October 30, 2006

Rhode Island Economy

The Cost of Doin' Business in Rhode Island (Industry by Industry)

Carroll Andrew Morse

A study commissioned by the Pioneer Institute for Public Policy Research and carried out by Global Insight Inc. analyzed the cost of doing business in Massachusetts in nine different commercial sectors. The study is of interest to Rhode Islanders for two reasons: 1) Rhode Island was one of six states used for the detailed breakdown of the cost-of-doing-business for a comparison to Massachusetts and 2) the study's conclusion is different from the usual "Rhode Island is nearly worst in everything" you probably have grown accustomed to seeing when discussing the business climate in RI.

Since the study was focused on Massachusetts, basic results were presented in terms of how much more or less profitable a Massachusetts company would be be if it were located in another state. In two sectors, Rhode Island based businesses would do significantly worse than comparable businesses in Massachusetts...

  • A plastics manufacturing company in Rhode Island would be 58.8% less profitable than a comparable company in Massachusetts.
  • A precision metal manufacturing company in Rhode Island would be 59.6% less profitable than a comparable company in Massachusetts.
But in seven sectors, a RI-based company would be expected to do better...
  • A biotechnology manufacturing company in Rhode Island would be 16.8% more profitable than a comparable company in Massachusetts.
  • A financial services company in Rhode Island would be 31.1% more profitable than a comparable company in Massachusetts.
  • An aerospace/defense company in Rhode Island would be 50.0% more profitable than a comparable company in Massachusetts.
  • A software company in Rhode Island would be 26.4% more profitable than a comparable company in Massachusetts.
  • A semiconductor equipment company in Rhode Island would be 18.4% more profitable than a comparable company in Massachusetts.
  • A medical device company in Rhode Island would be 12.1% more profitable than a comparable company in Massachusetts.
  • A search and navigation instruments company in Rhode Island would be 46.5% more profitable than a comparable company in Massachusetts.
Thomas C. Palmer reports in today's Boston Globe on some of the interesting inferences, economic and political, being drawn from the Pioneer Institute report...
The cost of energy was one factor among the 10 making costs in Massachusetts higher than elsewhere, and little can be done about that in the short term. But a number of the other nine are subject to reduction through policy changes, the report suggests.

They include unemployment insurance, higher here than in four other states; municipal property taxes, where in biotech and finance sectors they were lower in three states; and corporate income taxes, where Massachusetts was the highest of all....

Stergios said Massachusetts businesses' high costs can be controlled. An efficient procedure for siting a liquefied natural gas facility would even lower energy prices in the long run, he said....

Dave Iaia, senior principal at Global Insight Inc. and author of the study, said executives gave two reasons for staying in Massachusetts: the pool of skilled and educated workers, and simple inertia.

"It's one ace in the hole, this pool of workers," Iaia said. "If we start driving them away, that's going to be a problem."

Mr. Iaia's analysis suggests that Rhode Island's education system may be so underperforming that it more-than-cancels out any economic advantages Rhode Island has over Massachusetts.

Two quick cautions about the results...

  1. One consistent advantage Rhode Island had over Massachusetts in the study was cheaper property costs/rents. If Rhode Island did become attractive to businesses, that gap would almost certainly close.
  2. Although RI has an advantage of MA in many industry sectors, it was frequenty a smaller advantage than the two states outside of the Northeast (North Carolina and Texas) that were analyzed.

7:41 AM
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I think the reasons companies in these industries are not flocking to RI for the "higher profits" are those for which RI ranks low in most other studies:

- a looming financial crisis due to overspending that will likely lead to even higher tax rates at the state and local levels.

- mediocre public schools

- a closed political system dominated by one party and run by a few powerful cronies.

- A very weak opposition party.

- But most of all a notorious reputation for political corruption and an apparent unwillingness of the electorate to do anything about it.

Posted by: George at October 30, 2006 11:10 AM

A fascinating study. And yet, it seems to miss a key point, noted by George (above): if it is so much more profitable to locate in RI compared to MA, at least for some firms, why aren't more firms moving here? George sums up the answer to that question quite well.

It is also interesting to read the comparative data in the report. It shows that on many measures, RI is inferior to MA. Our workers comp rates are 77% higher (3.01 vs. 1.70). Our health insurance premiums per mfg employee are 7.3% higher (and that will only worsen, as our pool of commercial insureds grows older relative to the Bay State's). Our municipal property taxes are between 25% (for industrial companies) and 28% higher (for commercial companies). And our sales tax is 40% higher (7% vs. 5%). Moreover, some of RI's alleged advantages are questionable. For example, while our commercial rents are low, we have lost more than one growing biotech company to MA because of our lack of available "move up" facilities -- RI's commercial real estate developers simply won't build space on spec. In other words, our prices may be relatively cheap, but there's no liquidity in the market.

Finally, the wage differential between RI and MA tells only part of the story. If the difference in productivity per worker is even greater (which you would logically expect, given the differences in educational achievement on national tests, percentage of population with at least a BA, etc.), then unit labor costs (that is, wages adjusted for differences in productivity) may actually be cheaper in Massachusetts.

Bottom line: the Pioneer report tells only part of the story...but still raises a large number of disturbing questions for people who (a) are looking for "move up" private sector jobs here; (b) are counting on continued tax revenue growth in RI to finance their Rite Care, welfare, childcare and other benefits; and (c) are counting on continued growth in state tax revenue to pay for their public sector retiree pension and
health care benefits.

But don't expect to hear that from Fogarty, Roberts, Lynch, Mollis, Caprio and the rest of the RI Democratic Party's merry band of Neros...

Posted by: John at October 30, 2006 10:15 PM

John, unfortunately, we don't hear enough about it from Carcieri, Centraccio, Harsch, Stenhouse, Lyon or Patricia Morgan.

That's what I meant by "A very weak opposition party".

Posted by: George at October 31, 2006 12:58 PM