Venturing capital, or, If not this, then what?

When people on opposite sides of the ideological divide are skeptical about something, you too should be skeptical. (When they agree on something, you should also be skeptical, but that’s a subject for another day.)

Milwaukee Magazine’s Bruce Murphy and the Milwaukee Journal Sentinel’s Patrick McIlheran are similarly skeptical about the venture capital bill in the Legislature. So is Thomas Hefty, who has for years campaigned for a better business climate in this state.

One reason for our business climate problems is the small amount of venture capital — money invested in companies that usually fit in the “high risk/high reward” investment category. Promoting venture capital was part of nearly every economic development study conducted in 2010 in advance of the election.

The Milwaukee Journal Sentinel reports:

The program is called the Jobs Now Fund and represents part of the $400 million Wisconsin Jobs Act. It aims to jump-start job creation in Wisconsin by promising $200 million in future tax credits in exchange for $250 million raised from insurance companies.

The money would be invested in Wisconsin businesses through management companies known as certified capital companies, or “CAPCOs.” …

In written testimony submitted for the hearing, Tom Hefty, the former chief executive of Blue Cross/Blue Shield of Wisconsin, called the program “the largest special interest Wisconsin tax cut in history masquerading as an economic development initiative.”

The $200 million in tax credits would never have to be repaid to the state. The payback, supporters say, would come from the job creation and business growth that would result from the investments.

There is no question this state needs more business investors. Not only have we lagged the national average in personal income growth for the past three decades, but we are low on business start-ups as well. (And for all the left’s braying about the evil “rich,” Wisconsin has very few people who could be defined as really “rich,” which helps show the state’s economic problems as well. The fact that the really “rich” can be named by those who pay attention to such things shows we don’t have nearly enough of them.) The question is how to encourage business investment, particularly in the fast-growth companies that were meant for venture capital.

Wisconsin Technology Council President Tom Still explains how the bill would work:

 The bill would create two funds totaling $400 million under the umbrella of a new Wisconsin Venture Capital Authority. The complementary funds — the Jobs Now Fund and the Badger Jobs Fund — are designed, respectively, to address Wisconsin’s short-term and long-term investment needs.

The proposal builds on the success of the widely acclaimed and often duplicated Act 255 Tax Credits, which were passed in 2005 and enhanced in 2009. Those tax credits have helped enhance early-stage investing in Wisconsin — but largely at the “angel” capital level, thus creating a need for follow-up investing by venture capital firms in emerging companies.

The credits helped spawn angel networks across Wisconsin, and those networks have dramatically increased both the number of deals and the dollars invested in those deals. But many angels are tapped out. They need “exits” — company mergers, acquisitions or venture investments — to recoup their money. And the companies in which those angels have invested are struggling to survive.

Senate Bill 94 would create the Wisconsin Venture Capital Authority and two funds:

The Jobs Now Fund is envisioned as rapid-response fund. It would issue $200 million in tax credits to insurance companies over time in return for investments in certified capital funds. The tax credits would be for 80% of the value of the investments made, so $200 million in credits could attract $250 million in investments. The credits could not be claimed for a minimum of five years, so the money would be put to work well before the credits are paid. It would invest only in Wisconsin companies that meet specific guidelines. In other states, this approach is called a “certified capital company,” or CAPCO, approach.

The Badger Jobs Fund is the longer-term tool. It would invest in qualified venture capital funds on a “fund of funds” basis. The authority could issue up to $200 million in private placement bonds for the Badger Jobs Fund, with the bonds supported by investment returns, the incremental growth of state tax collections from financed companies and contingent tax credits. Bonds would not be a debt of the state, and no more than 15% of the funds could go to any single venture capital firm. For every $1 a qualified venture capital fund receives from the Badger Jobs Fund, it would need to raise $3 on its own.

Murphy goes so far, commenting on the Journal Sentinel story, as calling the Jobs Now Fund a scam:

… the law allows the CAPCOs to keep all the money invested in them by the state, plus 80 percent of the profits generated.  Critics have called it a “massive corporate giveaway,” [reporter Kathleen Gallagher] writes.

One new point in her story is a Minnesota study of Wisconsin’s earlier CAPCO program, which found that rather than increasing it may have actually displaced the total amount of venture capital funding in Wisconsin. …

The language of the bill is quite convoluted, and most legislators never understand it.  I’d love to hear a detailed explanation of the Wisconsin bill by its sponsors, Sen. Randy Hopper (R-Fond du Lac) and Rep. Gary Tauchen (R-Bonduel).

