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Assessing Lawmakers' Wisdom As Connecticut Faces Economic Shock

By Dan Haar

June 07, 2013

State Sen. Tony Guglielmo, arguably the most liberal Republican lawmaker in Connecticut, often supports raises in the minimum wage but voted against the hike this year. It just didn't seem like the right time, he said, echoing most of the GOP.

The Stafford insurance agency owner did support a law barring insurance companies from dropping customers as a result of a major storm.

Those measures both passed, along with a raft of other taxes and laws that either increase business costs or bring new restrictions to companies. The list isn't unusual for a budget year, and none of the measures is likely, on its own, to hurt Connecticut's economy very much.

But now we must look at the picture as a whole — since the world changed on the morning after the session ended. Connecticut in 2012 was the only state to see its economy shrink. Worse than that, the U.S. Commerce Department said Thursday, a revised view of 2011 shows that we didn't grow by a respectable 2 percent. No, we shrank in 2011 too, as measured by the estimated total value of goods and services produced in the state.

Let that sink in for a moment before we jump back into what the legislature did and didn't do. In 18 years of following economic reports daily, this is the most shocking piece of news I've seen, period. As a bombshell, it rivals the $2.2 billion loss posted in January 1989 by Bank of New England — heralding the region's worst recession since World War II.

This could become even worse, if Connecticut stands alone while Massachusetts and even perpetual laggard Rhode Island notch growth. It's more complicated than a recession because we are adding jobs, and some of the same policies that are under fire here seem to be working elsewhere. Raising the minimum wage, for example, could help the economy if it puts more money in the hands of the working poor.

So what is to be done? Have we crossed a tipping point, too much piling on of good, smart measures that add up to make Connecticut unfriendly to business? Even the liberals among us must ask that question. Friends, we are now officially in a quiet, creeping crisis and we're in it by ourselves as the rest of the nation ponders rising interest rates in a return to normal times.

"It's like death by 1,000 cuts," Guglielmo said. "It's no one thing. You help people with all these mandates but in the end you've got a product that costs so much more than any other state...there is a point where you've got to strike a balance."

Lawmakers' 2013 Legacy

In addition to the minimum wage and the insurance mandate, the measures adopted by Gov. Dannel P. Malloy and the legislature this year include:

A gas tax increase that was long scheduled, amounting to almost 4 cents a gallon; labeling of foods that use genetically modified ingredients, a rule that will kick in only if New York and other surrounding states join in; an extension of the 25 percent surcharge on the corporate tax, leaving the rate at 9 percent; a financial clampdown on hospitals; a levy on electric generators through October, which was supposed to sunset this month; a raid on the state's fund for clean energy projects; and a cap on the film tax credit.

Let's not forget the ban on sales of military-style weapons and bullet magazines larger than 10 rounds. Aside from whatever public safety it adds, the post-Newtown gun ban sent a message that Connecticut can punish a thriving industry.

My view of this list is mostly positive. The hospitals took it on the chin too deeply and that will lead to layoffs and service cutbacks. The gun ban, enacted through emotion rather than logic, will do less for safety than the welcome registration and access restrictions that came with it. The rest of the measures seem reasonable considering the budget hole Connecticut faces, and considering the distaste for raising income tax and sales tax rates.

Lawmakers did allow a seemingly barbaric sport called mixed martial arts as a way of spurring activity in Bridgeport, and they did send $3 billion to cities and towns, which will tamp down property tax increases — a critical factor for manufacturers.

But a breakdown of the individual pieces is less important than the overall question of business climate. I find it impossible to believe that if the Commerce Department report had come out six weeks earlier, the result would have been the same.

House Speaker Brendan Sharkey bristles at the idea that the just-ended session was anti-business. He points to Malloy's constant efforts to "change the perception," and it's true that Malloy is out there supporting business with backslapping and cheerleading, handing out checks to job-creators and cutting the time it takes to complete environmental permits.

"I'm sensitive to the need to be sensitive to the needs of the business community," said Sharkey, a Hamden Democrat and lawyer who helps companies with permitting and site selection. "I'm in lock step with the governor...I have a small business myself, I don't like to see us nickel-and-diming small businesses."

It's easy for those who favor reining in government to point to this legislative session with disdain, and say we needed to slash spending. But it's not that simple. Malloy has already pared the state workforce by more than 1,000 people, and as UConn economists pointed out in a report this week, the state's economy loses about 15,000 jobs for every $1 billion cut from state outlays. Even where Malloy did cut spending, denying a $500 million increase that hospitals said they needed to serve a larger Medicaid population, we could see an economic backlash.

What We Can And Can't Do

Malloy's insistence on borrowing heavily to fill the state's budget gap was the best of all evils — assuming the state's woes are temporary and we'll be able to pay back the loans in the future. Combined state and municipal borrowing as a percent of total income is in line with other states, contrary to popular belief.

What Connecticut can do is spend more on the overall economic picture by lowering corporate tax rates, and less on specific firms such as Blue Sky, the digital animation studio that fetched more than $60 million after moving a few miles to a Greenwich neighborhood on the New York State line. Also, this business of writing checks totaling tens of millions of dollars a year to restaurants and Main Street retailers is good for communities but doesn't help the economy overall.

And a suggestion from Guglielmo: Since we can't stop the out-of-control tax credits that may or may not be helping the economy one credit at a time, we should take a look at the credits as a whole, and let the General Assembly vote up or down on a broad reform package, like the federal military base-closing commissions.

Part of the problem is trends that we can't easily change. The biggest hit to economic growth in 2012 was the financial sector, as giant banks such as UBS in Stamford reduce staffs and as the financial services industry spreads out from centralized places.

Young people and dynamic tech firms like to be in big metro areas such as Boston, which partly explains why Massachusetts is outperforming Connecticut. And that seems to back up Malloy's expensive habit of spending money on the state's larger cities, such as moving UConn's West Hartford campus to downtown Hartford and spending $60 million on nice apartments in the capital city.

The most dour view of all is that we're in an inevitable decline brought about by too much entitlement — for the poor, with federal supports; for the middle-class, with rising health and retirement needs; and for the top 10 percent of earners, who are amassing a dangerously large share of wealth without adding jobs. In this view, the whole American empire will slowly fade, starting with rich places like Connecticut, where growth is naturally slowest.

Guglielmo knows the answer is not in cutting off the people on the bottom, people like his grandfather and namesake, who came to this country from Italy with nothing. His observation in the suddenly quiet halls of the state Capitol complex on Thursday could prove tragically prophetic.

"I've seen it this bad before," Guglielmo said, "But never this bad for this long."