The Cost of Doing Business in America

October 31, 2011

By Michael Hendrix, Research Manager

Every year the World Bank releases its Doing Business report, a collection of rankings aimed at putting a number to every factor a business must take into account when trying to “do business” and comparing that figure across countries.  Increasingly, with the release of every new report America has found itself lower and lower on some portion of the list.

Lest we panic too quickly, America is still a tremendous place to start and run a company.  Barring only three – Singapore, Hong Kong, and New Zealand – the US sits at the top of the overall country list.  The specifics tell a different story though.  We are ranked 72nd in the world in “paying taxes”, meaning that the cost and hassle of our corporate tax system is stifling business in the eyes of the World Bank.  Who else is ahead of us?  Practically the entire developed world, as well as others such as Afghanistan and Cambodia.  According to The Economist, America’s “tax code is as simple to understand as a thesis on post-structuralism translated into Klingon.”

“Trading across borders” is also an area in which America holds rather dismal rankings – 20th at last count.  With the passage of three free trade agreements, it is easy to think that American firms can trade with relative impunity.  It is true that tariffs are on the wane, but note that the World Bank includes trade facilitation issues in its ranking, meaning that it looks at the red tape a business must cut through in order to trade.  In short, rules matter to the World Bank and ours are becoming onerous.

Other concerns are small, but growing.  Take the cost of starting a business.  In 2004, the World Bank judged that it cost 0.7% of income per capita to get a firm off the ground.  Today, that number practically doubled to 1.4%, and with this rising trend our rankings have also fallen.

The World Bank may well be doing us a favor by highlighting growing areas of concern for business in America.  It is far too easy for commentators in a country as big as America to compare our performance only to ourselves.   That is a recipe for complacency.  The World Bank has the ability to step back, line us up against other countries, and figure out whether the fundamentals of our economy are as strong as we like to think they are.

It is also tempting to take any piece of data and project onto it our own visions of where America is failing, a surprisingly common pastime for an optimistic country.  The truth is that America’s fundamentals remain strong on average.  And on average, everything changes eventually.  These rankings will deserve a watchful eye in the coming years.

Immigration & American Competitiveness: The Education Imperative

October 27, 2011

The National Chamber Foundation recently hosted New York City Mayor Michael Bloomberg, US Citizenship and Immigration Services Director Alejandro Mayorkas, and a set of esteemed panelists to discuss high-skilled immigration and American competitiveness.

One of those panelists was Dr. Alfredo Quinones-Hinojosa (also known as “Dr. Q”), a brain surgeon and professor at The Johns Hopkins University and their Bayview Medical Center.  Dr. Q is internationally renowned for his groundbreaking work on the brain, and is currently directing a team of researchers in finding a cure for brain cancer.  He was himself an immigrant once, illegal at that, who went on to graduate from Harvard Medical School.

Check out the video below to hear Dr. Q speak on an issue near and dear to him and his work:

A Both/And Proposition for America’s Small Businesses

October 26, 2011

By Michael Hendrix, Research Manager

The Gallup Group recently released a survey that begins with the following title: “Gov’t Regulations at Top of Small-Business Owners’ Problem.” What’s always interesting about data though is that it tells a complex story.  As Adam Ozimek at Modeled Behavior points out, small businesses are worried about a whole range of issues, politics included.

When small businesses were asked what their top concerns were, sure enough, at the top of the list were government regulations.  Look at what also comes up on the list.  Points like poor cash flow, as well as (or because of) low consumer demand and the declining availability of credit.  Look too at the next question, where some 36% of small businesses say that they are worried about going out of business soon.

