Cincinnti Business Enviroment Continued

This post if a follow up to yesterday's post on how a better business climate leads to growth. This isn't always an obvious relationship. Increasing taxes and regulation don’t necessarily have a huge impact on growth right away. Proctor and Gamble will not move suddenly because of poor government, even if state taxes increase 30% tomorrow. But, they may start to shift jobs out of town. Yet, in the short-run, bad policies really tend to stifle innovation and make it harder for entrepreneurs who are competing nationally and internationally. Remember when there used to be a bunch of tech start-ups in Over the Rhine? Not any more; the business environment in Cincinnati is becoming less conducive to that type of start-up.

...When people get angry about offices moving to West Chester, they should stop and consider why that's taking place - economic policies more encouraging of growth. Why else would you move out to the boondocks?


In the long-run, bad tax and regulatory policies will also have a big effect when companies are making strategic decisions. NCR’s recent move from Dayton to Georgia was based on expected improved productivity in their new location. When companies are merging you can see this also. Cinergy/Duke and Star Bank/US Bank both decided during mergers to move their headquarters out of Cincinnati. They've both moved to states with better business and regulatory environments. Fifth Third is often mentioned as a merger target. Cincinnati should be very worried about that possibility and potential job shock. Better yet, they should try to turn Cincinnati into the obvious choice for new headquarters. Unfortunately, local policies are causing a significant loss of good jobs and talented workers in Cincinnati, contributing to a brain drain.

Ohio is stuck with some institutions that will continue to be a drag on growth (legacy unions and the labor laws they have pushed through). No doubt also contributing to Ohio's poor business climate, was the 2006 election of Ted Strickland (who favors the U.S. leaving the World Trade Organization) as governor, and the perceived anti-market attitude of his administration. However, stuck though it is in Ohio, Cincinnati can do some things to improve competitiveness.

According to Chief Executive Magazine, business leaders most highly prize low tax rates and perceived attitudes toward business, followed by living environment considerations, such as real estate costs and education. These are considerations that ultimately lead to better business productivity. In the long-term, more productive companies are more successful, grow, and hire more people. This is how a region grows economically.

Based on the concern of this study (and also my biased perspective), if the city wants to grow, it's priorities should be:

1.) Improve local education
2.) Reduce and improve regulation (UrbanCincy has a great post on this today)
3.) Rationalize the transportation system
4.) Improve public safety and perceptions of safety
5.) Improved the perceived attitude of city council towards business
6.) Maybe even reduce taxes.


I would say the top three issues handled by Cincinnati City Council in recents years have been:
1.) The police layoffs.
2.) The issuance of significant debt to pay for a 3.9-mile streetcar system / cuts in bus service.
3.) Kroger executives being yelled at by city council for the seemingly obvious business decision of closing an unprofitable store.

It's simple to set the right goals on what the city should be doing. The politics of making it happen is the tough part. The general move right now appears to be further in the wrong direction, contributing to Cincinnati's relative decline along with the state.

Ohio's Business Climate and Growth Prospects

Chief Executive Magazine publishes yearly rankings of the Best and Worst States for Business. This study surveys over 600 CEOs for their views on a wide range of criteria. Ohio has been on a slide in recent years and is now down to 44th in this year's ranking. According to the authors, CEOs most value low tax rates and perceived attitudes toward business, followed by living environment considerations, such as real estate costs and education.

Predictably, business environment appears to be very a good predictor of population and economic growth for states. Texas ranked as the best state for business in this survey, while New York and California were at the bottom of the list. The authors of the study explain that Texas has also had the biggest net gain in population of any state over the last ten year while California lost 1.5 million and New York had a net loss of over 1.6 million - the highest of any state. Also, "High-tax, big-government New Jersey ranked fourth (in population loss), with a net loss of almost 460,000."

I wanted to see how well this trend holds up. So, below I've put together the changes in population of the top ten states and the bottom ten from these rankings.*

The Best States for Business:


The Worst States for Business:

As you can see, there's a strong correlation between business climate and growth. The data show that every one of the states in the top ten for business climate has outperformed every state in the bottom ten. I find California's mediocre performance particularly startling. The state has everything going for them, with amazing real-estate, the Silicon Valley cluster (!), and even significant immigration due to their position on the border. Nonetheless, California had been outperformed due outmigration from the state, largely due to the hostile business climate.

