Study says state’s economic recovery slowed by rough first half in 2011

Connecticut was on pace to achieve a strong economic recovery by the end of 2013–until both national and state economies sputtered during the first half of 2011, according to the latest quarterly analysis released Friday by the University of Connecticut.

The failure of federal stimulus grants to spur economic expansion, coupled with subsequent government spending cuts and financial chaos both in American and European markets, means Connecticut will likely have to settle for one-half or even one-third of the recovery it was on pace to achieve over the next two years, according to the report from the Connecticut Center for Economic Analysis.

But the fiscal wrench in Connecticut’s recovery engine would have done far more damage had Gov. Dannel P. Malloy and the General Assembly tried to solve the entire state budget crisis with spending cuts, rather than a mix of reductions and new revenue, said economics professor Fred Carstensen, the center’s director.

“The state would have enjoyed almost a 10 percent growth in output and recovered another 55,000 jobs, performing better than the national economy. But this was not to be,” reads the center’s latest analysis, titled “Navigating Tumultuous Waters.”

“Virtually all economic forecasts, both for the United States and for the global economy, have been trimmed back,” the report adds. “Realistically, Connecticut will not see the improvements it might have seen.”

The state lost an estimated 105,000 to 120,000 jobs during what has become known as the Great Recession, which extended from March 2008 through early 2010. Connecticut, which was on pace to see 10 percent growth in economic output and 55,000 jobs recovered by the end of 2013, now likely will have to settle for something much more modest, and only one-third to one-half of those jobs, the center concluded.

One factor in the less-than-robust economic improvement, the report said, is that the state’s share of the federal stimulus spending was almost entirely offset by reductions in state and local spending. For example, between the 2008-2009 and 2010-2011 fiscal years, the state used $2.16 billion in stimulus money to prop up its operating budget. The loss of those funds contributed to the $1.3 billion Malloy and the legislature had to cut from the current year’s budget.

The stimulus “didn’t have the expansionary impact they expected on the economy,” Carstensen said. Though that stimulus spending created new jobs–not just in construction but in social services, health care or any other field that receives government contracts–it largely has been neutralized by cutbacks in other government expenditures.

Looking forward, the report said, $1.7 billion in tax increases approved by the legislature and Malloy and $1.6 billion in labor concessions will be a drag on the economy, although that will be partially offset by spending on the Hartford-New Britain Busway and on the Biosciences Connecticut initiative. With the stimulus money ended, however, the state’s share of those projects, will have to come from revenues raised locally.

“It’s not a free lunch anymore,” Carstensen said. New state government initiatives “mean we all have less money to spend on other things.”

Still, the center concluded that Connecticut’s economy would be in far worse shape had Malloy and the legislature tried to close the entire $3.67 billion deficit built into the 2011-12 budget with spending cuts. They ordered more than $1.6 billion in tax increases at the state and local level, and while this will leave consumers with less money, “it is  much better way of getting our fiscal house in order,” Carstensen said.

The center’s conclusions drew criticism Thursday from Deputy House Minority Leader Vincent Candelora, R-North Branford, a member of the Finance, Revenue and Bonding Committee and one of the most vocal critics of the new taxes approved by Malloy and his fellow Democrats in the legislature’s majority.

“Basically he (Carstensen) is saying you can tax people as much as you want and you still won’t change their behavior,” Candelora said, adding he believes the study dramatically underestimates how state and municipal tax hikes will curb the spending habits of Connecticut households. “You hear anecdotally from consumers all of the time. If people aren’t confident they will save their money.”

Increases in state income, sales, corporation, estate, cigarette and liquor taxes are causing that confidence to deteriorate and will stunt the economy, Candelora added.

The challenge posed by the expiration of the federal stimulus has been compounded by unstable financial markets, both at home and abroad, the study also notes: “The financial chaos of this summer has again sucked confidence out of the equity markets, and the continuing crisis in sovereign debt in the European Union has scared investors into the safest available havens–gold and American Treasuries.”

The Dow Jones Industrial Average, one of the chief measures of blue-chip stock health, hit a post-recession high of 12,810 on April 29 and hovered for the most part over the 12,000-point level until late July. It would then begin a 2,000-point, three-week plunge, bottoming out on Aug. 19 at 10,817. The Dow has rebounded modestly since then and closed Thursday at 11,493.

Meanwhile, economic crises in Greece and throughout much of Europe has weakened demand there for goods from Connecticut and the rest of the United States, Carstensen said.

Connecticut can help redirect its economy with an increased focus on “green energy,” backing technologies to promote more efficient electricity consumption and promoting electric vehicles to combat rising petroleum prices.

The center also repeated its call for a more strategic approach to the use of state tax credits to ensure those investments are tied both to specific pledges of new job growth–and are focused on cutting-edge science and technology fields such as bioscience.

“We have some economic independence in terms of determining what happens to us as a state,” Carstensen said, adding that for too many years, governors and legislatures doled out hundreds of millions of dollars in credits that effectively increased company profits–and little else.

The economics professor said Malloy’s new First Five program, which will dedicate tens of millions of dollars in state assistance to each of the first five Connecticut companies pledging to create at least 200 new jobs, “is much more symbolic than substantive, but symbolically it is terribly important.”

Though a good first step, First Five needs to be expanded into a larger, statewide plan tied to carefully selected targets and specific, measurable job-creation results, he said. “No single company is going to be our savior, Carstensen added.

Sen. Gary D. LeBeau, D-East Hartford, co-chairman of the Commerce Committee and a backer of the First Five program, said that while he agrees with the need to focus state investments on more specific economic goals, he believes expanding research programs at public colleges and universities also could be an important economic development engine.

For example, while the University of Connecticut has an Eminent Faculty program that it uses to recruit top researchers, “we really haven’t done enough to bring in the stars that we need,” LeBeau said, adding this could trigger additional private-sector and federal funding, and ultimately grow new cutting-edge technology businesses here. There are dollars out there, but we have to be willing to take a little bit of risk and bring in the right people.”