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The Rhode Island Economy and Beyond: Is there Hope?
URI Professor of Economics Len Lardaro leads December 2008 chat
Right now, most of us are overwhelmed. Unemployment rates are high and growing higher, credit is at a standstill, and the value of our homes and our 401(k) accounts is in freefall. How do we begin to think about this economic crisis and what can we do to survive the storm?
On Tuesday, December 16, at 1:30 p.m. Len Lardaro, professor of economics, author, and commentator, joined us for a Web chat, and responded to your questions about the state of the economy in Rhode Island and beyond.
Professor of Economics Len Lardaro has been on the faculty at the University of Rhode Island since 1981. His courses emphasize the application of economics to current events, and his research centers on the econometric analysis of labor markets.
Since 1991, Professor Lardaro has been forecasting the Rhode Island economy, focusing on its labor and housing markets, demographic factors, and the income created by the state's economy. In 1995, he formulated and began to publish the Current Conditions Index (CCI) for Rhode Island, a monthly indicator of the present state of the economy. A regular contributor to the Providence Journal, he is the author of Applied Econometrics.
Web chats are a feature of the URI Division of University Advancement electronic communications program. Answers to other frequently asked questions can be found in our FAQs. If you have other questions about Web chats, please contact the URI Publications Office at 401-874-2075 or email: eservices@advance.uri.edu
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Leonard Lardaro: Good afternoon. As an alumnus of the University of Rhode Island myself it's very nice for me to have the opportunity to speak to the URI community. Over this half hour, I will speak openly and frankly in response to the questions that have been submitted. |
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| Charlestown: I get that bad things happen to good people - illness, accidents, natural disaster, and so on - and for these people, we need programs that help. But how do we as a state and a society stop the pattern of people borrowing more money than they can afford to pay back, living above their means, and having more children than they can afford to support, and then blaming their problems on the banks or the government or their employers or anybody but themselves? |
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Leonard Lardaro: A part of this is cultural. That's certainly been true for the nation and for RI. I really believe strongly that we in RI are too predicated on consumption and not on investment-oriented activities. For the past decade, both the US and RI have been bingeing on easy credit, debt, and leverage. While that led to a strong stock market, very successful holiday shopping seasons, and a lot of home equity, it was never really sustainable over the long term. So now, we find ourselves living within our means which we haven't done for over a decade and the financial system is de-leveraging. So the transition is both painful and slower than we would like it to be. I think it's part of our culture, however, to always blame large institutions and government for whatever goes wrong, and not take individual responsibility. So, while we as a society might not be able to stop people from living beyond their means in a voluntary manner, this painful adjustment will force that discipline that has been so lacking. |
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| Wakefield: The economy seems to be somewhat cyclical. Is it possible that what we're experiencing now isn't all that different than generations past, and that this too, will pass? |
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Leonard Lardaro: The economy is indeed cyclical. Right now both RI and the US find themselves well into recessions. But not all recessions are alike. This recession is probably the most severe in over three decades. And it is already one year old at the national level. Sadly, with financial system problems and more weakness yet to play out, the national recession will extend well into 2009. Rhode Island had its economic activity peak in July 2007, well before national activity peaked. As you are likely aware, RI has the highest unemployment rate in the country (for two months now). The cause is related to our failures in generating a critical mass in high technology and in cleaning up our tax and cost structure. Believe it or not, 10 years ago, RI had budget surpluses and strong employment growth, and we knew what we had to do to be successful in the future. Obviously, we didn't do it. URI and higher education are at the center of what RI needs to focus on to move forward in the technology and growth areas. But what actually happened over the last 10 years? Instead of cleaning up our tax and cost structure, we remain among the worst places to do business in the entire US. And as for growth, our leaders opted to dis-member higher education, not fully integrate its products into private sector activities, and place higher education farther and farther out of the reach of our citizens. How does that work? How can that generate success in a knowledge-based economy? The short answer is that it can't. For those of you who were around in the late 1980s, RI's economic policy is what we used to call Voodoo Economics. So, the sad state of RI's economy is largely self-induced, and we remain a vivid example that Voodoo Economics does not work. Our current recession ranks fairly close to what we experienced in 1991--state weakness I never thought we would experience again. So, in a sense, this does have generational implications. So now, RI literally has a negative margin of error to combat upcoming global and national weakness. So, things are going to get worse before they get better, both here and nationally. So, all of this will pass, but the question I've been posing for a decade is: Will RI survive? The answer to that is Yes. But I also have posed a second question: Will RI flourish? The answer to that question will depend substantially on whether our leaders will abandon Voodoo Economics at long last and recognize the central role of higher education in a knowledge-based economy. |
