Carstensen: CT's state of uncertainty

Fred Carstensen, Professor of Finance and Economics, Director of Connecticut Center for Economic Analysis, School of Business, UConn

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By Fred Carstensen, Professor of Finance and Economics, Director of Connecticut Center for Economic Analysis School of Business, UConn

Connecticut’s economy is struggling. But this is a struggle long in the making: It has been true since 1990.

For 25 years, Connecticut’s economy has essentially failed to create additional jobs; from 1989 to 2009, Connecticut had the worst jobs record in the nation. Worse, the jobs lost over the years have often been replaced with jobs with lower wages and benefits, as Comptroller Kevin Lembo has highlighted.

Add to this long-term malaise the onslaught of the Great Recession, in which Connecticut suffered the longest recession in the nation (2007 through 2011) as measured in real output, not employment. It lasted for over 17 quarters, even as the nation began to recover in 2009.

Connecticut also had a recovery weaker than any other state save Nevada; at the end of 2014, Connecticut’s output was still more than 5 percent below its peak in 2007, just as total employment is still below its peak in early 2008.

Singularly strong investments in bioscience (Bioscience Connecticut plus Jackson Laboratory) and aerospace (the UTC agreement that anchors Pratt & Whitney in Connecticut with the new major research center in East Hartford) should have helped push Connecticut onto a new trajectory, but they did not find sustained support with holistic policies or initiatives to strengthen the whole bioscience/biomedical sector (which includes hospitals that provide critical clinical support) or advanced manufacturing.

One idea policymakers should consider is allowing companies with stranded tax credits the opportunity to cash them in against the cost of major capital projects. Just as in the UTC arrangement, this approach is self-funding because of the scale of new jobs and incomes it creates. And, critically, it transforms tax credits into prospective incentives that shape corporate planning — as it did with UTC — rather than a residual of past activity with little influence on future planning.

Contrast Connecticut’s approach with the growing impact of initiatives in Albany, N.Y. in nanotechnology and Cornell’s new technology campus in New York City, or Massachusetts’s billion-dollar bioscience fund and the multi-university High Performance Computing Center in Holyoke, Mass., and the linked IT infrastructure initiative. Indeed, a striking aspect of the current situation is that Connecticut sits between two of the nation’s strongest growth centers — the New York City and Boston metro areas — but is largely unable to share in that dynamic.

Add to this historical perspective the current budget and tax chaos, in which Connecticut faces sizable deficits over the next two fiscal years. No business in Connecticut can now anticipate and thus plan for its tax (or regulatory) environment.

Nothing is so hostile to business as uncertainty. Connecticut it seems has become the state of uncertainty.

Forecasts now show budget deficits as far as the eye can see; the conversation focuses only on trying to now minimize the damage already done with incoherent tax initiatives and where to cut spending. But there is essentially no solution to the budget crisis without economic growth. And to that there is remarkably little attention.

Conventional forecasting tools rely to a significant degree on stability and continuity in policies. Clearly, in the current environment, it is particularly difficult to see where Connecticut’s economy is headed. Perhaps the current crisis will finally force Connecticut both to develop far better measures of its own performance (Connecticut is, some have said, a “data desert” because it does not regularly benchmark its own performance, and rarely exploits best practices other states pursue) and to build a policy process that will, in the future, frame policy in a more coherent and transparent way.

Connecticut, which has a remarkable array of assets and an important locational advantage, can chart a course that will restore its economic vitality and, in so doing, meet its fiscal challenges.

The question is, will it?

[See what others are saying on HBJ's Economic Forecast 2016 page]