Posted by: Richie Bernardo

Two thousand fifteen was a banner year for the U.S. economy, thanks to a strong dollar, job gains, lower oil prices, increased consumer spending, and general improvements in the housing and business sectors. And the International Labour Organization expects steady growth ahead despite a slowing global economy.

But within the U.S., state economies could still be either boom or bust. Illinois, for instance, is currently in a fiscal free fall, with no budget for the second year in a row — putting its schools and social programs in peril — and the highest unemployment rate in the Midwest. Meanwhile, California has blossomed into the seventh largest economy in the world, boasting a GDP of $2.3 trillion, which was comparable to Brazil’s $2.2 trillion, in 2014.

With such wide disparities in growth, WalletHub’s analysts compared the economic performance of the 50 states and the District of Columbia across three key dimensions: Economic Activity, Economic Health and Innovation Potential. Continue reading below for our findings, expert commentary and a full description of our methodology.

1. Main Findings
2. Ask the Experts
3. Methodology

Main Findings

Embed on your website<iframe src="//d2e70e9yced57e.cloudfront.net/wallethub/embed/21697/geochart-best-performing-states.html" width="556" height="347" frameBorder="0" scrolling="no"></iframe> <div style="width:556px;font-size:12px;color:#888;">Source: <a href="http://ift.tt/2rVnzRc;  

Overall Rank	State	Total Score	‘Economic Activity’ Rank	‘Economic Health’ Rank	‘Innovation Potential’ Rank
1	Utah	71.55	2	2	4
2	Washington	70.68	1	10	3
3	California	67.84	4	12	2
4	Massachusetts	65.58	8	15	1
5	Colorado	60.81	9	7	5
6	Delaware	59.85	5	18	14
7	District of Columbia	59.50	17	1	10
8	New York	58.82	6	27	11
9	Texas	58.74	3	34	20
10	Oregon	57.48	10	9	13
11	New Hampshire	57.30	20	3	6
12	Maryland	56.52	19	8	7
13	North Dakota	55.15	7	13	42
14	Connecticut	54.88	15	33	8
15	Virginia	53.13	18	4	21
16	Arizona	53.10	16	23	17
17	Georgia	52.41	11	29	26
18	North Carolina	51.50	22	22	16
19	Minnesota	51.34	33	6	18
20	Michigan	51.08	26	30	9
21	Vermont	51.00	25	16	19
22	New Jersey	49.20	24	38	12
23	Wyoming	48.92	12	28	48
24	Idaho	48.80	28	19	28
25	Alaska	48.76	27	25	23
26	Florida	48.33	14	37	34
27	South Carolina	47.58	13	41	36
28	Wisconsin	47.09	38	5	30
29	Illinois	46.41	21	40	25
30	Missouri	46.04	40	11	27
31	Pennsylvania	45.05	31	44	24
32	Montana	44.99	41	20	29
33	Tennessee	44.50	32	26	41
34	Iowa	44.19	37	24	38
35	Kansas	44.18	35	31	31
36	Nebraska	43.84	42	21	35
37	Indiana	43.82	36	32	32
38	Nevada	43.78	23	35	43
39	Ohio	42.12	34	43	33
40	South Dakota	41.13	46	14	40
41	Rhode Island	39.91	45	39	22
42	Hawaii	39.35	50	17	39
43	Oklahoma	38.50	39	42	46
44	Alabama	38.00	44	46	37
45	Kentucky	36.62	30	50	45
46	Louisiana	36.28	29	49	49
47	New Mexico	34.52	47	51	15
48	Maine	34.34	48	45	47
49	West Virginia	34.31	43	47	50
50	Arkansas	33.94	49	36	51
51	Mississippi	31.86	51	48	44

 

Ask the Experts

Nearly a decade since the Great Recession, some states still struggle to rebound. We therefore consulted a panel of economic experts regarding growth strategies that state economies can adopt in order to improve or return to full capacity. Click on the experts’ profiles below to read their bios and responses to the following key questions:

1. What are the most effective ways for state and local officials to boost their local economies?
2. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers?
3. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states?
4. What makes a state attractive to potential entrepreneurs?

