Business Climate in NJ - Sunny

For the masochists who are not content with 5 word headlines. Enjoy reading the thousands of words I amassed to describe why Doug Forrester's dismal view of New Jersey's affinity for business is in a word...

WRONG

As promised I have delved a bit into both the Entrepreneur piece and the Beacon Hill study cited by Doug Forrester in his poopy descriptions of the current NJ business climate.

Let's compare Entrepreur's apples to Forrester's apples and see if one of them is an orange.

First off, who did the research:

The Entrepreneur piece is based on research done by the National Policy Research Council whose mission statement claims:

is a non-partisan think tank dedicated to serving state and local policymakers. We were founded on the principle that governments, and those who run them, face unique challenges and constraints that require equally unique solutions. We understand that while state and local officials can perform many functions on their own, in today's increasingly complex society they need access to highly specialized resources, both to perform those functions for which they lack the capabilities and to enhance their existing capacities and processes.

Our mission is to develop, enhance and sustain our clients' capacity to carry out their public policy functions more efficiently and effectively. Relying on our core values and expert professionals, we provide Frontier Solutions to today's most challenging policy issues.

Best of the Brightest
We are committed to hiring only the best of the brightest people from premier institutions across the globe. Our entry-level professionals are recruited from a small group of top tier universities. Our mid-career professionals come from leading consulting companies, think tanks, and law firms.

Timely, Accurate & Objective
We maintain a steadfast dedication to delivering timely, accurate, objective offerings based on the most current available data and exhaustive research. It is doubtful that any company commits as much resources to safeguarding these essential values as we do.

Their mission statement alone is lengthier and more comprehensive than that belonging to the Beacon Hill Institute:

Grounded in the principles of limited government, fiscal responsibility and free markets, the Beacon Hill Institute engages in rigorous economic research and conducts educational programs for the purpose of producing and disseminating readable analyses of current public policy issues to voters, taxpayers, opinion leaders and policy makers.

Statement of Vision
The Beacon Hill Institute is a world-renowned learning and research center that develops and performs innovative economic and statistical analyses of current and emerging public policy issues. It aims to strengthen that function by: providing local, state, national and international research entities with state-of-the-art tools and economic analyses, partnering with a PhD granting department of economics, and expanding its reputation for providing objective analysis to examine and influence public policy.

So in terms of partisanship of the think tank, we have a non-partisan vs. an openly conservative think tank. Statements like "world renowned" always inspire skepticism in my mind. In any case, a research center that provides the Federal Government with research on a regular basis, tends to hold more water, than a think tank that I have never heard about. However, name recognition does not equate quality... So I will give this little weight in determining which study is the most credible.

Methodology is much more important in making a judgement of credibility between 2 studies. One obvious difference is the age of the studies. The NPRC study is current as of this year, whereas the Beacon Hill study is from 2004. Typically, a more recent study is given points for credibility.

Also worth noting, the NPRC study costs $60 dollars, which is a pittance for Doug Forrester, but too much for me to dole out for a simple blogpost. So I will have to glean from the Entrepreneur article regarding their methodology.

To the credit of Beacon Hill, their study is free. In summary, their methods involve the following indices which they claim measure competitiveness:

Government and fiscal Properties (tax rates and bond ratings)
Security (crime and corruption in government)
Infrastructure (commuting, broadband availability, housing prices, and energy costs)
Human Resources (price, skill, and availability of labor force)Technology (research funding, patents issued, proportion of scientists and engineers in the work force, and high tech companies)
Business Innovation (rate of business births)
Openness (exports, and # of immigrants)
Environmental Policy (degree of environmental regulation)

Now for NPRC's Methods:

To measure business formation, researchers identify the percentage of businesses started four to 14 years ago and that employ five or more workers today. (Researchers ignore newer firms because it takes several years for new businesses to appear in national databases.) Areas then receive a rank based on that information, and this rank appears in the Young Company column. This rank represents the best places to start a new business.

To determine growth, researchers then measure the percentage of those young businesses that have experienced rapid growth over the last four years. That rank appears in the Rapid Growth column. This rank represents the best places to grow a business.

By combining the Young Company rank and the Rapid Growth rank, researchers calculate an overall Entrepreneurial Rank--the best places to start and grow a business. An area must have a large number of young businesses and be able to support their growth to achieve a high overall score. The full listing includes 276 small, midsize and large consolidated metropolitan statistical areas, 50 states and 784 counties.

