Column originally published by Center Maryland on June 20, 2014
By Donald C. Fry
During the last two weeks, Maryland business advocates and policymakers have been subjected to economic-ranking whiplash.
On June 11, the U.S. Department of Commerce’s Bureau of Economic Analysis issued data showing that Maryland registered zero economic growth in 2013, as measured by Gross Domestic Product – second worst among U.S. states.
Five days later, Maryland was ranked 5th best in the nation on the 2014 New Economy Index published by the Information Technology and Innovation Foundation.
How does Maryland reconcile the fact that it currently ranks in the top five states for “new economy” and in the bottom two for economic growth?
The basic answer is that one ranking is a measure of potential and the other ranking measures actual performance. The New Economy Index looks at Maryland’s capacity for growth in the 21st-century economy. Meanwhile, the Gross Domestic Product is raw data that measures economic outcomes.
This contrast of potential versus performance is not new for Maryland.
The New Economy Index has consistently ranked Maryland high for its potential to thrive. Our state also ranked 5th in 2012 and 3rd in 2010 and 2007.
“The purpose of the index is to measure the economic structure of states,” write the New Economy Index report’s authors ITIF President Robert D. Atkinson and researcher Adams B. Nager. “Unlike some other reports which assess state economic performance or state economic policies, this report focuses more narrowly on a simple question: to what degree does the structure of state economies match the ideal structure of the New Economy?”
Among other things, their report cites Maryland strengths in managerial, professional, and technical jobs; workforce education; migration of knowledge workers to Maryland, largely for government jobs in the D.C. suburbs; and non-industry investment in research and development.
Though well-positioned, Maryland’s post-recession economy and job growth have been sluggish, trailing the national average for the last two years, according to the Bureau of Economic Analysis.
Economists point to the federal government spending slowdown as the most prominent reason for Maryland’s recent underachievement. Over the years, they have warned Maryland policymakers about the vulnerability of a state where a third of its economy is either directly or indirectly dependent on federal spending.
While Maryland’s location advantages and its strong relationship with the federal government will continue to be source of economic stability, related growth is forecast to be slow or flat in the near future.
Economic experts say Maryland should work on strengthening its business climate to nurture private-sector growth and job creation in the two-thirds of the state’s economy that does not rely on federal spending.
Maryland business advocates strongly contend – and virtually all of candidates for governor from both parties in Tuesday’s primary elections say they concur – that strengthening our state’s business climate is what’s needed to enable Maryland’s economic performance to live up to its potential.
Business leaders at the Greater Baltimore Committee overwhelmingly agree that reforming Maryland’s tax structure and the state government’s spending processes should be the top priority for improving our state’s competitiveness.
A GBC commission of private-sector fiscal experts has been studying Maryland’s tax structure and is working on recommendations for revenue-neutral reforms that would make the state more competitive from a tax standpoint.
The commission is also scrutinizing the way Maryland sets its spending parameters and priorities. One issue that stands out is the process by which Maryland lawmakers determine the state’s spending affordability from year to year.
For example, during the last 10 years, the General Assembly’s Spending Affordability Committee has recommended annual state spending increases ranging from 9.6 percent in 2006 to zero in the first post-recession year of 2010. A state spending increase of 7.9 percent in 2007 was also among “affordable” recommendations in those years.
This begs the question: is there any year in which it is appropriate to recommend a 7 percent or 9 percent increase in state operating spending?
Any effort to strengthen Maryland’s business competitiveness must begin with responsible tax and spending reforms. The GBC expects to issue recommendations this fall.
Maryland has many advantages that make our state a desirable place to live and work and that promote a strong economy. It’s fundamentally important to build a better business climate around those advantages to achieve stronger economic and job growth.
Whether the current economic stress emanating from Washington is temporary or longer term, Maryland business and government leaders together must begin to pay serious attention to addressing issues that detract from our state’s ability to thrive.
Despite the sharp contrast in Maryland rankings released this month, the New Economy Index and the Bureau of Economic Analysis both got it right. They starkly frame the reality of our state’s economic challenge.
Maryland is oozing with potential for economic growth. We just need to get our business climate right.
For the sake of Maryland’s future, those elected this year to lead our state government in 2015 and beyond need to make that objective their top priority.
Donald C. Fry is president and CEO of the Greater Baltimore Committee. He is a regular contributor to Center Maryland.