Business Climate Mania in Rhode Island

eco opinions
April 16, 2014
by Greg Gerritt

Greg Gerritt

Greg Gerritt

Rhode Island is in the economic dumps and its politicians are pledging allegiance to economic growth at all costs and pulling out all of the traditional verbiage and a few new buzz words in the never ending search for faster economic growth. The traditional, but unproven, methods are to cut taxes, reduce regulation, and provide subsidies for those seeking to build or rebuild buildings. It is announced solemnly at least once a week by a powerful politician that he is working to get rid of the impediments to business and thereby create faster economic growth. By god we shall have a better Business Climate and be more Business Friendly. We just have to give tax breaks to billionaires and allow them to pollute. It is American as apple pie. Unfortunately for the politicians, and those of us who have to live with the results of their misguided policies, the expectation of and insistence on economic growth as the promised land is becoming a nightmare. There is a long term downward trend in the growth rate of old industrial cities and mill towns  and the thrashing around that we now do for growth based on the Business Climate Fantasy is doing much harm, exacerbating climate change, inequality, and the breakdown of our communities without generating employment, while at the same time destroying ecosystems world wide further undermining livelihoods.

The standard measure of the economy is the Gross Domestic Product. GDP simply measures how much money is flowing, not whether anything good is happening. Simon Kuznets, when he developed the methodology in 1934 Simon Kuznets, 1934. “National Income, 1929–1932″. 73rd US Congress, 2d session, Senate document no. 124, page 5-7. stated that it was inappropriate to use it to indicate anything about the general well being. But it has come to be THE indicator of general well being, much to our detriment. A big part of the reason it does not reflect what is going on in our communities is that GDP includes a great deal of what Herman Daly calls uneconomic growth; growth that harms communities, people, and ecosystems, while transferring more and more wealth to the 1%.

The Business Climate has become iconic in the US primarily because it has become an ideological tool for radically conservative interests  that have dumped millions of dollars into the pseudo studies and efforts to publicize the results. Business Climate Reports come in two basic formats. One format focuses on tax rates, the lower the rates the better you rank. The other tradition focuses on a broad range of indicators, often including indicators that are both used to determine the index and touted as a result of the index. Not actually very good science. The Beacon Hill Institute at Suffolk University in Boston produces one of the more widely used indexes.  According to Kansas Inc., Kansas’ state economic development agency,  there is absolutely no correlation between the rankings in business climate indexes based on regulations and lifestyles and the economic performance of the various states. The New England example is low tax New Hampshire riding high in the Business Climate reports and the people’s Republic of Vermont ranking down in the 40′s along with Rhode Island in some indexes. But Vermont’s unemployment rate is a full point below New Hampshire’s and one of the best in the country.

The Tax Foundation, a part of the Koch Brothers right wing propaganda machine, produces one of the tax rate oriented Business Climate Reports . The Tax Foundation never met a tax it did not want to eliminate, no matter what has to happen based on the cut. Kansas Inc notes that there is a very weak correlation between lower taxes and faster growing economy. Reducing corporate tax rates, all other things being equal, can improve a state’s growth rate by up to 5%, from 2% to 2.1%. Of course if a tax cut causes you to defer infrastructure work or reduces the quality of your schools, other things are not equal. In addition Kansas Inc notes that other factors, including economic history such as Rhode Island last being a prime place for industrial development in the 1890’s, before the automobile and electricity reshaped industrial locations, are much larger factors in determing growth rates. You can be sure the Tax Foundation has ignored any of the recent work on the long term slowdown of economic growth rates in post industrial already urbanized regions and communities. And I doubt the Tax Foundation has included in their ratings anything related to how damaged ecosystems are, and how they affect the economy .

