By D. Dowd Muska
September 2007
For graphs and references, please see attached PDF.
Growing Connecticut’s Economy: Corporatism vs. Capitalism
Executive Summary
Connecticut’s economy has serious structural problems. Median household income is falling. Low paying jobs are replacing high-paying jobs. The cost of living in the Nutmeg State is high and rising. And young adults flee Connecticut at a rapid rate. The economic-development initiatives pursued by government at the state and local levels are clearly ineffective. This failure is due to a fundamental misunderstanding of the sources of economic growth. Connecticut’s decision makers need to understand that corporatism can’t work in theory, doesn’t work in practice, and better economic-development policies exist.
Corporatism Can’t Work In Theory
Capitalism is founded on the principle that entrepreneurs and workers should be free to pursue their self interest with minimal interference from government. The public sector, capitalists believe, exists to secure individual rights, not redistribute income and “create jobs.” Corporatism — sometimes called “corporate welfare,” “crony capitalism,” and “industrial policy” — is founded on the misguided belief that private enterprise, union officials, and government officials must be “partners” in creating economic prosperity. Few reputable economists and public policy analysts believe that a corporatist-style approach can be an efficient tool to produce prosperity.
Corporatism Doesn’t Work In Practice
Both internationally and within the United States, economic planning has a very poor record. Independent analyses of state- and local government programs designed to boost employment and personal income have consistently found that corporatism does not deliver on its promises, imposes unintended consequences, hides a significant cost of government from taxpayers, and invites political corruption. Many examples of these negative effects exist in Connecticut, a state where politicians have fully embraced corporatism.
Pro-Growth Alternatives Exist
Research has demonstrated a strong linkage between economic freedom and economic growth. Connecticut should abandon its failed corporatist policies and embrace an economic development strategy founded on freedom.
Corporatism is not the answer to Connecticut’s economic woes. Only a lower tax burden, less (and smarter) government spending, education choice, and regulatory relief will provide a brighter future for workers, families, and businesses in the Nutmeg State.
“Connecticut has a lot of economic-development agencies, but apparently not much economic development.” -Tom Condon
“We pick winners and losers in Hartford, and we’re not that smart.” -State Senator Tony Guglielmo
Connecticut Remains a Wealthy State — But Its Outlook Is Bleak
Connecticut’s economy is struggling. Job growth is tepid. Total employment recently regained the peak it reached in the summer of 2000, but as even a taxpayer subsidized economics professor admits, the number of jobs at the turn of the century “was near what we had in 1989. Basically what we’re looking at is virtually no job creation in 20 years.”
The quality of the jobs being created in Connecticut is a particular concern. Research conducted by an AFL-CIO funded project found that “jobs in Connecticut’s growing industries aren’t as good as the jobs in Connecticut’s shrinking industries. Average wages in the state’s growing industries are 32.3 percent lower — $18,021 per year less — than those in Connecticut’s shrinking industries.”
Other research confirms this finding. A 2006 analysis of Connecticut Department of Labor statistics revealed that the industry sectors in which Connecticut lost the most jobs between 2004 and 2005 pay more, on average, than the industry sectors in which Connecticut had the greatest job gains over this period. The average 2005 wage in the five employment sectors showing largest employment losses was $63,587, compared with an average wage of just $35,857 for jobs in the five sectors with the highest employment gains in 2004.
While some workers and families in Connecticut are doing quite well economically, the “typical” household in the state is not. The Yankee Institute research depicted below shows that after adjustment for inflation, between 1991 (a year notable for the passage of the state’s income tax) and 2005, median household income — which represents the midpoint where half of Connecticut households earn more, and half earn less — fell.
Declining household income is exacerbated by the state’s high cost of living. Connecticut’s citizens consistently pay more for housing, energy, transportation, healthcare, and other vital goods and services than citizens in other regions. For example, in the Stamford area, housing costs are more than double the U.S. average. In greater New Haven, the cost of utilities is 28.5 percent higher. In New London, groceries are 18 percent higher. Another major cost for Connecticut’s families and businesses is taxation. When taxes at the federal, state, and local levels are combined, Nutmeg State residents bear the highest tax burden in the nation. The long-term trend in poverty is cause for further alarm. As Waterbury’s daily newspaper observes: “In 1989, Connecticut’s poverty rate was just 3.5 percent; at the end of 2006, it was 8.3 percent.” Orlando J. Rodriguez, manager of the taxpayer-subsidized Connecticut State Data Center, recently wrote that “the progressive loss of its middle class” is the “most important demographic issue for Connecticut.”
