For the better part of a century, Providence, Rhode Island was known as “the jewelry capital of the world.” At its peak, the city boasted an estimated 85% of the precious metals products manufactured in the U.S., and the industry was the state’s primary source of revenue.
But by the ’80s, jewelry manufacturing was in a tailspin. Between 1978 and 1996, the number of jewellery employees shrank to 13,500 from 32,500, according to the New York Times.
Today, Rhode Island employs just over 3,000 jewelry workers, a 70% drop from 2000.
It’s called the Ocean State, but Rhode Island might better be considered a satellite of the Rust Belt, as it’s been in a state of unending decline for nearly three decades. At 7.9%, it now has the country’s highest unemployment rate. A plurality of Rhode Islanders are now employed in either healthcare or tourism, while total manufacturing employment has declined 43% since 2000 to 41,000 workers, less than 10% of the overall workforce.
“Rhode Island became a post-manufacturing economy … over 25 years ago,” Len Lardaro, a University of Rhode Island economist, told Business Insider.
Like the Rust Belt, the state faced a flood cheap overseas competition, especially from East Asia. A 2013 paper choseProvidence as an archetypal city vulnerable to outsourcing competition from low-wage workers in China between 1990 and 2007. National Bureau of Economic Researchers calculated that the city saw increases in Chinese import exposure of $US2,910 per worker between 1991 and 2007. In other words, employers could save almost $US3,000 if they started using Chinese workers instead of American ones.
“Several years ago a major American company offered to buy 100,000 corporate medallions from me if I could match, or even come close to, the unit prices they cost in Taiwan: twelve to fourteen cents each,” a retired Rhode Island jewelry executive told editor Ted Klein in his book on the state published in 2008. “I contacted nearly a dozen firms in Providence, and the cheapest price they could quote me was twenty-eight cents.”
And yet the cost of doing business did not come down. The state’s 9% corporate tax rate has long been one of the highest in the nation. Between 1988 and 1998, property values in the state’s five largest cities declined by 24%, or more than $US3.3 billion. At the same time, their effective tax rates went up by 44%, according to a 1999 report. And following the Great White concert disaster in 2003, which claimed 100 lives, the state revised its firecode in a way that Bryant University economics professor Ed Tebaldi says inadvertently made it one of the most expensive in the nation.
So the state put its hopes in housing. And it got clobbered. Property values climbed higher and fell harder than the national average, and have struggled to recover since.
Since the crash, lending standards have remained ineffectually high, Moody’s Chris Lafakis said in a recent note, as the percentage of first mortgage holders with a credit score above 700 climbed much faster in Rhode Island than nationally. And the state’s foreclosure inventory remains massive.
Many economists agree that there’s only so much elected officials can do to turn around a state’s fortunes. The best strategy is ultimately to limit losses and create an environment where companies can thrive.
That has not happened in the Ocean State.
“The mindset of our elected officials is, ‘When the economy turns around, when the economy turn around’ — because most problems tend to be cyclical,” Lardaro said. “But that doesn’t happen in a post-manufacturing economy. You have to reinvent yourself.”
State officials seemed to recognise this. In 2010, they began holding talks with Curt Schilling about investing in a project called 38 Studios, according to Boston Magazine’s Jason Schwartz. Schilling’s firm planned to create a new massively open online game, like The Sims. Faced with a non-existent industrial base and eager to get a foot in the door on what smelled like a techy, innovative source of growth,
Rhode Island committed $US75 million in loans to the firm.
Two years later, 38 Studios filed for bankruptcy, the victim of poor timing in the business cycle, mismanagement, and, allegedly, fraud.
Schilling himself lost $US50 million, but the damage to the state’s finances, not to mention psyche, has proven more profound. The state now owes 38 studios bondholders $US90 million, and just allocated $US12.3 million for its latest interest payment.
“People from all persuasions are disgusted” that they remain on the hook for “a crackpot investment scheme concocted behind closed doors by politicians with possibly dubious motives,” the Providence Journal in a recent op-ed.
Repaying the state’s obligations have become a central campaign issue in the race to replace Gov. Lincoln Chafee, who is stepping down. The field of five Providence hopefuls are actually split on the issue.
“38 Studios was a bad deal and a bad investment from the very beginning, and now Rhode Island taxpayers are being asked to take the hit for bondholders who should have known better,” Republican candidate Ken Block said in May. “As long as there are serious legal questions still to be decided, we need to stop the repayment process.”
The 38 Studios boondoggle has driven state officials already struggling to turn the state around to distraction, Lardaro said.
“Our elected officials are spending too much time there,” he said. “They need to be looking to the future and addressing our structural deficiencies.”
In 2012, the state charged Schilling, along with Wells Fargo, which helped complete the deal, with misleading officials about 38 Studios’ financial health. Lardaro said there’s now discussion about whether to continue to make interest payments. The suit has now dragged into its third year.
“There’s a lot of people who genuinely believe that if Rhode Island defaulted on its moral obligations, that there would be no consequences…and that was an eye opener to me,” Lardaro said. “I didn’t expect to see that kind of naivete…They need to be looking to the future and addressing structural deficiencies.”
State GDP growth now stands at 1.4%, and even before the financial crisis it had fallen below 2%.
Population is also down 2% from its peak.
For all this, Rhode Island may have put its worst troubles behind it. Lafakis observes that food manufacturer Greencore recently signed a 50-year lease at a former military base turned business park in Kingstown to build a 400-worker facility that could be expanded later. Electric Boat is also hiring 650 workers to make Virginia-class submarines. And toymaker Hasbro, the state’s remaining pillar of manufacturing, continues to see steady growth.
Given the Schilling debacle, it’s ironic that Lafakis says it may take a Boston rally to permanently revive the state’s fortunes: The city of Boston’s tepid recovery is holding back Rhode Island’s growth. Ocean Staters will have to hope Boston finance and tech firms start getting priced out of the city and begin to move south across the border, he explains.
“Historically, businesses have relocated at a faster pace when office rents are rising strongly in Boston,” he writes. “However, job growth in Boston has been sluggish for the past two years, and before rents can take off, office space left vacant during the recession needs to be absorbed. Since Boston’s economy is expected to trail the nation’s until 2016, growth will be lackluster in RI.”
Until recently, betting on Red Sox Nation was always a bad move. But the state doesn’t seem to have much choice these days.
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