AS-AD Effects in Rhode Island

In late 2010, amidst economic turmoil, equal or if not worse in comparison to the recession going on in the United States as a whole, the state of Rhode Island was looking for a way to boost their economy. The government’s solution was a $50 million Job Creation Guarantee Program, where the state would loan help with the upstart of entrepreneurs looking to bring their business to Rhode Island in the hopes of creating more business now and getting that money back in the future. Around the same time Rhode Island did this, Curt Schilling, a great famous New England hero for his courageous performance and dominance with the Red Sox against the Yankees in 2004, was looking to expand his new video game company. The two sides came to a deal, and Rhode Island decided to expand its Job Creation Guarantee Budget Program to $112 million in order to loan the $75 million of tax-payer money that Schilling and his company 38 Studios required.

The thought of the mayor and others in the government was that the addition of Schilling’s company into Providence would boost the city’s “high-tech sector” and add to the luster of Providence’s self-proclaimed, “Creative Capital”. However, this deal was not seen as one of success. The $75 million loan was turned down by Gov. Deval Patrick and the state of Massachusetts after even they, who owe much of the state’s happiness to their Boston hero Schilling, could not see a new, undeveloped video game company being worth $75 million. Many Rhode Island economists against the proposal stated that yes bringing in new technological companies would be great for the economy, but giving $75 million to one company ($25 million over their original budget) out of $112 million, is giving 67% of loans to one company, very much the definition of putting your eggs into one basket. Many economists say the way to go about adding new companies, is to let the city decide for itself. Let multiple companies engage in competition, instead of giving 38 Studios a monopoly.

These red flags didn’t stop Mayor Donald Carcieri from signing off on the loan. Rhode Islanders would now pay $75 million in taxes to Schilling’s company. From an economics standpoint, we can see that higher taxes mean a lower Y, and a shift to the left in our AD curve. The thought was however, that with this added technology, of bringing in a high-tech video game company, would bring other businesses and more technology, thus increasing our alpha in the Solow growth model, and shift our AS curve to the right, increasing our Y, and GDP. The predictions also said that 38 Studios would itself create 650 new jobs for Rhode Islanders, and many more from other companies’ entrance, and so decreasing unemployment would help the citizens spend more money, increase C, and shift the AD curve to the right.

What actually happened to 38 Studios was completely opposite. For starters, new employees were imported, from places such as Silicon Valley, Texas, or even Schilling’s family were given jobs, all who live in Massachusetts, so not as much employment was created as expected. Furthermore, the company experienced very little profits and therefore in 2012 filed for bankruptcy and closed its office doors. The technology that 38 Studios brought to Rhode Island disappeared, and so AS shifted left, however the $75million in taxpayer money was already paid, so AD remained shifted to the left. This put Rhode Island into a deep recession and left the state looking for new solutions to help its GDP, and its 11.2% unemployment rate, second highest in the nation. A solution that most think is a good start, and one with which I agree, is increasing government spending. There are countless roads and highways and other public facilities that desperately need repair, and an increase should in theory shift AD to the right, lower unemployment, and bring us closer to our equilibrium.

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2 thoughts on “AS-AD Effects in Rhode Island

  1. drewbechard2015 Post author

    I think the problem was that they spent money on such a risky venture. I am in favor of the government increasing G in a state that needs many new or updated public facilities. Also, in a state with such high unemployment, it would be tough to raise taxes more, and I think like we have gone over before in class, an increase in G would make the state a much happier and better place to live, which although can’t be measured precisely, would help all the citizens.

    Reply

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