Meredith Whitney is at it again, scaring the bejesus out of us all. But small businessmen had better pay attention.
I chanced to turn on Bloomberg on June 19 and heard the alarming thoughtfulness of the lovely and pragmatically pessimistic Ms. Whitney. She warns of a new trend that is coming out of California, where it seems many things happen first in the U.S. What she says essentially is that, without radical change, California is going down, both as a state entity and individually in its municipalities. And it may well be a harbinger of things to come for states like NY, IL, and NJ, as well as many individual cities.
Whitney states that businesses in all these big-spending, tax-heavy, government union states are leaving. She feels it is utterly predictable that they will accelerate their exodus, eventually leaving behind economic dead zones—ghost towns and possibly even ghost states marked by a fleeing tax base and falling property values. Says Whitney,
“…businesses are moving. The U.S. economy just has to rebalance itself. So the areas that grew our economy the last 30-50 years are the ones that are the most challenged and struggling right now. So you’re rebalancing that with the center part of the United States that’s booming. So you go to Texas and Oklahoma and North Dakota. Some of these states have very small populations and are getting incredible immigration and emigration from California and high tax zones. Every 60 years or so the U.S. economy reinvents itself. It’s in that process right now regionally.”
The canary in the coal mine of this coming demographic and capital shift is Stockton, California, which has gone bankrupt. The cause and culprit for this donnybrook is basically outrageously over-compensated and rigid pension plans foisted on government by egregiously self-serving public sector unions.
The Wall St. Journal editorial board addressed the Stockton, CA conundrum with some specificity on June 27.
“Pension costs are about 40% of what [Stockton] pays on worker salaries and are growing. The average fire-fighter costs the city about $157,000 a year in pay and benefits and can retire at age 50 with a pension equal to 90% of his highest year’s salary plus nearly free lifetime health benefits….You can’t build a city on debt and retirement checks.”
Those figures are not too far from the retirement compensation levels for teachers, token takers, bus drivers, et. al. in my own native Westchester County, NY.
So what is the relevancy here for the entrepreneur?
Well, as I’ve said before, it makes no sense to bring your business into these hoary old, inefficient bureaucracy and tax laden states. The states that have business friendly policies are doing much better than their benighted brethren. It is pure common sense for entrepreneurs to seek out those states that operate with reason, efficiency, and flexibility—those states that reign in crazy public sector costs and those states that actually like entrepreneurs. States like Texas, North Dakota, Oklahoma, Indiana, and even Florida. Or like Wisconsin, that has been updating its model for two years, resulting in a steady new business flow. Wisconsin’s unemployment has recently dropped to 4.7% while California’s has increased to almost 9%.
My own executive sales outsourcing firm, Corporate Rain International, is based in New York. I will stay here, despite its business climate, for personal reasons. But a younger, earlier stage company than mine should think long and hard about residing or incorporating in any state or municipality with an inefficient, anti-diluvian attitude toward business and public sector unions. It is too easy to increase taxes and bureaucracy on us (small business) when the money runs out, as surely it will—as evidenced by California’s ghost towns like Stockton and Vallejo, as well as Detroit, Harrisburg, and many others in the ghost town pipeline. That list will grow substantially in our brave new world of forced austerity and macroeconomic tentativity. (If you are interested in more on this topic scroll back for posts on 5/17/11, 4/26/11, 4/13/10.)
As Thomas Jefferson said, “Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.” (Letter-3/17/1814)
Thank you Thomas.