Wednesday, November 9, 2011

Maryland & MoCo in 2020: Business Leaders Make "Altruistic" Suggestions As Defense Jobs Bubble Bursts

Lately, area politicians have gone out of their way to seek the input of small business owners, independent contractors, and ordinary residents as they decide who to screw over in budget decisions, when setting tax rates or otherwise making cuts. Indeed, voters should sleep easy at night knowing that policymakers are getting advice from altruistic sources. Maryland Reporter today, for example, highlighted this recent meeting of the Maryland Board of Revenue Estimates:
Comptroller Peter Franchot concluded “there is a sense of uneasiness about the economy” after three hours of testimony from Maryland business executives at a Board of Revenue Estimates meeting on Tuesday.

“You—the private sector – are going to lead us out of this,” Franchot told the business representatives. “I think it calls for a lot of caution.” In recent weeks, Franchot has repeatedly urged no new taxes or fees in the coming year....
Franchot said, “I was surprised at that the call for caution,” though that’s what he’s been preaching himself. He pointed to the new toll hikes for highway, bridges and tunnels, the proposed increases in the gas tax, and proposed increases in the flush tax for Chesapeake Bay restoration.
“You could reach the tipping point very quickly” for consumers who don’t have much money, Franchot said.
Sorry, but that tipping point feels like it is here, and it doesn't feel like the alarm is leading to shared sacrifice. To state a few uncontroversial facts: Maryland has rolled back the millionaire's tax, increased fees and tolls on average residents, ramped up collection of revenues from tickets and other punitive measures, brought gambling revenue to the State, is currently debating two regressive taxes (ie: an online "" sales tax and a gas tax increase), and has not passed legislation to close corporate tax dodges. Maryland Juice makes no comment on any of the proposals above (and in some instances I even support them), but I am struggling to point to equal sacrifices from the very people who are essentially asking legislators to force more "hard decisions" down the road (ie: more cuts and pain onto voters). If you disagree, I encourage you to cite instances in the comments.

Transitioning the Region's Economy: But here is an equally large problem that we don't appear to be wrestling with in our public dialogue. Defense spending, which has recently propped up the area's federal spending, is definitely going to decline for the forseeable future. Remember that President Obama is making good on his promise to pull out of Iraq? Ain't nothin' we can do about that. Combine that with the fact that the Pentagon isn't in Maryland and there is a (soon to be Metro-connected) international airport and concentration of existing defense jobs over the border, and you can see that we need to diversify our portfolio. (We still appreciate Lockheed's presence in MoCo, but that doesn't mean all tax and budget policy should be geared toward them!). To be fair, many Maryland leaders are already launching Maryland 2.0b with new investment in biotech, green and other industries.

Who is Bloated?: But still, these arguments from business leaders about taxes persist, and some politicians love to keep taking them at face value. Riddle me this.... Are corporations in Maryland willing to abide by the golden rule? Do unto others.... Because for the last few years, Chamber representatives have been marching into public hearings to testify on the need for government to trim spending and reduce its workforce costs. To do otherwise would be irresponsible, they claimed. Maryland, after all, had become bloated at the expense of Federal largesse and overspending. But apparently, area defense contractors have been behaving no differently. The Maryland Reporter article in question also noted the following:
There was considerable trepidation about the impact the decisions on federal budget cuts by the congressional Supercommittee could have on Maryland...

Jose Boluda of Northrup Grumman’s Electronic Systems Sector in Linthicum said that his company “has been working under a flat budget” for several years. He said that a defense industry group has estimated that proposed Defense Department cuts could cause the loss of 18,000 to 36,000 jobs at Maryland defense contractors, many of them in research and development.
He said the company was concerned by “any of these things that make us less competitive,” such as tax hikes.
No Tit for Tat: Indeed, as Maryland and Montgomery County transition their economies, it seems important to play devil's advocate for a second. If we are going to adopt the market-based solutions espoused by the business leaders, shouldn't we tell them not to be hypocritical? If their companies got fat during an era of Federal largesse, perhaps they need to shrink, become less bloated, downsize, adjust to the new economic reality, etc? If the R&D jobs are in danger, maybe they need to rethink the applications of their research and find new non-defense uses for their workers. After all, that's what they want us to do with government workers and their pensions and health benefits: retool or cut. But Maryland Juice is not making that aggressive counter-argument because these defense contractors are also Maryland Democrats, Republicans, shoppers, taxpayers, etc. We want everyone to stay, and we want to grow jobs, too. But I don't feel like the corporations are being team players. Do you?

