So you want to start a business
Economic freedom allows people to buy, sell, invest and use their property to pursue life goals. Many Americans aspire to exercise this freedom to start a business. Where someone wants to open this new business makes a big difference for the burden of government licenses, regulations and taxes.
The Center for the Study of Economic Liberty at Arizona State University’s Doing Business in North America report sheds light on this. The study extends the World Bank’s Doing Business project. The ASU study measures things like the number of approvals necessary to open a business and restrictions on hiring or firing workers.
The study focuses on barriers facing small and medium businesses, the types of firms which entrepreneurs start and try to grow. Most of these government rules are well-intended and likely beneficial. Still, failure to get proper permissions could at least temporarily shut down a new business.
The study tracks 63 different provisions for 115 cities across the U.S., Canada and Mexico, including Birmingham for Alabama. The World Bank project includes only New York and Los Angeles in the U.S. For economists studying economic freedom, Doing Business North America explores how business regulation varies across states.
The index includes six categories: starting a business, employing workers, getting electricity, registering property, paying taxes, and resolving uncertainty. Bankruptcy is as important as starting a business or hiring because many new businesses fail. Indeed, many eventually successful entrepreneurs initially fail, like Henry Ford. If entrepreneurs cannot get a fresh start, they may never put the lessons learned from failure to use.
Cities’ scores range from 0 (worst) and 100 (best). A city with the best policy on each component would get a score of 100, while a city with the worst policy on each would score 0. A score of 60 is roughly 60% of the best policies.
The U.S. and Canada are two of the world’s freest economies according to the Fraser Institute, while Mexico ranks 76th. Not surprisingly then, the 39 Mexican cities rated occupy the lowest ranks. Although the U.S. and Canada have similar national economic freedom scores, the top American cities outrank Canadian cities; Canada’s top city, Halifax, ranks 53rd.
Across America, Oklahoma City ranks first with a score of 85, or about 15% off the best policies on average. Arlington, Virginia, Sioux Falls, Boise and Atlanta round out the top five. San Francisco is America’s lowest ranked city (77th) with a score of 59.
Birmingham places 22nd with a score of nearly 80. Birmingham’s business environment is much closer to Oklahoma City’s than San Francisco’s. Its highest ranks are in the bankruptcy (tied with many cities for 1st), employment, and taxes categories, with its lowest ranks in starting a business and electricity. How do other Alabama cities compare to Birmingham? The Johnson Center is working with the Center for the Study of Economic Liberty on this.
The impact of legal and regulatory burdens likely depends on an entrepreneur’s background. Many Americans can navigate rules; we know that things like building permits and business licenses exist and how to get them. We know how to hire a lawyer or accountant if needed. Americans with lower incomes and less formal education are often unfamiliar with legal compliance. Even reasonable rules restrict their economic opportunities and possibly deprive us of their innovative ideas.
The biggest limitation in measuring economic and business freedom, I think, involves uncertainty about obtaining permission. Some permits require significant paperwork and processing time but will eventually be issued. Permits for things like liquor licenses and new construction are granted by public boards subject to citizen pressure. Political pushback can be hard to predict. The difficulty of quantifying such uncertainty about securing permission limits measuring the full burden on entrepreneurs.
Entrepreneurs create the new products, services and innovations that increase our prosperity. Thankfully, freedom to start a business and succeed or fail based on your merits still exists in much of America.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.