The CAPCOs have a set game plan and typically grab all the state funding before any real venture capital companies can get a dollar of it. “Local venture capital people often support the bill because they think they’ll get the money,” says [Rutgers University Prof. Sass] Rubin. “But they never do. It’s a con.” …

Rubin cites an earlier law passed in Wisconsin, a 25 percent tax credit for angel investors, as a far more sensible way to go. “It’s just enough money to encourage investment, but you’re not screwing up the market and becoming the only reason they invest.”

Rubin’s aforementioned position happens to dovetail with a previous Murphy column that describes CAPCOs thusly:

Wisconsin previously passed a CAPCO bill in 1998 which created a $50 million venture capital fund.  Normally, experts say, a venture capital fund attracts money from investors, invests it in start-up companies and then returns the principal plus 70 to 80 percent of the profits to the investors. But under the CAPCO model, the state was the investor and got nothing back: None of the profits flowed back to it, and none of the principal was returned.

The state Legislative Audit Bureau found it cost $90,000 per job for that CAPCO program. That’s an outrageous cost, but actually better than the experience in most states. Florida spent $150 million and lost 150 jobs. New York spent $280 million but lost 88 jobs.

A study done for the National Association of Seed and Venture Funds found that state subsidized CAPCOs  gained  “10 times the return” of unsubsidized companies.

One problem is that your favorite lefty (go here and find the list under “Left” for starters) inevitably describes anything that promotes business development, including business investment, as a giveaway for the “rich.” The same people President Obama has been ordering to hire more employees are the same people accused of trying to run the state (the Koch brothers, owners of Georgia–Pacific, one of this state’s largest employers), ruin the state (any business that objects to the overregulation of the Department of Natural Resources), or rob the state (any business person who complains about the state’s tax hell, as in the fourth highest state and local taxes in the U.S.).

Tax credits for business should not be used because businesses should not be taxed on their income. The benefits of a profitable business — employees being paid, customers being served and contributions made to their communities — are sufficient to our society if a business was not taxed on any of its income. And businesses don’t pay taxes anyway; every tax assessed on a business — corporate income taxes, personal property taxes, payroll taxes, and taxes to fund Unemployment Compensation, among others — is part of what the business charges for its products or services. Every dollar of cost government dumps upon a business means one less dollar that can go into employee salaries, into owner dividends (and half the households in this country are in the stock market, directly or indirectly), or back into the business.

McIlheran identifies the specific problem and the general solution:

The plan would offer $200 million in future tax credits to insurers not because anyone likes them but because they’re giant pools of investment money. They’d put up the cash, $250 million, that other management companies would parcel out to entrepreneurs, and the tax credits would ensure they wouldn’t lose their shirts. The credits are a lure, nothing more.

Still, why the special inducements? Why the tax gimmicks, which are what high-tax, regulatory hells offer? Why not stick with the program of making taxes more reasonable generally and regulation more rational for all? Sen. Glenn Grothman called it “the most dubious giveaway I’ve seen since I’ve been in the legislature,” and Tom Hefty, Mr. Business Climate, calls it suspect. Experts get quoted by the Journal Sentinel as saying it’s a deal of dubious worth.

Hit the brakes. Read the prospectus carefully, as they say in those ads, because if forgoing future tax revenue is to be considered an investment in luring capital to Wisconsin start-ups, it isn’t an investment that state lawmakers have spent enough time examining.

The “tax gimmicks, which are what high-tax, regulatory hells offer,” were the preferred approach of the Doyle Administration. They worked well for the companies that were able to take advantage of them. They were better than no tax incentives at all, but the state’s business climate certainly did not improve during the 2000s. Had the state’s business climate improved at all, then the trend of per-capita personal income growth trailing the nation’s, which started during the Patrick Lucey administration (for those ignorant of Wisconsin political history, Lucey was governor in the 1970s), would have ended during the Doyle administration. It hasn’t.

There is also a potential problem with any kind of state-sponsored venture capital approach that has been demonstrated  by the alternative energy industry in the past few years. The Obama administration has offered huge amounts of tax credits to encourage use of wind and solar power and other green energy technology. People and businesses take advantage of the tax credits, and then when they expire, business drops off the face of the earth, so to speak. And one should hesitate when the government anoints a preferred business sector (in the present case, any business with the word “green” in its title), because government operates on politics and not on what is the best potential investment.

