‘The shakiness of this company is a tragedy for Rhode Island,” Governor Lincoln Chafee said Wednesday about 38 Studios. “Shakiness” was an understatement. The next day, Curt Schilling’s troubled video game studio, which the state lured from Massachusetts with a $75 million loan guarantee, abruptly laid off its entire staff.
Yet the problem isn’t just that Schilling’s company has apparently run out of cash. It’s that Rhode Island put itself in a position where the failure of one specific mid-size firm would be a tragedy for the state. Whenever any state gets into the “economic development” business — that is, handing out favors to individually selected firms — it is playing venture capitalist with taxpayer dollars. But while real venture capitalists know that many investments fail, Rhode Island doesn’t appear to have planned for anything other than success.
Comments
What a great idea. A political entity walking away from an obligation because they made a mistake. A deliberate default would put Rhode Island 's credit rating somewhere below a 3rd world country.
i got a kick out of people congratulating themselves and our electoids for having dodged the bullet on schillings failed venture. my response is that even a pig will root out a truffle every once in awhile and here in good ol suffolk county ma. US of A where resides our state house and city hall and it's elected and appointed dregsmost of whom have never ever held a real job in their lives, the truffle finding industry ain't been to good lately. ma
I seem to recall a somewhat similar situation here in MA several years when the governor and legislature gave Raytheon a huge tax break. Raytheon repaid the MA by laying off hundreds of workers the following year - after receiving the tax break, of course!
A state's fiscal rating depends on paying off all obligations, including "moral" debts. If the state defaults not only will honest investors in these bonds lose money, the state in the future will likely find all of its bowering costs to rise (if, indeed, anyone will lend the state money).To default is to go against the economic system now in place; the state loses, not the people who lent it money, that is the way it works.
So let me get this straight, because Rhode Island -- my home state -- is a fiscal train wreck, bondholders should be left holding Curt Schilling's bag? Because RI gave away the store to public employees and retirees, that gives RI the right to default on its "moral obligation"? Yeah, good suggestion. And the next time Little Rhody heads to the bond market? "Athens on the Narragansett" has made plenty of mistakes over the years, but they would do well to ignore the sage advice of Mr. Barro.
Debts run up by States for normal State functions (schools, roads, public safety, etc.) should enjoy full faith and credit. But speculative business ventures outside a State's proper sphere of expertise? I see "due diligence" issues here. The bond-holders shouldn't be zeroed out entirely, but a "haircut" (shared loss) would benefit the public by deterring both irresponsible lending and irresponsible speculative borrowing.
Raytheon did not lay off any workers, the work was moved to Tucson, Arizona. Workers were given the opportunity to move with the white collar (non-union) workers expected to take a 20 to 25% pay cut and union workers being reclassified to lower wage positions. The Raytheon CEO got a very nice bump in his compensation with MA political leaders getting nice contributions from Raytheon's PAC.