What the Bureau of Economic Analysis report says to Rhode Island

Greg Gerritt June 2015

My goal is the most widespread prosperity possible in Rhode Island. Every kid should grow up well nourished, with every opportunity. Every adult should have a right livelihood, meaningful work that satisfies and supports the community and their family. We are far from that goal, and seem to be moving away from it towards a state of greater inequality, more intractable problems. It is my contention that we are moving in the wrong direction because a few people who benefit from the current system are pushing us there, and using their money to create a public policy arena that is toxic to our community. To combat this, in addition to feistiness, we need information and honest analysis. Then we have to bring what we learn into the public policy arena so that outcomes are based on reality, not a Chamber of Commerce fantasy.

The fantasy is that old industrial states will reach 3% economic growth per year on a regular basis. There are a number of reasons why the 3% growth game is a fantasy, and a very burdensome one to most of the community. But also a very useful fantasy for the wealthy. They always have a tool for giving themselves more if they can remotely tie it to the proposition that it would increase economic growth rates and create jobs. Study of places around the world experiencing rapid economic growth since the beginning of the industrial revolution point out the conditions necessary for rapid growth, essentially 3% per year or more growth for an extended period of time. When looking at the key factors leading to rapid economic growth I tend to follow Immanuel Wallerstein. Immanuel Wallerstein The Modern World-System: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century. New York: Academic Press, 1976,

Here is a synopsis of the criteria for rapid growth over the last 500 years, and just as relevant today. Places need at least one of these things to be happening, and rarely does a place have all three working simultaneously. Most of the industrialized west has none of these things happening, and therefore low growth rates are very common.

The first category is a natural resource boom. Fossil fuels and minerals are often involved, but as growth ultimately happens because of the demands of growing cities, even more important are forests and forest products such as wood to build new buildings and furniture. The record is quite clear, cities can not get built or grow without new sources of wood. And as the forests are usually gone on any flat land near cities soon after founding, the race to expropriate the wood used in new cities is going faster and farther afield now than ever before in human history. Less than half the global forest remains and deforestation numbers are in the millions of hectares every year. Deforestation and expropriation are often accompanied by genocide, compounding the problem.

The depletion of resources of all types: forests, fish, soil, minerals, phosphorous, clean water, the climate, sinks, whatever you can think of that people and the rest of the life on the planet need all the time, goes faster than ever, and is swiftly reaching limits and tipping points that seriously threaten civilization and our economy. Rhode Island has no natural resources that can stand additional pressure, and therefore we shall not get large scale natural resource based growth, though agriculture is one of our growth industries.

The second condition for rapid growth is a rapidly urbanizing population of rural dwellers coming into the city for their first taste of urban life. Many are the expropriated forest people who were left with the choice of moving to shanty towns or death if they resist and insist on the right to live on the lands of their people. Many others are farmers with no place to farm, families squeezed out by soil depleting agriculture foisted upon them by Monsanto and its ilk. Urban Rhode Island is not exactly a steamroller of population growth. We have no hinterlands producing too many hands for the land and encouraging all the kids to head out before the army comes, but we do have a flow from our neighbors to the south as their agriculture succumbs to free trade chemical agriculture, deforestation, and death squads funded and trained by the US government.

The third condition for rapid growth is to be a mega city with historic ties to one of several industries that globalize well such as finance, entertainment, medicine, and communications/computers. I know RI wants to be the home of design and the medical industrial complex, which globalizes reasonably well, despite how often medical bills bankrupt people, but we are not in a megacity and will not be until Earthcity jumps off the science fiction pages and into our lives. Often the policies communities use to get in this game increase inequality and harms 99% us while benefitting the owners of downtown land and others who can get subsidies and tax breaks (see medically induced financial disasters). In other words it is a strategy guaranteed to fail the community. If you build it it often stands empty without another reason to move for people to choose to move in.

But even the megacities of the rapidly industrializing lower income countries are unlikely to achieve a western income level before the boom runs out. One thing to watch for is the middle income trap in which low income places grow rapidly, but get stuck at a per capita income around $10K. China is struggling to avoid this, and very very few of the newly industrializing countries are managing to avoid it. South Korea may have been the last country to escape. One must never forget the resource base that is rapidly depleting and therefore will be unable to sustain growth forever.
The Bureau of Economic Analysis report on economic growth for 2014

About a year ago I started subscribing to the occasional releases of the Bureau of Economic Analysis. It is a Federal government agency and its primary job is to report on the rate of economic growth and parse the data a bit. The most recent release http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm discussed the final numbers for economic growth in 2014 nationally and by state. This report stated that the growth rate of the USA in 2014 was 2.2% up slightly from the 1.9% in 2013, and in keeping with the recent trend of being in the 2.2 neighborhood since the worst of the recession ended. Given the frantic efforts in Washington DC to boost growth, and the fact that none of the policy makers in DC consider 2.2% growth to be all that good, it makes me wonder whether the politicians actually know what is going on. All the kings horses and all the kings men could not put the growth machine back together again. And never will.