To mirror and counteract the two aspects of the Business Climate Fantasy, efforts to sustain communities have begun reporting on expanded monetary measures of the economy and with indicator based systems. Full Cost Accounting is an approach in which the damage done is recorded on the negative side of the ledger not the positive as is done in measuring the GDP. In theory you could compare it directly to GDP getting from one to the other with the simple subtraction of how much damage was done and what it cost to repair. It would monetize the cost of damage to the ecosystem (or at least what are called ecosystem services like water purification, reduced runoff, a livable climate, food) and damage to the health of people and their communities and then subtract from, rather than add to, the economic output. If we used full cost accounting we would already see the global economy in decline rather than growing. The economy only appears to be growing if the damage is added to the economy rather than subtracted and we do not account for the depletion of natural capital.

Indexes such as the Genuine Progress Index  and the Social Progress index  include a wide variety of measurements of well being and seem to pretty accurately reflect community well being in the US and around the world. The US has gone backwards in the GPI since 1978 even as the GDP has grown, It is interesting that GPI started dropping the same year as the global ecosystem went fell into yearly biological deficits. Herman Daly refers to economic growth that harms communities as uneconomic growth and points out how much uneconomic growth harms overall economic health as well as communities and people. Stagnation in the GPI has happened all over the world once countries reach a middle class per capita income. Well being does not continue to rise as environmental damage, industrial disease, and the social breakdown that happens as inequality grows, harm communities and economies. Countries in which growth is still moving a large segment of the population out of poverty do see a real rise in the Genuine Progress Index until middle class status is reached. Then GPI mostly plateaus even if GDP grows. Vermont and Maryland have officially adopted the Genuine Progress Index as a key state indicator and Rhode Island might consider doing so as well.

For skeptics about what is in this essay, and believers that following the dictates of the business climate indexes is the path to prosperity, I commend to your attention the article “Business Climate and the Second War Between the States” Written by The Business Curmudgeon (Ron Coan) and published on line in The Journal of Applied Research in Economic Development in February 2013  He reviews much of the relevant information and the studies such as the one from Kansas Inc. that have analyzed what “good” Business Climates actually deliver. The Business Curmudgeon states that all work on Business Climates is ideologically driven to create a perfect storm favoring the 1% and ideological conservatives, and that the economic results of following the dictates in these reports are not any better than other approaches. It is about power and politics, not the economy. Good Jobs First  is a left wing think tank, but they too do a good job analyzing what Business Climate reports are, and whether their dictates provide a good economic model. You might ignore Good Jobs First, though it is an excellent report, but it is harder to ignore the Business Curmudgeon, and even harder to refute Republican Kansas’ economic development agency.

Despite zero evidence that Business Climates have much of an effect on economic growth rates these rating systems are often used in the call for reduced regulations to unleash business. Often these attacks are general, against all regulations, but many are specifically directed against environmental protections. But beginning with Stephen Meyer in 1991  the case that strong environmental regulations hold back the economy has been soundly refuted. No one has ever demonstrated any correlation or causation that makes the case that environmental protections harm economies. In fact while there is no statistically valid relationship the evidence leans towards stronger environmental regulation being associated with stronger economies, and in a place like Rhode Island with its beaches and agricultural renaissance that is even more obvious.

Recently at a hearing  a state senator said he could not even begin to get his arms around the idea that strong environmental regulations can help an economy. I sent him a number of references on the topic, notably an article reporting that the economic benefits of various sections of the Clean Air Act ranged from 4 to 1 to 40 to 1 greater than the costs of compliance for the Acid Rain sections of the law.  Here are their conclusions

1. The Clean Air Act has proven to be a very good investment. Studies show that the economic benefits of the Act have far exceeded the costs of controlling air pollution emissions. According to the Office of Management and Budget, the total economic benefits of the Clean Air Act are estimated at more than four to eight times the costs of compliance.

2. The CAA has fostered a long period of economic growth and development by protecting public health and the environment. In the last two decades, emissions of the most common air pollutants have declined by 41 percent, while Gross Domestic Product (GDP) has increased by more than 64 percent.

