Can the Nation's Mayors Save the Federal Government from Itself?

The press has planted a phrase in our heads – dysfunctional government.  It’s hardly a phrase the man on the street would invent.  Yet, it has overtaken the economy as voters’ biggest concern.  Sounds like a problem we should try to solve, doesn’t it?

There’s a central truth to this issue that most are missing.  The government was designed to be dysfunctional.  If you were designing a system to function efficiently, would you come up with this?

Indeed, if one were to design a government system to function efficiently, one might choose the British Westminster system.  In the UK, elections can be called at irregular intervals to throw the bums out and the leader of the party who achieves a majority appoints the ministers (from among those elected) who run the bureaus of government.

No separation of powers, no process of advice and consent, no oversight committees or any of the other nonsense that clogs up the works in D.C.

In the midst of all this federal Sturm and Drang, many states have stepped into the breach.  And, why shouldn’t they?  In a nation that is geographically larger than all of Europe, it makes sense that we would have diverse cultures with different values.  Continental Europe certainly does.

Former Indiana Governor Mitch Daniels forged a new path by selling some of the state’s assets – including highways -- to pay down their debt and balance their budget without raising taxes.  It was a bold move.  What can we learn from Indiana’s experience?

In California, new/old Governor Jerry Brown chose a different direction.  He raised taxes on the wealthy to address the state’s budget issues. Unlike Indiana, California benefits from thriving entertainment and technology industries and geographically important seaports like Long Beach and Oakland.  A recovering economy has boosted state revenues and balanced the budget.  The very wealthy haven’t abandoned the state to move to Indiana or even to Arizona or Texas.

Texas pursues a different model.  A no-income tax state, it benefits from a booming energy industry and low costs of living and doing business.  Want to move from high-tax states like California, Illinois or New York?  No problem.  You’ll be welcomed. 

That Texas and California can pursue such different models and both thrive is an expression of the diversity of our economy.  There’s no need for the federal government to be involved.

Last June’s Supreme Court ruling allowed each state to make its own decision about gay marriage.  And, each state is doing so.  Easy?  For some yes and for others no.  But, the decisions made at a local level are more likely to reflect local values.

Mississippi will never have it.  Vermont always will.

Contrast that to the 40-year-old Supreme Court ruling on abortion.  Proponents and opponents are still marching in the streets. 

Enter the nation’s mayors. 

More than 80% of the population now lives in or near a big city.  So, our mayors are likely to have an increasing impact on society.

Many focus on economic development.  Denver has established a Business Incentive Fund that has attracted large national companies like Southwest Airlines to its environs.  Raleigh, NC has a well-educated workforce and has attracted financial companies like Fidelity, Credit Suisse and MetLife.  Seattle benefits from a resurgent Boeing and has also attracted technology companies like Amazon and Google to build new operations there. 

But, it’s not all about economics.  Cities may also serve as laboratories for social experiments. New York’s new mayor, Bill de Blasio, ran on a platform of taxing the rich to fund universal pre-K.  If he receives the necessary support of the state government, we’ll get to see if that experiment works before liberals in Washington take a crack at it.  Will Wall Street big shots relocate their HQ’s to White Plains, Princeton or Greenwich?  It will be interesting to find out, won’t it?

Seattle’s city government considers raising the minimum wage to $15 per hour.  Will the rise in incomes lift local businesses and cause the city to thrive or will it drive out local employers who reckon they can’t carry that burden? Will Seattleites be buying Tex-Mex from Taco Bell or from Burrito Box?

Conservatives point to the first principles of economic freedom as drivers of prosperity.  The elected governments of California and Seattle have chosen a different direction.  Liberals see the divergent incomes at the top and bottom of the economic ladder as a challenge they must address directly.  The elected governments of Indiana and Texas have chosen a different direction. 

I don’t know about you.  But, I would rather see how these many experiments work on a small scale before imposing them on the entire nation. 

The accretion of special interest lobbying and its impact on the federal taxes and regulations violate Americans’ sense of fair play.  The decentralization of American governance can only serve to make elected officials more responsive to the electorate and the results better aligned with our values and beliefs.  The folks in Washington will not endeavor to slow the momentum of our central government.  Change must be driven from outside the system and it’s more likely to be driven by political, social and economic forces at play in our states and cities than by those who pretend to represent us in Washington.

WHO WILL LEAD?

The Land of Perfect Weather

I knew where I was flying to of course.  But, even if I hadn’t, I got my first clue when I stopped to buy a bottle of water in the airline concourse.  Ten percent sales tax!  I must be in California, the land of perfect weather…  and high taxes.

I have written about the "has-been" state before.  A study by the Federal Reserve Bank of San Francisco revealed that California’s non-farm employment growth has lagged that of low tax, low cost states like Texas substantially.  The bank’s president said, “Economies of states ranked high on tax-and-cost indexes [meaning lower taxes and costs]…  tended to grow faster than the states ranked lower”.

California is not alone as a high cost state.  On my recent visit to the Finger Lakes region of NY, I watched CNBC diva Maria Bartiroma emcee the presentation of over $700M in state government grants to developers throughout the state.  Presumably, these are projects that did not offer sufficient return to attract private capital.  The Finger Lakes (western NY) garnered the largest share, $96M, which was cheered by local business leaders – you know, those free market Republicans who don’t like government interference.  Those I spoke with pointed out that the region got none of last year’s freebies.  As for the free market?  “Well, they’re going to give it away anyhow.  At least we got our share,” said one.