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• Giuseppe Moscarini Professor of Economics at Yale University
• Trevor Gallen Assistant Professor of Economics in the Krannert School of Management at Purdue University
• Joseph J. Persky Professor of Economics at University of Illinois at Chicago
• Michael Jones Assistant Professor of Economics and Academic Director for the Master's in Applied Economics at University of Cincinnati, Lindner College of Business
• Gregory S. Burge Associate Professor of Economics at University of Oklahoma, College of Arts and Sciences
• Lynn Browne Lecturer in Economics at Brandeis University
• Joshua L. Rosenbloom Professor and Chair of the Department of Economics at Iowa State University
• Emanuel Xavier-Oliveira Assistant Professor of Economics in the School of Business & Economics at Michigan Technological University
• John J. McGlennon Chair and Professor of Government at the College of William & Mary
• Timothy Duy Professor of Practice in the Department of Economics and Senior Director of the Oregon Economic Forum at University of Oregon
• Henry Sirgo 2016 McLeod Endowed Professor in the Department of Social Sciences at McNeese State University
• Syeda Aneeqa Aqeel Assistant Professor of Economics and Business at Lake Forest College
• Ninos Pierre Malek Professor of Economics at De Anza College and Lecturer at San Jose State University

Giuseppe Moscarini Professor of Economics at Yale University What are the most effective ways for state and local officials to boost their local economies? First, one should ask why boost the local economy. If it is only to be re-elected, then one should pause. If it is because the local economy does need a boost, then the right policy depends on why it needs it, what's wrong with the local economy. Some states have ageing population. Others have infrastructure problems. Yet others have higher taxes. And so on. Boosting per se can be very detrimental to welfare, by introducing new distortions, subsidies, misallocation, keeping afloat businesses that should exit, etc. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? The Equality project suggests to me that good public education is an effective tool to retain skilled workers, because skilled people care about education, so they care about the schools their children go or will go to. And that project shows that growing up in a poor neighborhood has life-long consequences, that can be quantified. One might think we knew this, but we did not, we just guessed. This project has identification, because of the lottery structure of the relocation. This obviously works mostly for people in child-bearing age range, but once people move, they may be locked in place. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? Superficially, it looks like it, but then again I do not know firm evidence on the trade off between the social cost of public funds (distortion from raising taxes, alternative use of the money) and local benefits of retaining businesses. The calculation is very complex, because retained workers pay local taxes but also use local services, add congestion, raise property values. Trevor Gallen Assistant Professor of Economics in the Krannert School of Management at Purdue University What are the most effective ways for state and local officials to boost their local economies? What makes a state attractive to potential entrepreneurs? One way that the White House has emphasized recently in their report “Occupational Licensing: A Framework for Policymakers” is to reduce occupational licensing. What you can get out of Appendix V is that occupational licensing: Generally does not seem to improve quality (its frequently-purported purpose) (pp. 58) Only two out of twelve studies found an increase in quality from occupational licensing. Typically raises prices on consumers (9 of 11 studies found higher prices from occupational licensing) (pp. 61) There’s some evidence (pp. 61) that occupational licensing reduces employment and increases wages in an occupation (sometimes by driving out less-educated and less-skilled workers). Occupational licensing seems to reduce state-to-state mobility and employment mobility because licensure differs across states, hindering entrepreneurship in this realm. It seems that most occupational licensing, on average, and almost certainly at the margin, doesn’t improve quality, reduces employment, and increases prices, acting at a particularly bad tax. There is some evidence that the people able to overcome the hurdle benefit from it, however. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? The differences or dispersion in tax rates can sometimes be as distortionary as the level of taxation, (which we know is distortionary). If, for instance, one state taxes high-skilled workers more and another state taxes low-skilled workers more, in the long run we’ll see production in the first state being inefficiently biased toward low-skilled labor while the second state is inefficiently biased toward high-skilled labor in its production process and industry mix. Similarly, production processes and industry mixes can be biased in their capital/labor mix and the economy makes things less efficiently than it could have. Fajgelbaum et al. find that eliminating dispersion in state tax rates (holding constant state revenue, so this is a revenue-neutral tax change) could improve real GDP by 0.2%. This would be a gain of around $220 per worker, if we have 16.7 trillion dollar GDP and 151 million workers. This seems a reasonable estimate of the distortions from unequal taxation alone: it isn’t enormous, but it isn’t negligible either. Note that this is just about unequal taxation, holding the total revenue constant. That said, it may be that tax competition between states brings down overall taxation or burdensome regulation. While the process of competition creates distortions on one margin, it may ease it on others Joseph J. Persky Professor of Economics at University of Illinois at Chicago What are the most effective ways for state and local officials to boost their local economies?