3. The CAA has spurred important technological innovations, such as catalytic converters, that have helped fuel job growth in the U.S. economy. The environmental technology industry— spurred by environmental regulations and particularly the Clean Air Act—led to the creation of 1.3 million total jobs between 1977 and 1991.

We have known this for years, but still the call goes out that regulations hold us back. Here are a few other commentators on the subject

A further refutation of the development model that we are being handed by the business climate reports is the recent report that restoring coastal ecosystems generates more jobs per dollar invested than offshore oil drilling and another stating that solar energy is creating more jobs than fossil fuels these days, even with the fracking boom.

Many in industry have made their peace with regulations and improved their business as a result . Every business has a green team generating profits. But some industries have continued their animosity to rules and regulations and fund business climate studies as part of a particular political strategy. The classic example is after an upgrade to the Clean Air Laws relating to auto emissions General Motors hired 1000 lobbyists and lawyers to fight the standards. Toyota hired 1000 engineers to create clean cars. Guess who made more money and did not have to be rescued from bankruptcy by the taxpayers? And GM is still trying to brush under the rugs the fatal defects they build into their cars, only recalling killer cars when FORCED to. Manufacturers have strong regulations to thank for helping them keep ranking among the world’s best innovators. The entire consulting industry around Lean, 6 sigma, and all the other fad of the week efficiency movements is based on an understanding that sending things down the drain or out the smoke stack is a bad thing and harms profits.

Unfortunately the real estate and rip from the earth industries are wedded to anti regulatory fervor. Buy Land, they ain’t making any more of it. The US was founded on real estate speculation backed up by armies. George Washington was a surveyor and land developer. Genocide was a tool of the trade. Still is in forests in the tropics. Even today we almost do not know how to talk about the future of the economy without basing the discussion on where to build buildings. But the fundamental reason the real estate industry resists regulations is that people like to live by the water despite the problems this creates. People have always needed to live by the water. We drink it, we wash in it, our food supply is dependent upon it. Many of the most fertile soils are in the bottomlands. It forms natural highways. Wet places are therefore often in locations that make them desirable though very prone to damage from misuse and with high costs when the damage comes.. When in our lack of wisdom we let people drain and fill, build in the flood plain, pave over the natural sponge, the short term gains can be large, after all the wetlands are in prime locations, but the long term troubles are just beginning. The billion dollar stormwater infrastructure that we need today in Rhode Island to keep our communities high and dry could have been designed with nature and built in from the beginning of the construction of modern roads and waste water management systems at a much lower cost. Retrofits are expensive. People have known how to manage waters since the very beginnings of irrigated agriculture and cities. There have always been some wise people in the community telling us not to push our luck. But the Warwick Mall still ended up under water in 2010, And how do the people of Oso, Washington feel knowing that 15 years ago there were reports circulated that told us that Oso was at risk of landslides, especially with the bad forestry practices being used on the top of the hill. Rhode Island will continue to battle with the real estate industry and its piles of cash and lobbyists despite clear knowledge that the foundation of the Rhode Island economy is clean water and healthy ecosystems not subdivisions and malls in wetlands or along the coast as sea level rises and the storms get more destructive.

The fossil fuel and mining industries have always been very dirty and destructive as well as powerfully connected to the ship of state. Even when the people have demanded cleaner management of mining wastes or drilling chemicals, something that passes legislatures only after extreme disasters, the industries have managed to undercut enforcement legally and illegally. The coal ash spills and mountain tops ending up in streams all over the South are only a small demonstration of the power of the fossil fuel industries, and the costs they foist upon the community when they skimp on safety and protecting the environment. Only now are North Carolina and West Virginia even considering regulations that might actually stop the spills.

