Service economy takes bum rap Recession, not service sector, said to cause budget problems.

January 14, 1992|By Jon Morgan | Jon Morgan,Evening Sun Staff

An unexpected villain has emerged from the budget crisis in Annapolis: Maryland's service economy.

The service sector, which long ago displaced manufacturing at the center of Maryland's economy, stands accused of pilfering the state treasury. Politicians and observers inside and out of the state circle blame it for at least part of the state's budget shortfalls.

But experts say it's a bum rap. The shift to services, though profound, really has little to do with the current budget problem.

"That's ridiculous," says economist Charles W. McMillion.

For one thing, manufacturing has not played a dominant role in the state's economy for decades and certainly didn't cause the recent budget problem, says McMillion, president of MBG Consulting Inc. in Washington and a former fellow at Johns Hopkins University.

For another, state revenue comes mainly from income and sales taxes that have little to do with the jobs people hold or the products they make.

And contrary to common perception, a service worker in Maryland is more likely to be writing computer software or dispensing medical care than flipping hamburgers, says Pradeep Ganguly, an economist with the Department of Economic and Employment Development.

On average, Marylanders -- led by service workers -- earn among the highest wages in the nation, he says.

The state's economic performance outpaced the nation's rate throughout much of the 1980s, adding high-technology and high-wage service jobs faster than its manufacturing base was eroding. Although individual workers were devastated by the loss of long-time jobs, the aggregate pool of jobs increased at a healthy clip until just before the recession.

"You can quibble around the edges about a half a percent, but when we're looking at another $1 billion in revenues in the next year that isn't it," McMillion says of the shift to service industries.

Jerry Wade, senior research economist with the Maryland Department of Economic and Employment Development, agrees that the service-sector shift plays a relatively small role in the current budget problem.

But along with the shift toward service production has gone a shift toward the consumption of services, Wade says. And that does affect the state's tax revenues.

In simple terms, Marylanders now spend a greater share of their income on services than they did 10 and 20 years ago, he says. That hurts the budget because the sales tax applies to goods, not services.

"We have changed where we spend our money. People have chosen to purchase more services over time," Wade says.

For example, non-taxed medical and housing costs are consuming a greater share of household spending than it once did. So for every additional dollar spent on rent or a visit to the doctor, there was one less dollar spent on a taxable product such as an automobile, he says.

But this is a long-term phenomenon, not something that suddenly appeared with the budget deficits, he says.

However, states do periodically have to examine their tax bases and this may be a good time to do it, he says.

"Inequities get generated and the time you deal with inequities is when you have a crisis," Wade says.

Jay Laden, an economist and fiscal planner with the state Department of Budget and Fiscal Planning, says the primary cause of the budget crisis is fairly straightforward: the recession.

The economic downturn threw people out of work and forced even more to scale back spending. That hurt income and sales tax receipts. Also, the state has been forced to spend more on social services to take care of all the people whose jobs were lost or who had incomes cut back.

Meanwhile, however, there are some long-term shifts going on, Laden says. Demographically, Marylanders are getting both younger and older. The population is increasingly made up of young and old people who require schools and hospitals, instead of the middle-aged workers who generate the wealth to pay for those public services, he says.

Also, projections show the state's income growth slowing, he says.

Del. James C. Rosapepe, D-Prince George's, agrees the recession is the chief cause of Maryland's budget problem. "But I don't think you can ignore the fact that there is a long-term structural change going on," he says.

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