Economic Development games on Smith Hill

In January 2017 the RI legislature will convene for the new session. Rhode Island faces a myriad of issues. The powers on Smith Hill will tell us fixing the economy is JOB 1. It is true that fixing the economy would be a great thing, but unfortunately the leadership on Smith Hill is using an outdated framework of development that is not supported by the data. And has never been shown to work.

The basic premise of economic development in Rhode Island is that the way to make the economy grow faster is to make the state more business friendly, business friendly being defined as following the prescriptions of right wing think tanks like the Heritage Foundation that spout a rhetoric that says the key to economic growth is to reduce regulation, cut taxes, and provide subsidies to millionaires to create jobs. The corporate media and the right wing think tanks have been beating this drum for so long that it has become an article of faith in political economics.

The election of 2016 has demonstrated ever more convincingly that America has become a fact free zone, in other words, actual facts do not make a difference. Ideology trumps facts for the electorate and for those who determine policy. But at least some portion of Americans are quite aware that policy that runs counter to actual facts rarely works.

It is in the spirit of helping my community align policies with facts that I offer this essay.
It is an article of faith that tax cuts and little regulation makes your economy grow faster and that states should always seek to align themselves with such policies. The problem is that no one has ever been able to definitively show that following these policies works. One would think since the idea is supported by the mainstream media and the think tanks that there would be study after study that demonstrates the efficacy of this program, and the before and after comparisons would be readily available. You would think that right wing think tank after right wing think tank would have a report lining up the business climate rankings with the economic growth rates of the states showing a wondrous correlation. I have argued for many years that the model does not work, and have repeatedly asked my readers to show me reports that make the case using actual data. Given my interest, and my reading of a vast breadth of economic data and analysis, I would think that in 5 years of serious watching I would have seen more than a few reports demonstrating statistically significant correlations between economic growth rates in states and communities and their adherence to the policy prescriptions we are being offered daily by the leadership on Smith Hill, the Chamber of Commerce, and the think tanks. But I have NEVER seen one serious report that makes that case. Not a one.

Given the wealth and media connections of those who have a vested interest in maintaining this status quo and its policy offerings it is almost impossible to imagine that if the business climate indexes and the economic growth rates of the various states worked in lock step, or at least in pretty good approximation, that the message would be front page headlines time after time, that the data would be everywhere.

Ask yourself. When was the last time you saw a report that used actual data to make this case? You see the constant policy offerings touting this formula, but you never see reports that demonstrate that it actually worked. In some cases the lack of data proves nothing other than the research has not been fully done, but in a case like this, where the stakes are high and powerful interests could easily get the data into the hands of the public, one has to conclude that the article of faith is just plain wrong.

Interestingly there have been a few reasonably good studies looking at this issue. The most definitive was written several years ago by Kansas Inc, which was the economic development agency in Kansas, the equivalent of Commerce RI. I read the report on the web, but the report is no longer on the web. When Governor Brownback was elected in Kansas he went all in on tax cuts and deregulation. But instead of rapid growth what Kansas experienced was the worst economic performance of any state in the country, with a shrinking economy for several years. Results so bad that schools closed, and state agencies were closed due to lack of funds. Check this link and see what I mean http://www.kansasinc.org/pubs/working/Business%20Climate%20Indexes.pdf    My speculation is that not only did Kansas go broke, but that the governor realized that his own state agency did actual research and proved decisively that his favorite policies were useless so he shut it down.
One of the best analyses of just how efficacious business climate indexes are was written by the Business Curmudgeon. He uses the Kansas Inc report as part of his case. Check this one out     http://journal.c2er.org/2013/02/business-climate-revisited/      After reading this see if you ever believe anything the Chamber of Commerce or the Koch brothers tout. And begin to understand just how little local and state tax rates actually mean to the growth rate. State and local taxes average 2% of the expenditures of businesses in the US. In a high tax rate state maybe 2.2% of expenditures goes to state and local taxes.

And then ponder this. If environmental regulations actually harmed economic performance you would easily find comparisons of growth rates and the strength of state environmental laws in the media. But you do not because it provides another inconvenient truth. What you would actually find a a relatively weak, but noticeable trend towards states with better performing economies having stronger environmental laws.

This is not to say correlation is causation, but if you can not even find a correlation, how can you claim causation.

The reality is that the history of a community, its natural resources, its population, the skills of the members of the community, and its location have a MUCH bigger effect on the economy than anything resembling the business climate. I saw a great example today. North Dakota ranks very high in every business climate index. In the last 5 years it has lead the US in growth rate several times.One year the North Dakota growth rate was 15.3% But as soon as the price of oil fell the state’s economy crashed and 2nd quarter of 2016 it shrank 5.6% on an annual basis.. In other words the realities on the ground were MUCH more important that the business climate.

So again I remind my RI colleagues, stick to the facts. Adopt policies that actually have been show to work rather than accepting the received wisdom that has a long track record of failure. We have a case in which if you keep telling a lie for long enough eventually people, especially people with a vested interest in believing it, start to believe it. But that still does not make it true, nor make it into good policy for our communities.

We are constantly told we need to be a data driven society, that science and innovation can help us solve problems. So i ask the folks in the media and on Smith Hill, how come this is different? How come the facts are ignored in this public debate? Does the ideology of capitalism trump facts? Is this why RI economic development policy has promised so much and delivered so little over the years? Is it possible that another model of development might suit us better? I think those on Smith Hill owe it to us, the people of Rhode Island, to start telling the truth about how their economic development strategy works. Or rather why it does not.