The fossil fuel industry has recently decided it has an even greater incentive to push into the public arena their anti regulation fervor, Climate Change. And the money is flowing. The Koch Brothers, owners of Chesapeake Energy (which was busted for a big spill recently) are the biggest funders of climate change denial (along with Exxon-Mobil) on the planet. And the biggest funders of the State Policy Network and the Tax Foundation that fund business climate studies and lobby hard for low taxes and less regulation despite a complete lack of evidence that business climates actually correlate with or create prosperity. You have to wonder why if their climate work is so fraudulent and there is no evidence that their give it all to the 1% economic paradigm actually helps communities anyone would pay them any mind? And yet RI legislators and bureaucrats and our commercial news media are obsessed, hypnotized, and unable to break the shackles.

The facts are that lower taxes might speed up growth in an economy a tiny bit, OTHER THINGS BEING EQUAL. But if your schools are bad due to underfunding, if your roads have more potholes , if the buses do not get people to work, if the beaches are polluted, if kids are falling through the cracks in the social safety net due to low taxes and little government spending, other things are not equal. What did you gain? More expensive prisons filled with the underclass? More kids sick with asthma? All you have demonstrated is that the powerful can shift costs from themselves to the less powerful and call it increased profits and economic growth. We see this clearly in the increases in wealth at the top and the growing impoverishment of the American people.  The Laffer curve that Ronald Reagan foisted on us stating that lower taxes will bring in more revenue, does not work at anything resembling the actual corporate tax rates of the various states. And we all know Republican presidents cut taxes for ideological reasons, but increase spending to get re elected, creating the largest deficits ever, and setting off a cycle of attack on social services and environmental protection that feeds into their austerity for the people/more for me campaign.

I want to point out one more hole in the fabric of the business climate before turning to what might actually be useful in Rhode Island. In “The Spirit Level” Wilson and Pickett (2009 Bloomsbury Press NYC) point out many of the different ways that rising inequality undercuts the economy, society, and communities, including grinding a consumer society to a halt due to the lack of consumers. Given this, one might think that it would be good public policy to reduce inequality if one wants to have prosperity. The Business Climate Approach , with lower taxes for the rich, less community investment, bigger holes in the safety net, more expensive health care, and the allowing of much more ecological harm that the public will have to fix clearly undercuts the economy those who tout the Business Climate claim to want,  Wilson and Pickett also strongly note that rising inequality feeds environmental destruction and climate change. Clearly there are approaches that are much more likely to bring success than that of the Business Climate Fantasy of low wages, no unions, and freedom to fill wetlands while ignoring climate change.

What we do now

Current Rhode Island strategy appears to be based on a few things. Much has been made of the Creative Class work of Richard Florida, and how attracting the Creative Class is a great strategy for growth. But more recent work seems to disprove that idea . Meds and Higher Ed are high on the list of what the ruling class in Rhode Island want, though both are industries that rely on ever higher fees for services. To the point where more and more people are being excluded and these “growth” industries are making it harder and harder for people to start businesses as they suck up more and more of the money in the economy and put it into the hands of a few highly paid people. Student loans are burdening an entire generation. Medical costs are the leading cause of bankruptcies, something unknown in single payer countries in the OECD. One might hope that we develop a strategy to create jobs here that the people who already live here could take, but that prospect seems to be off the table despite that it would make us much more resilient in the face of climate change.

The rest of the Rhode Island public economic development strategy seems to depend upon real estate speculation specifically with the I-195 lands, One problem with real estate is that the rent is still too damn high and this kind of development only drives up prices One way the growth of inequality has played out in Rhode Island is that rents are too high for the wages paid as all of the new money is ending up in a very few hands and bailing out the banks and Wall St made it impossible for prices to return to affordable. Is it any surprise that in a place where the rent is Too Damn High, kids are going hungry and it is hard to find a job? If you read the reports, the last time RI politicians decided to jump start growth they touted the FIRE industries. Finance, Insurance, and Real Estate were getting all the love as the engines of economic growth, that is until they burned down the economy in 2008. Until housing prices go DOWN and we accept and celebrate that, we shall never have an economy that works for the 99%.