1. Solid education system. Start with pre-school-12. My own opinion is that's the most crucial. (See work by Bartik on pre-school.) I'm no fan of charter schools, which haven't really performed that well. More to the point, raising teacher salaries and prestige must play a central role in improving educational outcomes. Higher education also makes contributions. (See Glaeser.)  Notice that one big plus of solid education is that if the state doesn't grow and prosper, the investment is not lost, but can be used by out-migrants as they move elsewhere.
2. Aggressively support human service industries such as childcare, eldercare and health care, targeting them toward the lower third to half of the income distribution. Such activities provide immediately useful services, employ large numbers of low skilled workers, and strengthen the safety net.
3. Making efforts to further develop agglomeration economies by strengthening public support of industries that are already well established; avoiding attempts to lure glamor industries that are hopelessly unrealistic for the state; and particularly targeting activities which are still getting their footing, but with modest support could provide a new cluster for the state economy. This last is the most important, i.e., to identify activities that can prosper in the state but need modest encouragement.  This is a tricky business, but well worth the effort.  (See Porter.)

What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? The work of Richard Florida (The Rise of the Creative Class) points in the right direction. Highly skilled and innovative people are attracted by a lively and accepting environment, rich in ethnic and cultural diversity. Look at San Francisco, Austin, Seattle, and Minneapolis. Investments in "life-style" capital pay substantial returns. Also note that the people in question are willing to pay for efficient and useful government. The goal is not to keep personal taxes low, but for governments to be transparent and accountable. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? For many years, regional economists were dubious about tax breaks. Recent work by Greenstone and Moretti and others have led to a reconsideration of such programs. There do seem to be gains from successful large scale subsidies. Prudence still suggests that such efforts be approached with a broad appreciation of what type of industries and firms will do best in the state. What makes a state attractive to potential entrepreneurs? Success builds more success. It is in the nature of agglomeration economies that they are self-reinforcing. So, entrepreneurs are likely to be attracted to areas where there is already much entrepreneurial activity. Michael Jones Assistant Professor of Economics and Academic Director for the Master's in Applied Economics at University of Cincinnati, Lindner College of Business What are the most effective ways for state and local officials to boost their local economies? State and local governments are most effective when they invest in services and infrastructure that the private market is unable or unwilling to provide. Well maintained roads, highly trained and effective police officers, and investments in education and research at institutions of higher learning are examples of strategic steps for governments. In our politically divisive climate, these are common ground issues where agreements exist about the deteriorating condition of our public infrastructure. Government can further boost the local economy by reducing long-term fiscal obligations to its pension system to free up cash flow for future investments. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? Attracting, or poaching talent from other states, may be an optimal strategy for one state, but it’s a zero-sum game for the entire nation. States need to focus on developing and retaining its existing workforce. The most important reason that young people leave a state is to find a job. If the state economy is healthy by investing in public infrastructure and services, then talent is less likely to leave. Because many college graduates often start their first job close to where they graduated, states must continue to invest in high quality universities. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? The way that states often use incentives is a race to the bottom, but when properly constructed, they can provide a “lift to the top.” First, tax incentives should only be offered to industries which generate positive spillover effects to the rest of the economy – what economists call positive externalities. For example, a large manufacturer can attract a supply chain with other highly skilled workers to contribute to government tax revenue. In these situations, a tax break more than pays for itself by generating additional tax revenue to offset the cost. However, for local industries like retail, a tax break for a new company to the region merely steals business and thus tax revenue from another local company. In these industries, tax incentives are a net, negative impact. Second, tax incentives should not be targeted to a specific company, but rather to any company in an industry with positive externalities that meets certain financial metrics. Local governments often chase the hot, new company while neglecting their homegrown talent. Any company which generates a certain level of profits or employee payroll in the targeted industries should receive a tax credit. What makes a state attractive to potential entrepreneurs? While tax incentives can be a critical factor for larger companies, surveys among entrepreneurs have often found that tax rates and incentives are barely on the radar of things that matter to them. This is not surprising when entrepreneurial companies are not at the stage where they have generated sufficient profits and payroll for taxes to matter. However, attracting entrepreneurial firms is still critical to the long-run growth of an economy. Entrepreneurs cite access to talent, customers, and capital as the most important issues in their location decisions. Fortunately, each of these has been addressed previously. States which have quality universities can retain more talent