Good Policy, No Buyer: The Fall Rhode Island’s Greenhouse Compact

No state escaped deindustrialization, but some weathered it better than others. Rhode Island was not one of those states. At the turn of the 20th century, Rhode Island was one of the wealthiest states, per capita, in the country. Industrial growth – driven largely by jewelry manufacturing – gave the state a third representative in Congress in 1913. In the next two decades industrial growth gradually slowed to a halt, and by 1933, concurrent declining population growth snatched away that third seat in Congress. After the Second World War stagnation turned into a slow decline and that decline into a rapid sinking that culminated in the flight of Coro – one of the state’s largest manufacturers – from Providence’s Jewelry District in 1978.

The bleeding did not stop in 1978; in absolute terms, industrial employment has fallen by close to 90% since then. But the national prosperity of the late-1980s, 1990s, and early 2000s had yet to kick in by the end of the ‘70s. By now, most Americans have heard the narrative of country-wide industrial decay often enough that there is little to be gained from reciting it. But Rhode Island’s experience was unique because, as both the smallest state in the country and one of the hardest-hit, it briefly became a proving ground for one of the most ambitious state legislative agendas since the Great Depression. The eventual failure of that legislative program – the so-called “Greenhouse Compact” – can teach us a great deal about the political challenges that have made Rhode Island the sick man of New England, and the circumstances of its defeat offer valuable lessons in how to overcome those challenges.

“[D]iscussions of industrial policy in America”, wrote Robert Reich in the January 1982 issue of the Harvard Business Review, “have finally lost their innocence.” Now, he intoned, “unemployment lines in Detroit… have replaced the traditional belching smokestack as the symbol of the nation’s economy.” Today this sort of rhetoric can seem so hackneyed that readers can be forgiven if their eyes glaze over while reading it. But at the beginning of the 1980s it was genuinely merited, not just because the recession that lasted from July 1981 to November 1982 was particularly severe, but because it confirmed, just as a decade of stagflation and general malaise had confirmed, that the economic stimulus of Keynesian deficit spending had ceased to do its job. For Reich – an unabashed liberal and Reagan critic – the crisis was just as much ideological as it was economic, discredited as the “tax and spend” policies of Lyndon Johnson now seemed. Without a credible response to Reaganomics the Democratic party faced intellectual bankruptcy. The left, Reich and many of his contemporaries decided, needed to re-tool, just as a corporation might.

The answer to America’s struggles and to those of post-war liberalism, Reich and others argued, was what they uncreatively referred to simply as “Industrial Policy.” The role of the government should be to step in with a light hand, to “intervene selectively to mold market forces” and give a hand up to industries in which the country had a comparative advantage – that is, in which it was naturally predisposed to be competitive. This, after all, was more-or-less the sort of neo-mercantilist approach than had cleared the way for post-war economic miracles in Germany and Japan, both of which were snapping at the Americans’ heels by 1982.

Even by political standards, IP gained ground quickly. The second-ever meeting of the Industrial Policy Study Group – at the AFL-CIO’s Washington headquarters in August, 1983 – was a who’s-who of prominent union bosses, investment bankers, and politicians; Massachusetts Senator Ted Kennedy was in attendance, as was former Secretary of Defense McNamara, who privately renounced his support for the Republican Party. Chrysler Chairman Lee Iacocca, apparently visibly distressed, said, “I believe in the free market, but I see what the Japanese are doing to me.”

The problem for IP advocates was that the GOP held the presidency and, despite taking a shellacking in the 1982 midterms, clung to a narrow majority in the Senate. IP would have to start in the states. And one state in particular was advancing the issue more quickly than any other.

The rapid advance of IP in Rhode Island had much to do with the efforts of one man: Ira Magaziner ‘69, a charismatic Rhodes Scholar and former student organizer who, for a brief moment in 1984, dominated Rhode Island politics more thoroughly than anyone before or since. In 1982, Governor J. Joseph Garrahy appointed a 19-member Strategic Development Commission (SDC), requesting only that it submit recommendations to the state legislature for the development of Rhode Island’s economy. With Magaziner quickly emerging as the SDC’s unofficial spokesman, it instead drafted a 900-plus page IP proposal dubbed the “Greenhouse Compact” after the four research centers, or “greenhouses,” that it proposed to establish around the state. It described in “smothering detail… subsidies to high wage firms, to entrepreneurs… to companies… [and to] specifically targeted industries in which Rhode Island was thought to have a comparative advantage – tourism, boatbuilding, fishing, jewelry.” Advocates estimated a price tag of $250 million – paid for by tax increases – which they believed would be outweighed by the economic boon the plan ensured. The final document was possibly the most detailed and far-reaching economic policy document ever brought to a vote in a US state. Instead of submitting it piecemeal, the SDC asked the state legislature to vote on the plan in its entirety, and, in an indication of the excitement which now surrounded the Compact, it got its way. With the legislature’s seal of approval, a referendum was scheduled. Magaziner, Governor Garrahy, union leaders, and prominent businessmen canvassed the state in support of what must have seemed, without the benefit of hindsight, to have been an idea whose time had come. Then, on June 14, Rhode Island voted.