What to do

We can all shoot ideological arrows, but the real concern is prosperous communities. So just what should RI do to achieve a wide and sustainable prosperity. First we need to understand current conditions, one of which is that you can not have infinite growth on a finite planet.

Our current conditions

As mentioned earlier Robert Gordon has hypothesized based on long term trends in the data that we may be at the end of rapid economic growth. Gar Alperovitz has discussed the same sort of thing in his recent article. Rapid economic growth is very rare in the historical record, and it may be that rapid (2% and up) growth is dependent upon a very specific set of conditions. Gordon thinks that the new technologies are unlikely to be as earth shattering as the automobile, the railroad, and the technologies of mass production and communication. That set off the rapid growth spurt in the Industrialized world from approximately 1870 to 1973. Since then growth rates in older industrial communities has gone down and so far the information technology revolution seems more likely to make jobs disappear than expand.

Immanuel Wallerstein suggests that two of the most critical factors necessary for rapid economic growth in industrial economies are the appropriation and harvesting of forests, and rapid migration to cities by those previously living in the forests or on farms. This pattern is world wide, and China is the latest example. China long ago ran out of forests, but it has driven deforestation across southern Asia to the point where the limits and stronger push back are being reached. In Indonesia and Cambodia forest communities are resisting. My friend in Cambodia and I share reports on the deaths of people in communities trying to protect the forest that supports their village at the hands of warlords selling wood to China and the push back on palm oil deforestation and by villages in Indonesia has been getting much more attention.

China also now has more than 50% of its population in its cities. Given the deforestation and urbanization we are predictably seeing a slow down in the rate of growth in the Chinese economy . Thankfully the Chinese government seems to understand some of this and is slowly abandoning its obsession with GDPism. China is still on the upside of the growth curve, though starting to enter the slowdown phase of the curve at a much lower per capita income than the currently dominant West. Rhode Island is among the earliest entrants to the post industrial phase, and therefore is farther along the flattening curve. Acknowledging the long term growth slowdown should encourage us to explore different strategies for developing prosperous communities rather than holding fast to the ideology that the 1% need more profits.

The McKinsey global consulting business is starting to take resource depletion very seriously  and have concerns as to how this might affect global growth. Rhode Island needs to be much more cognizant of this as well rather than keeping our heads in the sand and thrashing about or growth.

If Daly, Gordon, Wallerstein, Wilson and Pickett, and many others are right, and RI is going to go through a long period of slow growth and decline in per capita GDP, what is the strategy for the greatest good under the conditions? Rhode Island had a chance to really take these kind of factors into account with the Rhode Map process but it squandered that opportunity by specifically focusing on getting more growth and the DOA worked hard to exclude information on conditions that might lead us towards beginning a more equitable shrinkage towards prosperity. In many ways Rhode Map was a wasted expenditure and effort as the public outreach was based on materials that would not acknowledge that the world has changed. Materials I have critiqued in an essay . And predictably attendance at Rhode Map events dwindled as it went along.

Accentuate the Positive

These days everyone is talking about the Green Economy. Mostly the talk is about clean energy , green manufacturing, reducing, reusing, and recycling, and Green Infrastructure for the management of water. All of these things are necessary but not sufficient to bring prosperity to our community. We should definitely move rapidly to a clean energy system and manage our stormwater. We should use less, recycle more and compost all organics instead of sending them to the landfill. But since everyone is talking about this I will focus elsewhere.

The only survivable future for our communities is a green future. Plain and simple. But it is not just a high tech green future, it is a healthy future for those people still excluded from the benefits of American life. The rich, the powerful , the highly educated (except for the young) are getting by. They do not need to be the recipient of economic development subsidies or action. It is economic development for the rest of us, and especially in our lower income neighborhoods, that needs to be at the heart of our public policy and the focus of our efforts, not some real estate speculator asking for a subsidy for the Superman building. For that reason I want to explore what we might want to consider in lower income neighborhoods based on what we have learned about economic development in tropical forests;.

