Economist contends Connecticut's fiscal woes haven't disappeared

By Scott Benjamin

Connecticut state government has a record $4.5 billion in its rainy day fund, a projected $470 million surplus in the budget for the fiscal year that ends June 30, $6 billion in additional funds coming from the federal stimulus legislation and recently received three bond rating upgrades.

Yet, Donald Klepper-Smith of DataCore Partners, who chaired former Gov. M. Jodi Rell’s (R-Brookfield) economic team, is pessimistic.

“The state’s economy is currently artificially inflated (from federal stimulus] in some regards,” he said in phone interview with Patch.com. “Connecticut is about 140,000 jobs lower than its previous peak” at the onset of the Great Recession in 2008.

“Under the current structure, Connecticut’s economy is not self -sustaining,” said Klepper-Smith.

“Connecticut has been moving sideways for 10 years,” he declared. “I don’t think this recent migration to Connecticut from the pandemic is going to last.”

The Wall Street Journal reported last July in a story with a “WESTON” dateline that, “It took a global pandemic and a severe economic downturn to do what once seemed impossible: make the Connecticut suburbs cool again.” The CT Post reported in May that during 2020 Westport added 672 residents.

However, Klepper-Smith said in the years before the pandemic that there was an average net of more than 400 people leaving the Nutmeg State each month, largely because of high taxes and a lack of jobs. Connecticut was the only New England state that did not recapture all of the jobs it lost in the Great Recession in the period between the fall of 2008 and the beginning of the pandemic in March 2020.

He said the “long-term business climate is more welcoming” in other states,” noting that the Milken Institute has reported that Connecticut has the fifth highest costs of doing business in the country.

Klepper-Smith praised Gov. Ned Lamont (D-Greenwich) “for saying he doesn’t want to add or increase taxes” as he and the General Assembly negotiate a budget for the fiscal year starting July 1.

Associated Press reporter Susan Haigh stated, that the General Assembly’s Finance Revenue and Bonding Committee has endorsed “a long list of tax proposals” that include a new consumption tax and a capital gains tax on higher income taxpayers.

The Associated Press has reported that Lamont objects to those proposals, saying, “We’ve got jobs that are being created. We’ve got companies coming to the state of Connecticut. I don’t want to do anything to stop that momentum.”

State Rep. Bob Godfrey (D-110) of Danbury has told Patch.com that the wealthy are not the ones leaving Connecticut, noting that during the 2010s the number of billionaires in the Nutmeg State increased from 11 to 17 and there was a 20 percent increase in millionaires.

A Wall Street Journal editorial stated that the governor is taking a stance against the “Never Satisfied caucus” in the General Assembly.

Remarked Klepper-Smith, “There has been a lack of fiscal discipline.”

The Wall Street Journal editorial stated, “Connecticut used to be the low-tax haven with a quick ride to Manhattan, but decades of tax-and-spend policies have eroded its comparative advantage.”

Klepper-Smith added that the state also is beset by high pension liabilities and crumbling roads.

The Wall Street Journal stated in a November 2020 editorial that the state has a pension system that recently has been evaluated by Fitch Ratings as the second worst in the country, after Illinois.

A 2017 report from a national engineering association reported that Connecticut’s roads are rated the worst of any state.

However, Klepper-Smith expressed optimism about future economic growth near Stamford and New London.

“Stamford and lower Fairfield County benefit from outflow from New York City and offer lower cost,” he said. The southeastern section of Connecticut “has manufacturing and contracts in the pipeline” for the Electric Boat submarine shipyard in Groton.

Klepper-Smith, who has been the featured speaker in recent years at the Greater Danbury Chamber of Commerce’s Economic Forecast breakfast, noted that the metro Danbury area’s 7.3 unemployment rate in March was the lowest among the nine labor markets in Connecticut. The state average was 8.3 percent.

He projects a strong rebound for metro Danbury, which was the only sector in Connecticut prior to the pandemic that had regained all of the jobs lost in the 2008 Great Recession. He said the region benefits from a diverse range of companies and retail outlets.

Klepper-Smith also applauded Lamont for establishing a Work Force Council to develop more public-private partnerships to retrain workers. He said with structural change taking place as digitization and robotics eliminate existing jobs, it is imperative to “retool the work force.”

Regarding the national economy, he criticized Democratic President Joe Biden for presenting a proposed $6 trillion budget with a $1.8 trillion deficit.

“There is no sense of fiscal discipline,” Klepper-Smith declared.

He added that the extended unemployment benefits were largely responsible for the disappointing April employment figures since they are a disincentive to return to work.

The nation gained 266,000 jobs in April. The New York Times reported that, “Economists had forecast an addition of about a million jobs.”

Klepper-Smith predicted there will be will be gross domestic product growth of six percent as a result of nearly $5 trillion in federal stimulus that has been approved since March 2020.

However, he contends, “We can’t print money as a way to prosperity. We can’t have economic growth at any expense. The inflation is already an alarming problem.”

Klepper-Smith noted that inflation soared to 13.5 percent in 1980 during a lengthy recession. He said today, using the algorithm from that era the rate is above 10 percent.

“The government understates the inflation,” he complained. “It is based more on the ability to survive than the cost of living.”

He said the $1.9 trillion American Rescue Act signed by Biden in March was unnecessary.

“When you get to your second and third stimulus programs there is a smaller benefit,” Klepper Smith explained. “Economic growth has to be about investment, consumption, exports and productivity,” that is self-sustaining.

He also said the Federal Reserve Board’s low interest rate policy has discouraged savings.

On another topic, Klepper-Smith said the pandemic has altered retail sales.

“There is going to continue to be more purchasing done through ecommerce and there has to be a tax structure that is global so that the right states and countries get the tax revenue,” he explained.

New York University Marketing Professor Scott Galloway wrote in his 2020 book, “Post Corona” (Portfolio, 229 pages), that, “At the beginning of 2020, approximately 16 percent of retail was transacted via digital channels. Eight weeks after the pandemic reached the U.S. (March to mid-April) that rate leapt to 27 percent . . . and it’s not going back.”

Said Klepper-Smith, “it is hurting the bricks and mortar stores, which are facing inflationary costs on electricity and labor.”