do the candidates have to say about what I write?).  

Before I delve into specific suggestions, I believe there are a few items relevant to economic growth that need to be clarified at the outset.

First, there isn’t much the government can do to improve the economy directly, particularly in this climate of economic distress and innovation paralysis.  When the economy is running smoothly, most folks want the government to “stay out of the way.”  But when the economy tanks, policymakers are the first to be blamed (this is a disingenuous and undeserved complaint), and everyone wants them to “fix it.”  First, you can’t have it both ways people.  Second, there is no magic solution to “fixing” the economy.

Second, economic growth takes time, commitment, alignment on a vision, and the autonomy to make things happen.  It is unlikely to see radically positive results in a few months or even a couple years.  Economic development is a decades-long strategy, that often requires partnerships and long-term planning that are challenging for public officials, policymakers, and civil service staff.  While the pain of recessions, joblessness, and foreclosures is real, there are often few options for state and local officials to ease that pain.

Third, everything matters to economic development: education, transportation, infrastructure, workforce, land-use, zoning, existing markets, history, taxes, regulations, natural assets, etc.  But each of these matter to varying degrees depending on the industrial sector and individual businesses.  To assume that “lowering taxes” or “reducing regulations” is the most important of considerations is foolish, ill-advised, offensive, and immeasurably distracting from the various other issues that are generally much more important for long-term economic success.  While everything is important, some things are more important than others.

Fourth, every strategy comes with trade-offs and there are always winners and losers with any policy change.  Typically, those with wealth and power can influence policy to their benefit.  And while this may benefit them personally, or as a group, there are long-term consequences for the economy that are generally ignored.  The incremental policy decisions that have been made in the past have led to our little state to lack the sufficient resiliency to bounce back from the recent and ongoing depression/recession.  The economic conditions in which Rhode Island finds itself will take many, many years to rectify.

Fifth, demand for goods and services drives the supply of goods and services.  If no one wants to buy stuff, stuff doesn’t get made, and people lose their jobs.  Most tools that are deployed by cities and towns and the state try to stimulate the economy do not address economic demand, and as such they are largely inefficient and/or ineffective.

Sixth, underlying everything is an often ignored but crucial criterion: the importance of inclusive and dispersed economic growth.  The benefits of economic growth need to be broadly shared because the more people who earn money, and the more money that they earn, the higher the level of economic growth.  When economic growth benefits a small (and shrinking) number of people, aggregate demand declines and the economy suffers.  When a rising tide actually lifts all boats, something that the post-WWII economy was notable for, everyone benefits.  When a growing number of boats are chained to the bottom of the ocean, as has been the experience from the mid-1970s onward (with a notable exception during the 1990s), the economy flounders, people fall deeper in debt to maintain their standard of living, and the economy slows.

Seventh, the ONLY way the state (or any state, region, city, etc.) can be successful in the long-run is by improving its competitiveness in particular economic areas.  This can be done by increasing the productivity of existing businesses through innovation or better trained employees or achieving higher workforce participation rates, while ALSO supporting the high and rising wages and living standards of Rhode Islanders.  Period.  This is hard to do, but not impossible.  The role the city and state can play is to lay the groundwork for an iterative process of successive improvements to support business productivity gains and assist with the dispersion of economic benefits.

Eighth, when we discuss economic development, it’s important to differentiate between locally-traded clusters, sectors, and industries and those that are subject to larger markets, regional, national, or global in scope.  The first group includes restaurants, local health services, residential housing construction, etc. while the second group includes software development, manufacturing, higher education, etc.  The success of the first group is largely dependent upon the success of the latter.  To put it another way, an economy can only grow by exporting lots of high-value goods and services and bringing in money to the state from other parts of the country / world.  The degree to which the economy is exposed to and successfully competes in global markets is the single largest factor that explains how successful its local economy is.  This isn’t to say that the local economy isn’t important, just that everyone selling hamburgers to each other does not grow the economy.

Finally, businesses grow at various points over their lifecycle.  The only businesses that are guaranteed to have net positive job growth are new businesses, for the obvious reason that they will employ at minimum the owner of the business and they have no current employees to let go.  Many businesses grow to a certain size and stay there for their entire existence.  Many businesses have dramatic fluctuations in their employment based on seasonal or market demand.  Some businesses have limited but sustained growth.  And only a few businesses experience pronounced growth, and that growth is generally limited to a short period of time.  

All of this is important when it comes to growing jobs because there are only limited opportunities to identify and support existing businesses during their growth phases.  But the opportunities are innumerable to support new business growth, and it is new business startups that have been responsible for net new job growth in the past decade.

There are additional factors that contribute or impede economic growth, but in my mind, the 9 above are of paramount importance.  Feel free to bookmark this post as I will update it as I begin listing specific strategies to Rebuild Rhode Island!

Brian Hull received his Master's Degree in Public Policy from the Kennedy School of Government at Harvard. He is Senior Consultant with the leading research and strategy firm on U.S. inner city economies. Professionally, he is lead advisor to municipalities and county governments on key trends impacting inner city economies and businesses, works on urban-based economic development projects for organizations and institutions across the country, identifies how large institutions can better provide local economic opportunities for low-income urban residents, and explores innovative workforce development systems to create a more productive local labor force.