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What's Up Magazine

What’s Up With The Economy

Jun 26, 2013 09:49PM ● By Anonymous

According to the most recently revised estimate supplied by the Bureau of Economic Analysis, the U.S. economy expanded a bit faster than 2 percent last year despite stalling during the fourth quarter. In fact, the economy has been growing at around 2 percent ever since the current economic expansion began in mid-2009.

This hardly means that all is well. Recent graduates continue to have an awful time finding work that aligns with their interests or their college majors. Recent research indicates that the college degree is increasingly the new high school diploma—a sort of minimum credential necessary even to secure low-level work. In other words, college graduates often find themselves competing with high school diploma holders for the same job. In that battle, college graduates typically win. The unemployment rate for those with only a high school degree has been roughly twice that of college graduates.

Despite overall progress in recent years, the nation’s economy is hardly out of the woods and still faces several hurdles this year. The passage of the American Taxpayer Relief Act of 2012 early in the new year meant that the nation averted plunging off its fiscal cliff, but still faces massive budgetary issues. More recently, the focus has been on automatic sequestration—a set of automatic federal spending reductions that has the potential to reduce the pace of economic expansion by 0.5 percent or more over the course of the current year. Anne Arundel County stands to be especially impacted since half of the cuts impact the Department of Defense.

In addition to spending cuts have been a host of tax increases that have already taken effect. While many of the Bush tax cuts were rendered permanent, families earning $450,000 a year or more will experience higher tax rates on their incomes. Nationally, about 0.7 percent of families have income at or above this threshold. Tax rates on investment income also will be higher this year, including in the form of a 3.8 percent Medicare tax on net investment income.

Higher income taxes on the wealthy may not concern a lot of Americans, but they are certainly a source of concern for national and regional luxury retailers. For now, sales of luxury merchandise have held up, with department stores like Neiman Marcus, Saks, and Nordstrom all reporting higher sales over the past year. A booming stock market gets a lot of credit for that. Financial wealth is heavily concentrated in America, which means that a relatively small proportion of families has primarily benefited from the run up in stock prices over the past three to four years. Affluent families are hardly the only ones paying higher taxes this year. The expiration of a payroll tax cut means that those earning in the neighborhood of $50,000 will end up paying about a $1,000 more in taxes this year.

Remarkably, the pain being inflicted in the form of federal spending reductions and higher taxes contributes little toward solving the nation’s massive national debt. According to an estimate by the Congressional Budget Office, the national debt will expand by another $4.6 trillion between 2013 and 2022. America’s financial hole deepens.


After several months of reasonably solid employment gains, job growth has slowed somewhat in Maryland more recently. Between March 2012 and March 2013, the Free State added 37,700 jobs, ranking the state 18th in the nation with respect to year-over-year percentage job growth. That represents a significant downshift from early last year, when Maryland ranked seventh (February 2012 vs. February 2011). While sectors such as professional services, education, health, construction, tourism, finance, and distribution added jobs on a year-over-year basis in March, manufacturing and government shed jobs statewide.

Despite serious concerns regarding Maryland’s exposure to ongoing federal government spending reductions, for now, the state’s economy doesn’t look too bad. At 6.6 percent, Maryland’s unemployment rate remains among the lowest in the nation, though Virginia’s remains significantly lower (5.3 percent), perhaps due to a more competitive business climate and better reputation for business friendliness.

Though people speak of “One Maryland,” the fact of the matter is that there are significant disparities in economic performance across the state. While certain Eastern Shore communities have performed respectably—including Queen Anne’s and Kent counties, where unemployment stands at 5.9 percent and 7.0 percent, respectively—others continue to struggle. Kent, Talbot, Caroline, Dorchester, and Worcester counties all have unemployment rates that are more than 8 percent. In general, rural economies in Maryland have recovered less rapidly than more urban economies tied closely to the Washington metropolitan area. As the next section of this article will discuss, much of the disparity in economic performance between jurisdictions is related to the respective performances of their housing markets.


One of the most noteworthy improvements in 2012 occurred in the nation’s housing market, which is now associated with both rising sales and median prices. According to the National Association of Realtors (NAR), “There are almost no housing market indicators showing weakness.” NAR reports that total existing home sales in 2012 were the highest in five years. The median existing home price for all of 2012 was $176,600, up from $166,100 in 2011, and was the strongest annual price gain since 2005. Moreover, new-home construction reached a 54-month high in December 2012, and the delinquency and foreclosure rates are at their lowest level in four years.

In Maryland, total unit sales were up 4.5 percent for the year, and the average home sales price was up more than 5 percent ($277,800 in 2011 vs. $292,179 last year). Inventory has continued to dwindle, with active listings down 24 percent year-over-year as of December 2012.

The decline in inventory positions the marketplace for further healing and price gains this year. If you are looking to sell your home and change your lifestyle in the near-term, this could be an opportunistic time for you. Lower inventory means that there will be less competition for buyers. What’s more, near record-low mortgage rates mean that your buyer can afford more house, which could help you get a higher price.

That said, there are quite a few dark clouds hanging over the local housing market. Job growth and accompanying household formation is likely to slow in Maryland as federal spending cuts take hold. This represents a very different dynamic from past years, when the growth in federal spending, including in the form of base realignment at Fort George G. Meade, helped to accelerate job growth. If federal workers, contractors, and others begin losing jobs in large numbers, mortgage bankers are likely to take a more cautious view toward lending, which could also help stifle housing market recovery in Maryland later this year.


