December 21, 2018

CT's shrinking economy: Is there a pathway to growth?

Good 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 percent, 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 eroded 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 consumption expenditures.

The sales tax applies to a mere 36 percent of total consumption because of the hundreds 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 massive 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.

But to date the legislative leadership has barely acknowledged the reality of our shrinking economy and have yet to make it a top priority. Yet without a focused effort to drive real growth, Connecticut faces continuing weak or non-existent growth and thus a nearly endless fiscal crisis.

Return to HBJ's 2019 economic forecast landing page

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