Ozimek puts the Gallup survey side-by-side with the most recent report from the National Federation of Independent Businesses (NFIB) on Small Business Optimism.  What he finds is that low demand may be a more important problem for small businesses than the Gallup survey highlights.  Far more businesses in the NFIB report cited “poor sales” as a problem today (28%) than Gallup let on to (12% targeted low consumer demand as an issue for Gallup) primarily because Gallup created a new category of “consumer confidence.”  Put together the 12% of businesses seeing anemic demand and the 15% lacking confidence and you get the same picture as the NFIB.  That is, demand is stagnant and businesses are as scared as consumers are.

Unfortunately, Ozimek chooses to again rank business’ concerns just after he artfully dissembles them.  He goes on to point out that when businesses were asked what they would want to see in order that they may thrive, they point to economic indicators like growing sales, improved consumer confidence, and (surprise) a better economy.  He concludes that businesses are far more interested in spurring demand than cutting regulations or improving the ease of doing business.  I would offer instead that it’s not an either/or proposition for business.  Both must occur.  Moreover, it doesn’t seem surprising to me that when a business is asked what will make them prosperous, they choose answers like “growth and sales increases.”  Having “better tax laws,” as one choice in the survey states, isn’t always immediately connected to the day-to-day of running a business.  Make no mistake though; taxes cost firms and consumers real dollars that really matter, and never more so in the bigger picture.

As we look for the ingredients of growth in America, let’s not forget that it’s a two-sided coin.  We need producers and we need purchasers.  We need job creators and we need good regulators.  It’s not either/or.  It’s both/and.

High-Skilled Immigration: Enterprise and Innovation

October 24, 2011

The National Chamber Foundation recently hosted New York City Mayor Michael Bloomberg, US Citizenship and Immigration Services Director Alejandro Mayorkas, and a set of esteemed panelists to discuss high-skilled immigration and American competitiveness.

One of those panelists was Stephen Fleming, a Vice President at Georgia Tech who manages their Enterprise Innovation Institute.  The Institute helps enterprises improve their competitiveness through the application of science, technology and innovation.  In the video below, Fleming offers his own take on the high-skilled immigration issue:

In Budget Fight, Don’t Sacrifice the Rule of Law

October 24, 2011

By Nick Schulz, NCF Scholar

As the so-called Congressional Super-Committee (SC) looks at ways to tackle the nation’s long run budget challenges it is being bombarded with suggestions from Capitol Hill.  One suggestion calls on the SC to eliminate tax subsidies for major energy companies. As someone who is generally opposed to subsidies, let me explain why this move is a very bad idea.

The subsidies in question are currently offered to domestic manufacturers of all kinds; energy majors are just a small number of those firms subject to the provision. The proposed change would eliminate this tax treatment for energy majors but leave it in place for other manufacturers.

As my colleague Alan Viard has noted, singling out big American energy firms for this kind of treatment is abusive and a “glaring violation of the rule of law.” If the rule of law means anything it is equal treatment under the law.  Yet, the proposed change of tax treatment singles out a small handful of firms for disparate tax treatment that is not applied to other similar firms.

Make no mistake, broadening the tax base is sensible policy, especially when the base broadening is coupled with lowered tax rates. Nevertheless, the spiteful campaign against one slice of American industry simply because it happens to be unpopular with some members of Congress is injurious to one of the nation’s most crucial and valuable intangible assets – the rule of law and equal treatment under the law. The potential economic harm that can result from weakening the rule of law is difficult to understate.

Blog Posts Driving the Debate

October 21, 2011

NCF curates a weekly list of blog posts that touch on emerging issues affecting the American business community.

The Atlantic is going on a road trip in search of the Silicon Valley of America’s South.  They want to know what the region is doing right and whether other places can equally develop the sort of innovation that seems to be popping up in cities like Richmond and Chattanooga.  ”Perhaps other regions can recreate the success of Silicon Valley at a smaller scale, bringing together researchers, young talent, lots of ideas, a risk-taking culture, and venture capital to drive economic growth.”

Nate Silver’s FiveThirtyEight blog mapped out the protests of the past few weeks, trying to see where they arose and how many attended.  His findings might surprise you.

