RI—What Went Wrong: Competitiveness

The devastating effect of property tax hikes and the less significant effect of a high unemployment insurance tax, discussed in previous columns, probably explain most of the portion of the unemployment gap that’s not explained by austerity. However, there is one more factor that might play a minor role in weakening our economy with respect to other states’. That factor is competitiveness. By competitiveness, I am not referring to the argument popular among conservatives that Massachusetts somehow has a more “competitive” individual income tax rate than Rhode Island. All that’s necessary to debunk that myth is to plot the tax rates:

What I am referring to is actual competitiveness. Although the Ocean State GOP would have you think otherwise, Rhode Island is not the poorest state in the union. Actually, we rank a bit above the average. The issue is that we are much poorer than the other blue states that surround us, as the rankings of states by median household income show.

As a blue state with a long history of unusually conservative government, this is to be expected. It does, however, have some consequences for our economy. By being a moderately wealthy state surrounded by much more successful states, we get many of the disadvantages of affluence with few of its benefits. One way this manifests itself is the strength of our currency. Because the Northeast is a wealthy region, it has a strong dollar, but this is more of a regional trend than a state-based one. A strong currency makes it harder for a state to compete in trade, which is why we want the Chinese to let their currency strengthen. This probably results in a trade deficit for Rhode Island, but the government does not track the trade positions of individual states, so it is impossible to know for sure. At the same time, we also suffer from competition with wealthier neighboring states, which can offer both lower taxes and better government services because of their wealth, as Josh Barro points out in Forbes. Competition probably explains a small portion of our unemployment gap, but the bulk of the blame falls on massive austerity and unusually silly tax polices.