Here is a summary of the overall trend:



So, the ten states with the best business climate have seen the bulk of the United States' growth in the 2000s.

The authors argue simple out-migration trends actually underestimate the significance of business climate: “The political elites in the states that dismiss out-migration trends overlook the radical demographic adjustment underway. As higher-income earners leave, they are more often replaced by those with lower incomes and lower skills, many needing public assistance. Gone too are the entrepreneurs and risk-takers, off seeking regions where their job creating abilities are rewarded.”

I'm planning a follow up post to explore this problem a little more. But for now, let me say that I believe the most important challenge for Ohio today is to move up on this type of list.

*Note: I used the overall change in population not the net migration that Chief Executive used. This is simply because census population numbers were simply easier to find in a usable form.

Friday Links

Here's my semi-regular post on a few notable links that I've flagged but decided not to turn into full posts:

1. As Cincinnati is now dealing with these regulations, here's Flex Salmon on Why do minimum parking requirements still exist? He's at a loss to come up with a good reason. But, here's a good quote from Tom Vandebilt:

“[I]f all of the vehicles in the county were removed from garages, driveways, and all of the roads and residential streets and they were parked in parking lots at the same time, there would still be 83,000 unused spaces throughout the county.”

We don't see all the costs on these parking regulation, but "everyone, even those who don’t drive, pays for it in one form or another, whether the invisible parking surcharge is built into retail prices or the various costs associated with parking-lot storm-water runoff" and also worse architecture... This is a needless and destructive regulation. Cincinnati is wisely rolling it back, but thus far only for those who are lucky enough to own land within 600 feet of the proposed streetcar route.

2. An underreported but very important ongoing development - "The most recent survey by the Consumer Reports National Research Center found that five-year-old vehicles had about one-third fewer problems than the five-year-old vehicles we studied in April 2005." The rate of problems in cars falling by a third in five years in huge. Robin Hanson comments:

"Most people are surprised to hear that the world economy doubles roughly every fifteen years; when they think back fifteen years, the world doesn’t seem that different. Besides a few big changes, most things seem pretty similar. But this is illusory – most change happens behind the scenes. In fact, one of the reasons why change can be so fast is that most of it happens behind the scenes."

I view this as a relevant point for Cincinnati's streetcar plans. Streetcars are less efficient than auto alternatives right now. But, technology also keeps improving and at a faster rate than we realize. So, it's a mistake to lock in a bad 30 year transportation plan. And, this will become much more 5-10 years from now when we are still paying the bill for the streetcar capital investment, while buses are increasingly more reliable and efficient.

3. Our Conservative Democratic Governor Ted Strickland signed new casino rules legislation. The simple thing to do on gambling would have been for the state just to legalize it with certain regulations. Then anyone could conceivably open a casino if they met certain requires. We would have equal rights and an efficient allocation of casinos. Instead, there are by legislation exactly four pieces of land in the state that can house a casino and certain people granted the privileges to develop that land - A rather questionable set up. So, it's not entirely unexpected that the government created Casino special interests, slipped into the rules an income tax deduction for gambling losses. This is expected to cost the state $60 to $80 million in taxes per year.

To put it another way, the state just passed a $60 to $80 million gambling subsidy. ...This is just bad government. Try to remember it when you vote this November.

4. Reason Magazine has a rather hackish post on the Cincinnati Streetcar, which I nonetheless link to. An outsider's opinion is valuable. They don't see the streetcar turning Cincinnati into another Portland. ...Maybe another Cleveland.

5. The Business Courier informs us that Washington Park was apparently built on top of a cemetery. They include a list of people who are still buried under the park, incuding William Lytle and James Findley. Creepy...

Update 7/6 - Quimbob informs that at least some people have been relocated. No need to fear being haunted by early Cincinnatians now.

Enjoy your 4th of July Weekend.