I do not believe the proponents of this bill are trying to perpetuate a scam on the state. I think there are reasonable objections to what they propose that are more meaningful than the reflexive anti-business attitude we’ve seen in this state for far too long. It is, for one thing, easier to pass one bill than to pass an entire program, contained within several pieces of legislation, to eliminate business taxes, cut personal income taxes, reduce regulation and defang the regulators. That is what needs to happen in Wisconsin.

To vacation, or to work

My definition of seasons is closer to the meteorological definition than the calendar definition. But not completely.

I have determined that, in Wisconsin at least, summer runs from the Memorial Day weekend to the Labor Day weekend, fall runs from after Labor Day to the Thanksgiving weekend, winter runs from Thanksgiving to Easter, and spring runs from Easter to Memorial Day weekend. (Which means that we had a really, really, really long winter this year, but you knew that already.)

That means that summer is beginning at the end of this week. School is a couple of weeks away from ending for the school year, depending on how many snow days you’ve had.

That brings thoughts of vacation for kids. And for the news media, that brings stories asking why Americans have so little vacation compared with other countries. CNN.com frowns:

Besides a handful of national holidays, the typical American worker bee gets two or three precious weeks off out of a whole year to relax and see the world — much less than what people in many other countries receive.

And even that amount of vacation often comes with strings attached.

Some U.S. companies don’t like employees taking off more than one week at a time. Others expect them to be on call or check their e-mail even when they’re lounging on the beach or taking a hike in the mountains.

(One wonders what CNN’s vacation policy is for its employees.)

This question has economic impact in Wisconsin. The license plates may say “America’s Dairyland,” but tourism is one of the state’s top three employers, and most of that tourism spending is coming up. (For proof, watch Illinois travelers try to navigate around the U.S. 41 construction in Oshkosh this weekend.)

This kind of story presents enormous opportunities for America-bashing among Americans. Someone namedNomadic Matt, writing about why Americans don’t vacation overseas, managed to bash government, the media and ourselves in just two paragraphs:

Americans are just scared of the world. I mean really scared. Maybe even petrified. In this post-9/11 world, Americans have been taught the world is a big scary place. There are terrorists outside every hotel waiting to kidnap you. People don’t like you because you are American. The world is violent. It’s poor. It’s dirty. It’s savage. Canada and Europe are O.K. but, if you go there, they will still be rude to you because you are American. No one likes us.

Even before 9/11, the media created an environment of fear. If it bleeds, it leads right? Prior to 9/11, the media played up violence at home and abroad. Pictures of riots in the foreign streets, threats against Americans, and general violence were all played up to portray a violent and unsafe world. After, 9/11, it only got worse. Politicians now tell us “they hate you” as former NYC mayor, Rudy Guiliani, did during his campaign. It’s US vs. THEM!!!

Those two paragraphs border on parody, but they’re not without some validity. It is true that Americans are much less multilingual than other countries. (Our French foreign exchange student, who leaves today, speaks at least four languages.) Government’s efforts to protect us from the next 9/11 — the Patriot Act, color-coded terrorism warnings, the fourth-degree sexual assault gang known as the Transportation Security Administration — have not made Americans feel safer,  have they? For whatever reason(s), the adventurous spirit that propelled our ancestors to leave their homes for an uncertain future in the New World has been replaced by a desire for familiarity and security, financial and otherwise. (Of course, the prevalent attitude in Europe seems to be that every American has shot at least one other American in the past 12 months, so fear based on ignorance is not unique to this country.)

Americans are accused of believing the world revolves around this country. That’s because … the world doesrevolve around this country, like it or don’t. Combine military, economic and political power, and the U.S. is still number one, like it or don’t. The number of people trying to move to the U.S. far outweighs the number planning on permanently leaving.

Nomadic Matt refrains from America-bashing long enough to point out:

Most family vacations in America are to other parts of America. Why? Because the U.S.A. takes up a whole continent and we have all the world’s environments in our states. Need beaches? Head to Florida. The tropics? Hawaii. Desert? Arizona. The cold Tundra? Alaska. Temperate forests? Washington. This attitude is best summed up by a response I got from a friend in Iowa: “Why would you want to go to Thailand? It’s far and scary. If you want beaches, just go to Florida.” Americans simply don’t see the need to go anywhere else when they can do it all in their country …

One difference between the U.S. and the rest of the world is the latter’s dependence on mass transit. In this country, the largest percentage of vacations are by family car. As much fun as, say, buying a Porsche and opting for European delivery would be, the number of Americans who drive on an overseas vacation is quite low. (Probably due to the stories others will tell you about the quality, or lack thereof, of other countries’ drivers.) So if you travel outside the U.S., you are dependent on the train or bus travel schedule, in addition to the airlines’ travel schedule. (And those who fly on business will tell you the more you fly in the post-9/11 world, the less you like the experience.) A lot of Americans prefer transportation independence.