That's why testimony earlier this week from GMU Professor Stephen Fuller has been causing a buzz in Montgomery County this week.

Mr. Fuller seems to look at the same troubling jobs and growth forecasts but somehow doesn't end up with a prescription focused on more corporate welfare, tax cuts, and environmental deregulation. According to Maryland Juice sources, Mr. Fuller reportedly even criticized Prince George's County Rushern Baker's $50 million Economic Development Plan and said the county should just spend it on education. The Bethesda Patch noted a few additional interesting comments:
Montgomery County will need to shift its focus toward housing and job training to allow for its growing economy, an economist told the Montgomery County Council on Tuesday.

The county economy, now at $69.5 billion, is forecasted to grow by $26.5 billion
over the next 10 years, said Stephen Fuller, director of the Center for Regional Analysis at George Mason University, on Tuesday....
Jobs are expected to grow 19.6 percent over the decade, but the population is
likely to grow 11.2 percent, Fuller said. The county will not have a labor force large enough to accommodate the growth without changes. Jobs follow the people, Fuller observed, an idea that’s contrary to the more common outlook of people following the jobs.

Residents will need to be educated and prepared for the coming jobs, he said, which will likely be in government and in education and health.

Want to see the same materials the County Councilmembers get to see? View Stephen Fuller's full slideshow presentation to the Council below. It covers a range of fascinating topics, such as where Montgomery County jobs come from, how we're doing compared to Fairfax, etc.

Montgomery County, Maryland - 2020 Economic Outlook


  1. Comment got cut off so I'll divide it into three parts :)

    Hi David,

    As usual a very well thought out policy analysis and overview of some of the current challenges that the state and region faces as we come up in the next couple of years. I do disagree on some points.

    Although I agree with the sentiment surrounding the decrease in defense spending, ultimately I think the solution is going to come from the private sector. And this is where I think Maryland is lacking. It isn’t necessarily a tax incentive or a simple tinkering of regulatory changes that will make any difference (though some may disagree – there is much research to support that they don’t make that much of a difference). Personally, I think businesses have a right to be "self-interested" - its what causes them to hire more workers, to create better and innovative products, to compete against each other for the best products, etc. I just think they're asking for the wrong things. These are only temporary fixes, especially if you want to foster the growth of the next Apple, Merck, Google, etc. we have to look long term. We’re going to have to revamp the entire business ecosystem and slowly shift to a “startup culture” of entrepreneurship and value creation. You’re right. We can’t compete on taxes. But we can compete on programs, on culture, etc.

    Entrepreneurship has been shown to be the only way to create new jobs. According to the Kauffman Foundation, startups annually create about 3 million jobs, while other companies lose 1 million jobs in the same time span. Here's a quote from the White House this year: “Startups are engines of job creation. Entrepreneurs intent on growing their businesses create the lion’s share of new jobs, in every part of the country and in every industry. And it is entrepreneurs in clean energy, medicine, advanced manufacturing, information technology, and other innovative fields who will build the new industries of the 21st century, and solve some of our toughest global challenges.” This comes almost intuitively for many of us who have been witness to companies like Facebook, Google, Apple, etc. starting off as an idea in a university dorm room and growing to become some of the largest companies in the world. This is where I disagree with you. I don’t think its fair to put ALL corporations in the same basket. Yes, you get companies like Bechtel – but that money, I think, should have gone to creating jobs through entrepreneurship because in the long run STARTUPS are the only companies that have a net increase in jobs. These are the types of companies you should be actively trying to recruit and fight for because they have the potential for high-growth and high value, which translates into an expanded tax base, high value creation, and a "race to the top" in terms of labor (in San Francisco companies are trying their hardest to out-recruit each other for the best and brightest engineers).