Business exemptions from the sales and corporate-income axes likely total several billion dollars annually. A 2006 analysis by Connecticut Economic Resource Center, a research organization funded by utilities, outlined what one reporter called a “gloomy, sad vision” of Connecticut in 2020, with the state suffering from “living standards gradually declining, state competitiveness gradually weakening, and an ever-increasing group of poorer, less educated workers.” Many of the state’s young adults want nothing to do with a state on such a path. Earlier this year, a research organization at the University of New Hampshire found that between 1990 and 2004, no state in the nation lost a greater share of its 25-to-34- year-olds than Connecticut.
Why Connecticut’s Economy Is Failing In Theory
For decades, Connecticut has aggressively pursued an economic-development approach based on tax perks, redevelopment projects, and other tools that favor certain economic interests. Often called “corporate welfare,” “central planning,” “industrial policy,” and “crony capitalism,” corporatism is perhaps the best term to describe an economic-development strategy based on a broad and deep “partnership” between the public and private sectors.
Starting in 1937, with the creation of the “Publicity Commission,” Connecticut’s legislators and governors began to appropriate ever more tax revenue to programs and agencies they claimed would boost the state’s economy. Seven decades later, the line between government and private enterprise in the Nutmeg State has blurred to the point of irrelevancy. Today three entities dominate the corporatist regime at the state level: the Department of Community and Economic Development (DECD), Connecticut Development Authority (CDA), and Connecticut Innovations, Inc.
But many other agencies and programs are charged with fostering economic development to some degree, including the Department of Transportation and Department of Labor. In addition, the indirect “cost” of the tax perks said to promote the economy are substantial. Business exemptions from the sales and corporate income taxes, for example, likely total several billion dollars annually. At the local level, state law permits municipalities to offer property-tax abatements to companies seeking to relocate or expand operations. Although the exact cost of these tax privileges has not been calculated, many cities and towns have economic development agencies with full-time staffs, and a considerable amount of state tax revenue flows to local “public authorities” and “development corporations.” A 2005 legislative report found that since 1993, “the state has provided just over $82.5 million in direct grants to the New London Development Corporation for various development projects, all from state bond allocations.” For the current fiscal year, the governor’s budget office was given $7.9 million to pass on to the Capital City Economic Development Authority. And earlier this calendar year, Bristol created the Bristol Downtown Development Corporation — the city already has a development authority — and appropriated $400,000 in start-up funding. While some might term the immense amount of central planning underway in Connecticut “visionary government,” respected economists such as Nobel Laureate Friedrich von Hayek have long realized that attempting to direct market forces in ways that help citizens is the “fatal conceit” of policymakers.
Jerry L. Jordan, former president of the Federal Reserve Bank of Cleveland, explains:
Because policy makers have no clear foresight of where entrepreneurial energies will
be directed in the future, it is impossible for them to predict where jobs creation
“should” occur. It is not surprising, then, that government policies that seek to direct the
flow of entrepreneurial talents in an effort to promote “good” jobs, and presumably to
discourage “bad” jobs, will have uncertain and potentially negative effects on economic
prosperity.
Two leading critics of economic-development programs agree:
No matter how intelligent central planners may be, they simply cannot possess enough
knowledge necessary to bet on winning businesses and industries (and thus, against
anticipated losers) with much success.
In addition, economic development agencies are asked to play the role of venture
capitalist. Political reality, however, forces agencies to cater to the needs of special
interests, whether they are large, high profile businesses mining for subsidies or
declining industries hoping to use government resources to buy more time to insulate
themselves from the rigors of the market place. Economic development policy is
ultimately driven by political expediency, not long-term investments or rational
calculations of risk, costs, and benefits.