Rhode Island was tied for 28th in the rankings with Delaware and Illinois at 1.2%, just over half the national rate. Just that number in all likelihood will set off the Rhode Island counterparts of the men who scream for growth and bring down upon us the prescription of austerity for the people and more tax cuts for the wealthy. But if you look at the data state by state it tells you the business climate mania that sets the policy, the Chamber of Commerce ideology that sets the agenda, has almost nothing to do with how well the economy of the various states are doing. The reports on how poorly business climate indexes predict economic growth are legion. My favorite is from the Business Curmudgeon http://journal.c2er.org/2013/02/business-climate-revisited/ . Good jobs first also has a good report on the business climate scam. Grading Places: What Do the Business Climate Rankings Really Tell Us? by Peter Fisher, with a Preface by Greg LeRoy May 2013 http://www.goodjobsfirst.org/gradingplaces

The first thing that jumps out from the BEA data, maybe because those states are shown as bright blue on the map, is that 9 of the 10 states with the highest growth rates are in the West (the exception is West Virginia) and that at least 8 of the top 10 have some sort of fossil fuel boom going on. The fossil fuel boom data is not on the map, but is widely available elsewhere. In other words nearly all of the states leading the US in growth rates are destroying the planet, especially its water and climate, for a temporary fix today. Oregon and Washington seem to be the only exceptions among the top 10, and even they are much more dependent upon depleting natural resources than the RI economy. Fracking is the only thing keeping the national growth rate above 2% and if we did anything like Full Cost Accounting, and deducted pollution and climate change costs from the overall economy, we would be going backwards and the obviousness of economic shrinkage would have to be acknowledged.

If you look east of the Mississippi, no region, not even the South, home of the business climate junkies, has a growth rate above 1.7%, though 9 of the 10 states with growth rates between 1.9 and 2.8% are in the east. The Southeast and the Mid Atlantic states are at 1.7% including places experiencing fossil fuel extraction booms. New England is at 1.6% and the upper Midwest is at 1.4%. Of the Rust belt states, the East minus the South, Rhode Island’s 1.2% growth is right in the middle and we are third in New England ahead of Maine, Vermont, and Connecticut. MA and NH lead New England at 2.3% or just about right at the national average. Boston, the only really large city in New England, leads with its knowledge economy, but even around Harvard and MIT, MA can not rival the growth rates of a fossil fuel boom. Texas and North Dakota lead the growth parade, with North Dakota growing by 9% in 2014 after growing by 15% the year before, though it is likely that much of the growth is building prisons for all the criminals in the oil boom towns. Every jail in the fracking parts of the state is full. Only 16 states are above the national average in economic growth with 34 states below the average. This also is indicative of booms in the fossil fuel states and everyone else trending towards a steady state.

The slowest growing states are all over the place with New England, the Southeast, the Northern Plains, the Great Lakes, and Alaska all represented, though for the most part not the West Most have Republican administrations, but more importantly each faces unique challenges. Many are low tax, weak regulation states that just do not seem to work the way we are told they should.

The literature in the economics field is starting to reflect that many scholars are looking at the end of rapid economic growth for most of the industrial world. They look at the industrial revolution and the 1870’s fossil fuel revolution as aberrations in the growth rate, and see a downward trend. Robert Gordon Robert J Gordon Is US Economic Growth Over? Faltering Innovation Confronts Six Headwinds NBER Working Paper No. 18315 Issued in August 2012 http://www.nber.org/papers/w18315 helped get it started. They see depleted resources and growing inequality, and have come to realize that in consumer societies, growing inequality throws sand in the gears of the economy. Piketty made that concept one that is widely know. And the inequality seems to grow from a public policy dominated more and more by the rich as their greed knows no bounds despite the planetary limitations. If they are to get richer, the middle class must be diminished.

Often a way to compare economic policy outcomes is to compare adjoining states with reasonably similar underlying economies but different policies. The poster children for the austerity for the people and tax cuts for the rich policies that the Business Climate indexes tout could be Wisconsin and Kansas. They might be contrasted with Minnesota and Missouri.

