CNN.com's slideshow on the "10 Best States for Starting a Business" determines its rankings on the basis of five variables: personal income tax rate, corporate income tax rate, property tax rate, electricity cost, and minimum wage. South Dakota comes in first. But The American Prospect's Tim Fernholz doesn't really buy these metrics, which he notes are largely based on minimal government intrusion.
Fernholz argues that the communities best suited to opening a new business are the ones where a significant government presence -- whether it's military contracts, public universities, or solid tech infrastructure -- provides some special, business-friendly environment. That's part of why there's so much business in major cities like New York or San Francisco but so little business in, say, the wind-swept Dakota plains.
Not to knock any of those fine states, but there's a reason we don't necessarily think of those states as business meccas, and it's because there's more to making a profit than avoiding government interference. In fact, government interference is often helpful.
Why did Silicon Valley emerge as a top business center? The U.S. Navy established a research site there and the Department of Defense provided a good deal of initial funding for tech research, Stanford University made a point of encouraging high-tech start-ups, and public universities like San Jose State supplied a stream of engineers. Other things that make for good business: Available financing, transportation and technological infrastructure, well-trained employees, a large customer base and prospects for economic growth. Those states that don't bother businesses with rules and levies are also those that might be missing all those other factors.
CNN calls Washington, D.C. one of the worst places to start a business, but by and large the city's business has thrived during the recession thanks to its proximity to government -- it's main unemployment problems come from long-standing structural inequality in race and education.Ultimately, the different conclusions reached by Fernholz and CNN.com are about ideology. Fernholz, who is liberal, sees government as being able to provide an environment that is beneficial to innovation and growth. CNN.com's writer, Malika Worrall, who kicks off the list by writing "Attention libertarians," clearly sees government as a burden on industry. So who is right?