One of the largest obstacles for Maryland’s economy this year and beyond may be its weakening competitiveness with other states as a result of high taxes and rapid spending growth. A recent article by Americans for Tax Reform called Maryland “one of the most hostile states for taxpayers” and “one of the most taxed states in the nation.” The Free State’s high tax environment is most evident when compared to its southern neighbor. Maryland’s sales tax is 6 percent; Virginia’s is 5 percent. The top personal income tax rate is 8.95 percent in Maryland, compared to 5.75 percent in Virginia. The corporate income tax rate is 8.25 percent, compared to Virginia’s 6 percent. What’s more, CEO Magazine recently ranked Maryland 40th in its 2012 “Best and Worst States for Business.” Virginia ranked sixth. Despite this, the state legislature continues to pass new tax increases, including, most recently, raising taxes on gasoline.

At the same time, spending in Maryland is expanding rapidly. According to the National Governors Association and National Associations of State Budget Officers’ Fall 2012 Fiscal Survey of the States, Maryland recorded the sixth highest rate of the budget growth among all 50 states and the highest in Mid-Atlantic region. Between FY2011 and FY2012, Maryland’s budget rose from $13.2 billion to $14.9 billion, an increase of 12.8 percent. The average budget increase for all states during this period was 3.4 percent. Among the most concerned Marylanders are estate planners, many of whom report that a good number of their most affluent clients are considering leaving Maryland for Florida and other low-tax environments. The impact of high taxes in Maryland is particularly apparent on the Eastern Shore, which abuts relatively low-tax Delaware.

Of course, there’s more to economics than taxes. Maryland policymakers discussed a number of legislative proposals during 2013 legislative session that were of special interest to Eastern Shore communities. One of the most controversial bills was the Sustainable Growth and Agricultural Act of 2012, or the “septic bill,” which was passed last year. Intended to help improve the Chesapeake Bay’s water quality and its watershed, the septic bill prohibits large developments in rural areas from using septic systems. The objective is to limit nutrients from septic systems seeping into the bay. The legislation requires county governments to establish four tiers of development, including areas served by water and sewer where new development is encouraged and a tier where little building with septic systems would be allowed.

Only 13 counties have submitted tier maps so far since the bill was passed in 2012, with many Eastern Shore communities holding out in hopes that the bill would be repealed during the 2013 session, but the session ended with the law intact. Opponents of the legislation, including many Eastern Shore farmers, argue that this represents an attempt by the State of Maryland to usurp land use authority from local governments. Naturally, such policy tends to limit the value of rural land. Another important piece of legislation directly related to the Eastern Shore was Gov. Martin O’Malley’s Maryland Offshore Wind Energy Act of 2013, or the offshore wind power bill. This legislation, which was passed and signed into law in April, requires a percentage of electricity sold in the state to come from offshore wind farms. The legislation will plan and implement financing of a multibillion-dollar offshore wind farm roughly 11 miles off the coast of Ocean City. According to the legislation, the project’s subsidy will be generated by adding a fee of $1.50 to every Maryland resident’s electric bill each month and a fee of 1.5 percent to large industrial and commercial electricity users beginning in 2017 and continuing for 20 years.


Despite concerns regarding the federal spending cuts and higher taxes, tourism remains active in Maryland. For instance, BWI Marshall Airport reported a record number of passengers last year, reaffirming its place as one of the nation’s most dynamic airports. In 2012, more than 22.7 million passengers flew with BWI, representing the third straight year for record traffic at the airport. International flights, including to destination such as Aruba, Bermuda, Cancun, and the Bahamas, increased significantly last year.

According to airport administrators, 2013 is expected to be another record year due to the addition of more domestic and tropical destinations. Beginning in April, AirTran will operate daily nonstop flights between BWI and Punta Cana, Dominican Republic. AirTran also will continue to operate a seasonal flight from BWI Marshall to Bermuda (four weekly flights will resume mid-May; daily service will begin in June). Southwest Airlines will begin new year-round nonstop service between Baltimore and San Juan, Puerto Rico, with two daily flights beginning in June. Also, just in time for spring break, domestic travelers will soon be able to take advantage of a new daily service from BWI to Las Vegas (AirTran and Spirit) and Myrtle Beach, S.C. (Spirit).

For those tired of flying, cruise ships represent another popular option, despite the occasional nightmare story that sweeps over us. According to the Maryland Port Association, the Port of Baltimore saw 240,676 passengers depart on 100 cruises in 2012, the second highest passenger total in the Port’s history (2011: 251,889). Two large cruise lines (Carnival Cruises and Royal Caribbean Cruise Line) and one small-ship cruise line (American Cruise Line) offer cruises from Baltimore. Carnival offers year-round cruises to the Bahamas and the Eastern Caribbean. Royal Caribbean sails from Baltimore to a number of destinations, including the Bahamas, the Caribbean, Bermuda, and Canada. American Cruise Line offers cruises around the Chesapeake Bay and down the Intracoastal Waterway from Baltimore.


The next several months will be treacherous from an economic perspective. Anne Arundel County stands to be disproportionately impacted by automatic federal spending cuts, particularly those impacting defense contractors and agency staffs. A slowdown in Anne Arundel County’s economy, which has been one of the strongest in Maryland in recent years, would have spillover impacts in Queen Anne’s County, which is, to a large extent, a bedroom community to the Baltimore-Washington employment corridor. Financial markets also have become more volatile recently, implying that investors need to be a bit more vigilant in guarding the value of their investments.

* Anirban Basu is chairman and CEO of Sage Policy Group, an economic and policy consulting firm in Baltimore.