By Steve Ahlquist in
Rhode Island’s Future
A new report calls into question many of the job growth strategies being pursued and implemented by our state leaders.
“To create jobs and build strong economies,” say economists Michael Mazerov and Michael Leachman in their new report, “states should focus on producing more home-grown entrepreneurs and on helping startups and young, fast-growing firms already located in the state to survive and to grow ― not on cutting taxes and trying to lure businesses from other states.”
The report, “State Job Creation Strategies Often Off Base” takes
advantage of new data accumulated over the last fifteen years “about which
kinds of firms create jobs” and the data shows that the “vast majority of jobs
are created by businesses that start up or are already present in a state — not
by the relocation or branching into a state by out-of-state firms.”
The immediate takeaway from this report for Rhode Islanders is
that Governor Gina Raimondo’s planned (yet not realized) trip to Davos and the
time she spent trying to persuade General Electric (GE) to move to Rhode Island rather than to
Massachusetts are wastes of time and money.
Raimondo’s offer to GE was in the “same neighborhood” as Massachusetts’s $140 million in state and city incentives and grants. Given the conclusions in this report, Rhode Island dodged a bullet when GE turned Raimondo’s offer down.
Raimondo’s offer to GE was in the “same neighborhood” as Massachusetts’s $140 million in state and city incentives and grants. Given the conclusions in this report, Rhode Island dodged a bullet when GE turned Raimondo’s offer down.
I asked the authors of the piece directly about the governor’s
plan to travel to the World Economic Summit in Davos and they told me, “That is
not where state economic development comes from and that’s really not where
policy makers should focus. They should focus on homegrown businesses and try
to stimulate startups and helping their businesses that are already in the
state to find customers and find the skilled workers they need. Business
recruitment accounts for such a tiny share of job creation and that’s really a
major point of this paper. It is not where the priority should be placed.”
In other words, we are, as a state, pursuing failed economic and
job creation strategies, and we will continue to fail unless we take this new
data seriously.
On average, 87 percent of new jobs are created by businesses
already in the state. In the chart below, you can see that Rhode Island is no
outlier in this department. The remaining 13 percent of jobs come from out of
state businesses branching into the state (think of a restaurant chain in
Boston adding a store in Providence) or a business actually relocating into the
state, as GE recently did when they moved to Massachusetts.
What kind of businesses stimulate job creation? The report
stresses that “startups and young, fast-growing firms are the fundamental
drivers of job creation when the U.S. economy is performing well.”
The report quotes economist John Haltiwanger and
his colleagues as saying, “Overall, the evidence shows that most start-ups
fail, and most that do survive do not grow. But among the surviving start-ups
are high-growth firms that contribute disproportionately to job growth. These
high-growth young firms yield the long-lasting contribution of start-ups to net
job creation.”
The firms that take off are called “gazelles.” Think Google,
Amazon, Tesla or Under Armour, or, in Rhode Island, think NuLabel.
These kind of firms accounted for about 15 percent of all businesses, but were
responsible for half of gross job creation from 1992-2011.
Failed Policies
In trying to create a “business friendly climate” that will lure
small businesses to the state, our leaders, like leaders in many other states,
have pursued strategies that are “bound to fail because they ignore the
fundamental realities about job creation revealed by the new data and research
discussed above.” A favorite failed strategy is tax cuts for “small
businesses.”
These tax cuts are not properly aimed at young businesses, they
are aimed at small businesses. Most small businesses don’t have employees
or plan to add employees. And targeting tax cuts to young businesses has little
effect because most young businesses spend so much money on new equipment,
product testing and marketing that they have little in the way of taxable
income in the first place.
Tax cuts don’t help a state’s business climate, but they do hurt
a government’s ability to do the important work of funding education and
maintaining a top notch infrastructure.
The report cites an Endeavor Insight study that showed that only 5 percent of entrepreneurs cited low tax rates as a factor in deciding where to locate their company, whereas 31 percent cited access to talent (education) and a city’s quality of life as a factor.
The report cites an Endeavor Insight study that showed that only 5 percent of entrepreneurs cited low tax rates as a factor in deciding where to locate their company, whereas 31 percent cited access to talent (education) and a city’s quality of life as a factor.
Offering tax breaks and non-tax incentives to lure out-of-state
companies to our state is also a losing game.
In Rhode Island we are addicted
to TSAs, Tax Stabilization Agreements, which allow
companies and developers to avoid paying their fair share of taxes and shifts
the businesses’ tax burden onto the rest of the city or state taxpayers.
As the
report clearly shows, “jobs gained due to firm relocation are such trivial
factors in a state’s overall job creation record that they should not be a
consideration in formulating state tax policy or economic development policy
more broadly.”
EDITOR’S
NOTE: In Steve’s
original article in Rhode Island’s Future, he presents a series of short
videos of Rhode Island leaders talking about their approach to growing the
economy, measures that are criticized in Steve’s article. - WC
Continuing to pursue strategies that have been
shown to hinder rather than help in job creation would be foolish in light of
the data in this new report. Instead, “policy needs to focus on encouraging
entrepreneurship generally, helping new businesses to survive, and enabling
businesses with the potential to become high-growth firms to fulfill that
potential.”
Steve Ahlquist is an award-winning journalist, writer, artist and
founding member of the Humanists of Rhode Island, a non-profit group dedicated
to reason, compassion, optimism, courage and action. The views expressed are his
own and not necessarily those of any organization of which he is a member. atomicsteve@gmail.com and Twitter:
@SteveAhlquist