So basically, we have an apples and oranges comparison to some degree here. The NPRC study is based on outcomes, whereas Beacon Hill is based on incomes (in the data sense). This is a major distinction and is probably responsible for the disparity of the results for New Jersey (and perhaps other states). I am a realist and if you want to rank a state as good to business, I like the NPRC's approach better. I realize that their approach is simpler, but it takes a larger scope in terms of time (10 years) in order to perhaps compensate for the simplicity. Either way, the fact is that Jersey businesses grew faster than almost any other state's businesses (save for Arizona) despite Beacon Hill's attempt to predict the opposite.

Any business wants to grow, and they want to grow fast. The whole point of owning a business is to make more money, and th emore money you make, the more success you have. Prospect of growth is a huge factor when looking for a location.

Beacon Hill's use of government corruption, and diversity of the workforce are questionable when it comes to rating a state's business attractiveness. While Corruption may reduce the bond rating of a state, (as has occured in NJ) it only affects state sponsored businesses, in terms of perhaps fewer federal dollars trickling in to the state. So government contract based businesses may not like states like that, however, I think most businesses depend on the free market and not the government (though I am starting to see why Forrester likes this study so much).

Also diversity. What bearing does that have in attracting businesses? If anything the more immigrants a state has, the more it can attract a business willing to exploit the immigrant workforce of said state. Is that the kind of business Doug Forrester wants to attract to New Jersey?

What about flaws?

Not having the complete methods and data set for both studies, as well as not being an expert on economical studies, limits me in determining flaws (if any) exhist in either study. However, I did find some (perhaps significant) flaws in the Beacon Hill study. This is largely due to the quantity of variables in the Beacon Hill study. As with anything, the more moving parts, the more likely they wont work in concert.

Now the Beacon Hill study methods go on to mention how their formula for calculating Competitiveness is largely dependent on per capita income. The per capita income is also a part of their human resource calculation and if the price of the workforce (in salry terms) is high, presumeably, the human resource score is low. New Jersey is well known to have the highest average per capita income. The Beacon Hill Study ranks NJ 20 in terms of Human resource scale. However, this is all besides the point.

The main indices that bring NJ down in the Beacon Hill study are Government and fiscal Policy (rank 49), Infrastructure (49), and environmental policy (50). If NJ's environmental policy is so "tough" why are we ranked numero uno in terms of toxic waste dumps Superfund sites? Despite its shortcommings, government and fiscal policy did not have an effect on the growth of business as described in the NPRC study.

As for Infrastructure, commuting times, rent costs, and energy costs are what drove that index down for NJ. Somehow, high-speed (communications) lines are placed in this category (where NJ's ranking is #2) instead of the technology category (where NJ ranks 26th).

So yes, I believe the Beacon Hill study is flawed, perhaps not in its indices per say, but the fact that it is not outcomes based makes it less credible.

For a man with "an accountant's penchant for detail" and "a passion for minutiae" (as the NYTimes put it), it seems rather odd that Doug Forrester would pick this study with its various flaws over other more credible studies.

To me, the NPRC study featured in Entrepreneur magazine, is simply more credible due to its outcomes based analysis, its simplicity, and its large temporal scope. Entrepreneur expanded on the numbers as well, and elaborates on why NJ is so great for business:

"New Jersey is the state with the highest population density and the highest [household] income," says Hopper. "That means we have a lot of people here who spend a lot of money." The state boasts world-class colleges, including Princeton University, and its profoundly developed land, sea and air facilities make it a magnet for transportation service firms. New York City and Philadelphia also offer opportunities for small firms to provide back-office operations to those cities' sizable financial service industries, Hopper says.

New Jersey remains congested--Newark's 31.5-minute average commute time ranks behind only Chicago and New York City--but as long as it retains its strategic position between East Coast population centers, the state is likely to continue to be one of the best places for entrepreneurs to tap into the country's richest markets.

Ms. Hopper from the Newark Small Business Development Center sums it up with the most basic of phrases. She reminds Beacon Hill, NPRC, Doug Forrester, and even myself that despite data dredging, and think tank analysis, consumption drives economies. With its "rich", and numerous population, New Jersey can safely claim a high place in entrepreneurial hearts for a long time to come.