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| Narragansett: I've been a little confused by all the talk about not letting banks and companies fail. Isn't part of capitalism learning about supply and demand, balancing income and expenses, figuring out what sort of profits are affordable within the company's expenses? Isn't is actually a good thing when poorly run companies fail, so that other companies and entrepreneurs can then compete in the marketplace with better business practices? Isn't that kind of how capitalism is supposed to go? |
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Leonard Lardaro: All of these things describe how capitalism is supposed to work. Taking it a step farther, that capitalism is not a profit economy, as some think. It is actually a profit and loss economy. Sadly, loss serves an economic function: it eliminates inefficient production and practices, and aligns production more completely with consumer demand. Looking at the macro level, recession also serve a purpose. It forces industries and sectors to align themselves with efficiency and the preferences of consumers. What you don't often hear about capitalism is that it's predicated largely on self-interest and the self-policing of economic activities. It is this last point that for the US has led to its undoing as our economic engine. Financial innovation left unsupervised gave us hedge fund calmaties, sub prime mortgages and a host of other questionable activities where self-interest was not up to the task of adequately regulating excessive risk. The result should be familiar by now. Major problems with the financial sector that have spilled over to the real " goods producing" economy. So where we find ourselves is now largely a profit system--socialism. Our leaders are not willing to let inefficient companies (the big three auto companies) fail. A number of banks have been declared "too large to fail." So, we have privatized gain and socialized loss. Nobody is entirely sure where this whole process will end up, as both the Federal Reserve and the US Treasury do everything they think is necessary. More disturbingly, as bad as this recession is, it will not "clean house" the way that recessions in the past have. We hear that when the economy gets back on its feet, all the liquidity and actions taken by government will be withdrawn. Trust me, that's far easier said than done. So the real question becomes not when capitalism will be restored but whether we will be able to become capitalist again. |
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| Marisa, West Greenwich: Where is the dividing line between a depression and a recession and how long will it be before we reach the worst of it?
Can we really solve our economic issues domestically or is this more of a global issue? |
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Leonard Lardaro: The dividing line between recession and depression is severity and length. A depression is defined as "a long and deep recession." Obviously, that definition has no operational significance. So, for people who hear we are headed toward a depression, they really shouldn't be worried. Prior to the Great Depression, the Federal Reserve cut the money supply in half and the federal government balanced its budget. Today, we have already more than doubled the money supply and our budget will have a deficient of around one trillion dollars. So the US is doing all that it can to make things better. However, this is a global crisis. We need central banks to work together and before this is all done, we will probably need some global fiscal policy coordination. |
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| Paul, Kingston: When do you project the recession will end in RI? the country? |
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Leonard Lardaro: The national recession should end by the end of 2009, hopefully sooner. For RI, things are more complicated. While we will benefit from improvement in national economic activity, our large and persistent budget deficits will counteract much of the beneficial effects of stronger national activity. So, for RI, it is very likely our recession will not end until at earliest the third quarter of 2009. The good news is that President-Elect Obama understands how state economic weakness counteracts federal fiscal policy. So, he will give some aid to states. Clearly, RI needs all the help it can get. |
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| westerly: Can you comment on how the smallest state has one of the highest deficits among the 50 states? How would you propose reducing this deficit? |
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Leonard Lardaro: If you go back to the answer I gave to an earlier question, RI doesn't have much in terms of elements of growth. We rely far too heavily on health services, tourism, and not for profits. Our high tax and cost structure has scared away businesses and led to an exodus of population since July of 2004. So, as a result, we have far less business activity here than we should and a number of the people leaving RI are taxpayers who don't demand many government services. The persons moving here tend to earn less income than those leaving and require more government services. The result should be obvious: less tax revenue and more government spending than had our leaders not opted to rule based on Voodoo Economics. One other element, which I've never understood, RI government is notorious for its lack of due diligence. I had to make up a term for what they do: Due Presumption. In other words, they think what they presume will happen will actually occur. Obviously, it seldom does. So, policies are initiated with no real idea of their likely success. Years later we hire someone to see if anything actually worked. Obviously, put this all together and what you get is large and persistent budget deficits. The good news is that these large deficits will force a discipline that our leaders have been unwilling to practice. So, even with bad news there is some hope for improvement in the future. But as long as we continue to rely on Voodoo Economics, we are not going to get a lot better in a hurry. |
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Leonard Lardaro: I want to thank all of you for giving me the opportunity to discuss the state's economy. I know that things are difficult, but there are still things to be positive and hopeful about. I wish you all a happy holiday season and let's hope that next year things bottom out and begin to improve. |
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