Reading a Free Market Solution Between the Lines

Three items on Ted Nesi’s Nesi’s Notes for this weekend imply a critique of the way Rhode Island government has approached economic development.

The first relates to the Beacon Hill Institute’s State Competitiveness Report.  RI’s big-government boosters like to promote Beacon Hill’s index because it includes mushy categories that make Rhode Island appear at least not to be in the bottom 5.  Of course, the first year I took note of this particular report, Rhode Island ranked 19th in the country.  That was 2011.  In the years since, RI hovered in the high teens and low 20s, with a surprise showing of 8th, last year.  So, 35th is a big come-down for the Ocean State.

Nesi highlights Business Incubation as the biggest single gap between Massachusetts (which tops the overall index) and Rhode Island.  In this category, Rhode Island is 45th, whereas last year, the state ranked 13th to Massachusetts’s 9th.  This means the Ocean State is languishing when it comes to new business creation and policies that empower new businesses.

It’s worth noting that I dug into job creation and corporate births in an extended way in 2015.  At the time, my general interpretation was that Rhode Island’s sour economy was forcing people to start their own businesses as an alternative to the jobs that weren’t available.  However, once an entrepreneur started to take additional steps to grow, they very often failed, because the state makes it so difficult.

If Beacon Hill’s result this year wasn’t a fluke, then what we could be seeing is that even this arguably negative boost in entrepreneurship is going away for the Ocean State.  That would certainly jibe with trends we’re seeing in our labor force continuing to shrink.

If the above suggests that Democrat Governor Gina Raimondo’s approach to economic development isn’t working, then another item, on the opening of the Wexford Innovation Campus in Providence, offers both some explanation and a warning going forward.  Nesi quotes Eduardo Porter of the New York Times, writing about a similar Wexford project elsewhere:

“Winston-Salem’s predicament reflects a larger social and economic challenge: the widening gap between a limited set of successful cities — which draw both highly educated workers seeking well-paid jobs and high-tech companies that want to employ them — and pretty much everywhere else. This new pattern of economic development amounts to a fundamental break from the decades after World War II, when poorer and generally smaller cities were catching up with richer, bigger places. In recent years, this convergence stopped. Many midsize cities and small towns that found manufacturing-based prosperity in the 20th century have lost their footing in the tech-heavy economy of the 21st. … The companies now leading the economy gravitate toward big cities where they can find clusters of highly educated workers and attract more.”

In other words, even if the top-down, contrived-innovation approach that Raimondo and her Commerce Corp. pursued with Wexford has some positive effects, they can easily be swamped by broader trends in the economy.  You can build it, but the hipsters might not come.  This gets to the great flaw of central planning:  Nobody can possibly understand the global economy well enough to know what investments to make, and making those calls with government subsidies (rather than the personal risk of private investment) ensures that less care is taken in the decision making.

Lastly, a separate item in Nesi’s Notes emphasizes the challenge RI has in the top-down competition.  Quoting Josh Barro in 2012, Nesi points out that Rhode Island’s poverty relative to Connecticut and Massachusetts means that it can’t match their investments without sparking the adverse effects of ramping up its tax burden disproportionately.  Put in terms of a single person’s life, productive Rhode Islanders can move to Massachusetts and Connecticut, experience a tax reduction and live in a state that spends more per capita on its residents than Rhode Island does.

Simply put, this is not a problem government can solve.  Only individuals, acting innovatively in their own interests and with their own resources can overcome this challenge.  That means lower taxes and lighter regulation.  We have to let ourselves dig ourselves out of this hole.


Featured image: The original site plan for Wexford’s Innovation Campus.

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