Carstensen contends state economy must be more collaborative

By Scott Benjamin

If the national economy started to recover from the Great Recession in June 2009 and grew into what became the longest economic expansion in the 244-year history of the United States, then why - as University of Connecticut Finance Professor Fred Carstensen has indicated - was the Nutmeg State’s economy “in recession for eight years – from 2008 to 2016?”

A: Is it because that state employee pensions are only 29 percent funded, according to a 2018 commission report?

B: Could it be that suburban Connecticut can’t compete because so many young people want to live in major cities?

C: Can you blame the state income tax, which was established 29 years ago? Some recent Republican candidates for governor have called for it to be eliminated

Carstensen, the director of the Connecticut Center for Economic Analysis (CCEA), says A.B, or C aren’t the prime reasons for the sluggish economy.

He says it has largely been due to a lack of public-private partnerships, a reluctance to enter the 21st century digital world, having the worst balance of tax payments with the federal government of any state in the nation, a growing number of residents who live in Connecticut but work over the border and pay their state income tax there and a bundle of unutilized tax credits that could facilitate major projects

“Few legislators appreciate how bad we’re doing,” Carstensen declared. He predicted that as a result of the economic impact from the pandemic the state government will make major cuts to “municipal aid, education and higher education.”

He stated in a memorandum that Connecticut’s economy “shrank, measured in terms of real output, almost 10 percent before enjoying a very modest recovery – so Connecticut is now where it was in 2005,” he wrote. “But the difference is that in 2005 the economy was growing at a three percent annual compound rate, among the best in the nation, and if you looked at its occupational structure, it looked solid even if job creation was non-existent.”

Former Gov. Dannel Malloy (D-Essex) said during his campaign in 2010 that Connecticut had fewer jobs than in 1989. Additionally, it never recaptured all of the jobs that it lost during the Great Recession, even before the start of the pandemic.

However, Carstensen said the state was producing well-paying jobs.

He said from 1997 to 2007, Connecticut’s economy grew 30 percent faster than the national average.

“That the income tax is the problem is utter, total nonsense,” Carstensen declared. “These candidates that run on a single platform plank to eliminate the income tax are not realistic.”

The Finance professor said in a phone interview that since the Great Recession, “Connecticut has been sitting on its hands Connecticut has been adding low-wage jobs. It had the worst performing state economy in the nation over the last decade.”

“After 2008, Connecticut disconnected from the modem, data-driven, digitally dependent economy with job creation focused in low-skill, low-wage areas of tourist, hospitality, elder care and logistics (fulfillment centers) all with median annual wages below $40,000 while losing higher-skill, higher-wage jobs,” he stated in a memorandum.

Amazon, which already has a presence in Wallingford, Windsor and North Haven, recently announced that it would expand to Danbury.

However, Carstensen said that, “Most of those positions are part time. The full-time jobs are estimated to pay about $38,000 a year. Jobs are important, but it comes down to the kind of jobs and what they will pay.”

“The importance of a broad collaborative among our institutions of higher education, public and private to support aerospace engineering, biomedical research and information technologies,” he wrote. “Connecticut loves two-legged stools – but for some reason they tend to fall over. We need an integrated economic development strategy that brings together human capital, infrastructure and private enterprise. There is a powerful synergy between these elements.”

He said the General Assembly has proven it can do that.

In 2005, U.S. Sen. Chris Murphy, then the state Senate co-chairman of the Public Health Committee, was a point person on a $100 million stem cell research project that then-Gov. M. Jodi Rell (R-Brookfield) signed.

“Hands down, it was the best stem-cell program in the country,” remarked Carstensen. “You had collaboration with Wesleyan, Yale and UConn.”

“Neighboring states – Rhode Island, Massachusetts and New York – have well-developed digital technology data storage systems,” he said. “Connecticut doesn’t have that. It is about the equivalent of driving along I-95 with no exits to go to,”

Carstensen said Massachusetts, for example, built a $100 million high performance computer center in Holyoke in collaboration with the Massachusetts Institute of Technology, Harvard and the University of Massachusetts at Amherst.

“It has made them a lot of money,” he said.

Carstensen wrote, “If the state continues to be the Florida of the northeast rather than a strong participant in the data-drive, digitally dependent economy, its fiscal crisis will be a permanent feature and there will likely be systematic, widespread cuts in public services and employment at both the state and municipal levels, a dynamic that will feed back into the private sector, which in the face of contracting aggregate demand will then also shrink.”

However, there are pockets of economic vitality.

Stamford has a robust skyline that includes Indeed, NBC Sports, WWE, Henkel, Pitney Bowes and Thomson-Reuters, and has attracted many millennials.

Said Carstensen, “Stamford feeds off of New York City and Metro North. The reason that Stamford is thriving is not because of leadership from the state government.”

Former independent gubernatorial candidate Oz Griebel of Hartford told Patch.com in 2018 that New Haven had changed over the previous 20 years as a result of the partnership between the municipal officials in Elm City and Yale.

Carstensen said, “Companies are spinning off of Yale.”

“The rest of the state is doing poorly,” he added when asked about the municipalities outside of New Haven and Stamford.

On a related topic, he said that since 2013 Connecticut had added almost 155,000 more residents that are working out of state and paying their income tax there.

Additionally, Carstensen said that Connecticut only gets $0.84 back “for every dollar it sends to Washington” – by far the worst figure in the nation.

He said that “no other state is below $0.90.”

Carstensen said has far fewer officials “tracking federal funding” than most other states.

He also called for the “redevelopment of [Igor] Sikorsky Airport in Stratford into a regional passenger hub. “Airports are powerful economic development drivers.”

Patch.com reported in 2017 that then-Trumbull First Selectman Tim Herbst, who was seeking the Republican gubernatorial nomination, had called for commercial service at Sikorsky Airport.

Carstensen also called on state officials to “unleash the approximately $1.5 billion in stranded tax credits for use in funding major capital projects.”

“A detailed CCEA analysis showed that this could be done in a way that does not cost the state any tax revenue but drives creation of about 40,000 net new permanent jobs per $1 billion in credits used,” he wrote. “The credits should be transferable between companies – we ought not care what company makes the investment. The core is to make credits prospective, not retrospective, to anchor companies here with major capital projects [such as Raytheon Technologies, which owns the Francis Pratt & Amos Whitney defense contracting operation in East Hartford, and Jackson Labs, which is based in Farmington].”

But talking about the retirement system: CT Mirror Budget reporter Keith Phaneuf told a Wilton League of Women Voters forum last year that the pensions for the state employees and the public school teachers were structurally underfunded each year from 1939 through 2010. The state Commission on Fiscal Stability & Economic Competitiveness reported in 2018 that the state employee pensions were only 29 percent funded.

Carstensen said, “There is no question that Connecticut has a pension funding problem, and [former Republican governors] Rowland and Rell and the unions [for the state employees] made it much worse by stretching out the basic agreement 20 years from 1997 to 2017 and offering lucrative early retirement programs.”

“However, it would have been not as bad if we had had more economic growth over the last 10 years,” he explained.

“Low-funded state pensions is a national problem,” he continued. “For example, Illinois and Kentucky have low-funded pension systems that are similar to what’s happening in Connecticut.”

Carstensen said, “New York has low-funded state employee pensions, but it has been doing extraordinarily well over the recent years economically.”