The 10th Man

Last One Out Turn Off the Lights

June 9, 2016

Back in 2015 I wrote about my hometown, Norwich, Connecticut, a luckless town at the intersection of three rivers: the Thames, the Shetucket, and the Quinebaug. Today I’m expanding the discussion to include the whole state, which is allegedly in crisis.

What compelled me to write about Connecticut today was the news that Governor Dannel Malloy’s approval rating had slipped to 24%, still above Dilma Rousseff, but tied with John Rowland, the previous governor of Connecticut, who actually went to jail.

Malloy was always an unpopular governor, though popular enough to win reelection against Tom Foley, an unsympathetic but hapless Wall Street Republican with a long career in private equity. Foley lost, but the fact that Richie Rich private equity guy almost beat Malloy in true-blue Connecticut sort of illustrates Malloy’s unpopularity.

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If you ask the Wall Street Journal’s opinion page, it will tell you that the problem is taxes. Connecticut, according to the WSJ, didn’t even have an income tax until 1990, but they didn’t waste any time jacking it up. It currently stands at 6.99% for incomes above $500,000, which, I might add, is conspicuously lower by one basis point than the 7% tax rate in South Carolina (I’ll tell you about South Carolina politics another time).

Connecticut used to be a tax haven of sorts. Now it is the opposite.

The thing with state income taxes is that some are high and some are low, and people are free to move around the country, so if you raise taxes high enough over here, people will move over there. And that’s what is happening to Connecticut: the state is depopulating very quickly, with folks moving south and west.

I talk to ex-Connecticutians all the time. They are like survivors of some great, big natural disaster, like a hurricane, huddling together for warmth.

But it isn’t just income taxes. The overall tax burden in Connecticut, including property taxes and sales taxes, is extremely high. Property taxes have skyrocketed just in the last 10 years to among the highest in the nation. And Malloy expanded the range of goods and services covered by the sales tax to just about everything—most gallingly, Connecticut tried to tax veterinary services.

No matter how you slice it, when you look at the 50 states with respect to their overall tax burden, Connecticut is always near the top.

But California has high taxes, much higher than Connecticut, and people still like to live there. Apart from the obviously better weather in California, Connecticut has a hyperactive regulatory state, with licensing requirements covering hundreds of businesses.

Four years ago, I tried to rent sound equipment for a 20-year high school reunion. The sound guy was booked solid, because he was one of only a handful in the state, because of licensing requirements, inspections, exams, and continuing education—all for plugging a 15” subwoofer into an outlet. I did some quick math and figured that the number of people writing regulations on plugging in speakers probably exceeded the number of people plugging in speakers.

Upon hearing that story, a subscriber commented dryly that it is that little panhandle down in the southwest corner of the state that pays for the giant regulatory bureaucracy in Hartford. Except now the people in that little panhandle are leaving.

You probably heard the news that GE, yes, General Electric, has moved its headquarters to Boston. I heard some backchannel stuff on the clownish attempts by the state to try to get them to stay. Hedge fund guys have figured out that there are no taxes in Florida, and Miami real estate has gone bananas. Slowly but surely, businesses are leaving, and the tax base is eroding, and like the dumb cable companies, the state continues to raise taxes on the poor people who are left behind just to break even.

Last one out, turn off the lights.


It’s kind of a political hack thing to say, but I’m going to say it anyway: What is happening in Connecticut is not all that different from what is happening in Venezuela (although on a much, much smaller scale, obviously, and without the humanitarian crisis).

What I mean by that is: If you make it difficult for people to conduct business and commerce, the smartest among them are going to go somewhere where they can, and leave everyone else behind. Some people call it a brain drain. Every once in a while there is a glimmer of hope in Venezuela that the opposition might be able to oust Maduro, but even if they did, anyone who was talented enough to help rebuild the country is already gone.

Capital goes to where it is treated best. Period.

Part of my shtick as a macro investor is to figure out where capital is going to be treated best, and send it there before everyone else does. This takes some pretty sharp political intelligence. Capital is flooding to Argentina now, after the election of Mauricio Macri, but the time to invest was actually in 2013, when Cristina Kirchner lost the midterm elections and was prohibited from running for another term. I once was blindsided by an investment in Chile because I did not anticipate Michelle Bachelet Part 2, Electric Boogaloo.

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It’s hard to separate cause from effect, especially since it was during the financial crisis, but US stocks were very nervous about Barack Obama coming to power. He was saying some pretty far-left stuff on the campaign trail. And I assure you, if there were ever a realistic chance of Bernie Sanders becoming president, the market would act accordingly.

