Economist: Tax cut deal short-term help, long-term pain in Md.

Extended benefit payouts help, but looming spending cuts will hurt

December 09, 2010|By Larry Carson, The Baltimore Sun

The proposed Washington compromise on tax cuts and extending unemployment benefits will pump billions more in federal dollars into Maryland's and Howard County's economy, a prominent local economist says, but the bill for that short-term gain will eventually come due.

"To me, this is quite bad news for Maryland," Anirban Basu of Sage Policy Group told more than 200 local business leaders gathered at an annual Howard County Chamber of Commerce economic forecast breakfast meeting at the Columbia Sheraton Hotel. "When the federal government needs to deal with its deficit demons, it's going to hurt Maryland," he said.

Basu said Maryland is more vulnerable to the effects of federal cuts than Virginia because Maryland's overall business climate is weaker.

While Maryland will benefit in 2011 from the more than $700 billion in new federal spending on tax cuts and unemployment, Basu pointed to Virginia's 6.8 percent unemployment rate compared to Maryland's 7.4 percent. But outside of Northern Virginia's Washington suburbs, he said, the state "is Kentucky," meaning that it's more rural and economically depressed. Yet unemployment is lower there, he said, because of Virginia's lower business taxes and less onerous regulations that make it more attractive to businesses. "At some point, that is really going to hurt us," Basu warned.

Meanwhile, oil is now going for $90 a barrel, and employment gains have mostly been in temporary jobs. "I remain somewhat pessimistic," he said. Gas is over $3 a gallon. "Early next year that could create some problems."

In addition, Basu said, he believes some of the higher consumer spending expected this holiday season and beyond is due more to changes in housing patterns because of the still-struggling development and construction fields.

Surveys have found an increase in households with two or three generations of one family living under the same roof, meaning some higher consumer spending on things from cars to clothing is coming from people with lower housing expenses.

"When I was growing up," Basu said jokingly, people who moved back in with their family after becoming an adult were called "losers. Today, it is acceptable" because of the general economic malaise.

Still, he told the crowd, places like Harford County near Aberdeen Proving Ground's growing military facilities, and Howard County, near Fort Meade's coming expansion of federal defense and cybersecurity jobs, should be better off than the rest of the state when federal spending is reined in.

"It's real," he said. "By 2013-14, this regional economy will be racing ahead. It will be breathtaking," he said.

Four other panelists at the breakfast concentrated on what local businesses are doing to cope.

Michael A. Mobley, executive director of the Jim Rouse Entrepreneurial Fund, said he thought the possibility of slowed defense spending as the nation tries to reduce the deficit might be tempered by events like the tension between North and South Korea and by problems caused by WikiLeaks revelations. Meanwhile, businesses are doing what they can to survive.

"Hope more than optimism" is the common watchword, he said, with business owners still boosting profits by cutting costs instead of increasing revenues.

Paul Gleichauf, senior vice president for planning and marketing at Howard County General Hospital, said health care costs are still rising substantially, with average premiums for family coverage up 41 percent nationally in just six years and deductibles up 63 percent in the same period.

Meanwhile, Medicaid reimbursements to doctors are dropping, pushing more physicians into so-called "concierge" private practices and reducing the number of practitioners available for people who can't afford such high-priced medical care.

Mark Cissell, managing partner of Katz Abosch, a local accounting and consulting firm, said it's now "almost impossible" to refinance a commercial property because of tighter bank credit and falling property values. He sees 2011 being the same as 2010 for business. A chamber survey of 94 business people showed most don't see layoffs or furloughs for employees coming next year, while most also see sales increasing.

George L. "Chip" Doetsch, president and CEO of Apple Ford in Columbia, said "2010 was our best year in business ever," with roughly 70 percent of new-vehicle sales done out of state via the Internet, while the firm has tried to keep local service customers. "It's more expensive to get new customers than to keep the customers we already have," he said.

Basu said he accepts that the recession is over and recovery is occurring, but the income gap between "haves and have-nots" is still growing, while fields like construction and development remain in the dumps.

One irony of federal stimulus spending is that China's economy may benefit more than the United States', Basu said. That's a major difference between the effect of government spending during the Great Depression versus current efforts. In the 1930s a person with a job bought products that were made in America. Now, people are buying items made overseas.

"The Chinese [economy] expands because of our stimulus package," he said.

larry.carson@baltsun.com

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