More generally, part of the reason Americans vacation less, I believe, is genetic, believe it or not. Our ancestors came to this country to better themselves. Those Europeans then and Latin Americans,  Asians and other minorities now who come here believe they will have better lives here than where they came from. What that does equal? Work, including more than one job in many cases. Those not interested in improving their lives (perhaps because they felt their lives were pretty good anyway) never came here.

Related is the concept that Americans like to work. One reason to go into business is to make more money (you hope); another is to be more in charge of your own destiny. Another is to be able to do what businesses do in the places where they have facilities — serve their customers, employ people, and contribute to their communities. As the CNN story admits:

Working more makes Americans happier than Europeans, according to a study published recently in the Journal of Happiness Studies. That may be because Americans believe more than Europeans do that hard work is associated with success, wrote Adam Okulicz-Kozaryn, the study’s author and an assistant professor at the University of Texas at Dallas.

“Americans maximize their… [happiness] by working, and Europeans maximize their [happiness] through leisure,” he found.

I assume that part of the harrumphing about us not-enough-time-off Americans has to do with your attitude toward not just work, but your current work situation. (I came to the conclusion that most journalists are anti-business because, well, as a work environment journalism puts the “fun” in “dysfunction,” and journalists probably assume that most workplaces are like theirs.) If you’re not doing what you want to be doing, or if you’re in an undesirable work environment (however you define that), or if you feel undercompensated (however you define that) for your work, then you’d probably prefer to be anywhere else other than work.

One reason I have not been sympathetic to public employee unions in their attempted coup d’etat to reverse the Nov. 2 election results is because of the number of business owners I know. Most businesses don’t have many employees, and making a profit (the most important thing, the thing without which nothing else happens, for any business) is hard. Unlike public-sector employees, business owners’ work hours vastly exceed 40 per week. They work nights and weekends and holidays. Their employees get vacation time; they often don’t, or if they do, they are the ones emailing and calling back to the office.

Another reason for lack of vacationing that parents figure out is the cost, in numerous ways, of vacations. Much, but not all of it, is financial. On the one hand, for parents to go off on their own vacation and leave the kids with someone else seems irresponsible. But given the bickering that takes place among our children on a typical day, to be blunt the idea of listening to their arguing for several days with no alternative outlet for the adults — you can’t tell the kids to go outside when you’re in a van between destinations — doesn’t sound very appealing. (How my parents put up with that with my brother and me is beyond my ability to comprehend.) Even if the kids get along, based our experience from a three-day wedding trip to Indiana last year, American military units have an easier time deploying than our family does going anywhere overnight. Vacations are really for the kids, not the parents; put another way, parents never get real vacations until the kids leave home.

In the current economy, the tourism industry has promoted the concept of a “staycation.” Even before today, I’ve taken weeks of vacation without planning on a major trip. And other than not having to get up to go to work, I can’t endorse the concept, seeing as how that kind of “staycation” inevitably involves doing things you haven’t previously had time to do (usually some kind of house project), or taking the kids someplace you wouldn’t otherwise choose to go.

The stereotypical school summer vacation — days where nothing other than lunch and dinner is on your schedule — is disappearing for kids, too. Those who believe Americans don’t get enough vacation time are countered by those who believe that American students aren’t in school enough. Chinese students are in school about a month longer than Americans, and the Japanese school year runs from April to March (with breaks between trimesters). Throw in where American students’ test scores compare to other countries’ students, and the conclusion is that more time in school would equal better test scores. (That is an assertion not necessarily proven by evidence, similar to the assertion that more money spent on schools is supposed to lead to better results.)

Our kids’ summer schedules include summer school, baseball, Scouting summer camps and trips to grandparents. (All except the first by their choice, I point out.) Wisconsin summers are so short that if I were to travel outside the U.S., I would (1) want it to be during a period of usually crappy weather here (2) in a place that has better weather than here. And that runs smack into school for the kids.

Economists will tell you that there are always trade-offs. Having children is the largest trade-off, a trade-off the scope of which no parent-to-be realizes. That trip where you and your significant other jet-set yourselves through Europe? Not happening in your lifetime, mom and dad. Home ownership is much more valued in this country than in other countries; the trade-off is that frighteningly large number that represents the sum of 360 house payments. And many trade-offs are trade-offs you don’t even realize you’re making at the time. While I would never argue against the value of going to college, there is that matter of post-graduation student debt, which encourages graduates into the work world as soon as possible.

