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Maryland's Misguided Approach to Growth

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Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

In a general, political sense, people tend to characterize "populism" as a movement against corporate marauders who are perpetually searching for a way to fleece the unsuspecting average citizen. In order to curtail this supposed abuse, government should step into various facets of the corporate/individual relationship to make sure that there remains what it considers a proper balance of interests.

In a larger, economic sense though, populism is better characterized as a movement of capital from government to government-favored enterprises. The latest example comes to us from Maryland. Steve H. Hanke, professor of applied economics at Johns Hopkins University, and Stephen Walters, a fellow at JHU's Institute for Applied Economics, Global Health, and the Study of American Business, have written an op-ed examining the manner in which the Maryland government is misallocating capital by dispersing it amongst projects that it believes will become profitable, rather than allowing that capital to remain in the market and flow to its most productive uses. As a result, those entities or people that are closely connected to the government would naturally have more influence in determining how the money would be allocated. Hanke and Walters highlight a recent example:

A small but telling example is in Towson, a thriving suburb of Baltimore, where the proprietors of a sports-themed chain restaurant called the Greene Turtle recently built a rooftop bar so patrons could imbibe at altitude. Just good old American enterprise at work, except for the fact that, according to the Baltimore Sun, $505,000 of the $890,000 cost came out of taxpayers' hides as low-interest government loans, much of which will be forgiven if the enterprise meets modest "employees added" targets and stays open five years.
At the grand opening on Jan. 2. Maryland's First Lady, Katie O'Malley, presented a governor's citation to the bar's proprietors, who happened to be childhood friends. It's remarkable how often development dollars trickle first to cronies or political donors.

Besides the obvious ethical conundrums involved in these sorts of deals, the economic impact is ultimately devastating. As this money flows to government-favored projects, the importance of economic viability studies and projections concomitantly lessens. Instead, the judgment of the executive and legislative branches replaces any institutionalized process. The ad hoc nature of this routine ultimately leads to ad hoc results:

In 2006, Martin O'Malley --then Baltimore's mayor, now the state's governor and a presidential aspirant--decided that the Baltimore Convention Center needed an adjoining hotel. Private investors disagreed, so City Hall "invested" $300 million to enter the hospitality industry. Since opening its doors in August 2008, the Hilton Baltimore--city-owned but managed by the global hotelier--has recorded more than $50 million in operating losses.

Baltimore's relentless and much-applauded campaign of subsidized development along its waterfront provides another example. Tax breaks of more than $200 million for a $1 billion project on a former industrial site called Harbor Point--justified with the usual claims that this will create thousands of jobs--have provoked demonstrations by citizens who now realize that these promises are empty. Since 2001, the city has bled 49,000 jobs.

As the failure of these projects begins to increase in frequency, the government will be forced to either cut spending, raise taxes, or increase borrowing to make up for the revenue shortfall. As Hanke and Walters note, Maryland has opted for the second one, raising taxes on personal and corporate income, while adding a slew of excise taxes to the mix. Even still, Maryland faces a structural deficit of $166 million over the next two years, while dealing with the exodus of 66,000 residents and $5.5 billion in taxable income from 2000-10. Consequently, the government will have to increase taxes again to make up for the shrinking of the tax base. This vicious cycle of tax-and-spend will continue until Maryland realizes that economic viability must be the primary criterion utilized when making investments, and that the market is in the best position to make consistent, wise investments.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.