You are more than welcome to disagree with me on politics, but the reality of the situation is that politicians like Malloy/Maduro/Bachelet are not good for markets, and the reformers like Macri and Modi are.

I’m sure someone is going to write in the comments section that stocks perform better under Democratic presidents, which is absolutely true, but part of that is because 1) monetary policy is usually easier, 2) short-term fiscal stimulus becomes a priority, and 3) economic reforms work with a long lag.

As for Connecticut: it was once a state teeming with industry, full of gleaming skyscrapers and insurance companies, a burgeoning aerospace industry, plus tourism. Not much left, aside from the leaves in the autumn.

I’ve also never been to a US state where people are so profoundly demoralized, just absolutely miserable. Even in parts of the Deep South, which always show up at the bottom of quality-of-life metrics, there is more hope than there is in Connecticut, where the only thing people are convinced of is that things will never get any better.

To that I say: If you keep doing what you always did, you’ll keep getting what you always got.

Jared Dillian
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June 10, 2016, 8:58 p.m.

Gary Lindahl
I would like to see more facts & data about the pension benefits that public sector workers get.  I have to think it is off the charts.  Let’s see some comparisons to typical companies.  Maybe with more taxpayer awareness we can make changes happen.

Ed D'Agostino

June 10, 2016, 12:04 p.m.

As a resident of CT I have to agree with everything you have written here Jared.  Sad… but so true.  CT could be a great state, but our policies discourage growth.  We are heavily taxed, heavily regulated, access to utilities is restricted (therefore extremely expensive), housing is expensive… this list goes on and on.  There are few reasons a young person would want to start a career here, and many reasons our college grads do not return home.  There is no reason to start a business here unless you are location-dependent. Any sort of business that can be located elsewhere, should be.  We are the epitome of the entitlement society, and it won’t be fixed until there is a crisis.  Given the state’s budget status, that day may be closer than many think. 

I spend a lot of time in Texas with John Mauldin. Dallas has cranes across its skyline.  Their economy is booming, across multiple sectors.  People are making money at all levels, despite a crash in oil prices.  That is a resilient, growing economy. 

Even Massachusetts, our neighbor, has better growth policies.  No one who grew up in New England would think of MASS as a low tax, high growth state… but when compared to CT, they are the TX of the northeast. 

It is time for a change.

June 9, 2016, 1:05 p.m.

I would like to see more facts & data about the pension benefits that public sector workers get.  I have to think it is off the charts.  Let’s see some comparisons to typical companies.

Ski Milburn

June 9, 2016, 9:46 a.m.

Capital goes to where it is treated best.

You said it brother, but one of the great mistakes of the Republican party was the blind belief that taxes and regulations were the only metrics, and that less is always better.

Like anything in business, you can get more or less than you pay for, and that’s often more important than how much you pay.

How else do you explain California, and Finland, for example?

Or the global financial meltdown of 2009, the direct result of bank deregulation that was supposed to deliver us to nirvana (passed by a damned democrat, no less).

Or Reagan, who campaigned tirelessly for lower taxes, but also for more of the tax burden to be assessed at the local level, so the collection and spending happened closer together and in small government units.  People forget that this formula might raise local taxes, even if the total burden went down as he wished.

Of course, he might of been accidentally promoting a USA that’s structured more like the EU, and we all know how well that’s working.

But we have our own version.  Anybody want to compare Mississippi to Puerto Rico to see what the difference between loans to member states and tax transfers looks like in real life?

But I digress.  What I want to see is the national idea that capital goes where it’s treated best.  And the idea that the best way to figure out what that means is by looking at examples, inside and outside the USA of what combinations of policies actually succeed at that.  I am so done with ideological constructs that make sense only in terms of the news cycle, the sound bite, and the reality distortion zone inside the beltway.

One way to do that is to look at the markets around the world, just like Jared’s investment filter.

June 9, 2016, 9:46 a.m.

You neglected to mention Malloy handed Ray Dalio (net woth ~$14Bil) and Bridgewater (AUM $150Bil) $5 million in grants and $17 million in low-interest, forgivable loans to renovate its headquarters in Westport along the state’s Gold Coast. Not to mention making them eligible to receive another $30 million in tax credits. The loan is forgivable if Bridgewater keeps 1400 jobs in Connecticut and creates 750 new ones in the next five years. UBS AG (HQ Basel Switzerland) has a similar loan to be forgiven deal, loan amount $20 mil, if it keeps 2,000 jobs in the state the next five years.

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