And what if you actually like your work? (I wrote three years ago that you should never love your job, because your job doesn’t love you.) Supposedly on our deathbeds we won’t regret not having working more. But many business owners I’ve met over the years don’t believe they’ve worked a day in their lives; that’s how much they enjoy doing what they do — serving customers, seeing the people they’ve hired grow in their skills and accomplishments, being able to make a positive difference in their communities, and so on. Employment is a two-way street — no one is entitled to a job, and certainly not a particular job; but no employer is entitled to a specific employee either.  Each has to agree to meet the needs of the other; when that doesn’t happen, either an employer excuses an employee from further work, or an employee leaves for a better opportunity.

If you think you get too little vacation time, maybe the problem isn’t in your vacation time, but in your work.

Return to Janesville?

On Wednesday, the Milwaukee Journal Sentinel reported that the United Auto Workers has not given up on convincing General Motors to reopen its Janesville assembly plant.

GM plans to "add or keep 4,000 jobs in the U.S. by hiring new employees or calling back furloughed workers" over the next 18 months. GM plans to spend $2 billion at 17 plants in eight states. Besides Janesville, GM has as options the late Saturn plant in Spring Hill, Tenn. (remember "A new kind of company, a new kind of car?" That turned out to be less than half right), and a Shreveport, La., plant GM had planned to close.

The Janesville closing -- production ended in 2008, and the plant closed in 2010 -- hit a lot of Wisconsinites personally. The father of a high school classmate of mine drove 40 miles one way every day from up the street in Madison to Janesville to work at GM. We owned a Janesville-built Chevrolet Caprice, which lasted more than 130,000 miles at a time when hitting 100,000 miles was a big accomplishment. Manufacturing is obviously a big part of Wisconsin's economy, and car manufacturing in particular has a certain status that manufacturing of other things doesn't have. So the closing of the Janesville GM facility and the Kenosha Chrysler engine plant, both in 2010, felt bad, whether or not it made business sense.

That last sentence is the first of several questions that come to mind. Back in 2008, Catherine Madden of Global Insight, said GM "simply has too many facilities in the system, if you look at where its [declining] market share is today."

It's been apparent for many years that GM's main problem was not the quality of its cars, but the quality, or lack thereof, of its P&Ls. Through their combination of sales incentives, loss leaders (as in small cars) and the few vehicles on which they made money -- in GM's case, pickup trucks and SUVs and, interestingly, the Corvette -- the Big Three sought to make money on volume, a formula that only worked as long as the automakers had a lot of sales volume. That formula fell apart in 2008, leading to GM's bankruptcy and Chrysler's sale to Fiat.

If any automaker is to make money in the future, it will have to do by building fewer vehicles more profitably. Big Three cars used to have a reputation for poor quality. (Unfortunately, I can attest to that in at least two cases.) Poor build quality has been substantially reduced, in part through design and in part through improvements in manufacturing quality. That means cars last longer, so people replace them less often. The profit-through-volume model runs out of gas when that happens.
 

Lakeshore Laments doubts GM's profitability:

Would I like to see Janesville re-open?  Absolutely, but I seriously wonder if GM has the capability, not to mention the revenue and cash flow from its post-bankruptcy operations to make re-opening Janesville a possibility instead of a pipe dream. Simply put, a lot of GM's numbers are not adding up.

A review of quarterly GM 10Q SEC filings reveals that, over the past six months, GM's cash and cash equivalents has gone down from $27.5 billion at the end of 3rd quarter 2010 to $21 billion at the end of 1st quarter 2011. GM continuing its old habits of burning money may be part of the reason its share price is stuck below the IPO price of $33 and well below the $53 per share needed for taxpayers to be paid back on the portion of money put in during the Obama term.
GM seems to be focusing on politically driven public relations campaigns (as also demonstrated by the Chevy Volt hype) rather than on maximizing profits. Investors should be wary if the trend continues.

If the above numbers are true, they indicate that General Motors is still bleeding cash.  Such finances don't seem to warrant re-opening the Janesville plant for the long-term.

GM's profitability is a bigger issue than any concessions the UAW says it's willing to make to reopen Janesville. This may look like a drive down the same path of Mercury Marine and Harley–Davidson, both of whose unions agreed to givebacks to keep their Wisconsin facilities open.

