🔒Fred Carstensen: Is CT’s economy finally recovering? Possibly, but jury’s still out

The rainy day fund is full, giving the state a nice cushion against future deficits.

The state budget is delivering large surpluses that are going to reduce the challenging unfunded mandates Connecticut faces.

All four credit-rating agencies have raised Connecticut’s score, thus cutting the interest rate investors demand on its bonds.

This fiscal health flowed from huge federal COVID-relief measures and an ebullient stock market. The state has not enjoyed such fiscal health since the Rowland administration.

But the state budget’s robustness has come at a cost.

Funding for higher education has been massively cut, for UConn by more than 75%, contributing to a sharp decline in its ranking as a research university and weakening the ability of the entire system to generate the skills our businesses need.

Municipalities face more than a thousand unfunded state mandates, imposing a heavy burden on local property taxes.

Perhaps most serious, many state agencies are now understaffed, most notably the Department of Revenue Services, which is now able to do at most a third of the tax audits that should be done. The state is surely failing to collect taxes due, well into the hundreds of millions.

Going forward, that weakness will likely compound itself. When deficits return — which seems likely — it means they will be worse than they could be if the state simply collected what is due. It also means those who actually pay their taxes are carrying a heavier burden than they should.

Economic uncertainty

The most striking fact about the state’s robust fiscal health is the contrast with the anemic state economy. Employment is still below 2008 levels; as of October 2022, the shortfall was 52,000 jobs.

State real product (our GDP) is still below 2007 levels; as of the second quarter 2022, it fell more than $7 million short.

Simply put, Connecticut has never recovered from the Great Recession. Nor has it recovered, unlike the nation and nearly all states, to the levels achieved pre-COVID shutdowns, when employment was nearly 35,000 jobs higher.

It has been the worst-performing state economy in the last decade, whether measured in jobs or real output.

Looking forward, the trajectory is changing. Connecticut’s 30 years of decline began in the early 1990s with drastic cuts in defense spending following the Soviet Union’s collapse and end of the Cold War. Connecticut suffered the worst recession of any state as it was second only to California in reliance on defense spending.

However, unlike California, Connecticut lacked a diversified economy and singularly failed to adapt to the emergent data-dependent, digitally driven internet economy. It has only recently adopted legislation to make it competitive to hyperscale cloud data centers, central to offering a competitive IT infrastructure.

The state’s recovery, measured in job creation, was painfully slow, got progressively weaker, and ended with the Great Recession. But current-day rising international tensions, particularly a newly aggressive China and Putin’s war on Ukraine, mean a dramatic increase in defense spending, a significant share of which is now and will in the future flow to Connecticut.

Electric Boat will likely generate the largest impact on the state, both because of its planned hiring of 9,000 net new employees (nearly an 80% expansion) and the impact that will flow through its hundreds of Connecticut suppliers.

Sikorsky and Pratt & Whitney also have significant military contracts. Add to this ASML’s $200-million investment in Wilton that will create another 1,000 jobs directly and more through supply chain and multiplier effects.

Both legacy companies and newcomers are also making investments, promising to put Connecticut on a new trajectory. And the state itself has begun unprecedented initiatives in workforce development, looking to create the skilled workforce upon which expansion depends.

These investments and jobs are far more valuable to the health of the state’s economy than the fulfillment center and logistic investments of which we have seen so much. Those investments have weak multiplier effects and virtually no supply chain benefits.

The danger is that Connecticut — assuming this new defense-driven trajectory delivers sustained growth and the state does not fall back into persistent deficits — will fail to make the sustained investments and pursue strategies to diversify away from its defense-driven economy.

Will Connecticut learn the lessons of its own history?

Fred Carstensen is the director of the Connecticut Center for Economic Analysis and a professor of finance and economics at UConn’s School of Business.