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December 28, 2020 Economic Forecast

Does Connecticut have a future?

Hartford's skyline.
By Fred Carstensen

Connecticut is in deep trouble. Very deep trouble.

From 1997 to 2008, Connecticut arguably had the strongest economy in the nation, growing in real terms 3% compounded annually; on a per capita basis expanding 30% faster than the national rate.

But since 2008, Connecticut has had the worst state economy, shrinking 9.1% before a modest recovery; in Feb. 2020, before the pandemic, the state’s economy was below its 2006 level, and employment 17,000 under its previous peak.

Fred Carstensen, Economist, UConn

In contrast, New York, Massachusetts and Rhode Island enjoyed robust growth, well exceeding previous peaks in output and employment.

Such a sharp contrast in performance has multiple drivers, but most salient has been Connecticut’s disconnect from the data-driven, digitally-dependent modern economy. The clearest evidence was the nearly 25% contraction in the data-intensive finance/insurance sector and the virtual absence of growth in Connecticut in IT-specific occupations.

Neighboring states all enjoyed robust double-digit growth in precisely those occupations, consistent with strong connections with the modern IT economy.

The pandemic hit the nation and Connecticut hard; what now looks like a third wave of infections, hospitalizations and deaths may pull the nation into recession as J.P. Morgan forecasts.

Because of our reliance on tourism and hospitality, Connecticut suffered disproportionately, but recovery has been marginally better than the region and the nation. Even so, full recovery is a long way off.

Looking further ahead, the Office of Fiscal Analysis and Office of Policy and Management forecast aggregate deficits in fiscal years 2021 to 2024 of more than $4 billion after spending the $3 billion rainy-day fund. But these are actually optimistic projections, assuming robust economic growth, minimal growth in state commitments, and a willingness to spend the rainy-day fund down to zero.

Absent aggressive initiatives, deficits will likely be higher, leading to massive program cuts and layoffs in fiscal years 2023 and 2024. The Connecticut Center for Economic Analysis’ long-term forecast points to that possible outcome: absent significant federal support and/or effective state policy initiatives, state recovery may take a full decade, to 2030.

Connecticut has one clear advantage: a robust rainy-day fund that can cover deficits for at least two years. Avoiding immediate cuts will help sustain employment and thus state tax revenues. If the state immediately implements aggressive economic-growth policies it could significantly mitigate if not eliminate projected fiscal year 2024 deficits.

There are obvious initiatives that would quickly impact Connecticut’s economy and state revenues. Legalizing recreational marijuana could generate 17,000 new jobs and nearly $1 billion in state revenue in six years; permitting online sports betting would generate new revenues; adopting tax incentives to incentivize development of hyperscale cloud data centers might attract billions in investments; redeveloping Sikorsky Memorial Airport would be a powerful regional economic driver.

One critical deficiency the state should address: our dismal balance of payments with Washington, D.C. Connecticut has the worst record of any state, getting a pathetic 82 cents of federal money back for every dollar it sends. This translates into a per capita deficit over $2,000; no other state suffers a deficit above $1,000 per capita.

A focused, multi-agency initiative to secure more federal funding could deliver hundreds of millions in federal money in the near term.

Connecticut faces daunting challenges, but it also has the resources and locational advantages to shape its own future. Do we have the will?

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.

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17 Comments

Anonymous
December 30, 2020

So is the takeaway here that a professor of economics at a liberal university claims drugs and gambling are the only real hope for salvation? And more specifically, we must legalize those vices so the state can... raise more taxes? Yep. Keep sending your kids to UConn. The real answer to our fiscal problems can be found in the comments below. See if you can figure out which one it is.

Anonymous
December 30, 2020

You get how you vote, this has turned into one big nanny the prof in how the five big cities vote during elections and rain in the unions

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