Maryland's economic forecast calls for pain

Viewed from an array of perspectives, Maryland's economy looks like a winner. During both the 2001 recession and the most recent economic downturn, Maryland's economy easily outperformed the nation's. For instance, during the earlier recession, Maryland's job loss was 15,800 jobs, or 0.6 percent of total nonfarm jobs at its pre-recession peak. By contrast, the nation lost 2 percent of its jobs, or 2.7 million.

Maryland's advantage during the most recent recession was even more apparent. The nation lost 8.7 million jobs from peak to trough and has since added back less than 12 percent of those jobs. Maryland lost 139,300 jobs, or 5.3 percent, and has added back nearly 31 percent of them. As of this writing, Maryland's unemployment rate was 7.4 percent, 15th lowest in the nation.

The state's future looks bright, too. For three years running, Education Week has ranked the state's schools as the finest in the nation, and Maryland has also led the nation in terms of the proportion of high school graduates who passed Advanced Placement exams.

Our adults are pretty smart, too. According to the Bureau of Labor Statistics, Maryland ranks fourth in the proportion of its workforce that toils in science and engineering occupations, and it has second position in the Milken Institute's 2010 State Technology and Science Index. Remarkably, despite a fiscal 2010 budget shortfall that the State's Department of Legislative Services now estimates at nearly $2 billion, Maryland remains one of only eight states to boast a AAA bond rating.

Here's the "but": Behind the glamour of these rankings and ratings is a state that continues to suffer from needlessly high taxes, a shrinking industrial sector, a poor reputation for business-friendliness and an excessive and growing reliance upon the federal government as a motivator of economic activity. While base realignment and cyber-security initiatives now under way are both positives, they further underscore Maryland's reliance on federal spending.

This growing dependence has become more apparent since the Sept. 11 attacks. According to the Federal Reserve, in 2001, federal spending in Maryland totaled $48.2 billion, then nearly 25 percent of gross state product. By 2009, this proportion had risen to more than 32 percent — and this fails to meaningfully reflect base realignment, cyber-security or various forms of federal stimulus that have helped to prop up the economy since the most recent recession began in December 2007.

Because Maryland has been a winner during a period of ongoing federal government expansion, many fundamental problems facing the state have been shielded from view and hidden in aggregate statistics. But signs of private sector decay are everywhere apparent. For instance, because the state essentially botched its slots program, Maryland's historic thoroughbred horse racing industry has needlessly rotted.

More frustrating is that Maryland's manufacturing sector has effectively been shut out of the national recovery. Between December 2009 and December 2010, the nation's manufacturing sector added 112,000 jobs, or 1 percent to industry job totals. During that same period, Maryland's manufacturing sector lost 6 percent of its jobs.

The steady, virtually relentless decline of Maryland's industrial sector potentially relegates our state to second-class status. True, our lack of exposure to manufacturing job losses has helped our state to outperform many others, particularly during recessions. Going into the most recent recession, only 5 percent of Maryland's employment was in manufacturing, compared with 10 percent nationwide. When inventories collapsed and manufacturers resorted to massive layoffs between 2007 and 2009, Maryland's exposure was limited.

But our service sector and government agency orientation will come back to haunt us as the balance of America fully participates in the export boom to come. Already, manufacturing exports in the U.S. are up 76.5 percent in just eight years. According to Standard Chartered Research, by 2030, China's economy will be $73.5 trillion; America will rank a distant second at $38.2 trillion.

There are many associated implications, but one is that states positioned to produce and sell merchandise to emerging upper and middle classes forming around the world will enjoy the most investment, job creation and income growth. Maryland, sadly, is not positioned to fully participate in the global economic boom to come because we have been such poor stewards of our industrial heritage.

There are many reasons for our inability to grow manufacturing in Maryland, including our high corporate income taxes, considered the 16th highest in the nation, according to Tax Foundation. Personal income taxes are also high by national standards. Local zoning regulations, which set aside far too little land for industrial pursuits, are also to blame since industrial land prices are artificially high.

Our status as the East Coast's most southern union-dominated state has also likely impacted our capacity to maintain manufacturing industry. Virginia, not surprisingly, the northernmost right-to-work state on the East Coast, has maintained a higher share of its manufacturing employment base over the past two decades.

Higher energy prices, state health insurance mandates and a lack of sufficient industrial training programs have also likely contributed to Maryland's ongoing hemorrhaging of industry. If Maryland is to avoid second-tier economic status, particularly as the federal government begins its lengthy journey toward fiscal discipline, we must alter our state's reputation as anti-business.

Maryland has been proud of its federal-first strategy. Maryland's economic development strategy largely revolves around federal agency employment, federal procurement, Medicare, Medicaid and federal student loans — not exactly a recipe for 21st century economic diversification.

The business of America is business, but in Maryland it's been government. For roughly three decades, that has served us well as government at virtually all levels has expanded briskly. That formula won't work much longer.

Anirban Basu is an economist and chairman and CEO of Sage Policy Group in Baltimore. His e-mail is

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