America truly has a love afar with entrepreneurs.  The go-getters and risk-takers, a throwback to the frontier spirit that informed America’s creation story.  Established businesses though are built on simultaneously fostering an innovative spirit and maintaining the status quo, and quite often it’s the latter that wins out.  David Shaywitz wrote at The Atlantic that while it’s understandable that older businesses want creative destruction, just without the destruction, we should still look to emulate the spirit and drive of our entrepreneurs.

Laura Tyson, formerly of President Clinton’s Council of Economic Advisors, called for infrastructure investment in the Economix blog.

Phil Izzo at The Wall Street Journal asked, “Which states are poised for growth?”  The state with the greatest population growth, it would seem.

The tyrant has met his demise.  Colonel Qaddafi (Ghadafi, Khadafi, or any of the 112 versions of his name) is dead.  Reza Jan at AEI’s The American laid out the five key questions that will influence the future of Libya.  What will the fighting, governance, legitimacy, tribes, and disarmament process look like now?

For this week’s wonky blog post, I’d like to turn your attention to a post called “Islands at the Speed of Light,” which summarizes a paper arguing for what is effectively quantum trading.  Financial profit is more about speed today than it is (assuming it ever was) about smarts.   With trades zipping about at the speed of light, distance and computational power are theoretically the only limits to outpacing the competition.  Or are they?  It appears that we have forgotten about quantum theory.  If trading centers were built at particular spots on earth opposite major trading hubs, they could exploit arbitrage opportunities exposed by the “past light cone” of particular trades (see below).  What does that mean?  We know that a flash of light travels across space and time.  We also know that there are particular actions which taken over a set period of time come together to create that flash.  The circular boundary encompassing those causes of the flash gradually contracts as time moves forward, as fewer and fewer actions have the ability to influence the flash.  That contracting circle forms a cone as times marches on until it reaches E – the event, that flash of light signaling a trade.  At that point, nothing can move fast enough to influence E — it’s already happening.   C’est la vie.  Not if you locate yourself in that past light cone though.  The light cone is directional, so if you find the right spot you can fit your own action into the contracting cone of time and influence the outcome of trades at the opposite side of the world.  An instant arbitrage opportunity.  So, if you were wondering what financial innovators would come up with next, I give you “quantum derivatives.”

Source: Wikimedia Commons

The Productivity Curse

October 21, 2011

By Michael Hendrix, Research Manager

Have we become too productive?  If there’s any question that seems least apt amidst the global economic downturn, it’s this one.  Yet, take a look at any chart on employment and you’re bound to worry that something larger, more fundamental is afoot.  As Bill Davidow argues in The Atlantic, skilled and unskilled alike are now strapped to the pitiless logic of a hyper-productive assembly line.  Moore’s Law famously dictated the relentless doubling of computer processing power every two years.  Technological growth is in turn making us so productive that what you and I create is becoming indistinguishable from the work of others.  The result, according to Davidow, is that our work is fast become a near commodity: useful, replaceable, and cheap.

After the worst of 2009 was past, America’s productivity carved a steep path back up to its previous heights and beyond.  Employment, on the other hand, stayed comatose (note the chart above).  Why hire more workers if a smaller number can do more than enough to meet demand?  That is the employment challenge we face today.

Davidow faced a similar situation when he used to work at Intel.  Intel was getting so good at making semiconductors – and the technology so refined – that the productivity of its workers was rising far faster than demand.  At the same time, the cost of each processor was dropping precipitously.  As a result, in Intel’s best years it still found itself having to lay off workers.  They had become “commodity workers.”

“If worker productivity is growing at an exponential rate and lots of new facilities are being built, we are at the point where commodity worker output can easily exceed the demand. If factory workers become more productive as a result of technological advances, fewer workers will be needed in each factory. When that occurs, the price for commodity work should decline, just as the price for transistors did. If this comes to pass, commodity workers will find themselves producing more and more units of output — clothes, consumer electronics, washing machines, the handling of customer questions, etc. — and being paid less and less for each one they produce.”