Economists James W. Gwartney and Richard L. Stroup describe another reason the
schemes of politicians and economic-development bureaucrats are likely to be
unsuccessful:
If the [private] investor makes a mistake — if the investment project turns out to be a
loser — he or she will bear the consequences directly. In contrast, the link between the
selection of productive projects and the personal wealth of the central planners will be
weak. Even if a project is productive, the planner’s personal gain is likely to be quite
modest. Similarly, if the project is wasteful — if it reduces the value of resources — this
failure will exert little negative impact on the planners. In fact, they may even be able to
reap personal gain from wasteful projects that channel subsidies and other benefits
toward politically powerful groups. Given this incentive structure, there is simply no
reason to believe that central planners will be more likely than private investors to
discover and act on projects that increase wealth.
Then there is the matter of corporatism’s inherent unfairness. As author James Bovard puts it, “Government cannot help one industry or business without indirectly disadvantaging all others.” Observers often note that small businesses, which usually lack the resources, experience, and lobbying muscle to play the corporate welfare game, are put at a disadvantage.
Corporatism also suffers from serious transparency and accountability problems. With programs spread across multiple agencies and levels of government, researchers find it extremely difficult to document the direct and indirect costs of economic development efforts.
Finally, good-government activists from various ideological perspectives note that the chummy environment of economic planners often produces “sweetheart deals” for businesses and favors — sometimes illegal favors — for public officials. Gwartney and Stroup believe this should come as no surprise: “When business enterprises get more funds from government and less from consumers, they will spend more time trying to satisfy politicians and less time trying to satisfy customers.”
Why Connecticut’s Economy Is Failing In Practice
Politicians, economic-development bureaucrats, and the businesspeople who receive perks from government issue a steady stream of press releases and regularly conduct ribbon-cutting ceremonies to tout the success of “incentive packages.”
But independent analysts who take a more comprehensive view have found little compelling evidence that as a whole, government economic-development programs are a wise use of the public purse. Researchers Alan Peters and Peter Fisher have concluded that “decades of policy experimentation and literally hundreds of scholarly studies” have concluded that corporatism’s claims of success are not “clearly substantiated.” The scholars even believe “there is a good chance that all these claims are false.”
“Not surprisingly,” observe free-market scholars Michael LaFaive and Sam Staley, “little substantive research has found that … economic development programs have significantly boosted economic growth or enhanced the vitality of city or state economies.”
In 1998, an extensive investigation by Time, found
that almost without exception, local and
state politicians have doled out tens of
billions of taxpayer dollars to businesses
that are in fact eliminating rather than
creating jobs. Some of the money has gone
to prop up individual companies and avoid
the consolidation within industries that an
unfettered market would bring about.
Some has been pumped into profitable
companies, making them more profitable.
Some has been awarded to companies that
have threatened to move if they don’t get it.
Some has been diverted to businesses that
local politicians have somehow divined will
be more successful than their competitors.
And last, some has gone to entire
industries that are shrinking.
The Connecticut Clean Energy Fund approved 206 projects that promised to produce 71.5 megawatts of clean energy; so far, those projects have produced 2 megawatts of energy. … The Connecticut Clean Energy Fund has taken some $75 million of ratepayer money and essentially squandered nearly all of it.
In 2004 the Hartford Courant reported several examples of subsidized economic losers in our own state:
There was Hi-G, the South Windsor company that vanished with $3.4 million of state
money. And Windham Mills, which swallowed $23.4 million in state assistance and
generated only a fraction of the jobs it was supposed to create. And Starrtel Cellular
Group, which got a $2.2 million loan from DECD to help it set up shop in Hartford’s
Veeder Place project. Starrtel produced not a single one of the 10,000 cellphones a
month it had promised to assemble before disappearing into thin air.
A 2005 investigation by the New Haven Register discovered that “Connecticut Development Authority officials have secretly written off millions of dollars in failed taxpayer-financed loans without formal approval from the quasi-state agency’s board of directors.” An annual report issued by the DECD in 2006 revealed that almost half of the businesses the department subsidized “to retain or create jobs and were under contract to meet specific employment goals by last summer failed to meet them.”
The Connecticut Clean Energy Fund (CCEF), run by Connecticut Innovations, has proven completely inept at using revenue derived from a tax on ratepayers to fund successful “green” power plants. As the Hartford Business Journal, a publication that has investigated the CCEF for over a year, recently observed:
Since CCEF’s inception in 2000, the clean energy fund approved 206 projects that
promised to produce 71.5 megawatts of clean energy; so far, those projects have
produced 2 megawatts of energy…
But the biggest outrage was reported earlier this year, when CCEF announced that it
had given Fairfield-based General Electric a $722,000 grant to buy solar panels —
which, by the way, are made by GE. We are now using ratepayer money to convince
GE to buy its own products.
