Sunday, September 29th, 2013
[ I've always been a skeptic of industrial policy, and the travails of the various federal green programs and such make me feel justified my thinking in that regard. Yet, for struggling communities, clearly something needs to be done, even if not trying to pick specific winners and losers. In 1983 Rhode Island had an opportunity to have implemented an economic turnaround plan dismissed by critics as industrial policy, but voted it down. I recently took a look back and that, and the results of that decision that I think are relevant to other places trying to figure out what to do or not do. ]
I’m a relative newcomer to Rhode Island, but you don’t to be here long to hear about the infamous “Greenhouse Compact,” a state economic development strategy developed at the end of the Volcker recession in 1983 and voted down by the public in 1984. It is certainly one of the most remarkable economic development analyses ever performed. I have not seen a full copy, but the internet tells me it exists in at least two volumes with a length of at least 976 pages. There was a 47-page executive summary – not much shorter than many full reports these days – that I did manage to get ahold of and read, however. If the full report is as robust as that suggests, then I’ve never seen anything that appears to be so thorough and in-depth.
The Greenhouse Compact vs. Laissez-Faire
The Greenhouse Compact was the brainchild of Ira Magaziner, who went on to design Hillarycare, apparently not learning his lessons as that plan was developed and failed in a similar fashion. Though perhaps not the reason the Greenhouse Compact was voted down, it was roundly criticized by economists like Brown’s Allan Feldman, who strongly attacked it as industrial policy.
Magaziner and Feldman lay out starkly contrasting views of the matter. The Greenhouse Compact says:
Today, Rhode Island is in an economic crisis….When an economy has a vibrant private sector which can clearly provide the growth opportunities in investment that the economy needs to employ its people fully and raise its living standards then one can speak of a laissez-faire attitude as being appropriate. Rhode Island is currently far from that. It has many industries which are becoming subject to low wage competition; it has many others which are mature low wage rate industries with very little growth prospect but a need to modernize and develop new products; it has very few companies that have the prospect for significant growth and these are often being wooed by other states with particularly attractive incentive packages; and it has only a smattering of activities in new technology areas. Under these circumstances, a concerted economic development effort is the only way to create the momentum to build economic prosperity.
In the run-up to the vote, Feldman told the New York Times:
“I think this is not an appropriate thing for government to do, but that’s not my basis for opposition,” said Allan Feldman, an economics professor at Brown who is co-chairman of a group, Common Sense, formed to oppose the Greenhouse Compact. ”Beyond the ideological question, I think the economic analysis is terrible and the plan won’t work. It favors bankers, venture capitalists and high technology, and while it might be great for Terry Murray’s bank, it won’t help the average Rhode Islander.”
After it was voted down, he said in the Christian Science Monitor, “It was not economically sound, and would ‘offer very little to taxpayers.’” He also wrote an article in which he gloated that “industrial policy is dead.”
A bit later, as Rhode Island’s economy was looking up, Feldman appeared vindicated, telling the Washington Post in an article titled “Rhode Island: Rags to Riches”, “Governors delude themselves. They like to think they’re responsible for everything.” In the same piece Magaziner stuck to his guns, saying, “We should be fixing the roof when the sun is shining. We really should have invested more than we have.”
The Greenhouse Compact Vindicated
Fast forward 30 years and what has history shown? The predictions of the Greenhouse Compact have been entirely vindicated and the approach of Feldman and company has perpetuated the economic ruination of the state. Rhode Island’s post-recession bump wasn’t a real recovery; it was a dead cat bounce.
The Greenhouse Compact had said, “Overall, prospects are bleak. Industries which are likely to lose employment or at best stay stable far outweigh those with growth prospects. Those companies with growth prospects often plan to expand out of state….Given the current structure of Rhode Island’s economy, these jobs are unlikely to emerge.” This report included a sector by sector analysis in which it concluded that with the exception of eds and meds, the future didn’t look bright. And while it may have been off in some details, clearly history has borne out the Compact’s central claims.
It certainly possible that the Greenhouse Compact’s recommendations would have failed to stem the tide. But it’s hard to see how they could have made things much worse, thus pursuing the strategy likely made sense on option value alone.