Knowledge workers are starting to feel like Lucille Ball on the assembly line too.

“Of course, those of us with unique skills should not be feeling too smug.  After all, a lot of what we do — answering emails, cleaning up our inboxes, following large numbers of bloggers to stay informed, and maintaining our pages on social networks — is commodity work as well.  These are all chores we have to do to stay relevant. The value of doing those commodity chores is dropping as well and so to maintain our current salary, we have to run faster as well.”

The fact that we are more capable than ever at working and that the cost of consumer goods has fallen should be very positive news – and it is.  We must consider though the brave new world we work in.  Just as companies closely examine their brand identity and the uniqueness of the products they offer in an increasingly competitive world, so should we in the labor market.  Productivity is a factor of physical and human capital as well as technology and institutions.  The answer to innovation and technological change then is to embrace it in a way that adds value to our unique work.  Only then will you and I avoid the productivity curse.

Chamber: “Wisconsin’s Winning Ways”

October 19, 2011

Yesterday on ChamberPost, Sean Hackbarth took a moment to highlight a critical study that NCF had the honor of spearheading.  Click through to ChamberPost here, or keep reading below:

“Over the past few years, I’ve been a spoiled Wisconsin sports fan. The Wisconsin Badgers went to the Rose Bowl this year and are one of the top teams in college football. The Wisconsin Women’s Hockey team won a national title. The Milwaukee Brewers had their best season ever and were two wins away from going to the World Series. And the highlight of it all was the Green Bay Packers winning another Super Bowl title.

Wisconsin’s winning ways has extended to its economy. A National Chamber Foundation report, Growing Wisconsin, released today as part an event recognizing the 100th anniversary of the Wisconsin Manufacturers and Commerce, found that a strong manufacturing sector–33% of the state’s economy–and exports have powered job growth. “Wisconsin ranks 19th in seasonally adjusted job growth in the first seven months of the year, with a growth rate one third higher than the national rate,” the report states.

Wisconsin’s economic progress can be attributed to streamlined government, tax incentives, and regulatory reform. The report notes that policymakers moved to a new “public-private economic development partnership” used in states such as Wyoming, Virginia, and Utah. Job-creating tax credits and tax incentives to bring businesses into Wisconsin were passed by the state legislature. Also, the executive branch has exercised its authority to “review and reject proposed administrative rules” and has ensured that proposed regulations undergo an economic impact analysis.

Margaret Spellings, executive vice president of the National Chamber Foundation noted, “Wisconsin has made tremendous progress improving its business climate, particularly in the first six months of 2011 when the state passed major regulatory reform, tax relief, and lawsuit reforms. But Wisconsin needs to continue to focus on lowering the tax burden for employers, controlling regulations and ensure the manufacturing sector is protected and promoted.”

Doing that will make my home state as successful economically as it has been on the field.”

The City Triumphant

October 18, 2011

By Michael Hendrix, Research Manager

National Journal recently hosted with the Gallup Group a CEO-level summit on the future of the American economy.  In reviewing what was discussed, I first highlighted the dual needs for jobs and education in America.  This time around I am looking at the role of cities in driving innovation and growth.

To the surprise of some in the beltway, there are cities outside of DC that have crafted successful growth models.  As Gallup CEO James Clifton said, the U.S. job creation machine isn’t monolithic.  The growth variation within and among American cities is incredible.  Just compare Detroit, once a hallmark of industry, and Silicon Valley, today’s innovation hotbed.  Clifton’s take-away?  ”Cities [that] are taking care of themselves are doing well.”