I offer to you a World Bank study on what works in economic development in forest communities  Forest communities in the tropics are among the most marginalized, disenfranchised, and disempowered communities on the planet. About 1 billion people on the planet rely on wild forest products for at least part of their livelihoods and several hundred million live int eh forest. Those living in or near forests that have access to healthy forests may have little money, but they are reasonably well fed. When people lose access to the forest their economy and nutritional status plummet like a rock. The World Bank reviewed its own work to try to figure out what gave the best outcomes, the win for the community, win for the forest, and win for the national economy and tax revenues. They discovered it was pretty simple. I reviewed this material in an essay an essay i wrote a while ago “The World Bank sort of Figures it out” and I offer the condensed version here.

Forests and Brownfields

The scoop is that if you would like to see development that serves the people in forest communities in the tropics the conditions that are most conducive to success, a win,win,win for the forest, the community, and state tax revenues there are things that consistently work. Forest communities are the most marginalized, disempowered, and disenfranchised communities in almost every country. Cities have been absorbing forests since the beginning of cities (as Wallerstein noted) and forest dwellers are considered primitive others and often of a different ethnicity than the city dwellers. Therefore some safeguards must be put in place or the project will be hijacked. The forest community must get secure land tenure. The project(s) must be based on keeping the forest healthy even while obtaining resources from it. The benefits from the project must be protected from outside interests and specifically directed towards the poorest members of the community (if the benefits are captured by outside interests or the traditionally wealthy in a community, it will not protect the forest nor reduce poverty in the community) . The people of the community must have a voice and a vote in what investments are made and what follows. The whole thing must be embedded in a democratic system that respects the human rights of everyone and will not use violence to remove people from their land. The World Bank found that under these conditions everyone except the warlords, bandits, and politicians wins. In one case cited the yearly benefits of the healthy forest in the hands of the forest community were approximately $3 billion dollars a year whereas if the forest was stripped by outsiders the total generated would have been $160 million total while the community was impoverished,. Not exactly an endorsement of the Business Climate Model.

The digression to tropic forests is important because the neighborhoods in Rhode Island that are the most marginalized, disempowered, and disenfranchised face very similar situations to what forest people in the tropics are facing, and the solutions that we might ponder are along the same lines. The issue comes down to who controls the land. In forests the people being pushed out have lived there for generations and have made a living on that spot for a long time. Nation states tend not to recognize these traditional owners, but there really is no one else who has any legitimate claim. Low income communities, Environmental Justice communities in Rhode Island, have never owned the economically important land in places like Olneyville. The river valleys were industrialized very early on and the workers, and now the immigrants facing toxic legacies with little of an industrial economy hanging on, face large brownfields with ownership outside the community. Development of brownfields occasionally is turned towards creating community assets, but more often the one tangible asset available to the community is simply gentrified, forcing many to move on.

If we were serious about economic development that enhanced life in our low income communities the model the World Bank offers is exactly the one we would follow. Make sure outsiders do not get to suck up all of the benefits of projects, no displacement of the poor, give the community a voice and a vote in what happens, and use the land to create jobs that the people in the neighborhood can fill rather than importing educated outsiders. Nope, it does not fill the pockets of the 1%, does not make those who view a high tech future as the way to go. But if we look carefully at the trends, if we want to reduce inequality and green our society, knowing that that is the path forward, economic democracy is the path.

This too is a direct challenge to the Business Climate model in which private profit is put before any community values or regulations to keep the community healthy. The whole idea of Business Climate ascendancy is to keep the rich rich and the poor in shackles so they will work for low wages. Transferring wealth to the community is not on the table. But given the conditions we find on planet Earth, and in Rhode island, the key to a prosperous future starts with making sure the benefits of Brownfield renovation stay in the community, backed up by clean energy, food security, climate resilience and economic democracy, not by following the dictates of the 1% and their minions at the Business Climate touting pseudo think tanks.