What Feldman and the ultra-purists on the right fail to fully recognize is that creative destruction is real. Just as in the commercial marketplace where almost all firms ultimately fail, the vast majority of places will end up failing as well. Once they reach the top of their maturity curve, they’re done, and unless they reinvent themselves and begin a new growth curve again, they sicken and enjoy a long stagnating decline. Rhode Island reinvented itself three times from agriculture to seaborne merchant trading to industry, but failed to pull-off a fourth reinvention. Any CEO of a company facing a similar need to reinvent itself certainly would not take the attitude that he should let the market sort it out and do nothing but manage costs. But that’s the prescription too many give to public sector leaders.
From ‘Industrial Policy’ to ‘Conventional Wisdom’
Not all of the Greenhouse Compact’s recommendations make sense. The $138 million (a lot more than that now when you factor in inflation) in incentives to existing industries seems more like a fillip to interest groups to secure their buy in than a real strategy, for example. But a lot of it, including the eponymous “greenhouse” component, were ahead of their time and indeed have become almost conventional wisdom.
The Greenhouse idea was to basically have some public sector support to nurture emerging industries that were research and technology related in areas where Rhode Island was perceived to have some potential to play. These would include a marketing and civic booster program, as well as a venture capital fund, including some unique components such as allowing the state’s pension fund to invest in startups.
Pretty much every state has adopted a similar model in the last decade. Even Tea Party friendly politicians like Indiana Governors Mitch Daniels and Mike Pence invested heavily in Biocrossroads, which is the umbrella organization for that state’s “greenhouse” in life sciences, for example. They may be fiscal conservatives, but they’re not dumb. Pretty much every single city and state has variations on these. Another example: one of the plan’s suggestions was to create a Rhode Island Academy of Science and Engineering to boost the supply of talent into those industries. This idea was recently implemented – by New York Mayor Michael Bloomberg, who is opening a new technical and engineering college on Roosevelt Island in conjunction with Cornell and Israel’s Technion backed up by significant public investment. Look at any city or state, and you’ll see them trying some variation on the greenhouse theme, though with different terminology. Many of these programs are ‘me too’ initiatives that aren’t likely to be effective. But where the approach is applied to areas where a state or metro area has a potential advantage, it makes a lot of sense.
It’s interesting that the Greenhouse Compact even specifically warned against 38 Studios style cross-border raiding, saying, “To some states, economic development has meant trying to convince industries in other states to close down and move. This will not be Rhode Island’s approach. We are not interested in ‘stealing’ another state’s companies.”
Now plans aren’t implementation, and obviously the reality would have involved a lot of politicization. I’m not so naïve to believe that poaching attempts would have been eliminated just because this report said so. But the bottom line is that Rhode Island had an opportunity to be 20 years ahead of its time, and took a pass. Free market types might argue that their preferred policies were never implemented either, but that’s the right-wing equivalent of “true communism’s never been tried.” The results are in and the Rhode Island experience makes it very clear that while some of these approaches that might have had aspects of industrial policy (though certainly nothing like the botched federal green subsidies and such that rightly give industrial policy a black eye) may not have been the right idea, doing nothing certainly didn’t work.
In a lesson to Tea Partiers everywhere, the Greenhouse Report summed it up, “If Rhode Island is to undergo an economic renaissance, investors must have significant positive reasons for investing in this state rather than any other. The absence of negatives will not be enough.” A Tea Party style focus on nothing other than taxes and costs – removing the negatives – is insufficient and history has borne that out (just as is now being repeated in many Midwestern states that are becoming Rhode Islands despite their nominally attractive business climates). Want to oppose plans like the Greenhouse Compact? Fine, but show us your plan and give us a reason to actually believe it will work.
Based on what I read in the executive summary, though there area a number of anachronisms and areas I didn’t agree with, the Greenhouse Compact actually stands up quite well today. If it were simply implemented as is, it would still probably be an improvement over the status quo, but now that everybody and their brother has piled on, the big returns have, sadly, already been harvested elsewhere.
This article originally appeared in GoLocalProv on September 23, 2013.