New York has the highest amount of public debt per capita in the country, over $13,000 for every man, woman and child who lives in the state.  It’s a shame that no one thought of the option of keeping $700M in the state treasury and either lowering taxes or paying off some debt.

Meanwhile, Californians are headed for the exits.  Despite high tax rates, state revenues are falling and Spectrum Location Solutions, a company that tracks corporate relocations, has documented over 250 corporate departures last year.   In addition, they have cited a loss of more than 15% of financial services jobs in both Los Angeles and San Francisco that have been transferred to other states.  In fact, all of our high cost, high tax traditional financial centers – New York and Chicago in addition to the two California cities – are losing such jobs according to a report by Moody Analytics.

Meanwhile, states like bordering Arizona are targeting California companies to convince them to relocate to their low-cost, low-tax state.  But, they may be late to the party.  The US Census Bureau reported that California’s coastal cities – San Francisco, Los Angeles and San Diego – have lost over 2.3M people people since the turn of the century.   The Orange County Register cited high cost of living, high taxes and onerous business regulation as the key drivers of the trend.  To make matters worse, the state has passed a new land use law (SB375) that will force people to live in densely populated areas to reduce sprawl and pollution.  The law requires housing density of at least 20 units per acre and easy access to mass transit.

The tyranny of a one party government – no matter the party or which government – generally leads to folly.  In the case of California, the folly is Blue State utopia.

Well, at least the weather is great.

What’s NEXT for Florida? Ask Alex Sink

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Alex Sink

I love former politicians.  They learn to fly once their political parties no longer tether them to the ground.  In the case of Alex Sink, it’s more like soaring than flying.  Ms. Sink is the former CFO of the State of Florida and ran an unsuccessful campaign for governor two years ago.  Before politics, she was a banker and a really good one at that.  She enjoyed a reputation as someone who truly got to know her clients’ business.

With that as a background, it surprised no one when she founded the Florida NEXT Foundation last year.  It’s mission?  To “empower young people, entrepreneurs and small businesses so they can drive the innovation needed to enhance Florida’s economy and quality of life”.

I had the pleasure of hosting a luncheon at which Alex was in attendance last week along with my partners at The SCA Group. The attendees included business owners, professionals and executives.  It was interesting to watch Alex hold court.  Like all great leaders, she listens more than she talks.

We had a far ranging conversation covering education, business incubation and, most of all, how we keep our best talent from relocating to another state. 

This last topic was of great interest to one of our guests, Dan Madden.  Dan is COO/CIO of Lake Worth based Eastern Metal Supply.  He is also a Ph.D. candidate at Nova Southeastern University and is in the process of founding a non-profit of his own.  The “95 Research Corridor Alliance” would nurture technology businesses in Southeast Florida.

With everything he is involved with, I wondered why he would make time for this new initiative.  “Because I don’t want to have to travel to Texas or California to visit my kids when they graduate from college,” he told me. 

Those are two very interesting states when you think of nurturing business.  California, of course, is home to Silicon Valley, highly concentrated with venture capitalists and tech entrepreneurs.  Texas’ claim to fame in this regard is Austin, home to the University of Texas and a burgeoning tech incubator in its own right. 

But, beyond that, the two states are very different.  California – the Golden State – has been a center of innovation and cultural leadership for over a century.  But, the emphasis here should be on the words “has been”.  A recent report of the Federal Reserve Bank of San Francisco concluded, “economies of states ranked high on tax-and-cost indexes [meaning lower taxes and costs]…  tended to grow faster than the states ranked lower”. 

Meanwhile, low tax and low cost Texas – with its low propensity to provide social services and quality public education – is thriving.  Now, before you conclude it’s all because of oil, I’ll tell you that the Dallas Federal Reserve Bank has reported that only 2.4% of Texas employment is in the oil and gas industry.  And, Texas’ job growth has been more than triple that of California over the last 20 years.

So, how should Florida respond to Dan Madden’s desire to keep his kids closer to home?  Should we become California with its first class public schools and infrastructure?  Or Texas with its 19^th Century pioneer spirit? 

Well, my answer is neither.  We shouldn’t pursue job growth so single-mindedly that we sacrifice efforts to improve public education.  The workforce of the future will be better educated than past or even current employees or else they’ll be waiting tables.

In other words, the fundamentals of attracting businesses and high content jobs to Florida are low cost and low taxes coupled with a well-educated workforce.  In a micro sense, Dan Madden’s 95 Research Corridor Alliance is focused on incubating businesses, especially high technology businesses – info, bio or nano.  In the macro sense, Alex Sink’s Florida NEXT is about mixing the right cocktail of entrepreneurial energy, government policy and infrastructure. 

Florida is a small business state.  In the tri-county area that makes up the Miami metropolis, there are about 3000 businesses with more than $10 Million annual revenue.  Of those, only 300 exceed $100 Million. 

We keep hearing that small businesses drive job growth and that’s true.  But, it’s not universally true.  A November report by McKinsey & Company identified the top tier of job creators by industry – heavy construction, social services, industrial instrumentation, chemicals and utilities.  So, should Florida focus on attracting those industries?  And, how should we take into account the wave of mobile technology that is destroying jobs in airports, publishing and banking?  What jobs will be created?  What companies will thrive?

Whatever the answers are – and, I don’t think there is only one right answer – the LEADERSHIP provided by both Ms. Sink and Mr. Madden will be critical to our success.