The Virginia-Maryland Border War

The fiercest rivalry in American politics today may not be between Barack Obama and Mitt Romney, suggests Stephen Moore in today’s Wall Street Journal. It may be between the governors of Maryland and Virginia: Martin O’Malley and Bob McDonnell.

Not only do the two governors and their states vie for bragging rights over job creation and economic growth, as any two neighboring states might do, they champion competing governance models. Maryland represents the blue-state governance model of activist government that raises taxes to “invest” resources in public works, schools, transit and other assets offering a social return on investment. Virginia represents the red-state model of more limited government, lower taxes and restrained spending.

That tussle takes on more meaning than, say, the rivalry between Virginia and North Carolina, because Maryland and Virginia both comprise part of the Washington metropolitan area and compete for a greater share of the region’s jobs, corporate investment and economic growth. Writes Moore: “The two [governors] regularly spar on the Sunday talk shows, on the pages of the Washington-area newspapers and over the radio.”

A prominent advocate of small government, Moore makes no secret of which governor and governance model he favors. Citing O’Malley’s triumphalism earlier this year when he bragged on CNN, “We’re creating jobs at two-and-a-half times the rate Virginia is,” Moore notes that Maryland proceeded to lose jobs the next six months, even while the nation as a whole was gaining them. Since O’Malley’s inauguration, he writes, Maryland has lost 30,000 jobs, or three times as many as Virginia. Maryland’s unemployment rate is 7%, while Virginia’s is 5.9%.

On O’Malley’s watch, Maryland has seen 20 fee and tax hikes. Moore cites a study by Change Maryland that found the Terrapin state lost 30,000 taxpayers from the state, costing $1.7 billion in lost tax revenues over the past five years. Maryland’s wealthiest counties saw the highest rate of out-migration, suggesting that high-income residents were voting with their feet. Virginia experienced a net in-migration of taxpayers over the same period.

Moore also cites Virginia’s successes in corporate recruitment. The Old Dominion beat out Maryland for the Northrop Grumman corporate headquarters, and has enticed Bechtel and Accentia to move major operations from Maryland across the Potomac.

Bacon’s bottom line: Moore acknowledges that many factors influence economic growth, and I must agree. While I share with him a faith that the “red state” economic model is superior to the “blue state” model — that, all other things being equal, smaller government and lower taxes are better than bigger government and higher taxes — I concur that the the size and reach of government is only one factor of many influencing growth. The impact of growing/shrinking the size and scope of government is best measured over decades, not years.

The dynamics of economic development have changed considerably in the past half century, when the low cost of land, labor and taxes was a valid recipe for growth in Virginia. To maintain a high and improving standard of living, the Old Dominion now must compete upon its ability to innovate, not on the basis of low costs. To attract corporate, venture and equity capital, Virginia must have human capital. To recruit and retain human capital, Virginia must build the kind of communities where educated members of the creative class want to live. Critical assets include better schools and universities, more transportation options, a cleaner environment, and a greater array of parks and recreational facilities, among other things. (Creatives also value openness and authenticity, attributes that governments cannot readily create.)

Schools, transportation, environment and public amenities are things that taxes can buy. In theory, if Maryland’s higher taxes buy more of these things and create communities more attractive to creatives, the Terrapins may generate more economic development in the long run, even if higher taxes drive off some high-income households…. but only if O’Malley and his liberal brethren “invest” wisely. Personally, I don’t have a lot of confidence in politicians of any ideological stripe to invest money wisely.

The trick to achieving prosperity in the 21st century is to create communities attractive to the creative class while also keeping taxes lower and letting wealth creators keep more of their wealth. How is that done? There is no simple formula, but it starts with the recognition that some of our basic institutions — K-12 education, higher ed, health care, transportation and land use — are broken. The blue state model of propping up broken institutions with more money and/or more government regulation is not a winning strategy. But the red state model is incomplete. Simply keeping taxes low — starving the beast — will not bring about reform of core functions of state and local government.

For the red state model to succeed over the long run, free marketeers and fiscal conservatives need to articulate a vision of how to restructure and reform our broken institutions. They have done the best job thinking about K-12 education: arming parents with vouchers to give them more school choice and encouraging schools to compete for students. But there has no been no serious discussion about applying the voucher concept to higher ed, where costs are out of control. Economic conservatives have batted around ideas for injecting market principles into health care, but they have not pushed them very aggressively. And when it comes to transportation and land use, conservatives tend to support the dysfunctional status quo.

The red state governance model may prove to be less destructive than the blue state model. You won’t see many red states swirling down the whirlpool of higher taxes, capital flight, eroding tax base and even higher taxes like California and Illinois. But avoiding fiscal disaster is not setting the bar very high. Virginia can, and must, do better.