Sunday, March 23, 2014

On the road to Baltimore

Baltimore went all in for crony capitalism.... and lost its _____ on special projects.  Steve Hanke and Stephen Walters posit that for every government-chosen winner exists a loser in the Wall Street Journal:

Progressives endlessly caricature free-market policies as "trickle-down" economics—giveaways to the undeserving rich with few benefits reaching the poor. In truth, trickle-down best characterizes the economic development policies pursued in deep-blue states like Maryland, where taxpayer dollars flow to the politically connected amid grandiose claims of "stimulative" effects.

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.

While local officials said the handouts were necessary to stimulate the Towson economy, the district's state senator, James Brochin, correctly called it "corporate welfare," and Maryland Comptroller Peter Franchot (alone among the members of the state's Board of Public Works) voted against the appropriation.

But the checks were cut, and 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.

When it comes to Keynesian-style stimulus at the state or local level, however, the juice is rarely worth the squeeze. The alleged magic of the multiplier—by which extra dollars of government spending supposedly ripple through the economy and raise incomes by several times that amount—depends on spending that is financed by deficits. But Maryland and most other state and local governments must balance their budgets, and the higher taxes required to finance these development programs crowd out private spending and offset some or all of the hoped-for stimulus.

These schemes also damage growth by misallocating capital. In markets, only projects that promise a return in excess of the cost of borrowing get built. Government allocation of capital, by contrast, exalts the judgments of politicians and bureaucrats over those of consumers and investors, and substitutes political pull for economic merit in the competition for capital. In combination, this is a prescription for inefficiency, inequity and corruption.

Maryland supplies examples of all three. 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.

Last summer, attired in "Tax Dodgers" baseball uniforms, members of the United Workers and Unite Here, community activist groups, staged a public protest against Harbor Point, a mixed-use business and residence project. "Time and again," the United Workers complained on its website, "the city has awarded our resources to wealthy developers at the taxpayers' expense in the hope that money will trickle down. This model has failed."

Then there is the $1.5 billion "partnership" among the state, city and developers of Baltimore's State Center district, which will build new "eco-friendly" government offices to replace acres of Soviet-style buildings from the 1950s, '60s and '70s. Though not yet: Baltimore Circuit Judge Althea M. Handy ruled last year that the deals negotiated in 2007-09 with several connected firms—which did not involve competitive bidding and guaranteed that tenants would pay above-market rents—violated state procurement laws. He voided the contracts, and an appeal is pending.

Officials hail every such project as a "game-changer," but each poaches business from older areas. For every subsidized "partner" of government, there is an unsubsidized loser. Thus, Baltimore's trickle-down policies increasingly meet opposition not just from populist community organizers, but from out-of-favor investors. The "Coalition to Save Downtown Baltimore," made up of landlords, small retailers and the Little Italy Restaurant Association, argues that two-million square feet of vacant space is available downtown and that "It makes no sense to squander over $1.5 billion taxpayer dollars on this ill-advised project." (Remember Old Capitol Green? Best argument against the project was the 38% vacancy rate downtown.)

In this policy regime, connections are everything, and politicians can demand tribute from all directions—though not without risk. In separate scandals involving allegations of influence-buying by developers (one of whom was initially involved in State Center), Sheila Dixon, Mr. O'Malley's successor as mayor, resigned in disgrace and councilwoman Helen Holton was censured and fined.

So how are Maryland's adventures in capital misallocation working out? To fund spending on everything from offshore wind farms to roof bars, Gov. O'Malley has raised taxes and fees more than two-dozen times, on personal and corporate incomes and on retail sales, gas, tobacco, alcohol and much else. Yet the state still faces "structural" deficits estimated at $166 million for the next two fiscal years.

Meanwhile, the nonpartisan Tax Foundation reports that a net of 66,000 residents and $5.5 billion in taxable income fled Maryland in 2000-10—a "Free State" trend that shows no signs of abating.


Mr. Hanke is a professor of applied economics at the Johns Hopkins University. Mr. Walters is a fellow at the university's Institute for Applied Economics, Global Health, and the Study of American Business.

5 comments:

Anonymous said...

Stimulus spending explained:

Not exactly GAAP [Generally Accepted Accounting Principles]

It's a slow day in a little east Texas town. The sun is beating down, and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich tourist from back east is driving through town. He stops at the hotel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night.

As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher.

The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100 and heads off to pay his bill at the supplier of feed and fuel.

The guy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.

The hooker rushes to the hotel and pays off her room bill with the hotel owner.

The hotel proprietor then places the $100 back on the counter so the rich traveler will not suspect anything.

At that moment the traveler comes down the stairs, picks up the $100 bill, states the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything. However, the whole town is now out of debt and now looks to the future with a lot more optimism.

And that, ladies and gentlemen, is how the United States Government is conducting business today.

Johnny Weir said...

Fantastic Post 7:34. I'm sending that post to all my Congressmen & Senators. Thanks for sharing. This post beats all the grammar police post. And, no I'm not Mr. Kingfish.

Anonymous said...

The 'number of jobs' test is implicit in Barbour's deal with the Port of Gulfport. The Port authorities got the housing re-build money now the port jobs are wanting and so is local housing. Hanke and the populist community organizers(Lumumba) are on the same page. Subsidize the grassroots and infrastructure not likely new tenants of likely new towers.

Anonymous said...

That article is hard to read, but needed. Thanks for posting KF.

excellent post, 7:34.

Anonymous said...

Good article.
I don't see how this is " Blue State " related.
It seems to me we have plenty of examples of our own Red State engaging in the same shenanigans.
This is Political Spoils economics where political graft gets legalized and becomes " tickle down economics" or " venture capital" or " government economic stimulation".
And, poor old Keynes! All he did was suggest demand played a more important role in economics when the focus was on getting the most widgets on the market so widgets would improve. He thought you needed a lot of folks to be interested in buying widgets for widgets to be successful and could stimulate the economy that way as well.
That's somewhat an oversimplification but needed given the bastardizations of economic theory out there these days.
Seems anyone who has a good idea or observation will attract those over time who bastardize a notion beyond all recognition. You start with Saint Peter and get to the Borgia Pope, Calixtus III before you know it.

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If you get tired come relax at the Fox News Tent. To gain admittance to the VIP section, bring either your Republican Party ID card or a Rebel Flag. Bringing both will entitle you to free drinks.Get your tickets now. Since this is an event for trolls, no ID is required, just bring the hate. Bring the family, Trollfest '07 is for EVERYONE!!!

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