Stephen J.K. Walters on Baltimore’s economy, wisdom of Kirwan plan

Originally published in the Daily Record

MPPI in the News Daily Record Staff Oct 24, 2019

The Daily Record interviewed Stephen J.K. Walters, who recently became chief economist for the Maryland Public Policy Institute. He also is a fellow with Johns Hopkins University’s Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

The Daily Record: What are the most important steps Baltimore can take to revive its economy?

Stephen J.K. Walters: Job No. 1 is … jobs. When Freddie Gray was born (1990) the city was home to 445,000 jobs.  Today we have about 344,000. Losing over 100,000 jobs has had a terrible impact on our city:  it is the root cause of our growing poverty and crime problems.

To turn this around, we need to solve our disinvestment crisis. Job creation requires a healthy partnership between labor and capital (the “tools of production”). Right now, the city is simply not competitive in attracting capital investment. Our tax rate on real and personal property is more than twice that available just a few minutes away in the surrounding county; that’s investment repellent.

We simply have no choice but to become competitive on this rate. It’s a necessary condition for the city and its citizens to thrive. Do it and all other problems become easier to solve as we re-capitalize and re-populate the city and grow our various tax bases (on property and income). Or continue to be non-competitive and live with continued loss of population and jobs and never-ending fiscal stress.

TDR: You have advocated a property tax rate cap on Baltimore as a way of spurring investment and reversing capital flight. Explain how this would work? How would the city bridge the gap between a reduction in revenue and when economic growth would reverse that revenue loss?

Walters: The key (as MPPI Fellow Louis Miserendino puts it) is to “build a financial bridge before you cross the river.” When other declining cities like San Francisco or Boston in the ‘70s (yes, those superstar cities once struggled like us because they over-taxed investment) cut their property taxes to a competitive level as a result of statewide referenda, they had no warning or transition period.

We can do it better. Amend the city charter ASAP to cap the city’s rate at a competitive level (thus assuring investors that the rate will not change with the political winds), but make that rate effective several years in the future.

In the meantime, as investors get in on the ground floor and we reverse the flight of capital and people, the tax base grows and we put extra revenue in a “lock box” that we can use to pay for the rate cut when it arrives. Baltimore is a superstar city waiting to happen; investors and residents will be eager to return once it makes economic sense to do so.

TDR: Baltimore civic leaders often accuse the state of turning its back on the city’s problems, citing as an example the governor’s decision to pull the plug on the Red Line light rail project. Do they have a point?

Walters: The state sends $1.28 billion in aid to the city for schools, transit, and much more; that’s second only to the $1.45 billion going to Prince George’s County (which has 51% more people). That’s not “turning its back” on the city, but state money is, indeed, getting tighter. That reflects both the city’s declining power in Annapolis (a result of our steadily falling population) and frustration from the state’s other 23 jurisdictions about having to send us so much money. The answer to both issues, clearly, is growth and greater self-sufficiency.

As to the Red Line, it’s not clear that fixed rail is a necessary or desirable transit investment. A few years from now, when autonomous vehicles are common and someone applies Uber/Lyft technology to micro-buses, that old Red Line plan might look as misguided as our I-70 /Route 40 “highway to nowhere,” which devastated many neighborhoods to no good end.

TDR: You have been critical of the Kirwan Commission’s approach to educational reform, writing that it would mostly create an education monopoly. What is your prescription for improving Maryland’s public education system?

Walters: Kirwan’s proponents argue that the status quo is not working but that the solution is to hand enormous amounts of money to those – the public school bureaucracy and teachers’ unions – who preside over it. It’s true that they promise some “reforms” to curriculum and more “accountability” within the institutions that have created the problem. But without meaningful competition in this sector, those promises are empty.

The evidence in education and every other industry on earth is clear: Competition is good, and monopoly is bad. Schools that have to compete for enrollments serve their students better. When charter schools or voucher programs are present in a school system, even the non-charters or non-voucher-eligible schools step up their game. Unfortunately, Kirwan dropped the ball here by making no provision whatever to bring the benefits of competition to students and their parents.