Tuesday, June 01, 2004

Real Economics versus the Casino Option

Robert Kerr, vice president for performance excellence and corporate quality at Taco Inc., in Cranston has written in today's ProJo about the false promise of a casino. He points out that too few are aware of Adam Smith's monumental work, "Wealth of Nations" and the basic economic principles it describes. In short, according to Kerr:
We must first understand that all types of commercial enterprise may be arranged on a continuum, according to the enterprise's relative contribution to the community. Smith described this contribution to the community -- "the wealth of nations" -- as the "mutual and reciprocal gain" that results from the division of labor applied to the conversion of raw materials into goods for sale.

Over the years since Smith, the conversion of raw materials -- otherwise known as manufacturing -- has been extended to include other value-added activities, such as personal and financial services, education, health care, and so forth.

The relative contribution to society of each of these types of enterprise is determined by how many times the same unit of money is "turned over" in order to make or deliver the product or service. This multiplier has greater or lesser effect on the economy depending on the type of product or service.

For example, in the manufacture of hard goods, the entrepreneur must buy raw materials from another entrepreneur, who in turn must buy raw materials from another . . . going back to the raw materials' being dug from the earth, raised from the sea, or grown on a farm.

Service enterprises also require raw materials, though never in the quantities required by manufacturing.

Similarly, the labor used to make or deliver the product or service carries with it a multiplier based on the resources the laborer needs to buy in order to do his or her job. For example, a worker with children needs to buy day care. And a worker who lives at a distance from the job needs to buy transportation.

Typically, the multiplier associated with manufacturing is seven times the gross sales. It is the largest of all the enterprise multipliers.

On the opposite end of the economic scale is casino gambling. Because of the relatively low overhead required to operate a casino and the enormous potential profit, this form of enterprise possesses essentially a negative multiplier: It sucks money out of the economy, because most of the money spent in a casino is not spent again by the casino to buy materials or labor; it is taken away by the casino operator as profit (emphasis mine).

While it is true that building a casino creates jobs, construction jobs are temporary and casino-job salaries never amount to more than a small percentage of the gross sales. Remember, too, that all this expense over the long term is far less than the profits taken out of the economy by the casino operator. The multiplier remains negative.


Particularly troubling is that, here in Rhode Island, "we consume more than we produce" and "more and more Rhode Islanders seek relief and support from the state, or the lifetime security of state employment. And too many of our politicians are corrupt, too many of our institutions burdened by a legacy of unethical behavior." As such, this state is especially receptive, and vulnerable, to the seemingly easy money earned by a casino. The most attractive argument seems to be over the proportion of revenue that would go to the STATE. This shows the degree to which it is accepted that, here in Rhode Island, the State Government is viewed as the ultimate purveyor of wealth. In contrast, again from Kerr:
Our corporate wealth as a state would be better spent in building needed infrastructure, supporting manufacturing, and reducing the overall cost of doing business in Rhode Island. An economy, never mind a state, too dependent on self-absorbing ventures like casino gambling cannot prosper.

We must tell our legislators in loud and certain terms that gambling, along with being a dangerous amusement, removes value from our economy.

Investment in manufacturing creates good jobs and puts a steady stream of money into our economy. Manufacturing activity develops the economy through supply of the greatest multiplier of all known enterprises. By contrast, gambling is a tax on the naive and the addicted -- a tax most of whose revenue goes to the casino owners, not to the local economy.


Kerr's definition of manufacturing is more inclusive than the traditional, but his point is valid. Unfortunately, it is simply easier to set up a gambling house, pay lip service to the "jobs" and "revenue" memes and go on our merry way. It is much tougher to develop the infrastructure necessary to create a pro-business environment.

This ties in with Edward Achorn's piece, also in today's ProJo, on 'Tax Hell Rhode Island'. Citing a report from the June 2004 issue of the Bloomberg Wealth Manager that ranks Rhode Island 51st out of the 50 states and the District of Columbia "for people who wish to keep some of their wealth." According to Achorn:
The Bloomberg study is more evidence, if you needed any, of the rape of Rhode Island by politicians who are either too small-minded or too uninterested in the public's welfare to consider what they are doing to the people they supposedly serve.

We all know the classic class-warfare line. The wealthy? To heck with them! Let them pay higher taxes so that middle-class public employees can make out like bandits. And why would we ever consider cutting rich people's taxes when the state is facing huge deficits? After all, the poor and the children will suffer if we restrain government (i.e., by reducing public-employee jobs or curbing their benefits).

There's one problem with Rhode Island's class-warfare approach: People in this country are free to move around and pursue their economic self-interest. Which is why there is a market for publications like Bloomberg Wealth Manager.

Consider what the magazine discovered ("Ride the Wave," by Janet Bamford and Thomas D. Saler) by running state and local tax forms through Quicken's Turbo Tax program. A hypothetical well-to-do family, under one calculation, would pay $7,259 in taxes in Wyoming; the same family would pay $56,419 in Rhode Island.


Rhode Island's reliance on class warfare and setting up government as the biggest "business" in the State has had dire effects in attempts to keep the wealthy or upper-middle class (the typical small business owners and corporate decision makers) in the State . According to Achorn:
At some point, well-to-do people make . . . calculations. And when a state is described nationally (and internationally) as "tax-hell Rhode Island," they know to steer cleer.

So who needs upper-middle-class people? To heck with them.

Except: They do contribute something to a community. Let us count the ways:

Jobs. Corporations tend to be where executives want to live. The beauty of Rhode Island, its superb quality of life and its proximity to New York and Boston would surely draw them to the Ocean State -- if not for its tax burden. Why would they throw away money to live here, when they could make a better life for themselves and their families somewhere else?

Charity. Well-to-do people are the lifeblood of community institutions, including charities and arts and civic organizations.

Taxes. It's better to get something from wealthy people than to drive them away and get nothing. A vibrant economy would generate many more tax dollars to pay for education, road and bridge repairs, health care -- the lot.

Civic culture. Corporate executives tend to demand better services from local government, and their presence on local boards can lift the standards of excellence, particularly in public education, an area in which Rhode Island has been performing poorly.

Families. Rhode Island does a good job of splitting apart loved ones. Because its tax and regulatory structure chokes off new jobs, children often must move out of state for work. And because it is one of the worst places for retirees, elders often move far away, taking their spending power with them.

Rhode Island, in trying to punish the wealthy, has only ended up punishing its middle-class and poor citizens.


And yet, many think a casino will solve many of the state's financial problems. It is this inability to see past short term gain (from casino "revue") and a related lack of interest in trying to address the basic infrastructure problems that leave Rhode Island far behind in the national economy. As Kerr explained, manufacturing businesses (as he broadly defined them) will go much farther in contributing to the economy than a casino. While most of the casino's money goes to the government and the casino company, manufacturing jobs more positively affect a wider range of people. Big companies beget smaller companies. All beget employees, across a wide salary range, who will live, work and play in the state. More stable revenue will be generated. Most importantly, more will feel they are stakeholders in the future of the state. However, if the citizens of this state continue to elect the usual suspects, continue to wish they had a State job instead of fight the excesses of those same jobs, and persist in viewing the State as a benefactor and not a leach, nothing can be accomplished. If this attitude persists, Rhode Island will continue to maintain its position as the worst state for wealth retention in the United States and those who have tried to make a difference will simply leave her to her fate.

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