PROVIDENCE, R.I. -- Five years ago, Rhode Island's unemployment rate hit 11.7 percent as its aging manufacturing economy began to sag beneath the weight of plant closings and depressed wages.
Despite urgent warnings from business, labor and government leaders, Rhode Island voters in 1984 rejected a $250 million plan to resuscitate the state through an infusion of state loans, grants and seed money.
Today, however, jobs are going begging here. The unemployment rate has plunged to 3.1 percent. Tourism is booming, housing prices have soared and the first Republican governor in two decades is trumpeting a "Rhode Island Renaissance."
Is this dramatic turnabout a triumph for free-market economics? Next door in Massachusetts, Gov. Michael S. Dukakis (D) practices the kind of governmental intervention that Rhode Island voters rejected. Both states enjoy similarly phenomenal levels of growth.
The revival is no mystery to Rhode Island Gov. Edward D. DiPrete (R), whose cautious, tax-cutting style has meshed well with the business community's agenda. "I'm a pro-business, pro-jobs governor," he said in an interview.
As with most economic puzzles, though, there are many interlocking pieces to the Rhode Island revival. For one thing, this tiny state has been swept along by a regional boom that has turned New England, an economic basket case for much of the 1970s, into the healthiest section of the country.
When states as politically diverse as New Hampshire (2.2 percent unemployment), Massachusetts (2.3 percent), Connecticut (3.2 percent), Vermont (3.4 percent) and Maine (3.5 percent) are virtually at full employment, larger forces than state economic policies are clearly at work.
"Governors delude themselves," said Allan M. Feldman, a conservative economist at Brown University. "They like to think they're responsible for everything." Feldman says some of the growth here is simply a spillover from the burgeoning Boston area.
Rhode Island's economy may not have received the stimulation of state-sponsored loans and grants, but it has been pumped up by good old federal spending programs. A surge in federal highway grants has helped the construction industry, and about $1 billion a year in Pentagon spending has flowed to such places as General Dynamics' Trident submarine plant in Quonset.
But signs point to possible harder times ahead. Rhode Island's growth rate slowed to 0.8 percent last year, the lowest in the region. The federal government is paring the defense budget. Consumer spending, which has triggered an explosion of retail and service-sector jobs, is falling off. After five straight years of economic expansion, some say the party is over.
"If you talk to 10 people on the street, nine will tell you things are great," said Ira C. Magaziner, a business consultant and a chief architect of the Greenhouse Compact, which the voters defeated. "But we should be fixing the roof when the sun is shining. We really should have invested more than we have."
The Greenhouse plan, which featured such initiatives as state investments in high-tech industries, was trounced in a 1984 referendum. It fell victim to public distrust of government and fears that the commission doling out the money would be vulnerable to corruption and favoritism.
DiPrete has adopted small parts of the Greenhouse blueprint, although at far more modest funding levels. He has arranged a worker-retraining program, science research grants to local universities and $1 million in seed money for a "thin film" technology for computers, one of the specific Greenhouse ideas.
But the governor's plan for a state venture capital bank was defeated by the Democratic-controlled legislature because, he said, "it smacked of Greenhouse." DiPrete said that it is dangerous for a politician to admit that he backed the Greenhouse plan.
In a gray suit and a Ronald Reagan tie-clip, DiPrete, 54, looks and sounds like an investment banker. Unlike Dukakis, he sees a limited role for government, one focused on helping business.
DiPrete boasts, for example, that the state is rerouting two rivers to make room for a commercial-retail complex of 3 million square feet outside his State House window. He also points to a 22 percent cut in income taxes during his three years in office and the elimination of jobless benefits for striking workers, a red-flag issue for corporate executives.
"That started the fireworks," DiPrete said. "It sent a message that we wanted to establish a new climate. Rhode Island had always been perceived as anti-business, pro-labor, high taxes and bureaucracy."
Presiding over good times has its political rewards. A recent poll gave DiPrete an 89 percent approval rating, which is particularly remarkable because this remains a heavily Democratic state. Nine months before the general election, the Democratic Party has yet to come up with anyone to challenge him.
Conspicuously missing from the drumbeat of good news, however, is the state's older manufacturing sector. Manufacturing industries, which still account for one-quarter of Rhode Island jobs, have continued to decline, and their average wage of $8.32-an-hour is only 84 percent of the national average.
"Rhode Island has not got as dynamic or viable an industry mix as some of the other New England states," said Anthony J. Ferrara, regional commissioner of the Bureau of Labor Statistics.
"They have a lot of low-wage industries, like jewelry and apparel, that are much more vulnerable to the business cycle. It's not a regional center for finance and insurance like Hartford and Boston. It's not a high-tech state."
While Rhode Island is accustomed to being overshadowed by its larger neighbors, officials here sometimes wonder why the "Massachusetts Miracle" is getting so much national attention. Part of the reason has to do with Dukakis' presidential campaign and his claims that he has used the tools of government to foster growth where it is needed most. Dukakis has even claimed partial credit for Rhode Island's prosperity.
Officials here can't help but observe, therefore, that Burroughs Wellcome Co., the big pharmaceutical manufacturer, recently chose to build a new biotechnology center in Rhode Island over three competing sites in Massachusetts. They also note that Rhode Island, often derided as a place to drive through on the way to Cape Cod, broke the $1 billion mark in tourism last year.
Regional rivalries aside, the state's rapid growth may contain some of the seeds of a future downturn. A serious labor shortage has developed, and General Dynamics, the state's largest employer, recently had trouble finding hundreds of carpenters, welders and other skilled workers.
At the same time, a 37 percent increase in Providence-area housing prices last year -- the biggest jump in the nation -- has turned this once-affordable city into another overpriced real estate market.
"We are suffering from some of the illnesses of success," Feldman said.
Gary Seminaro, chief economist for Fleet National Bank, said the tremendous growth in the service sector cannot be sustained and that "sheer overbuilding" will lead to "store closings and overcapacity."
For now, however, nearly everyone here is enjoying the good times. Warning signs are viewed like next winter's weather forecast: too distant for immediate concern.
"If there's a real big bust nationally, could it affect us? Sure. It'll affect everyone," DiPrete said. But recalling the calamity when a Navy fleet pulled out of Newport, he said: "I don't think we'll ever go back to the days when the shutdown of one industry could double the unemployment rate."