while states which have strong infrastructure in place can provide easy access (e.g., direct flights) to cities where customers and venture capital are in abundance. Governments often make the mistake of trying to pick the “winners” in an entrepreneurial ecosystem. By definition, entrepreneurs are on the cutting-edge, generating new ideas and technology where success can be difficult to predict. Governments should stay focused on what they do best – investments in public infrastructure and education. Gregory S. Burge Associate Professor of Economics at University of Oklahoma, College of Arts and Sciences What are the most effective ways for state and local officials to boost their local economies? State and local officials have few tools available to stimulate economic activity within their local economies in the short run. For that reason, consistent and effective stewardship of tax revenues should be their focus. Taxes are not the enemy - wasteful spending is. Even though a common misconception is that all taxes are a drag on the economy, many studies have demonstrated that effectively managed government spending helps the economy. Government officials should also "know their economy". To the extent it is heavily weighted towards a few particular industries, officials should budget in ways that pro-actively deal with the cyclical nature of those industries. For example, Oklahoma's economy is heavily invested in the energy sector, stressing state and local budgets when the price of oil and natural gas is low. A natural pro-active step to correct for this would be to save resources when the prices of those same resources are high to then smooth government spending over the economic cycles of their economy. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? This is a great question - but I'm not sure it is the right one. State and local politics is important, but I tend to think at a larger level - looking at the national and international economy. I'm not sure it fits the classic definition of economic 'efficiency' to want the most talented young people born in poorer areas to 'stay put', rather than moving to parts of the country that better support high tech industries. Still, the spirit of the question should matter to officials in lower income regions who want to provide opportunities for the best and brightest workers to stay. I would say increased investment in human capital (through primary and higher education, child health care, job training, etc.) and public infrastructure systems (transportation, environmental protection, public health and safety) is a good start. The two biggest things are probably education and infrastructure. As an aside, one aggravation of mine is that folks don't note more consistently that keeping the US federal taxation system progressive (or even making it more progressive but possibly adjusted for cost of living) is one of the most effective ways to address the phenomenon that some areas tend to lose their highest income earners while other areas (big cities, Silicon Valley, etc.) tend to attract them. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? The academic literature on this question is mixed. "Tax breaks and other incentives" lumps together so many programs that would operationally differ so much. As they say, the devil is in the details. In general, tax breaks help those who get them and harm those who don't. Most people incorrectly assume differently - that getting a tax break is good and that not getting a tax break is neutral. The trouble with that approach is that the math doesn't work out. My take on this is simple. Start with a fair and uniform tax code for both companies and individuals. Deviate by creating a tax break or tax incentive only in cases where the company receiving the tax break stimulates a significant positive externality (spillover effect) onto other companies and individuals in the region. However, even tax breaks that meet that criteria are still not efficient when viewed under the lens of the larger economy as a whole. They just allow one state to take economic activity from another. The structure of these programs mimics a "Prisoner's Dilemma" type situation where everyone offers tax breaks to the same types of companies, but then is collectively worse off than a situation where nobody offered those same companies tax breaks. It is a classic case of states doing what is in their own best interest, but the outcome fails to be efficient. (Put another way, the big contribution John Nash made over the original "Invisible Hand" principle of Adam Smith.) What makes a state attractive to potential entrepreneurs? The ability to make profits. I personally think entrepreneurs and other business investors value strong economies and stable demand for their services more than they value low taxes. The lowest tax states don't tend to be the places attracting the type of high-end entrepreneurs one would tend to think states would fight for. Lynn Browne Lecturer in Economics at Brandeis University What are the most effective ways for state and local officials to boost their local economies? It is much easier for public officials to have an adverse impact than to have a visible positive impact. Of course, natural amenities, especially a mild winter climate, confer great advantages and can compensate for a number of deficiencies. Performing the basic responsibilities of government well should be the first priority. A high quality educational system at all levels is a great asset. It is the foundation for a high quality labor force and an important attraction and retention mechanism for highly educated workers. Transportation is often neglected: does the state or locality have good access to the rest of the country and the rest of the world? States and localities should avoid regulations and taxes that stand out as unusually punitive or arbitrary; they should avoid being known for having the highest rate for a tax. Public officials should be willing to meet with and truly listen to representatives of all interest groups, including the business community. Even though they will not be able to satisfy everyone, being accessible and willing to give everyone a fair hearing will be appreciated. And such conversations may well surface actionable ideas. In a study of mid-sized manufacturing cities, Yolanda Kodrzycki and Ana Patricia Munoz found that collaborative, inclusive leadership made a positive difference to the cities’ economic fortunes; but such leadership had to be sustained over many years. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? A high quality educational system is probably the most important requirement. Not only will a strong educational system produce quality workers; but highly skilled workers, as parents, place great value on good schools. Both the K-12 system and colleges and universities must be high quality. Cultural and recreational amenities are important, but natural advantages matter and personal tastes vary. Some people like the outdoors, others care more about vibrant cities. Developing an appropriate housing strategy is a difficult challenge. Restrictive zoning can raise costs and discourage growth, but may be important in preserving valued amenities. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? Businesses value high quality services, particularly education, as well as low taxes. So, tax breaks that deprive the state or locality of the resources to provide essential services or that require higher taxes on everyone else are likely to be counter-productive. Nevertheless, sometimes a package of incentives can be developed that does not impose costs on others; for example, the state may forego tax revenues that will be realized only if the company does locate in the state. Sometimes the prospect of a major employer may prompt initiatives that are desirable whether or not the recruitment effort is successful. And sometimes the arrival of a major employer has a valuable signal effect, announcing to other current and prospective employers that the state has a new development strategy or has otherwise become more competitive. In these cases, where the incentives are not too costly and where attracting a major firm signals a meaningful change in the state’s development approach or competitive position, offering an incentive can be positive. What makes a state attractive to potential entrepreneurs? The availability of highly skilled workers is probably the most important issue for entrepreneurs in the technology fields. Thus, high quality schools and universities are critically important. Since entrepreneurs and their employees hope to be successful and do well financially, states should avoid taxes that fall unusually harshly on the affluent and on the forms of income received by entrepreneurs and highly skilled workers. Joshua L. Rosenbloom Professor and Chair of the Department of Economics at Iowa State University What are the most effective ways for state and local officials to boost their local economies? Answering this question requires answering a more fundamental one: what determines the success of local economies? It would be misleading to say we fully understand the answer to the latter question. Nonetheless, there is considerable consensus that prosperity is closely tied to “supply-side” factors that raise the productive potential of a state or country. Put differently, productivity enhancing innovation is the key to a successful economy. Most economists would say that good institutions: the rule of law, reasonably secure property rights, limited regulatory interference are crucial ingredients in supporting productivity enhancing innovation. Note that this is not an argument for eliminating government, rather it is an argument for “good government”; that is a government that provides the necessary transportation, education and communication infrastructure to support a modern economy. These are all examples of public goods whose provision is dependent on governmental bodies. So, these are the issues that state and local officials should attend to, to help boost their economies. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? Highly skilled workers are geographically mobile. High wages are one important factor that influences this mobility. But providing amenities: good schools, recreational and cultural facilities, and affordable housing, all matter too. Some states have natural advantages of geography or historical advantages of urban agglomeration so this is not a level playing field. But states can avoid making things worse by failing to invest in the kinds of amenities that make them more attractive, or pursuing policies that alienate members of this “creative class.” States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? The evidence seems pretty clear that trying to stimulate growth through cutting taxes is not terribly effective. The “Kansas experiment” under Sam Brownback has cut taxes, reducing public revenues and investment in schools, higher education and roads, without producing any meaningful acceleration of economic growth. Other factors besides tax rates are likely to weigh much more heavily in the location decisions of businesses and high skilled workers. What makes a state attractive to potential entrepreneurs? Entrepreneurs need several things. They require: access to venture funding, proximity to markets for specialized talent as they grow, and the staff they recruit need to have other employment opportunities available since the majority of ventures will inevitably fail and they know that they will be looking for another job soon. All of these factors tend to promote agglomeration of venture activity in larger metropolitan centers with a history of entrepreneurial activity — Silicon Valley, Route 128 near Boston, the Research Triangle area. Efforts to consciously seed these conditions face a very steep uphill climb and are probably not going to succeed. Emanuel Xavier-Oliveira Assistant Professor of Economics in the School of Business & Economics at Michigan Technological University What are the most effective ways for state and local officials to boost their local economies? Provide state-of-the-art market infrastructures and support the creation/update of innovation hubs. This is of particular relevance for developed nations because the current dissemination of knowledge is facilitating the catching up