Tuesday, July 22, 2008

Taxes and Baltimore

"If you've seen HBO's 'The Wire.' you know why those of us who live in Baltimore are often asked whether our city really is the hellhole it is portrayed to be on TV. Our answer is, well, yes. Baltimore deserves the Third-World profile it has developed because it has expanses of crumbling, crime-riddled neighborhoods populated by low-income renters, an absent middle-class, and just a few enclaves of high-income gentry near the Inner Harbor or in suburbs. ... Today, the city has a population that is almost 50% smaller [than in the 1950s], and about 40% of families with children live at or near the federal poverty line. ... Most people think of cities as dense concentrations of people. They are that, of course. But they are also dense concentrations of capital--homes, offices, factories, theaters and roads. ... The problem is that once capital is built, it can become a target for tax-and-spend politicians who bank on the fact that physical capital will continue to draw people, even as it is taxed more heavily. This is what has happened in Baltimore. ... Politicians, in short, reason that because physical capital cannot typically be picked up and moved, it is immutable. Wrong. It depreciates. Fail to replenish or improve it, and it decays to uselessness. ... To the extent that city officials recognize the problem, they seem to confuse symptoms with the root cause of the economy's disease. For them, poverty, street crime or bad schools are the problem. Their solution is always more social spending and still-higher taxes, together with targeted tax breaks and subsidies aimed at bringing 'big footprint' development projects downtown. ... True enough, the ability to hand out subsidies gives officials great power. But is also gives them a reason, and incentive, to dismiss the common sense that if tax breaks for the well-connected are a good iodea, lower tax rates across the board would lead to broad-based redevelopment", Steve Hanke and Stephen Walters (H&W) at the WSJ, 5 July 2008.

I agree with H&W. As Uncle Miltie said many times, "We economists don't know much, but we do know two things: If you want more of something, subsidize it, if you want less of something, penalize it". Baltimore's city fathers want more poor people and less productive people. So be it. I note Mexico has "milked" Pemex for so long, it may bring foreign capital back to fix Mexico's oil industry.