Marketplace of Ideas Blog

One year ago, I reported that according to the annual Pollina Corporate Real Estate state business climate comparison, Wisconsin’s business climate improved from 37th in the U.S. to 35th in the U.S.

So much for progress. Pollina’s 2010 comparison ranks Wisconsin 46th, ahead of just Massachusetts, West Virginia, Rhode Island and California. That of course also means Wisconsin ranks last in the Midwest, behind Missouri (10th), Indiana (23rd), Iowa (24th), Ohio (25th), Michigan (31st), Illinois (36th) and Minnesota (42nd).

Pollina’s annual comparison is important to note because Pollina’s business is in business site selection, a field in which Pollina’s clients can choose from not just across the U.S., but around the world.

Pollina’s report “details how many state governments have the resources, but not the will, to keep Americans employed in high paying 21st Century jobs. After 30 years experience representing corporate clients in selecting sites internationally and seven years of detailed examination of all states’ economic development efforts, Pollina Corporate has observed that current economic development trends are not promising. … Certainly these trends are not in keeping with a nation that would like to consider itself an economic leader. Federal efforts are very disappointing, as is true for far too many states.”

The top 10 states, which are “making the effort to keep their existing jobs and to attract new employers … those states that ‘get it’” are Virginia, Utah, Wyoming, South Carolina, North Carolina, Nebraska, Kansas, South Dakota, Alabama and Missouri.

(For those who automatically see a partisan bias in this comparison, it should be pointed out that of those top 10 states, six have Republican governors and four have Democratic governors. It’s not party, it’s policy.)

Pollina’s report, “limited to factors over which state government has control,” is based on two groups of rankings — labor, taxes and other factors, worth 64 percent of the score, and incentives and economic development agency factors. The first group includes factors like high school graduation and college attainment rates, unemployment rates, which states are right-to-work states, and jobs gained or lost in the past three years. Tax comparisons include corporate taxes, individual income taxes, sales and gross receipts taxes, states with a unitary tax vs. states with combined reporting, and inventory-tangible personal property taxes. “Other factors” includes a Litigation Environment Index, Transportation Infrastructure Index, the average cost of electricity, a Broadband Access Index ranking and crime rates.

Pollina has some stern words for those states in the bottom half of its comparison:

Those states that did not make it into the Top 25 should evaluate their economic development capabilities. These bottom-ranked states need to have their state political leaders give serious consideration to rethinking their efforts to attract and maintain jobs. …

Among these bottom-ranked states are some that have such weak or non-existent programs, or are so inept in their procedures, that they are pushing their best jobs out of their states. Fortunately for the Bottom 25 states, they have many strong regional and community economic development organizations. Often these organizations are forced to carry the burden of attracting and maintaining jobs with little or no assistance from state government.

The report’s executive summary takes three pages to discuss jobs here vs. jobs overseas, beginning with this: “The fact is that the nation was well on its way to losing jobs critical to our economic growth and prosperity well before the beginning of the recession.” It adds:

Contrary to popular belief, companies do not move offshore solely because of lower labor costs. Our federal government and most state governments have created a business environment that has become hostile to business, while other countries have created business environments that are considerably more business friendly. Many states have also created hostile environments for business through the use of overzealous taxation and regulation.

The phrase “hostile environments for business through the use of overzealous taxation and regulation” certainly describes Wisconsin, doesn’t it? For proof, you need ask only those business owners who get to deal with the tax and regulatory output of our overzealous legislators and state government employees (who, in their defense, have to interpret and enforce what the Gang of 132 devises) — which is to say, all Wisconsin business owners.

Those who accuse disloyalty to the state for daring to bring up this subject (proving that McCarthyism isn’t limited to the right side of the political aisle — isn’t that right, Sen. Jauch?) or claim these business climate comparisons don’t matter have yet to adequately explain why it is that different organizations that use and weigh different criteria consistently rank Wisconsin as low as this state ranks. We also await an explanation as to why the views of business owners and economic development professionals are inferior to the assertions of the left side of the political aisle on government issues. (For that matter, the ostrich-like reaction of not wanting to hear bad news about the state’s business climate is similar to a business’ refusing to listen to its customers, or a patient’s refusing to listen to his or her doctor.) And we still await an explanation of why the state’s current government über alles regime of high taxes and high levels of regulation is a superior model given our below-national-average measures of business and personal income health.

The good news about all this is that business climate is one of the big issues in this year’s race for governor, among the candidates and with such organizations and movements as the Wisconsin Technology Council, the Wisconsin Way and the Be Bold Wisconsin report, as well as the upcoming Wisconsin Policy Research Institute Refocus Wisconsin initiative. The bad news is that Democrat Tom Barrett’s plan doesn’t significantly differ from policy of today, other than his pledge to rearrange the Department of Commerce. Giving tax credits to businesses that create jobs ignores the fact that businesses create jobs not when there are tax breaks for job creation, but when there is enough business to justify hiring. His refusal to eliminate combined reporting or to advocate for permanent tax cuts seems to indicate that his core belief is that government revenue is more important than healthy, profitable businesses.

