To help small businesses, lawmakers should loosen regulations
This week is National Small Business Week. And to celebrate small businesses, a bunch of events have been planned around this topic in Minnesota. As the Department of Employment and…
This week, it was announced that US News had ranked Minnesota the 2nd best state in America. State policymakers were quick to crow. Gov. Walz put out this press release:
Steve Grove, Commissioner of the Department of Employment and Economic Development, tweeted:
In fact, a closer look at the US News rankings suggests otherwise.
These rankings are constructed from a number of components, one of which is ‘Economy,’ on which Minnesota ranks 15th. This, in turn, is made up of three components: ‘Business Environment’ (on which we rank 20th), ‘Employment’ (9th), and ‘Growth’ (18th). How are these constructed?
‘Business Environment’ contains the following:
Business Creation Rate
This metric from the Bureau of Labor Statistics evaluates the rate at which new businesses were formed between the first quarter of 2018 and the first quarter of 2020. It examines the private sector and is seasonally adjusted.
On this measure, Minnesota ranks 37th.
Patent Creation Rate
This measures the number of patents the U.S. Patent and Trademark Office grants annually by state. States were ranked on the average number of patents granted between 2017 and 2019 per million residents. Included in the counts are utility patents – or those for invention – as well as design, plant and reissue patents.
On this measure, Minnesota ranks 5th.
Low Tax Burden
This metric measures total state and local taxes from 2017 – including corporate income, personal income, sales and more – as a percentage of total state income, according to the U.S. Census Bureau’s Survey of State and Local Government. At 7.2%, Alaska has the lowest tax burden, followed by Tennessee.
On this measure, Minnesota ranks 45th.
Top Company Headquarters
This measures the number of top company headquarters per million residents in each state in 2020. Top companies are pulled from Fortune magazine’s list of the 1,000 top revenue-generating companies – known as the Fortune 1000 – and population data is from the U.S. Census Bureau.
On this measure, Minnesota ranks 8th.
This measures venture capital dollars invested in each state per $1,000 of nominal state gross domestic product in 2020. Venture capital data is from PwC/CB Insights MoneyTree™ Report, while gross domestic product data is from the U.S. Bureau of Economic Analysis. Massachusetts and California boasted the most venture capital investment, while Alaska, Mississippi and West Virginia had the least.
On this measure, Minnesota again ranks 8th.
‘Employment’ contains the following:
This metric evaluates the compound annual growth rate of jobs over a three-year period between 2016 and 2019 by measuring the number of civilian, noninstitutional individuals employed. It uses data from the Bureau of Labor Statistics. and the number of jobs created each year. Only four states boasted a growth rate of more than 3%: Arizona, Nevada, Colorado and Idaho. Conversely, four states – Alaska, Hawaii, North Dakota and Wyoming – had negative growth rates.
On this measure, Minnesota ranks 25th.
Labor Force Participation
This assesses the percentage of state residents age 16 or older who participated in the labor force, including all people classified as employed, unemployed or in the armed forces, in 2019, according to data from the U.S. Census Bureau. The national labor force participation rate was about 63%, going up to 71% in North Dakota and down to about 54% in West Virginia.
On this measure, Minnesota ranks 4th.
Low Unemployment Rate
The Bureau of Labor Statistics measures the percentage of the labor force that was unemployed each month. This data uses the annual summary for 2019. North Dakota and Vermont boasted the lowest unemployment rates for the year, while Alaska and Mississippi had the highest. Nationally, the unemployment rate was 3.7%.
On this measure, Minnesota ranks 17th.
‘Growth’ contains the following:
This metric measures the three-year compound annual growth rate of real gross domestic product by state in millions of chained 2012 dollars, or dollars that have been adjusted for inflation to allow for year-to-year comparison. It captures trends from 2016 to 2019, according to data from the Bureau of Economic Analysis. While the gross domestic product of some states grew by more than 4%, it shrunk for others.
On this measure, Minnesota ranks 23rd.
Growth of Young Population
Young people drive the economy forward, creating a symbiotic relationship between a state’s economic growth and innovativeness and its ability to attract and retain members of younger generations. This metric assesses the three-year compound annual growth rate of the total population age 25 to 29 between 2016 and 2019, using estimates from the U.S. Census Bureau’s American Community Survey.
On this measure, Minnesota ranks 14th.
This evaluates the three-year average of net migration to and from a state – both international and domestic – as a percentage of the state population, using data from the U.S. Census Bureau. A positive figure indicates that more people entered the state than left, while a negative figure signals that more people left the state than entered between 2017 and 2019. Fifteen states experienced more emigration than immigration, while Idaho and Nevada saw their populations grow 1.5%.
On this measure, Minnesota ranks 19th.
The bottom line
This underlines the fact that these ‘studies’ have to be interrogated much more closely than they usually are. An impressive headline number can mask a more complex story.
That is the case here. Minnesota is a wonderful state, that is why I moved 4,000 miles to live here, but its economy is only ‘meh’. Indeed, it is acting as a drag in this list.
And what does this ranking tell us about Minnesota’s economic policy? Little good. All the measures which go into the ‘Economy’ category, like Business Creation Rate, Job Growth, or GDP Growth, are measures of outputs or results of state policy, among other things: the state government cannot dictate them, it can only influence them. The only one of the measures over which the state government has direct control is Low Tax Burden, and there we rank a lowly 45th (and no, that isn’t why we rank so highly overall).
The policymakers crowing about this ranking should look more closely at it: the state’s economy is dragging it down and state fiscal policy is one of the culprits.
John Phelan is an economist at the Center of the American Experiment.