The Connecticut Clean Energy Fund has taken some $75 million of ratepayer money
and essentially squandered nearly all of it.
According to a 2000 analysis from the liberal Commonwealth Institute, actual job growth for the firms receiving “support” from the DECD, CDA, and Connecticut Innovations in the 1990s was wildly off the predicted mark.
Furthermore, researcher Marc Breslow found that “the subsidy cost per job gained as of June 1999 was $54,271, or about 55 percent higher than the federal guideline — indicating that Connecticut’s programs are well above the reasonable range of costs to expand employment.” Even more evidence of Connecticut government’s spectacular inability to make progress on its economic goals arrived in 2005. Consultants had been brought in to revise the state’s “Industry Cluster Initiative,” the state’s “blueprint for long-term economic growth.” The consultants found that
of the eight clusters measured, four actually had fewer jobs in the state in 2003 than
they did 10 years earlier. And the fastest-growing cluster posted annual average job
gains of less than 1.5 percent during the period, and that was the maritime group — the
smallest of all the clusters.
Employment in each cluster was compared across the 25 states having the most jobs in
that cluster. In these comparisons, Connecticut was almost a no-show. It brought up
the rear in seven out of the eight clusters. In agriculture, it ranked 24th among the top
25 states.
Finally, the cozy relations and outright corruption theorists expect economic development programs to produce are easy to document — especially in a state that has embraced corporatism as aggressively as Connecticut. Corporatism played major roles in the recent corruption scandals in the City of Bridgeport, as well as the administration of former Governor John Rowland.
The Best Economic Development Plan Is Freedom
Defenders of corporatist strategies often accuse their opponents of being advocates of “unilateral disarmament.” (“Competing for companies is a game state must play,” was the headline of a 2005 piece by a Hartford-area business editor.32) But this myopic view ignores the emerging evidence that economic freedom, not politicized planning, is the most effective tool to promote job growth and higher incomes.
Most Connecticut entrepreneurs already understand that freer is richer.
A 2005 survey of 100 readers of the Hartford Business Journal found that 73 percent believed taxes on business were a “major factor” in “the overall health of Connecticut’s business climate.” Two thirds agreed that the state’s regulatory and legal requirements were a “major factor.” When asked to list “the one or two most important issues facing state government in terms of Connecticut’s business climate,” taxes were the top choice. (Zero percent rated the state’s ability to manage its budget as “high.”) Any serious effort to make Connecticut an economically vibrant state again must begin with fiscal policy. A top priority for policymakers should be elimination of personal- and corporate-income taxes, as well as reducing the property-tax burden.
Two business-oriented taxes that also deserve close scrutiny were documented in a 2006 Global Insight study that compared Connecticut to five neighboring states, North Carolina, and Texas. Connecticut’s unemployment-insurance and worker compensation taxes, researchers found, were “among the highest of the eight states analyzed.”
Tax cuts can be achieved through lower, and smarter, government spending. A cap that limits annual expenditure increases to the combined rate of inflation and population growth should be applied at the state and local levels. Wildly generous public-sector compensation must be made to conform to the pay and benefits of comparable private-sector workers. In addition, spending in two areas that directly impact private enterprise — education and transportation — must be reoriented. Connecticut’s political elites continue to tout the state’s relatively high-performing government schools as a “silver bullet” which renders moot the state’s well-deserved reputation as an expensive place to do business. But between 1981 and 2001, real K-12 spending on government schools more than doubled, while enrollment growth was less than 10 percent.35 So despite the claims of education-union officials and their boosters in the legislature and governor’s mansion, Connecticut’s government schools are becoming less, not more, efficient. Fighting traffic congestion also needs to be a goal of smarter government spending. Connecticut’s transportation priorities are seriously out of whack, and returning to the goal of mobility — not social engineering a politically correct assault on the automobile — should be of paramount importance to public officials seeking effective economic-development strategies.
