Hartford Business Journal Special Editions

6 | HARTFORD BUSINESS JOURNAL • DECEMBER 24, 2018 CT's shrinking economy: Is there a pathway to growth? By Fred Carstensen, Director of the Connecticut Center for Economic Analysis; Professor of Finance, UConn's School of Business G ood news: Connecticut's economy grew during the first six months of this year — it is now about as big as it was in 2005! The state's economy ended 2017 smaller than it was in 2004. This is not the first time Connecticut has enjoyed two quarters of growth, but since 2008, bad quarters have overwhelmed good ones. The result has been an economy steadily shrinking — with 2015 carving out minuscule growth — at almost a negative 1 percent annual compound rate for a decade. It is the worst performance of any state in the nation, by a significant margin. Two of Connecticut's leading sectors in 2008 took heavy hits. Nondurable goods manufacturing, the third-largest sector in 2008, was annihilated, shrinking 75 per- cent, losing more than $20 billion in value. Finance and insurance lost over $10 billion in value, nearly a 30 percent contraction. Overall, nine economic sectors in Connecticut's economy shrank between 2008 and 2018. Only the information sector enjoyed robust growth, but at a slower rate than the national average. In contrast, our neighboring states have done well. They now enjoy employment and real output well above their previous peaks. Nationally, every sector, except government, expanded between 2008 and 2018, underlining the poor, anomalous performance of Connecticut's economy. Is there a path to growth? Connecticut faces the twin challenges of addressing a daunting fiscal crisis while adopting policies and initiatives that will restore real growth in the economy. There are two areas the state can address to help deal with its fiscal challenge: • Make a concerted effort to secure as many federal dollars as possible; • Restructure the revenue system, where raising rates has been undermined by selective cuts and employment dynamics. Connecticut is unusually reliant on own-source revenues because it has historically paid little attention to the federal dollars to which it is entitled or for which it might compete. Other states make an institutionally focused effort to secure those dollars; Connecticut likely foregoes hundreds of millions, perhaps a billion dollars, because of its lack of effort in this arena. Meantime, the legislature has been raising tax rates, but it has simultaneously erod- ed revenue through selective exemptions (tax expenditures). The clearest example is the sales tax, where revenue as a percentage of household consumption has declined annually since 2011 — revenue is now about $220 million lower than it would be if the collections were the same share of aggregate consump- tion expenditures. The sales tax applies to a mere 36 percent of total consumption because of the hun- dreds of exemptions that exist in the tax code (a notorious example is the exemption for UConn faculty and staff for food purchases on campus). Worse, the income tax in 2017 generated $490 million less revenue, measured as a share of total personal income, than in 2013. Thus, the two main drivers of state revenue were down in 2017 by over $700 million relative to what they generated in earlier years. Two strategies for quickly driving real growth in the state's economy are: • Unleashing stranded tax credits to fund major capital projects. Done correctly, the state forfeits no net revenue, but could generate tens of thousands of net new permanent jobs. • Engaging institutions of higher education in powerful collaborative efforts. We have seen this done only once: the very successful stem-cell initiative under Gov. M. Jodi Rell. Gov.-elect Ned Lamont should personally bring together higher-education leaders to facilitate similar collaborations in aerospace engineering, biomedical research and information technologies. Such an effort would help address the critical education/ research/workforce pipeline that is fundamental to the state's future competitiveness. There is some hope that Connecticut is beginning to bend the curve. The mas- sive fuel cell and data center development in New Britain has the potential to be a game-changer for the state, as does the arrival of Infosys in Hartford. There is also an initial effort among state agencies to strengthen their efforts to secure federal funds, as well as a small opening for the use of stranded tax credits. State policy will drive CT's economic future By Pete Gioia, Chief Economist, PGEcon.com C onnecticut has great economic potential. We saw a glimmer of that in 2018 with year-over-year job growth of over 25,000, and especially strong growth in construction and manufacturing jobs. But, the state still significantly lags the U.S. and the region in numerous factors of economic performance. Can 2019 be a breakout year? For the U.S., 2018 was a solid year and 2019 may be great. Despite challenges from tariffs and Fed rate hikes, most factors are decidedly positive. We should see job growth of 200,000 or more per month, oil prices under $70 a barrel, solid GDP numbers and overall stock-market growth despite some bumpiness. Worldwide, the economy is solid too, helping exports despite tariffs. U.S. tax reform will be kicking in fully not only helping local corporations but setting the stage for more nationwide corporations to purchase Connecticut goods and services. Connecticut has definite strengths: Productivity: Some of the most productive workers in many sectors in the U.S. Good mix of 21st-century businesses: Aerospace, nanotechnology, bioscience, biomedical and high-end financial services. Manufacturing: Jobs have grown by 4,300 year over year and thousands of open jobs still exist. Resurgent construction and positive financial-services job growth: Both sectors have grown during the last 12 months. Solid innovation: Connecticut Business & Industry Association (CBIA) surveys show over half of firms have and will introduce new products or services. Positive company profit and growth expectations: CBIA surveys have shown their best numbers since 2008. Indeed, recent CBIA surveys have shown company performance and expectations for growth and profits are all up. Likewise, concern for tax increases, need to cut state spending and manage long-term unfunded liabilities remain major concerns. Repeatedly, I hear from business people that they may move new production or their entire operations out of state if these latter areas do not improve. Business sectors that Connecticut is strong in, such as aerospace, defense and financial services, will take advantage of strong U.S. and international markets. This will push the Connecticut economy forward. The real issue for Connecticut is whether our public-policy actions help rather than hinder growth. It all centers upon Connecticut fiscal and regulatory policy. With Ned Lamont as our new governor and the new legislature solidly Democratic it is imperative that the right choices are made. CT21.org has stated that its reports show upwards of $2 billion can be saved without harming citizens with accelerated prison reform, rebalancing to more home care in long-term care and greater use of not-for-profits in social-services delivery. The Malloy administration over the last two budget cycles demonstrated that deficits can be handled without tax increases. Will policymakers make the right choices? Many statements were made by Democratic candidates to support regulatory changes that have been vehemently opposed by business. In Washington, whether you love or hate Trump, his initiative to not add new business regulation without sunsetting two regulations rocketed business confidence and led to added investment and new job creation. The proposed Democratic regulatory plan does the opposite. There is also a lot of concern that the new policymakers may raise taxes or non-tax costs like tolls. Malloy, facing large deficits the last two years, found ways to avoid tax increases. In part, this was done because of real concern that tax hikes would drive wealthy taxpayers and businesses out of the state. The new administration should seriously talk with Malloy and his budget office before proposing to add taxes to solve the state's fiscal problem. ECONOMIC FORECAST

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