Obviously a new approach is needed. Obviously the old approach isn’t working.

FirstTrust Advisors’ Brian Wesbury and Robert S. Stein:

For almost a decade, everyone has known this day was coming. On January 1, 2011, the top income tax rate on ordinary income and dividends will go back to 39.6%, the top tax rate on capital gains will revert to 20%, and the top tax rate on estates will go back to 55%. Some in Congress want to extend the tax cuts for everyone, some want to extend them but not for the “rich,” and others want to hold the dividend tax rate to 20%. These decisions make a huge difference to American business. But rather than putting it up for a vote, Congress is playing political games.

Our best guess is that, ultimately, all the current tax rates on regular income, dividends, and capital gains get extended for another year. When this happens remains a major mystery, and no matter what we say or think, uncertainty about all of this remains extremely high.

Ideally, it would happen before the election this year. But this would require President Obama and the Democrats to turn dramatically, just when the public is paying more attention to politics. It would look opportunistic, it would demoralize some liberal voters and it would undermine the Democratic position that tax rates on the rich don’t matter that much to the economy.

How about in a lame duck session? If the consensus is right and Republicans take the House and make large gains in the Senate, it would give Democrats a chance to say they are listening to the voters. But in a lame duck session, Speaker Pelosi would still rule the House with little to no incentive to do the heavy-lifting needed to pass a bill.

That leaves us with one more scenario for extending the tax cuts, the one loaded with the most taxpayer uncertainty, but which may be the most likely outcome. In this scenario, Congress fails to extend any of the tax cuts before the end of the year. All of the tax rates from 2000 – on everyone, from the “rich” on down – come back on January 1. Then, sometime in 2011, President Obama – his political advisers telling him to maximize growth going into his re-election battle – agrees to an extension but only through 2012, with all the lower tax rates made retroactive to January 1.

The second and third scenarios may be too late for U.S. Sen. Russ Feingold (D–Wisconsin) and U.S. Rep. Steve Kagen (D–Appleton), who are not getting good news from pollsters these days.

It’s clear, though, that much of the economic uncertainty today has to do with what happens to the tax cuts after Dec. 31. But then there’s long-time Democratic advisor Paul Begala, who told The Hill, “It’s hard to say the Republican economic policies were bad, [and] then continue them. That is a bit of a mixed message.”

So what should Democrats do, and what should Feingold and Kagen advocate? The Wall Street Journal’s Best of the Web Today quotes blogger Ed Morrissey:

Democrats have a conundrum. If they agree to extend the Bush tax cuts — the heart of Bush’s economic policies, which only have an expiration date in the first place because Democrats threatened to filibuster them otherwise — they’re endorsing Bush’s economic policies. If they don’t extend them, Barack Obama and the Democrats still left in Congress will almost certainly create a double-dip recession that will threaten to make their party radioactive for the next few election cycles. Perhaps they should have thought their 2010 strategy of demonizing Bush through a little more.

With school starting in most school districts today, a caller to WAPL’s Rick and Len listener call-in Tuesday about what people learned in school (most of which cannot be repeated here) noted that unlike his classmates, he did pay attention in school.

He learned, he said, that Belgrade is the capital of Yugoslavia, Pluto is a planet, and we are entering into a new Ice Age.

Michael Noer on Forbes.com first diagnoses the problem in Congress’ spending $10 billion on buying teacher union votes — I mean, preserving teacher jobs:

First, it’s unclear that these jobs needed “saving”; indeed, some states are gleefully figuring out how to spend the unanticipated windfall. Second, federal stimulus spending of this sort can have only a short-term impact on employment. If we are serious about creating jobs, we need to rethink the problem from the start.

Government-backed paychecks come with a cost. The money to pay for the teachers or the extended unemployment comp or the public works project will, sooner or later, have to be extracted from the pockets of taxpayers. Anticipating that burden, taxpayers with money sit on it. Corporations shrink from hiring; consumers hesitate before buying. …

Here in America vast amounts of stimulus money and White House jawboning have done little to move the unemployment needle, frozen at 9.5%. Add in the people who have simply given up looking for a job and you get an unemployment rate of 16.5%. A third of this is a hard core of potential workers who have no realistic chance of finding a job in the foreseeable future.

So Forbes contributors pass on some interesting ways to increase employment without government involvement. For instance:

Pay employees a fixed share of company revenue: “Some of the compensation could still be traditional hourly wages, but the sharing component creates the incentive to expand employment. An extreme example illustrates the point. Say that a firm paid a fixed amount for wages no matter how many employees it hired. In that case, the cost of an extra worker is zero. It would make sense to keep hiring people until the extra person added nothing to the top line.”

Import entrepreneurs: “First, nearly all new jobs are created by relatively new companies. A recent study from my colleagues at the Kauffman Foundation (see Every Man [and Woman] an Entrepreneur) found that young companies (those less than one year old) create 3 million American jobs a year, while older firms destroy a million.