Between 1980 and 2000, the percentage of state commuters who used trains and buses fell from 4.9 percent to 3.8 percent. (The share of commuters who drove alone to work rose, from 68 percent to 80 percent.) For Connecticut to thrive, government-run buses and trains can no longer be the central focus of transportation policy. Notwithstanding any recent uptick in usage — which is surely driven by the huge rise in the price of gasoline — public transit in Connecticut is losing market share. Between 1980 and 2000, the percentage of state commuters who used trains and buses fell from 4.9 percent to 3.8 percent. (The share of commuters who drove alone to work rose, from 68 percent to 80 percent.) Connecticut’s citizens have made their transportation choice, and it is the automobile. Unfortunately, the Nutmeg State’s transportation planners have yet to get the memo. Since the late 1960s, the number of vehicles registered in the state has soared, as has the number of licensed drivers and miles traveled, yet additions to the state’s highway capacity have been meager. A whopping 40 percent of the Connecticut Department of Transportation’s operating budget remains devoted to buses and trains.
“When opportunity costs are taken into account,” notes transportation analyst John Semmens, “there can be no question that putting money into public transit lowers the rate of economic growth, consumes capital, reduces job opportunities, and worsens the finances of federal and local governments.” A recent study by the Reason Foundation outlined how an emphasis on expanding highway capacity can boost the state’s competitiveness:
Connecticut can significantly reduce congestion by adding about 1,600 new lane-miles
by 2030 at an estimated cost of $3.4 billion in today’s dollars. This investment would
save an estimated 56 million hours per year that are now lost sitting in traffic, at a
yearly cost of $2.41 per delay-hour saved. The annual cost to relieve severe congestion
in the Bridgeport-Stamford area alone is significantly lower, at $1.19 per delay hour
saved. This does not account for the additional benefits … including: lower fuel use,
reduced accident rates and vehicle operating costs, lower shipping costs and truck
travel time reductions, greater freight reliability, and a number of benefits associated
with greater community accessibility, including an expanded labor pool for employers
and new job choices for workers.
Regulatory policy must also be adjusted in ways that promote economic freedom. The high cost of health insurance, a frequent complaint of business owners, can be lowered through several policy shifts, most notably the repeal of mandates on insurance companies. “These mandates,” report the Small Business & Entrepreneurship Council, “while often sounding reasonable, carry real and
sometimes significant costs.” Only four states impose a higher number of mandates on insurance providers than Connecticut.
A new measure of healthcare freedom, the “health ownership index,” was recently developed by the Pacific Research Institute. The index measures “the degree to which Americans are still free to engage health resources as they prefer, free of undue interference.” It will come as no surprise to close observers of Connecticut public policy that 41 states score higher on the health ownership index. The Nutmeg State’s healthcare sector needs fewer regulations, not more.
Labor regulations must also change in Connecticut. One bold option for lawmakers is the adoption of a Right to Work law. Doing so would greatly reduce the political muscle of organized labor, which constantly lobbies for the higher taxes and bigger government that contribute to the state’s economic woes. The last two states to adopt Right to Work laws have not regretted their decisions:
Idaho voters adopted right-to-work by a decisive margin in 1986. Although unions
poured in a fortune to demonize the proposal, that state has been one of the fastest
growing. Its per capita personal income is forging ahead at a rate more than 8 percent
higher than the nation’s as a whole.
Oklahoma’s experience mirrors Idaho’s. Prior to becoming the 22nd right-to-work state
in 2001, Oklahoma’s personal income grew at about the same rate as the U.S. average.
In the five years since, it has grown 35 percent faster.
Idaho and Oklahoma are not anomalies. Seven of the eight states that experienced
nonfarm employment growth of 3 percent or more in 2006 were right-to-work states.
And between 1970 and 2000, manufacturing employment grew by 1.43 million jobs in
right-to-work states but declined by 2.18 million in non-right-to-work states.
Conclusion
Economist Frédéric Sautet has a simple economic-development prescription: “Keep taxes low across the board. Don’t grant favors. Cities and states that pursue nondiscriminatory reforms, like reining in taxes, debt, and public spending, will enjoy the most robust growth. Remove barriers rather than trying to steer economic growth to this favored corporation or that one.”
Connecticut’s corporatist policies have failed to foster economic growth. It is time for sweeping reforms aimed at empowering entrepreneurs, workers, and investors. Economic freedom, not economic planning, is the path toward a brighter future for the Nutmeg State.
