November 19, 2012

Fiscal Cliff

Y2K+13: The road off the "fiscal cliff" has already gone through Baltimore

Much has been said about the federal "fiscal cliff" of automatic tax hikes and budget cuts that are scheduled to take effect on December 31st, due to the ongoing national tax policy gridlock between liberals and conservatives. But Baltimore's economy fell off that cliff years ago, even with Baltimore mayors being free to follow any policies they've wanted. Baltimore has had no gridlock, except the old-fashioned kind on roads.

Baltimore's ongoing fiscal crisis is a preview of where the rest of the country is headed. The city already has high taxes on a dwindling tax base, supporting even higher spending that reflects the city and state's overwhelmingly lockstep liberal politics. But Baltimore has also followed the purportedly conservative course of dishing out tax breaks to the upper class who were supposed to lead to increased investment which has never materialized.

The solution should be a whole new tax policy that addresses inputs rather than outputs. What we get out of the economy is only as strong as what we put in.

Baltimore can teach the rest of the country a lesson

The stalemate is not between liberal and conservative goals. Individually and collectively, most of us have a liberal and a conservative side. Two years ago, President Obama kept the "Bush Era Tax Cuts" reviled by liberals when they were already set to expire on a mini-cliff. Conversely, "Romneycare" in Massachusetts haunted his conservative base throughout Romney's failed presidential campaign.

Maryland missed most of the onslaught of political sound bites broadcast nationally about this over the last two years, since the Democrats were obviously able to take our state for granted in their recent election victory. But basically, both sides were talking about us behind our back. The economic travails of the rest of the country have been supporting government spending allowing liberal Maryland to be the richest state in the union, even while Baltimore is still one of the nation's poorest cities.

So whatever happens at the Y2K+13 fiscal cliff will have more effect on Baltimore than the campaign volleys leading up to it. Democrats will still say tax the rich, which aims their fire directly at high income Maryland which supports poor Baltimore. Republicans will say cut federal spending, which also supports Baltimore. Automatic military cuts are also pending, which would also have an inordinate effect on Maryland. 

And beyond Baltimore and Maryland, military spending also has a global economic dimension. Middle East war cries affect the price of oil. Relations with China affect most everything else, particularly world trade which goes through Baltimore's port. The outcome of all this will probably be confusing or ambiguous, but it won't be pretty. Y2K+13 will no doubt have a greater impact than the Y2K computer crisis trumped up 12 or 13 years ago.

Baltimoreans also have arguments that we hope the rest of the country won't hear. Despite the city's virtually lockstep Democratic monopoly, Mayor Stephanie Rawlings-Blake continues a conservative mantra of lowering at least some taxes to attract investment, even if it's unclear for who, when and where. Of course, everyone wants someone else to pay and someone else's budget to be cut, not their own. But the laws of economics are not much in question. The power to tax is the power to destroy. When the country catches a cold, Baltimore gets pneumonia.

Clearly the tax system isn't working. Not enough private investment is trickling down through Baltimore's economy and the public money is either in the wrong places or isn't enough or both. It's all the same thing: misallocation of resources. The geographic money pipelines are clogged and/or misdirected, between Baltimore, its suburbs, the state of Maryland, the U.S. and the world.

Blame the game, not the playas

How do we get through Y2K+13 without just muddling through a battle of political wills? Places like Baltimore need to be played for their strengths instead of their weaknesses. Instead of playing for ever more federal aid for the "right" educational system or the "right" transit system or the "right" jobs stimulus projects, cities should simply be treated as places where people can live and work with a maximum of interaction and transportation efficiency. Yeah, that sounds vague...

But here's the point: Like the rest of the country, Baltimore will benefit the most not from picking winners and losers among the rich, middle class, poor, government agencies, private sector, military, civilians, or however one might want to slice the pie. We should be focused on how the game is played. Only then can cities like Baltimore play to their strengths.

There are actually still people who live in Baltimore because they want to, and because it serves their needs, rather than because they're stuck here or have found their niche to "game the system". It's not even something vague about potential. It's people who are really already here, and just want to make it work. Of course, it's also the thousands of people who would come to the city if they felt it would work, or have been repelled in the past. Cities work if their unique role in bringing concentrations of people face-to-face is exploited, which can't happen in the suburbs and hinterlands. To succeed, Baltimore needs only a small minority of the population, not as it was back in the heyday when Baltimore had nearly half the state's population.

To get off the fiscal cliff, we simply need to let those people flourish. It's not even just a matter of liberal intervention versus conservative laissez-faire. No matter how much the government intervenes, there will always be many people who are off of that radar screen.

Tax inputs, not outputs

Here is the clear way of how Baltimore can gain from the path down from the fiscal cliff: The nation needs a whole new approach to tax policy that addresses inputs rather than outputs. This has been proposed in many guises, such as energy taxes, consumption taxes, value-added taxes, gas taxes, sales taxes, user fees, carbon taxes, "freedom taxes" to reduce foreign energy blackmail, and cap'n trade systems to reduce global warming. It has been proposed as revenue-neutral to placate the anti-tax conservatives and as cash cows for the big government liberals.

What should be clear in this debate is that we're only going to balance our budget if we first grow the economy. It's dynamic, not simply arithmetic as has become trendy to say. There aren't enough rich people to carry us, even in Maryland, the nation's richest state. So we need to move from production (income) taxes which penalize output productivity to resource consumption taxes which encourage input productivity, quality and efficiency. People who want to benefit from less driving, less gas guzzling and more access to labor, social interaction and culture will find Baltimore. And they'll find all of Baltimore, not just the rich trendy waterfront.

Consumption taxes make a huge difference. When gas taxes go up, people find better ways of doing things and organizing their lives. Whereas when income taxes go up, people simply do less. Tolls on the new InterCounty Connector have radically curtailed traffic to the extent that questions why the multi-billion dollar road was built in the first place. That's money that did not need to be spent.

The stalemate between liberals and conservatives is just an excuse for an ongoing political fight. All Baltimore needs to do is hold itself up to the nation as a cautionary example as what will happen when we let ourselves fall off the fiscal cliff.


  1. I think you're looking for Strong Towns [] ...

    1. Thanks - That comment looks like spam, but it really isn't. I just went to that website and while it contains a lot of typical platitudes, they're good platitudes. It also presents the core of our local-state-federal economic disconnect which supports what I wrote, and of which our political leaders are largely clueless.

      Check out this page to see their take on the heart of the matter:

    2. I've been reading Strong Towns for a while too, and while I don't necessarily agree with all their points, I think it generally does a great job (especially the poignant article Gerry linked to).

      That Strong Towns article also alludes to a phenomenon that preoccupied Jane Jacobs during her final years: that we were squandering our money by engaging in "transactions of decline." Basically our entire conception of national economics is flawed:

  2. What the government should do is to prevent the state from falling to fiscal cliff. That might be done through the exertion of effort and full-hearted support to help in the rise of economy.