“Second, immigrants are far more likely — 30% more inclined, by some estimates — to form new companies than are native-born citizens. Ebay, Google and PayPal were all cofounded by immigrants; AT&T, U.S. Steel and Procter & Gamble were also created by foreigners searching for opportunity in the U.S.

“Today there are 1 million highly skilled immigrants in this country legally, if temporarily, on H-1B visas. Another 125,000 foreigners graduate from our universities each year. If only 10% of them launched businesses under this program, we’d have 110,000 new jobs right off the bat. Immigrant founders would then have superstrong incentives to expand their businesses in the U.S. so they could stay here.”

Eliminate the minimum wage: “The effect of a minimum wage is a classic example of the law of unintended consequences. Minimum wages create unemployment: At above-market prices people want to supply more labor than employers wish to hire. Repealing the minimum wage would have two effects. First, it would create job opportunities, particularly for teenagers, and the chance to acquire experience today that can translate into higher future earnings. Second, it would send a powerful message to employers, employees and investors that they can hire and invest without fear of punishment. …

“Between 2007 and 2009 the federal minimum wage increased by 41%, from $5.15 an hour to $7.25 an hour. The consequences have been disastrous: According to the Employment Policies Institute in Washington, D.C., approximately 98,000 jobs — a 6.9% reduction in employment among 16- to 19-year-old workers in the states affected by all three stages of the federal minimum wage hike — have been lost. Broadening coverage to the 32 states that were affected by some portion of the increase, the three-stage minimum wage hike cost 114,000 teen jobs.”

From the Aug. 31 Marketplace

There has never been a shortage of opinions about how to fix the problems in the state’s business climate.

In the past two months, the Wisconsin Technology Council released its Case for Bold Action, its prescription to improve the state’s environment for technology-based businesses. Two former secretaries of the state Department of Commerce are coauthors of Be Bold Wisconsin: The Wisconsin Competitiveness Study, which focused on the effectiveness, or lack thereof, of the state Department of Commerce in promoting Wisconsin as a place to do business.

And, of course, the three major candidates for governor have their own economic revitalization plans. You’ll be happy to know that Democrat Tom Barrett “knows that businesses create jobs. However, he also understands that we can build an even stronger economy in Wisconsin with a full partner in the Governor’s office paving the way.” The would-be “full partner” Barrett calls for tax cuts “linked directly to job creation,” that are “targeted to stimulate the economic activities that will create the high-paying, high-growth jobs we need.”

The lack of personal income tax cuts in his plan or on his Web site leads one to believe Barrett thinks our current high tax rates are otherwise just fine. (Indeed, Barrett makes pejorative reference to “George W. Bush-style tax cuts for the wealthy and the powerful,” which makes one believe that Democrats don’t (1) realize that Bush is running neither for president (2) nor governor and (3) have anything else to run on besides being against Bush.)

There is also the difference between targeted tax cuts being useful to their recipient and targeted tax cuts driving job creation. Businesses will do whatever they can to reduce their tax burden, so if the federal or state government offers a job-related tax credit or tax cut, of course they’ll take it. That does not mean that targeted tax credit or cut was the deciding reason for creating a single job. A job is created because the business needs the employee either for current or confidently anticipated future business.

Republican Mark Neumann has a five-point plan to create jobs by “cutting wasteful government spending, lowering taxes, eliminating regulations, and improving education.” (Point five, by the way, is “Restore trust in government.”) Neumann’s primary opponent, Scott Walker, says only that “The fastest, most effective way to create new jobs is to cut taxes and implement regulatory and fiscal policies that encourage job growth and economic investment.”

One can conclude none of the plans mentioned here are sufficient regardless of their detail or lack thereof. Neither the Case for Bold Action nor Be Bold Wisconsin says very much about economic development outside Milwaukee or Madison. Both seem to call for a statewide approach and statewide implementation, when economic development officials would tell you that a top-down one-size-fits-all approach isn’t necessarily the most effective way to administer economic development programs.

Barrett’s plan is similar to how the Doyle administration has handled economic development — high taxes for all, then redistribute tax proceeds toward favored, for whatever reason, businesses, ignoring the impact of excessive taxes and regulation on every Wisconsin business. (In fact, read through Barrett’s 67-page plan, and one concludes we will get more government and higher taxes just to fund everything Barrett has in mind.)

Neumann’s and Walker’s economic development plans are similar and on the simplistic side. We can all agree that government does too much, but whatever government does (and in the 21st century government is not going to abandon economic development), it needs to do well, and in the case of economic development, certainly better than it’s doing now.

The one thing I’d like to see from Barrett, Neumann and Walker is an economic development scorecard that measures yearly progress, or lack thereof, in various economic development measures, specifically those in which Wisconsin always seems to do poorly in comparison with other states — growth in business starts, employment, personal income, corporate income, venture capital activity, businesses moving into Wisconsin, businesses whose corporate headquarters are in Wisconsin, and so on. Those are the measures by which voters can determine if the candidates’ lofty campaign promises actually make a difference. Those are the measures by which voters can reward, or punish, elected officials come next Election Day.