Municipal fiscal woes are impeding R.I. recovery

Economist Nicholas S. Perna knows the business climate in New England better than most. An economic adviser to Webster Bank since 2002, he is also the president of Perna Associates, a consulting firm specializing in economic forecasting, strategy and analysis.
He says the Great Depression and the Great Recession are similar in their root causes of financial chaos. As such, recovery will take far longer in the current case for many sufferers, including Rhode Island, than is common with recessions.
“Fiscal stability must be restored,” he told Providence Business News. “It’s a fundamental prerequisite to restore growth in any state.”
It’s a message Perna was expected to share with business leaders on May 3 during the luncheon keynote address at the Rhode Island Business Expo.

PBN: In Rhode Island, the jobless rate went up in March to 11.1 percent. In Massachusetts, the rate is 6.5 percent. Why the disparity?
PERNA: It’s not only a problem, it’s sad to see it; there’s a human side to unemployment.
Seven years ago jobs were growing and house prices were rising, but there wasn’t enough underneath it to sustain it. When the national recession hit, Rhode Island got hit hard.
In Massachusetts seven years ago, state and local budgets were in better shape than Rhode Island, so they didn’t have to do the cutting that needed to be done in Rhode Island. One of the big contributors in Rhode Island is local fiscal problems, which make it hard to get out of a recession. It’s also hard to attract people to your state or keep them there when there’s so much fiscal uncertainty.

PBN: Rhode Island’s economic plan includes attracting technology-driven industries and promoting small, entrepreneurial businesses. Is this a valid plan?
PERNA: Massachusetts has a portfolio of business that is much more growth-oriented than Rhode Island. Education and medicine is on everyone’s list of where to grow. It’s a bigger proportion of the Massachusetts economy than Rhode Island’s but part of that is due to luck because Massachusetts was fortunate to have so much technological development along Route 128. Rhode Island wants to emulate that and there’s a good chance of doing it. One of the things Rhode Island has to do is to remain patient and understand it has to work from the ground up, with education. What states really need to do is create a winning environment. What that does, with regards to tax structure, stability and supply of educated people, is it benefits all companies in the state, not just a select industry.
PBN: Will the strategy of promoting small, entrepreneurial businesses have a cumulative affect?
PERNA: Very small businesses can make a difference. At one point Apple was in a garage and Facebook was like that as well. But can you have an environment that increases the odds of hitting a few home runs with these small, entrepreneurial businesses? You also have to nurture those businesses that get on first base, too.
These small businesses have the potential to create a lot of jobs, but they also have a high birth rate and a high death rate. I don’t think we pay a lot of attention to the death rate, and there are a lot of other things that go unstudied; why do business leave, or not come to the area? What could have been done, or not done, to help out existing industry or small businesses?

PBN: Does education play a significant role?
PERNA: What we are seeing repeatedly is that we are having trouble competing with students who are educated overseas. The relevant comparison now isn’t between the schools in Connecticut and Massachusetts, it’s what’s going on elsewhere in the world, whether it be China or India, for example. It makes it hard for us to justify the wages we have when everyone else can do it for a lot less, or more efficiently.

PBN: What are some of your observations on the Great Recession?
PERNA: The Dow has recovered about 85 percent of what it lost, so it’s not back to its peak. Executive compensation for the S&P Top 500, and for that matter earnings per share, is above where it was when the recession started, so it has recovered everything and then some. That’s Wall Street.
Then there’s Main Street, where only 40 percent of the jobs that had been lost have been gained, and none of the decline in the national housing market has been regained. The prices are down about 30 percent.
I’m not saying that it is completely a case of Wall Street versus Main Street; it’s just that for some people the recession is completely over while for others, they aren’t any better than they were a few years ago.
Economists [such as] Carmen M. Reinhart have studied the behavior of recessions through history, and those caused by financial chaos are few, this one and the Great Depression, as well as situations going on right now throughout the world. The ones in between were caused by the Federal Reserve System raising interest rates, or defense cuts or other things.

PBN: Was this recession simply very bad or was it ever on the verge of becoming cataclysmic?
PERNA: You have to ask what would have happened if we didn’t have the president’s stimulus package or if the Fed did nothing. How close did we come? Very close. We came within inches of the whole U.S. – global financial system crashing. The human carnage would have been enormous.•