Wisconsin grew at 1% last year despite Governor Walker’s breaking unions, cutting taxes and shrinking the state budget. I say despite because Minnesota, Michigan, and Illinois, all adjoining states, grew faster. With administrations in Minnesota and Illinois not following the Chamber of Commerce cliff jumping frenzy. Michigan is jumping off the austerity cliff, but its economy has been so anemic for so long with the loss of the auto industry that with no where left to go but up it achieved somewhat higher growth last year even with the cracks in the facade widening as infrastructure breaks down.

Kansas went even farther than along the bunny trail of tax cuts to the point where its schools started shutting down for the year in May when they ran out of money. Kansas is experiencing something of an energy boom, so its growth rate slightly exceeds Missouri’s, but it is much lower than Oklahoma’s which is right in the middle of the boom. Nebraska had a slow growth rate, but as its unemployment rate was 2.6%, the lowest in the country, it did not have many people that could take new jobs. Kansas’s austerity program went so far that they had to shut the website of Kansas Inc, the state economic development agency. This is a big loss as Kansas Inc http://www.kansasinc.org/pubs/working/Business%20Climate%20Indexes.pdf ( the link takes you to something totally different as the website is closed down) did the definitive study comparing business climate indexes and economic performance, finding almost no correlation, and the study is no longer available on the web. You wonder if Kansas Inc was closed because it refused to mis-state the research and put its stamp of approval on the Governor’s misguided policies.

This analysis of growth rates points to a few things that seem relevant for RI. The first is that it is the economic and natural resources of a state, its history, geography, the size of its cities and its connections to the global economy have a much greater influence on economic growth rates than tax policies, regulatory regimes, or business climate. If all the top 5 growth rates are found in fracking states hell bent on global destruction, and none of the states with the slowest growth are involved in fracking, planetary destruction seems to be the key indicator of growth as long as you forget how to subtract the damage done instead of adding it to the Gross State Product.

The second is that growth is fading away in the US and will soon be gone. This is especially the case in states that were the growth regions of the Industrial Revolution like Rhode Island, but no longer fit the growth profile in the 21st Century. Industrialization in the rich economies no longer employs a broad working class and brings it into the middle class. Now computers eat jobs rather than create them, and we have no mechanism for creating jobs for people with High School diplomas. We are going to have to get ready for a steady state economy and we are going to have to figure out how to create prosperity and employment under those conditions.

I offer up a quote on growth that comes from some rather reputable consultants. McKinsey and Co. http://www.mckinsey.com/insights/health_systems_and_services/Africa_A_continent_of_opportunity_for_pharma_and_patients?cid=other-eml-alt-mip-mck-oth-1506

Africa: A continent of opportunity for pharma and patients
Africa may be the only pharmaceutical market where genuinely high growth is still achievable. Here’s what’s driving that strength and how companies should react.
June 2015 | byTania Holt, Mehdi Lahrichi, and Jorge Santos da Silva

“In a world of slowing and stagnating markets, Africa represents perhaps the last geographic frontier where genuinely high growth is still achievable. Early movers can take these four steps to pursue competitive advantage:”

What McKinsey is saying, that rapid growth anywhere except in the very poorest and rapidly urbanizing places is likely to be a short term resource boom followed by a bust. Combined with the slowdown of growth in China, the steady state economy in most of western Europe, the collapse of ecosystems everywhere, and the growing inequality in which the anemic growth they tout all ends up in the hands of 1% of the population, one has to conclude that Rhode Island is very unlikely to ever achieve high growth rates again. No matter what tax policy and give aways they come up with. And the effort to achieve rapid growth is likely to do significant harm by damaging ecosystems and increasing inequality.
Since RI is not going to achieve high growth rates again, what we face in the public policy realm are choices as to which policies are likely to create the most widespread prosperity in the low to zero growth environment we find ourselves in. Unfortunately the policy makers in Rhode Island insist that they can get a high growth rate here if we just follow their prescription. Of course they have been failing for the last 50 years with this prescription. And unfortunately, policies to achieve growth that do not fit the actual situation we find ourselves in make things worse and accelerate inequality. Thereby making things worse. The political leadership get their marching orders along with the campaign cash they use to get reelected from global corporations and the real estate industry. The prescriptions of tax breaks for the wealthy, and subsidies for everyone who wants to build a building downtown definitely contributes to greater inequality in RI, and as Piketty (Capital in the 21st Century) and a variety of other authors have pointed out, increasing inequality makes it very hard to run a consumer society or an economy that works at all well. And when 99% of the income gains are going to 3 to 5% of the population, it makes it really hard to be a consumer oriented economy and get economic vitality from consumption as most people get poorer. What is frustrating about the policy disaster is that the results we are seeing are exactly what any thinking person would predict given the formula being crafted on Smith Hill.

