When Forbes magazine’s annual ranking of “Best States for Business” placed our state in ninth position, some Minnesotans started patting themselves on the back.
Others scratched their heads because warnings about a supposed hostile “business climate” have been a staple of Minnesota politics for years.
If we have such a lousy environment for business, why would a noted business magazine, a self-proclaimed “capitalist tool,” place us ahead of 41 other states? Many of these lower 41 are cited by some politicians as competitors that are eating our lunch because they are more business-friendly. What gives?
The first thing is to remember that rankings such as this involve subjective judgments. The various criteria used and the relative weight given each is arbitrary.
So take such rankings with a grain of salt, whether done by Forbes, a personal-finance publication like Kiplinger’s, an NGO like Transparency International or even a quasi-government body like the World Bank.
This doesn’t mean these are worthless. If Minnesota falls in the Top 10 and Mississippi in the Bottom 10, there probably is something to that. Similarly, if Denmark is near the top in a ranking of freedom from government corruption in Europe and Bulgaria near the bottom, that reflects an actual state of affairs.
Don’t place too much emphasis on fine gradations, however. And understand that different businesses have different needs. So what may be generally true overall will not necessarily apply to any specific company.
North Dakota ranks second in the Forbes survey, apparently because of high ratings for “growth prospects” and “economic climate.” Neighboring South Dakota ranks 14th overall because of much lower rankings on those variables.
Are they that different?
Forbes factored the recent rate of economic growth into both these composite categories. Because of explosive growth in its oil patch, largely in the western third of the state, North Dakota’s growth recently has out-stripped South Dakota’s. But dozens of businesses probably would do just as well in Sioux Falls as in Grand Forks, despite the rankings.
A second lesson is that, whether you agree or not with Forbes’ selection of 36 specific indicators and the relative weight for each, overall prospects for business depend on myriad factors. And while some of these hinge on discretionary public policies, others don’t. Those who fret that Minnesota has an adverse business climate usually focus first on taxes and then on levels of regulation.
One can quantify tax burdens in terms of marginal income tax rates for households and businesses or the percentage of personal or business income paid in taxes. The Tax Foundation, a conservative and highly respected research institution in Washington, D.C., has done this for years. Forbes incorporates Tax Foundation data into its rankings. It is an important component of their “business cost” rubric and that grouping is the most important of six overall.
Minnesota is a high tax state and does not do well in Tax Foundation rankings. That has to weigh against it in Forbes’ tabulation, yet our state does well overall. That is due in great part to the magazine’s “Quality of Life” composite, which includes poverty rates, education test scores, health indicators, another guru’s score for “culture and recreation opportunities” and the number of four-year colleges. Minnesota does well in all of these.
Despite chronic grumping about Minnesota’s onerous regulation of economic activity, Forbes gives it a better rating for “Regulatory Environment” than our neighbor South Dakota and 27 other states. That is partly because Forbes includes transportation infrastructure in this group.
South Dakota does have less business regulation. Many of their state roads now seem better than ours, which was not true in the past. But they don’t have a major airport, barge transportation, a seaport or even railroads radiating in as many directions. So they lose out on transportation.
Some will see that as an example of the considerations in deciding where to locate a new business or in the profitability of an existing one. Others will see it merely as an example of how arbitrary judgments in tabulating some magazine’s ranking can create the impression of an important difference when none exists for most companies.
Access to a hub international airport is important to the headquarters of a multinational corporation. But it isn’t to a mid-sized metal stamping or fabricating company. The Port of Duluth and the Mississippi River are important for commodities businesses, but not for those writing accounting software.
Being able to attend professional sports games, a fine orchestra or good professional theater is a plus for knowledge-based biomedical firms. And it is a plus for residents in most stations of life. People in Mankato who only have to drive 90 miles for a Wild game, SPCO concert or Guthrie play do have more cultural and recreational opportunities than those in Aberdeen, S.D., 200 miles further away. But is there really much difference between the quality of life in Marshall, Minn., versus Huron, S.D., a similar town 120 miles to the west, that would make it harder or easier to hire good workers?
There are economies of scale in some state functions. North Dakota and South Dakota have public universities where one can get a fine education. But such states with populations of 800,000 cannot afford a major research university like Minnesota’s. And the graduate education and research programs at the U have contributed enormously to the high-value-added and high-paying tech sector in Minnesota.
It may be an accident of history that the Mayo brothers founded their clinic in Rochester rather than in Rapid City or Jamestown. But the physical remoteness of those latter towns and their limited transportation options probably would have mitigated against a major medical hub developing, even if the doctors were as skilled and innovative.
The Tax Foundation gives Wyoming its No. 1 spot on terms of “State Business Tax Climate.” And Wyoming’s regulation of business is light indeed compared to Minnesota’s. Yet Forbes places that state 27th overall and 42nd in terms of “Economic Climate.” That a “capitalist tool” would put Minnesota 35 places higher in the second category will make many conservatives in the Legislature shake their heads. Can that be right?
Only time will tell, but I think it is. Twenty years from now, the business sector and household incomes probably will have grown more in our state than in Wyoming. The reasons for that, like Forbes’ tabulation, are complicated and somewhat arbitrary. And they are far broader than the relative tax burdens alone.