New Report: Enterprising Cities -- Regulatory Climate Index 2014

Cities are the engines of economic growth and prosperity in the United States. Our urban economies thrive on innovation, expansion of small businesses, and entrepreneurship. Our economic achievement is inherently tied to a legal infrastructure and regulatory environment that is sensible for entrepreneurs and small businesses. ndp | analytics and the U.S. Chamber of Commerce Foundation are proud to release the Enterprising Cities: Regulatory Climate Index 2014 (the Index), which compares and ranks the efficiency of local regulations applying to small businesses in ten cities across the United States. 

The Index measures three components (number of procedures, time, and costs) that are required to comply with five areas of business regulation in each city. The Index assesses the areas of starting a business, dealing with construction permits, registering property, paying taxes, and enforcing contracts. The results act as a barometer for the overall business environment and point to areas where reform is necessary for competitiveness. 

The main results of the study are:

Among the 10 cities in the 2014 Index, the most efficient cities across all 5 areas of business regulation are Dallas and St. Louis. The cities of Raleigh, Boston, Atlanta, and Detroit have moderate levels of regulatory efficiency. Chicago, Los Angeles, San Francisco, and New York City have the least efficient regulatory environments.

There are sizable variations in the design, practice, and costs to fulfill basic regulatory requirements for small businesses. Geographical and historical influences seem to account for much of this variance. The basic regulatory steps for opening and operating a business remain relatively similar across the cities measured. In recent years, these places have begun to adopt smarter business regulations and to streamline bureaucracies; however, the scope for improving their business environments remains significant.

Each city evaluated has its own clear strengths and weaknesses. For example, Los Angeles and San Francisco have the best practices for opening a business, yet both cities have the highest requirements and costs to obtain construction permits. St. Louis has the best practice for the registration of properties but scores below average in enforcing contracts. Chicago ranks highly for enforcing contracts while ranking lower for starting a business. 

All cities provide small businesses with information and materials to comply with their regulations. Yet the websites and publications are often disorganized, missing information, or unclear to third parties. Few cities provide detailed information on the procedures, expected waiting time, and administrative costs for construction permits. Overall, no city provides comprehensive information. 

At a time when America’s entrepreneurial dynamism is in decline, the costs of housing in our cities is soaring, and governments are challenging the existence of transformative companies, this project is more important than ever. The ease of doing business in America’s cities will help determine the future of America’s economic growth. The success of these places depends on improving existing regulatory processes, simplifying application and compliance with local laws, and trimming the barriers to entry for entrepreneurs.

Sorry, China Is Not The World’s Largest Economy

Mainstream media has the American public aghast at a recent report from the World Bank claiming China is poised to take over the United States as the world’s largest economy. Of course, this is not exactly true. Measuring economic performance goes beyond simple measures of GDP, PPP, and per capita income—something that is obviously missing from the World Bank report. China still has a ways to go to give the United States serious contention as the world’s greatest economic power.

There are considerable issues with trying to use Purchasing Power Parity (PPP) to compare the sizes of world economies. The concept of PPP is useful for domestic policymakers to evaluate the relative prices of non-tradable goods and services within their country. But, it’s not exactly a true barometer of economic prosperity. For example, as the Wall Street Journal points out, China cannot buy missiles, ships, iPhones, German cars, or any other imported goods, at PPP exchange rates. When standard GDP exchange rates are used rather than PPP, China’s economy is only half of the size of the U.S. economy. When population is taken into account and factoring PPP measures of GDP, China’s economy is only ranked 99th in the world. Most of the Chinese population is still relatively poor.

Beyond these technical problems, the future of the Chinese economy is less bright when China’s major long-term economic weaknesses are taken into account. There are many essential factors China lacks that will prevent the country from experiencing the sustained, broadly-based economic growth that developed countries such as the U.S. experience. It is well-established among economists that institutions are the fundamental determinants of long-term economic growth.

The United States and other advanced economies have well-developed, transparent, and accountable political institutions that have implemented laws and policies which favor trade, innovation, and competitiveness. For that reason, developed economies are the most connected to the global economy. While Chinese policy leaders have attempted to foster innovation to spur domestic sources of economic growth, they lack these institutions, which allow Chinese citizens to become entrepreneurs. It is this top-down approach that will ultimately limit the innovativeness of the Chinese economy, and why the U.S. economy continues to be driven by bottom-up sources of innovation

The Adverse Effects of Reducing the Mortgage Interest Deduction

Tax reform is on the table, again. The mortgage-interest deduction (MID), as expected, continues to be a contentious issue for policymakers. In his latest proposal, Rep. Dave Camp (R-MI) calls to reduce the limit on qualified home mortgages for MID to $500,000 of principal from the current level of $1 million. While the prospects for a complete overhaul of the tax system are unlikely before the 2014 midterm elections, understanding issues like the MID are important for future debates.