    Not only does entrepreneurship create jobs, but it has the potential to solve some of our region’s biggest problems. Last week, I was talking with an entrepreneur who was working on developing a smart app to create long-run algorithms about traffic patterns around the state and put the information on a GUI interface easy to use on an iPhone in addition to an engineer-entrepreneur who was working on developing a more efficient way of converting trash into energy. The problem with Maryland isn’t that we don’t have the talent or expertise to develop this kind of technology – its that there are just no incentives and safety nets for entrepreneurs to make the jump, create value, and distribute their products on the open market to get it to the people.

  2. Comment got cut off so I'll divide it into three parts :)

    The $100 million in the new InvestMaryland is great but it’s definitely not enough. As you’ve stated before, the educated workforce, the access to high quality schools, etc. all matter, but once again it’s not enough. We have to fundamentally change the culture of the state to move towards innovation and entrepreneurship.

    In two recent Presidential Memorandums, the President ordered all federal agencies, including high-tech agencies such as the National Institute of Health and the Department of Energy, to cut the time of tech transfers by 50% to spur on innovation and job creation among private companies. And for the past several months, the White House has been coordinating a privately driven movement, Startup America, with some of the entrepreneurial community’s biggest hitters (Steve Case, Michael Dell, Reed Hastings, Reid Hoffman, Frederick Smith, etc) to take a grassroots approach to connecting entrepreneurs with resources such as venture capital, providing them with much needed mentors, lobbying for targeted tax incentives, and cutting suffocating red tape for startup companies.

    I think this is a signal from the White House that “yes, we are going to face huge cuts but we want to mitigate that by making it easier to get access to federal agency research and resources by the private sector” – an implicit nod of the head for many federal workers to go out and start their own companies. The challenge now is: where are all the jobs and the companies going to go?

    In any startup there are three things that matter: land, labor, and capital (and how to obtain and manage them like accounting, legal, human resources, etc). Put yourself in the position of an entrepreneur: you have a great idea and you are looking to minimize costs for all of these and maximize access to resources in your critical early stages. Maryland and Virginia are on par for labor and in many cases labor is better in Maryland (given the abundance of agencies like NIH, DoE, and FDA that are all located here). As for land, I think Montgomery County, in particular, has done an excellent job in terms of providing special commercial zones as well as government incubation programs (free or subsidized land for startups through its business innovation network) and this is certainly an area that the rest of the state can improve in.

  3. This comment has been removed by the author.

  4. Comment got cut off so I'll divide it into three parts :)

    The last one, in my opinion, is the deal breaker. Capital. The fact that the STATE of Maryland had to come in and create a fund is testament to the lack of private venture capital in the state (not just in comparison to Virginia but to other major hubs like San Francisco – which by the way is the only other hub that isn’t facing the high unemployment rates that the rest of the country faces, New York, etc). Capital is the lifeblood of startup companies and cashflow is everything. But here’s what you got: you have a barren venture capital field, you have no organized networks for entrepreneurs (networking events where you could bump into your next investor or your next cofounder – trust me! This happens!), you have no established angel networks, etc. If I were an entrepreneur (and I’ve been in this position before with my own startup), I would be scared to death by the prospect of not being able to get capital for my business and having to go completely into debt and bootstrap my business all the way though. The problem then isn’t that we’re losing companies, it’s the fact that given our schools, our labor, our land, our technology (especially given the new increased tech transfers we’re going to see) we aren’t unleashing the full potential of our regional economy. That is the real problem. But in order to solve it we need to change the entire way our economic ecosystem works. A race for capital against a state like Virginia would essentially be a race to the top in terms of the free flow of capital and institutional investors and this is where we have to compete.

    We have to create a strong DEMAND for venture capital (including their networks and expertise) to come to our state and start accelerating startups, we have to encourage a culture of entrepreneurship, we have to facilitate mentorship and resource networks, etc.

    As an influx of highly skilled workers look for work apart from the federal government, we can turn this into an opportunity to transition our economy, to create incentives for people to pursue their own interests, and move our state forward. Lets make sure the next big thing is created in Maryland and make it a major competitor to Silicon Valley in California. I think if we want, we have the potential to raise a generation of leaders and visionaries who have the potential to create millions of jobs, solve society’s deepest problems, and move the state forward.

    Tim Hwang