The I-195 land and the RI economy of the future.
Brownfields are a critical component of the Rhode Island economy of the future and what we do with them, and how the benefits of reuse are distributed will be crucial to our ability to create prosperous communities. But before we go to brownfields we need to go back to forests. And bring in some lessons from the forest as to what kind of development is needed in RI communities and how it might be organized.
Forest health may be the most important indicator of ecosystem health on Earth, and no one has ever figured out how to build cities without a new supply of wood. Now think about the people who live in forests, who are often he most marginalized and disenfranchised people in a country, just like those who live near brownfields.
As noted earlier forests are a critical ingredient for prosperity. And with the global forest half gone, and our understanding of the role of forests in keeping our planet alive, more and more folks are realizing that it no longer is useful or makes sense for our communities to allow anyone to displace the forest people and steal their forest. In fact the World Bank found exactly the opposite to be the case, and that economic development is most helped, locally and nationally, by providing secure tenure for the forest people and making sure all of the benefits of economic development accrue to the poorest people in the community, since if any of it leaks out it defeats the poverty ending agenda and harms the overall health of the national economy as well as the forest. Managing Forest Resources for Sustainable Development: An Evaluation of World Bank Group Experience, prepared by the Independent Evaluation Group, distributed internally on December 28, 2012 http://www.redd-monitor.org/wordpress/wp-content/uploads/2013/01/ForestCODE-Jan-2013.pdf

Now think about brownfields, the land that is most available in our old cities and along the rivers. Now think of areas near brownfields as the RI equivalent of forest communities, inhabited by the most disenfranchised and marginalized members of the community. And the people who most need to benefit from economic development (Think Olneyville, Woonsocket, and West Warwick) . Taking a hint from the World Bank we have to realize that the for the 195 lands to really benefit Rhode Island economically they really need to be used to build equity and create benefits for the lowest income people in the community.

But clearly the plan is to do exactly the opposite, it will be used to attract more wealthy folks and the very wealthy folks who buy land and build buildings will get large subsidies (essentially a transfer of wealth for the community to some of its wealthiest members) and tax breaks. I have been told by people in the real estate industry that nothing would get built in Providence without tax breaks as our economy is too bad and there is not enough profit in it. The subsidy is the profit.

Clearly there is a breakdown in the system, and the breakdown is the belief that churning prosperity redeveloping property in the city has to bring more money per square foot than it did the last time, with ever greater profits to the landlords of downtown, is actually economic development for the 21st century. In most older cities this system has failed for the last 50 years, but going through it again and again is the received wisdom. This system is also responsible for nearly all of the corruption in politics.

RI needs to pay attention to this lesson because if we want to end poverty, especially among the most disenfranchised and marginalized members of the community, we can not keep giving tax breaks to millionaires to develop brownfields into high end properties. We have to break the cycle of upcycling. Yes I know it is very hard in a system running on debt, but eventually the growing inequality must get reversed. If that means no one can afford to build buildings, then lets start to use the land for purposes that can spread the benefits widely and that means brownfields for community food security.

It means there will be a bit less money sloshing around. It means planning for the shrinkage of the economy with an eye on economic justice. Something we ought to do since 99% of us are never going to see growth again. In the growth game as currently played 1% gets 99% of the growth in income. But we need prosperous communities, and that means thinking about widespread prosperity in a shrinking economy. Based on ecological healing and economic justice.

Here on Earth, and in Rhode Island, for the sake of ecological healing and the future of food, we need to use less, and considering how many people really do NEED more, then the 1% and the middle class in the industrial world are going to have to use less.

Some people think that is impossible or it would be horrible. But we have to think about prosperity rather than growth. We have to reduce inequality, heal ecosystems, close the war machine, create zero carbon emissions, reforest and farm our sprawl. Not build shopping centers or the next big thing.
There is much spending we could easily eliminate in ways that mean a happier, healthier, and more vibrant community while spending less money and refusing to exploit workers around the world.

For Providence’s prosperity start with food security and turn the I-195 land into farms, not biomedical labs or baseball stadiums. If we keep thinking economic development starts with real estate speculation and subsidies for the rich, we shall be stuck forever. If we think we need to relax environmental protections to grow the economy faster, remind yourself that for 99% of us growth left town years ago, and ecosystem health underlies our prosperity. Its time to give up the fantasy that growth is helping us build better communities when it is all ending up in the pockets of the few. Its time to think about the real consequences of growth with a Full Cost Accounting System, and think about how in the industrial world it is never coming back. Then lets build a prosperous future with solar energy and no more war machine.

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