But what would be built in Janesville? To respect history, GM should bring back the aforementioned Caprice (which is still being built in Australia and the Middle East), which it plans to sell to law enforcement agencies, but for the entire marketplace. GM made a huge error in killing full-size rear-drive cars in 1996, a mistake Ford is about to repeat by finally ending production of its ancient (as in first built in 1979) Ford Crown Victoria. Irrespective of $4-a-gallon gas, there is still a market among police departments and taxi companies for body-on-frame rear-drive cars. (The Dodge Charger, now appearing in a rear-view mirror near you, is not as large as the Crown Victoria.)

It’s unfortunate, but a fact of life, that workers bear the brunt of bad decisions made by management. I think GM erred by not offering diesel engines in their SUVs, which would have resulted in better fuel economy, even at, in 2008, 70 cents per gallon more than unleaded. GM was the only one of the Big Three to manufacture its own diesel engine, instead of getting outsourced diesels — Ford's previous truck diesel was made by Navistar, and Dodge's is made by Cummins — until Ford started producing its own diesel engine for its Super Duty pickups. (It's taken more than a decade for GM to undo the damage created by its first move into diesels, a product so bad that it is credited for having damaged the entire market for diesel cars in North America. Not until GM got its Detroit Diesel division to build a V-8 for pickups and the Suburban did that stigma start to go away.)

GM’s gas V-8 engines have Active Fuel Management, which turns off half the cylinders when not needed, when attached to automatic transmissions, but I suspect buyers remember GM’s first crack at that, the V-8-6-4 on 1980s Cadillacs. (And not fondly; Time.com called the system “the Titanic of engine options. The cars jerked, bucked, stalled, made rude noises and generally misbehaved until wild-eyed owners took the cars to have the systems disconnected.”) The Chevy Tahoe and GMC Yukon have a hybrid system option based on shutting off and restarting the engine when needed (i.e. in traffic), which seems to me antithetical to long engine life. GM dragged its corporate feet on equipping its cars and trucks with six-speed automatic transmissions (the more gears you have, the better a vehicle will perform, in both acceleration and in fuel economy), and pretty much eliminated manual transmissions, which still get better fuel economy (in the hands of the right driver), on vehicles bigger than subcompacts.

GM pushed trucks and SUVs because GM made much more money on trucks and SUVs than they did in cars, and particularly small cars. The aforementioned Spring Hill plant was the exclusive home for GM's Saturn to build small cars. Unfortunately, there was nothing Saturn built that was particularly better than its Japanese competition. (I can speak with authority on that, having test-driven and rejected their SC2 and SW2 due in large part to the noise of their twin-cam engines.

People bought Suburbans and Yukons because they felt a need for them — either to pull boats or campers, or just because they preferred their roominess and their higher driving position to smaller cars. Those smaller cars, incidentally, are the result of increasingly stringent fuel economy standards, which helped kill off large rear-drive cars, and particularly station wagons, in this country; an SUV is nothing more than a station wagon body on top of a truck chassis. SUVs weren't subject to those fuel economy regulations, so those who wanted a vehicle more like the old big cars (for instance, tall people) voted with their feet and purchased SUVs. If they wanted small cars, they purchased small cars from companies that had more experience in designing, building and selling them -- Toyota, for instance.

There are lessons from the Janesville closing for both workers and for government. The days of having the same employer for your entire career (40½ years in my father’s case) are over. The days where someone can make $54,000 (the average GM Janesville assembly line worker's salary by 2008, according to the Milwaukee Journal Sentinel) after walking into the plant with your only marketable skill being your work ethic are over too. 

The GM closing obscured a couple of interesting facts about Janesville. The Wisconsin State Journal in Madison pointed out in 2008 that GM had fewer employees in Janesville than Mercy Health Care. By 2008 86 percent of new jobs in the post-9/11 recovery were created by companies of 100 or fewer employees, and 65 percent of new jobs were created by companies of five or fewer employees. GM and its suppliers total 6.3 percent of the jobs in the Janesville area, half of the total at GM's peak in Janesville, so it's obvious that economic development officials in the Janesville area did in fact get the message years ago. As Doug Pearson, the former executive director of Chamco, the nonprofit Oshkosh development corporation, pointed out, "If you've got 50 small companies, it's a lot less likely you're going to have something that's going to affect all those companies."

#41 to #24: How?

Readers of the late Marketplace of Ideas column and blog know that I kept regular watch over the various state business climate comparisons.

That is something one would expect a regional business magazine to do. My following the state's business climate, however, dates much farther back than my arrival at Marketplace in 1994. Ten years earlier, I wrote about the state's business climate and perceptions thereof for a term paper in my introduction to state government course at the University of Wisconsin. (Foreshadowing, perhaps?)