The Compact failed with less than a fifth of the vote. When the national economic recovery gathered steam over the next few years, the IP experiment ended just as quickly as it had begun. Without a surfeit of public polling, it is unsurprising that neither proponents nor opponents predicted the margin. But the SDC and its allies should have seen storm clouds on the horizon. From the start, the Greenhouse compact faced derision from Brown University economists who called it an “elitist scheme” designed to benefit big business alone.The fact that all 19 SDC members were white men might have proven a non-issue if they had seemed open to the concerns of a diverse electorate. But when a consumer activist group requested modifications to the Compact document including more “aggressive anti-bias measures, daycare, neighborhood revitalization, and representation”, they were deemed a “special interest” and turned away. Furthermore, union leaders backed the plan, but failed to organize behind the scenes or to listen to the concerns of their membership. Public polling conducted on the day of the referendum found that 88% of no-voters and 39% of yes-voters believed they had not been represented in the decision-making process that produced the Greenhouse Compact. The problem was not merely that the SDC itself was aloof and unrelatable, but that it flaunted its aloofness, and that in distancing themselves from partisan politics, the Compact’s champions had not set themselves above the fray but rather confirmed their most prominent opponents’ worst expectations. One SDC document from 1983 declared that “[i]f Rhode Island’s economy [were] to develop, all groups in society must sacrifice, [and] abandon old prejudices”. Because it was a delicate compromise between business and labor, the argument seemed to go, the entire thing must be voted on as a unit, without debate or dissension. With a public image like this, the most amazing thing about the Greenhouse Compact is that it won as many votes as it did.

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Other states have dealt with their own post-industrial hangovers in remarkable ways.

 

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These discussions are of more than purely academic significance. The Greenhouse Compact, for its various and sundry flaws, was nevertheless the last, best effort by an American state to approach economic development with a coherent, all-encompassing strategy. Rhode Island has not come close to passing a comparable measure since. Rhode Island’s political leadership has since pursued a rather less grand approach to economic policy. In 2010, the state-run Economic Development Corporation (EDC) – founded in 1974 to develop partnerships between the state and private businesses – approved a $75 million dollar loan to 38 Studios, a video game developer founded by former Red Sox pitcher Curt Schilling. Within a year the company went under, wiping out tens of millions of dollars of taxpayer money at a time of acute fiscal crisis and chronic pension underfunding. Then-Governor Chafee nonchalantly intimated to a Providence Journal reporter in the aftermath of the implosion that he had declined to dismiss EDC Executive Director Keith Stokes – of whom he was known to be suspicious – because Stokes was friends with M. Teresa Paiva Weed, president of the State Senate.

Most post-Greenhouse development policies in Rhode Island have not imploded as dramatically as the 38 Studios venture did. But the gubernatorial administration of Gina Raimondo has, if anything, doubled down on the same basic approach to development that made the 38 Studios fiasco possible in the first place. Under Governor Raimondo the state of Rhode Island has handed out hundreds of millions of taxpayer dollars to dozens of companies, including a Massachusetts-based printing company ($2.2 million) and science & technology giant Wexford ($41.3 million).

That brings us to the present. Rhode Island is by no means the economic basket-case that many seem to believe it is; the state’s unemployment rate, poverty rate, and median income have all been on par with or better than the national averages in recent years. But Rhode Island is far behind its neighbors. Rhode Island’s median personal income is almost $14,000 less than Massachusetts’ and and $12,000 less than Connecticut’s, and the Ocean’s State’s unemployment rate has remained stubbornly higher than that of every other New England state. Rhode Islanders pay higher income taxes than their neighbors in Massachusetts and higher sales taxes than citizens of any other state in New England, but receive fewer services for it. Other states have dealt with their own post-industrial hangovers in remarkable ways. High technology, tax reform, and heavy investment in public investment pushed the unemployment rate in Massachusetts from 12% in 1975 to under 3% in the mid-1980s; since 2013, average income in Massachusetts has risen 4% annually. Rhode Island has natural disadvantages – unlike Massachusetts and Connecticut, it cannot rely on a major, well-educated city to fuel its growth – but none so severe that effective management could not have mitigated them. Instead, Rhode Island has handed out successive rounds of ill-advised tax incentives lacking anything resembling a coherent strategy.

It can be hard to understand how one of the smallest states in the country manages to be one of its worst-run. The answer, it seems, is that Rhode Island’s legislature is too risk-averse to pass grand reforms. A post-referendum autopsy by Brown professor Elmer Cornwell attributed the failure of the Greenhouse Compact in large part to the plan’s complexity and to “a hyper-suspicion of politicians… endemic ever since Watergate.” But the legislators who had backed the Compact so fervently at the outset learned the wrong lessons from its defeat. The failure of the Greenhouse Compact was a failure of messaging. It was defeated not by the quality of the arguments against it but by the bungling of a mysterious, self-righteous, and uncompromising SDC. Political success is more than a matter of good policymaking; good salesmanship is, if anything, more important. …. Flawed though it was, the Greenhouse Compact remains an alluring vision of what policymaking in Rhode Island could look like.

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