"The state is not fundamentally going to change if my [tax cut] program is approved."
Gov. Parris Glendening.
BETHESDA -- The honorable governor is exactly right. Passage of his or any of the scores of legislators' proposals for minimal personal-income tax cuts will have precisely the result the governor predicts.
Nothing fundamental will change, which is precisely why business is unlikely to succumb to this legislative effort to change Maryland's "image" as unfriendly to business interests. Tax-cut tinkering in Annapolis appears to be little more than motion masquerading as progress, and will likely be seen by business and industry as the equivalent of perfuming a pig.
The Glendening administration long has tried to recruit businesses to relocate in Maryland for the jobs they allegedly would bring. But what is needed to raise the standard of living is not more work but more wealth, or economic growth.
The distinction between wealth and work (or jobs) is important. When government policies that increase work take the place of policies that increase wealth, incentives are created that bring lower, rather than higher, living standards. That's because when business (and individuals) react to government policies, seeking capture advantages or dodge disadvantages, they direct attention away from producing and marketing their product.
To raise the quality of daily life, Maryland needs more wealth, gained by increased productivity growth. As the productive capacity of the economy grows, increased employment will follow, at increased rates of pay. Productivity growth is the only source of real increases in wages and the standard of living. Moreover, it is the only responsible and enduring source of increased state revenues to cover growing social obligations such as Medicaid, education, infrastructure, and other public resources and programs that will, in fact, help attract and retain business and industry within the state.
To many people, productivity means "the boss wants me to work harder." More accurately, increased productivity means that the work we do is worth more, so we can work less, if we choose. Productivity growth is a better measure of economic progress than increases in employment, which can simply mean that more people are holding down multiple jobs.
Productivity -- the value of goods or services produced per hour of work -- grows mainly through time-saving innovations, more and better equipment, improved knowledge, advanced skills and efficient organization. If you previously produced one widget per hour of work, and now you can produce 10 widgets per hour, your income and standard of living should similarly improve to roughly the same extent.
More than a century ago, the economist Karl Brunner wrote in "Poverty of Nations," that the two economic activities, production and trade, enrich the entire population, by producing wealth, or economic growth. Two other economic activities, he added, make the entire population poorer, by destroying wealth or growth: influencing the political system to capture the resources of others, and defending against redistributive economic efforts of the state and others.
Brunner held that government policies promote either productive destructive economic activity, depending on whether they protect or redistribute the fruits of production and trade. Laws, regulations and judicial systems influence private decisions to allocate resources among these uses.
Brunner's analysis 110 years ago explains why the tinker-toy tax cut being debated in Annapolis will, as Governor Glendening claimed, do nothing to fundamentally change the state.
Entrepreneurial activity is the truest source of economic growth, and Maryland's economic-development programs at least give lip service to this fact. But government officials are misguided at best, wasteful at worst, when they ignore the fact that entrepreneurial effort is not manufactured by social engineers, but must take root naturally in an economic soil untainted by deliberate policy intervention.
If Maryland's political leaders want to increase economic growth and improve the overall quality of life in Maryland, they must begin by revamping the tax code and examining the regulatory infrastructure to ensure that policies are protective rather than redistributive of the fruits of production and trade. Historically, governments have helped wealth creation by promoting a stable commercial environment, conducive to risk-taking and innovation.
"Jobs" programs, or work "creation" efforts are almost always jobs-protection programs, which tend to stifle the creation of new, wealth-enhancing, technology and innovation.
They should let the marketplace do what it does best: create wealth. That will bring increases in employment and living standards. States that try to tax and regulate populations into prosperity have historically failed resoundingly.
Frieda Campbell is an economist and political adviser.
Pub Date: 4/01/97