In the nearly two decades since then, state business climate comparisons have become what one might call objective subjective science. Most of the comparisons use objective rankings, but which rankings are important, and to what extent, is of course a subjective decision. Every ranking I have ever seen uses taxes (personal and corporate, plus property and sales taxes, and exemptions to all), but other factors also are included depending on the survey, including per capita gross domestic product or income growth, business startups, unemployment rates, quality of labor force (including education thereof), regulatory and legal burden, percentage of unionized workers, worker compensation insurance costs, and quality of life comparisons.

In the 10 years since I started professionally following business climate comparisons, two things  became apparent: (1) Wisconsin, with rare exception, ranked in the bottom fourth of business climate comparisons regardless of who conducted the comparison, and (2) said comparisons were always criticized by either Democratic politicians or their fifth column in the media or blogosphere under the rationale that low rankings were criticisms and therefore invalid.

One example of truism number one was last October's ranking by Forbes magazine,  which placed Wisconsin 43rd. Forbes' comparison used two other comparisons, the Pollina Corporate Real Estate site selection survey, which ranked Wisconsin 46th, and the Tax Foundation's State Business Climate Index, which ranked Wisconsin 42nd. Another was Chief Executive magazine's survey of "More than 500 CEOs" who "considered a wide range of criteria, from taxation and regulation to workforce quality and living environment," in which Wisconsin came out 41st in 2010.

Earlier this month, Chief Executive released its 2011 comparison, in which Wisconsin jumped from 41st to 24th, the highest positive jump of any state. Wisconsin is mid-pack in the Midwest, below Indiana (sixth, up from 16th), Iowa (22nd, down from 17th) and Missouri (23rd, up from 26th), but above Minnesota (29th, up from 31st), Ohio (41st, up from 43rd), Michigan (46th, up from 48th) and Illinois (48th, down from 45th). Texas ranks best, and California ranks worst.

This is great news that, however, begs this question: How did Wisconsin jump that high?

First, Chief Executive's methodology:

We asked CEOs to consider three criteria:  Taxes & Regulation, Workforce Quality and Living Environment. In most companies, the CEO makes the ultimate decisions about where to locate and/or expand the business, making his or her perceptions of each state critically important. 556 CEOs completed our detailed survey, which was conducted between Jan. 14 and Feb. 1, 2011. They were each asked to provide their selections for the 4 best states for doing business and the 4 worst states for doing business. ...

Chief Executive also asked CEOs to provide ratings for the states that they ranked, as well as other states for which they had opinions, along 3 key criteria: 1) taxes and regulations, 2) workforce quality and 3) living environment. They were asked to rate the states on these criteria using a 1-10 scale, with 10 = outstanding, 5= average and 1= poor.

Wisconsin ranked 33rd in taxation and regulation, 11th in workforce quality, 20th in "living environment," 33rd in 2005–09 state gross domestic product growth (2.72 percent less than the national average), 21st in unemployment rate (2.2 percent better than the national average), 26th in domestic net migration rate (people moving in vs. people moving out), 19th in state government debt per resident ($3,707), and 10th highest in state and local tax burden.

The Chief Executive story doesn't talk much about Wisconsin other than to note its 17-place improvement. More generally, the story says:

Business leaders graded the states on a variety of categories grouped under taxation and regulation, workforce quality and living environment. “Do not overtax business,” offered one CEO. “Make sure your tax scheme does not drive business to another state. Have a regulatory environment and regulators that encourage good business—not one that punishes businesses for minor infractions. Good employment laws help too. Let companies decide what benefits and terms will attract and keep the quality of employee they need. Rules that make it hard, if not impossible, to separate from a non-productive employee make companies fearful to hire or locate in a state.”

Not surprisingly, states with punitive tax and regulatory regimes are punished with lower rankings, and this can offset even positive scores on quality of living environment. While state incentives are always welcome, what CEOs often seek are areas with consistent policies and regulations that allow them to plan, as well as intangible factors such as a state’s overall attitude toward business and the work ethic of its population.

This is one reason Texas has consistently held the No. 1 position since 2005. It gets strong marks in all areas important for business creation, and has the second-lowest taxes in the nation. The state has created more jobs than any other—about 250,000 last year. Not surprisingly, it also enjoys the highest inward net migration rate of any state.