The Wall Street Journal’s recent piece on the MID helps explain the divergent policy perspectives on the deduction as a policy instrument. The Brookings Institution argues that the MID needs to be revamped or replaced. Brookings argues that homeownership in the U.S. is not higher than those in other developed countries who do not have the MID. On the opposite side, the Hudson Institute provides another perspective that supports the benefits of the MID. The Hudson Institute points out that it’s incomplete to just compare the MID in the U.S. and other developed economies to analyze the homeownership. For example, while the United Kingdom and Canada do not specifically have the MID, they do have specific policies that encourage overall homeownership.

While the jury is still out on the magnitude of the impacts of the MID, the elimination or reduction of the MID will affect the real estate markets, millions of American homeowners and renters, and ultimately the health of the U.S. economy. The elimination or reduction of the MID is an equivalence of a tax hike policy that will affect the purchasing power of homeowners and renters negatively. When the component of housing expenditure increases, the negative income effects will reduce purchases of other items across all income groups.

Since housing expenditures make up a larger share of total household expenditures of the middle-income than higher-income groups, the relative values of the MID are in fact larger for the middle-income groups. Under the current U.S. tax code, the MID can only be claimed if a taxpayer itemizes their deductions. The limit of the mortgage principal might need to be expanded, and not reduced, to benefit the lower-income groups who do not itemize their tax filings. Policymakers must understand and measure the potential short- and long-term impacts of the elimination of the MID on the housing market and broader economy before tax reform passes through Congress.

MyRA Is Laudable, But Won't Produce Grand Returns

One of the more interesting policy proposals from President Obama’s sixth State of the Union address was the announcement of an executive order directing the Treasury Department to create MyRA—a government backed savings account. The details of MyRA are pretty straight forward: the plan offers American workers a savings account with low interest rates for whose employers do not offer traditional retirement savings plans.

Here’s the skinny via Nick Summers at Bloomberg Businessweek: "The accounts are intended for workers whose employers don’t offer 401(k) accounts, and they can be started with as little as $25; contributions after that can be as low as $5, withdrawn automatically from their paychecks; and earnings on the investments—U.S. government bonds—would be tax-free, like a Roth IRA."

And Lydia DePillis in the Washington Post notes, "The MyRA option would create an cheaper way for smaller employers to enroll their workers in some sort of plan, by taking an automatic payroll deduction that goes into a Roth IRA-style, government-backed account with the employee's name on it."

The plan has its advantages in encouraging meaningful long-term savings for retirement. The proposal is indeed ambitious and well-intentioned, but unlikely to significantly boost overall retirement savings of American workers. As a financial product targeted at lower- to moderate-income individuals, the incentives—other than retirement savings and protection of the principal balance—are weak. Since MyRA is a Roth plan, the contributions are not tax-deductible, which eliminates some incentives for savings.

Last year, we released a report detailing the contributions of the financial services industry to the U.S. retirement savings system. Overall, the current U.S. retirement savings system has proven to be successful, with participation and retirement assets both rising steadily over time. While the overall savings rate has dropped, more than two-thirds of American households have accumulated $19.2 trillion in retirement assets. Presently, the U.S. currently lags many OECD countries in terms of level of savings in private retirement savings plans (adjusted by country GDP):

Private Retirement Savings OECD 2011.png

President Obama’s plan may achieve success by helping ordinary Americans start a meaningful savings account, but it’s not going to produce a sea change of in the way that Americans plan for retirement. It may work in the short-run to prop up participation in general retirement savings, but over the long-term there must be meaningful policy changes to induce increases in general retirement savings rates. The U.S. retirement savings system has proven to work. Policymakers, plan sponsors, and service providers should work together to implement additional measures to strengthen this system beyond the small steps of myRA. These successes should be built upon with policies that further incentivize retirement savings for all economic and demographic groups. Ensuring America's small businesses are able to offer plans that are cost-effective is of great importance.