What makes places like Silicon Valley and Omaha work?  In short, location, cooperation, and education. As Ryan Avent has put it, “Cities aren’t simply a collection of raw human talent. Instead, they’re the processing power embodied in the conversation that talent conducts.” A dense city that’s full of talent and connected to the rest of the world has a lot of things going for it.  A study by Edward Glaeser and Giacomo Ponzetto showed that cities full of highly skilled individuals benefited disproportionately from the decreases in the cost of transportation and communication that have been the hallmark of the past 20 or so years.

Leaders throughout the public sector should look at what’s working in America’s cities now and support it (or at least not kill it).  Unfortunately, many keep looking to DC for answers.  In truth, city leaders need to take the reins for themselves and build the human and institutional processing capacity that will make their cities, and America, prosperous.

If you want to read more on the role of cities in innovation, I’d recommend three sources.  First, Stephen Smith just joined Forbes to write on this very issue within the context of the politics, economics, and history of urbanism.  Second, The Atlantic magazine started a project called The Atlantic Cities to explore “the most innovative ideas and pressing issues facing today’s global cities and neighborhoods.”  Finally, Ryan Avent of The Economist wrote a short e-book called The Gated City, a resource also mentioned above, in which he looks at how urban innovation rests on providing opportunity and a high quality of life for an oft-forgotten middle class.

In the “Underbelly of Despair,” A Reason for Hope: Education

October 17, 2011

By Michael Hendrix, Research Manager

National Journal recently hosted a CEO-level summit, together with the Gallup Group, on the future of the American economy.  The event highlighted a lot of the fruitful discussion occurring across the country as we try to figure out how to get our economy growing again.

The first issue that arose was two-fold: the relationship between job creation and education.  The second, local-level innovation, will be covered in a subsequent post.

As James Clifton, CEO of Gallup, strikingly put it, there are some 1.8 billion people in the world today who want a real job and can’t get one.  He believes that this will be a defining feature of future social conflicts.  In America specifically, some 18.5% of the population is underemployed, and approximately 60% of those individuals have no hope of ever finding a real job.  Each of us are at least one degree removed from these long-term unemployed.

America is united around the “pinched nerve” of jobs, but disagree on the solutions.  This is where Alex Karp, CEO of Palantir Technologies, stepped in and said that the answer is for America is to educate like we’re the best in the world, which we are.  While I am a proud graduate of a Scottish university myself, the recently released 2011 Academic Ranking of World Universities (ARWU) bears out the fact that most of the world’s finest institutions of higher education are in fact found on our shores.  People want to identify with something valuable, he said, and education is it.  Unfortunately, too many Americans are either not taking advantage of the educational resources available to them or are finding that these courses are not relevant to the needs of employers. Offering viable routes for technical or vocational education, rather than relying solely on four-year degree programs, would be a useful first step to encouraging higher rates of completion (as Germany has shown).  Colleges in turn should collaborate more with the private sector to insure that their students are being taught knowledge and skills equally relevant to their respective degree program and their intended career path.

If education should be the focus for renewing America’s economy for the long term, what should be taught and how?  The panelists agreed that we have to give people the ability to do technical things, and that means that educators should emphasize cognitive skills at an early age.  In our increasingly skilled economy, math and science knowledge are critical to master.  Interestingly, Karp made the point that math and science aren’t skills per se; they’re more like languages, which must be taught and repeatedly reviewed from an early age onward.  Math and science then become important building blocks for children’s development and future competitiveness, no matter their ultimate career.

Another critical element is to identify and nurture those who have an entrepreneurial spirit.  As Senator Mark Begich (D-AK) later pointed out, we are far too programmed right now in our lives and learning.  Not only is creativity lacking in the classroom, but we’ve mastered the process of finding someone’s intelligence quotient while totally missing how to identify a child’s entrepreneurial quotient.  Clifton noted that only 3 in every 1000 people have this raw ability, and that finding and fostering these individuals is critical to our nation’s future job growth.

Noted journalist Michael Hirsh began the program by saying that in today’s America “there’s a deep underbelly of despair.”  It would appear that education remains our hope for the future.