Interestingly, that first excerpted paragraph would not appear to describe Wisconsin. "... regulators that encourage good business" instead of punishing "businesses for minor infractions"? Three letters: DNR. If "good employment laws" include the ability for a worker to decide whether or not to join a union, well, that doesn't describe Wisconsin either. Those who claim that Wisconsin's corporate income taxes aren't that high usually ignore Wisconsin's high personal income taxes, and the owners of S corporations and other corporate bodies are assessed the corporate income taxes that are assessed on C corporations.

There is one difference between Chief Executive's 2010 comparison and its 2011 comparison. That difference took place between the 2010 and 2011 surveys, on Nov. 2:

New Jersey Gov. Chris Christie, who confronts one of the nation’s worst pension underfunding problems, is using the prospect of insolvency to push for significant pension reductions. In his move to end public sector collective bargaining to get control of the state’s budget, Wisconsin’s Scott Walker made Chris Christie appear reasonable. Indiana Governor Mitch Daniels slowed state government payrolls to the point where Indiana has the nation’s fewest state employees per capita. In addition, while at least 35 states raised taxes during the recession, Indiana cut them.

These are some of the actions that encourage business leaders. As another CEO respondent remarked, “We need some political backbone to control spending, address out-of-control debts, and use common sense on environmental and other governmental regulations. Quit demonizing businesses. Who do they think provide real jobs?”

In Wisconsin before Nov. 2, the answer to that last question might as well have been: Why, public sector employee unions, of course! While that may indeed be the correct answer in the People's Republic of Madison, it is not in the rest of Wisconsin. But voters Nov. 2 noticed the state's poor economy, and may have actually noticed the fact that per capita income growth has trailed the national average since the late 1970s, and voted for change.

Some change has occurred. WISN radio morning host Jay Weber asked his listeners after the Nov. 2 election what they wanted the new governor and Legislature to do, and got a lengthy list. The items on the list that pertain to business climate include (accomplishments in boldface):

5. Repeal combined reporting and pass a package of pro-business legislation.(done)

7. Kill off the Regional Transit Authority Board. Don’t create any boards that have taxing authority. (soon)

8. Bring back TABOR or some taxpayer bill of rights.

9. End the minimum markup law

14. Allow school districts to negotiate for health insurance on the free market. (done, as part of collective bargaining changes)

15. Create a rainy day fund from excess or unexpected  revenues that pour into the state coffers during boom times. (only talk of this so far, so far as I know)

16. Eliminate the  state income tax on retiree pensions to help keep them in Wisconsin.

17. Freeze the property taxes of retirees to keep retirees in Wisconsin.

18. Move on reasonable Tort reform.  (done, but we could go further in the future)

20. Ten percent across the board pay cuts for all state employees. (lets call this done, as part of collective bargaining changes)

24. End early retirement for public employees, so they can no longer live off of a state pension longer than they ever worked at the job.

25. Change the state law to make MATC and other tech school boards elected positions and accountable to the taxpayers.  (Lazich, Darling are on it..vote not pending, though)

26. Reinstitute the QEO for teacher pay. (Again, call it done, Walker’s fixes are better)

41. Review and repeal the so-called ‘smart growth’ environmental requirements and restrictions, which have hit the point of absurdity.

That is not a bad list for merely four months of work (apparently enough CEOs have noticed what has been done, or at least a change in attitude from Madison, to make 17 places of difference) , but it's not nearly enough. For that matter, going from the bottom quarter to mid-pack isn't enough. We do not have lower income taxes, we still have too many employees at all levels of government (fewest government employees per capita -- now there's a goal worth pursuing), we still have too much spending and too much debt in all levels of government, and we have not defanged the regulators. Changing the Department of Commerce to the Wisconsin Economic Development Corp. may help.

Walker tweeted that his goal is for the state to have the nation's best business climate, which will not happen as long as we have anti-business Democrats in this state. (And as long as the state Democratic Party remains in thrall to the public employee unions, the last pro-business Democrats in Wisconsin will remain Democrat-turned-independent Rep. Bob Ziegelbauer, the Manitowoc County executive, and before him Gov. Patrick Lucey, who signed into law the machinery and equipment property tax exemption.)

The aforementioned part about "consistent policies and regulations that allows them to plan" poses a future problem for Wisconsin. The right people are in charge on the Capitol Square now, but at some point Democrats will recapture state government. The last time that happened, we got $2 billion in tax increases. Merely repealing past tax increases is an incomplete answer; tax increases must be largely prevented from happening in the future, which is why the inclusion of a Taxpayer Bill of Rights-like mechanism in the state Constitution is imperative.

Improving one state business climate ranking is one step. Many, many, many more steps are needed.