of countries priory perceived as non-competitors. These new global players are using the latest technologies to build market infrastructures they previously lacked. The so-called industrial nations already have similar infrastructures but with tech that is quite older than the ones these new comers recently installed. Just because a state is somewhere in the middle of a great nation, that fact alone does not mean that it is insulated from the global economy. Concurrently, recreational amenities play an important role in attracting citizens and tourism so that whoever moves in or stops by is able to experience quality leisure time. If these are lacking then its attractiveness is diminished. Local city halls should also play more attention to their architectural guidelines – beauty is as important as functionality. Other aspects are also relevant, such as local crime rates and availability of quality health care, schools, and so on. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? If state-of-the-art market infrastructures are available then it will likely attract innovative businesses which in turn hire skilled workers. Concurrently, it creates a business environment prone for startups able to exploit such technologically advanced infrastructures. On the other hand, more merit-based financial incentives should be given to college students in order to attract the best to local universities. These two policies can jointly contribute to an increased retention of skilled workers as well as to attract outsiders. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? Rather than a “race to the bottom”, states should focus on the “race to the top” (market infrastructures). It is true that states like Delaware and Nevada attract headquarters of many companies, but states should not forget that workers spend their money locally and those companies with headquarters in tax/financial heavens typically have their production plants elsewhere due to reasons other than taxes, such as human capital availability and top quality market infrastructures. To have the latter, local governments need fiscal revenue, which comes from companies too but most of it is collected from dependent workers – highly skilled workers are also desired by states because these have higher taxable wages. What makes a state attractive to potential entrepreneurs? Again, market infrastructures and human capital but also macroeconomic indicators like GDP per capita and consumer spending (e.g., California is very attractive on these measures). The prevalence of innovation hubs and incubators are also important because in addition to attracting entrepreneurs (those that search for these facilities are often highly skilled) it tends to create a contagion effect to the surrounding population as well. Obviously, tax incentives may also play a role but their impact is only meaningful to attract establishments that create value locally (not just headquarters with the sole purpose of avoiding taxes) if the market infrastructures and human capital are of quality. Other issues to consider at the state level may include the implementation of regulations related to trade secrets that favor employees over employers in trade secrets disputes, such as the abolishment of non-compete covenants (e.g., California) in order to diminish deterrents for employees to create their own businesses. Another policy to consider is the adoption of stronger social safety nets targeted at encouraging more entrepreneurial risk taking. In addition to federal, state, and local government policies, the private sector also needs to augment its contribution to the fostering of entrepreneurship, such as the creation of more affordable supporting services, more sophisticated supply chains, etc. For example, there is a need for more dissemination of entrepreneurship-related information able to fill the knowledge gap that many wannabe entrepreneurs face when attempting to fully understand the local market conditions and potential earnings of their ventures in the selected locations. Currently, this granular data is predominantly freely available in government websites but in a raw format (e.g., Bureau of Economic Analysis, Bureau of Labor Statistics, US Census) which lacks a proper analysis and summary so as to be meaningful for entrepreneurs that lack business analyst skills. However, there are already some baby steps being implemented in this direction, similar to the efforts made by WalletHub in providing free apps targeted at fostering financially literacy – for example, LaunchScore provides free market research reports customized for entrepreneurs which include earnings estimates for more than 800 business types in 750 cities across the US. Notwithstanding, more of these supporting services are needed to foster entrepreneurialism among the populace. John J. McGlennon Chair and Professor of Government at the College of William & Mary What are the most effective ways for state and local officials to boost their local economies? A lot depends on the state or locality. It’s a good idea for local officials to understand their area’s competitive advantages: geographic location can’t be changed, so recognizing what kind of jobs or industries fit your community is important. For a lot of cities and counties, encouraging expansion and diversification of existing businesses may be a better investment than the elusive pursuit of the magical “clean, high tech industry” that every community seems to seek. Local officials really need to be careful about understanding the costs and benefits to them: what local tax revenues will they collect directly or indirectly vs. how much will they have to pay in new or improved services? Will a tax break really pay for itself when businesses are much more mobile? Often, businesses that may be considering relocation are less interested in tax breaks than quality of life and presence of a well-trained/educated workforce. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? Invest in education. Promote entrepreneurship: you are more likely to have success keeping people with attachments to your state than to attract newcomers if you are already losing population. A turnaround has to start with your own folks. But be open to immigration from outside the US. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? If tax breaks are your first weapon, they probably won’t work out so well. They can be an effective deal closer, but if you can’t compete on location, quality of life, educated workforce and other things that should matter, you might not get such a great deal out of companies that can pick up and move or shut down overnight. If you have the attention of a company because of the desirability of your location, you should structure tax breaks which require deeper investment in the state or locality by the business (e.g., tied to hiring of locally trained workers, escalate the break as the company expands its workforce or plant size). What makes a state attractive to potential entrepreneurs? Depends on the entrepreneur, but usually, things like quality of life, access to markets, well maintained infrastructure and openness to new ideas. Timothy Duy Professor of Practice in the Department of Economics and Senior Director of the Oregon Economic Forum at University of Oregon What are the most effective ways for state and local officials to boost their local economies? Build off of their existing set of assets. In other words, don’t try to build something like a new “cluster” from scratch. Everyone wants a “biotechnology” cluster, but few regions have one and difficulty of building one from scratch means officials will spend vast amounts of time and money on a project that is not likely to succeed. Instead, identify the clusters of firms already in your region and ask why they are successful. It will likely be some mix of workforce, proximity to customers or raw materials, and area infrastructure. Once you understand your asset base, local officials can work to protect that base and ensure that local firms can grow. And then, officials can begin the process of promoting your region to firms that need that same set of resources you have already developed. Note that this is never an easy process. Strengthening and expanding the local economy takes a lot of time and effort - and a broad coalition of private and public partners need to buy into the plan to make it effective. Achieving that buy is a critical part of that process. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? Work to promote the amenities those workers desire - schools, housing, recreational opportunities, etc., while at the same time supporting the firms that employ those workers. You are most likely to retain workers if they are both attached to the community and have an opportunity to grow their careers. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? I remain wary of tax breaks. The primary reason a firm moves into your region is because it fundamentally fits with the available resources. Tax incentives are just the icing on top of the cake - firms ask for them because they can, and local officials often oblige, but they are not the reason a firm comes to a region. Also, there are plenty of cases of firms receiving a hug tax credit only to leave a community a few years later, leaving behind a hole in the local economy. Such failures foster community resentment against economic development activity and may limit future opportunities. That said, I also believe that tax incentives should remain in the developer’s tool kit. This may be particularly important for recruiting firms with high capital to labor ratios - firms that would pay multiples of taxes per worker over that paid by the average firm in the community. In such cases, there may be room to use incentives effectively. It still requires good judgment on the part of development officials to implement effectively. My preference is to use incentives in such a way that they add to the stock of publicly available infrastructure. For instance, a firm may need access to better sewers or a new highway access to expand. Once these assets are created, other firms, both existing and new, can use them. They become public goods. Another example is that maybe an incoming firm needs a high speed internet cable to succeed. Once that cable is laid, other firms will be able to tap into it. What makes a state attractive to potential entrepreneurs? A presence of other entrepreneurs for networking, ease of doing business (permitting, etc.), access to capital (banks, venture capitalists), resources to grow (land, labor, infrastructure). And livability - that can be a driving factor in the decision making process. But even if they come for the lifestyle, they eventually will need those other factors if they want to grow. Henry Sirgo 2016 McLeod Endowed Professor in the Department of Social Sciences at McNeese State University What are the most effective ways for state and local officials to boost their local economies? State and local officials must commit resources to education and infrastructure. The Republic of Korea and Finland are about the size of the average U.S. state. These nations have high performing economies. Finland, which consistently ranks at or near the top in educational attainment of its elementary and secondary students, routinely requires that teachers have degrees in the disciplines which they teach. South Korea, which has surged in its economic ranking among the members of the Organization for Economic Co-Operation and Development, has among the world’s best rapid mass transit systems. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? Place an emphasis on elements of the core curriculum when dedicating funds to elementary, secondary, and higher education. Examine detailed documents of the past including the National Defense Education Act of 1958 and the exemplary document produced by the National Commission for Excellence in Education during the tenure of U.S. Secretary of Education, Terrell Bell. Highly skilled workers, when deciding whether to remain in a community consider whether public schools offer Advanced Placement (AP) courses in biology, calculus, economics, foreign languages, political science, and physics. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? Since predictability is paramount when choosing a business location, such efforts usually generate a negative impact on state economies and create a “race to the bottom”. What makes a state attractive to potential entrepreneurs? Entrepreneurship is inherently creative. Communities with cultural amenities and other elements which contribute to a high quality of life will attract and retain such individuals and foster civic engagement. Syeda Aneeqa Aqeel Assistant Professor of Economics and Business at Lake Forest College What are the most effective ways for state and local officials to boost their local economies? Often times, the measures that are taken at the state or government level are long-term by their nature, such as investment in education, infrastructure and amenities. These have the impact of making an area desirable as a place for business and living, but don’t target any particular industry. For instance, to improve the general standard of living in a state or local geography, investing in institutions of higher learning and good schooling systems, strengthening law and order, patronizing the arts, hosting large sporting and other events on an established schedule, and promoting tourism, may all help. Meaningful opportunities for volunteer work and participation by community members can also help to strengthen the bond that individuals feel with an area. All these will help to create and retain a local labor market that is rooted in a geography. Additionally, some initiatives at the local government level might assist small business owners in growing local economies. Assistance with marketing and small trade fairs or exhibitions, providing small business funding, business and tax education and assistance initiatives, and providing excellent infrastructure, might all help small business owners. To strengthen local labor supply, worker training and retraining opportunities might help as well. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? To combat brain drain, local and state governments should look at the reasons for why workers leave: holding everything else constant, it is either due to better wages or due to a concentration of highly skilled peers in particular locations, or both. By providing targeted grants to local universities and attracting employers to their own economies with startup incentives, each state can assist a high-skill concentration. Local grants and tax breaks can be tied to conditions for worker performance incentives and geographical location requirements that employers must enforce, similar to how doctors are required to serve in rural areas to complete certain parts of their training. Investing in the school system and in local health care systems is also a way of improving standards of living in an area that can assist in retaining labor. Housing costs, property taxes and the vibrancy of the rental market can be addressed, especially for younger entrants in the labor market. Finally, improving transportation systems and airports can have an impact on whether workers and employers find it feasible to stay in a location different from their network or move to an established hub if commuting costs are high. With telecommuting and flexible work environments beginning to gain popularity, many of the additional amenities of geographic locations matter in the decision of where to locate for the long term. What makes a state attractive to potential entrepreneurs? Lenient tax laws and minimal bureaucratic interference by the state. Ninos Pierre Malek Professor of Economics at De Anza College and Lecturer at San Jose State University What are the most effective ways for state and local officials to boost their local economies? The theme for success for state economies and local economies should be “economic freedom.” Empirically, the more economic freedom a state has the more prosperous it is. The same is true for national economies. Economic freedom means a government that is limited in scope. The government enforces property rights, promotes voluntary exchange, keeps taxes simple and low, and provides certain public goods that are difficult for private firms to produce. As for state and local economies, the best thing that the state government can do is create an environment that is business friendly and does not punish small businesses or corporations with high taxes. It is also a state that respects property rights and freedom of exchange. Moreover, local governments need to stop buying into the argument that building stadiums is a boost for the economy. Most studies by independent economists show that stadiums are net losers for the taxpayers. Teams should finance their own stadiums. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers? Not have a legal environment that allows for frivolous lawsuits against certain high skilled workers such as medical doctors. Also, if state officials want businesses to stay, they need to create a business friendly atmosphere with few and reasonable regulations and low taxes. What politicians need to remember is that corporations do not pay taxes -- individuals pay taxes. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states? An environment of high taxation creates a disincentive for businesses to want to produce in that state. However, it is against economic freedom for a government to give subsidies to businesses. Governments should not take money from taxpayers to give to corporations. What makes a state attractive to potential entrepreneurs? Economic freedom - an environment that makes it easier for someone to become the next “shark” on Shark Tank. A state needs to send the message that profit is not evil and that business owners and CEOs are not taking advantage of people when they make a profit. When a business makes a profit, the business wins and the customers win. Entrepreneurs need to know that they are in an environment that supports this view.

Methodology

In order to identify the best-performing state economies, WalletHub’s analysts compared the 50 states and the District of Columbia across three key areas: 1) Economic Activity, 2) Economic Health and 3) Innovation Potential.

We first identified 23 relevant metrics, which are listed below with their corresponding weights. Each metric was given a value between 0 and 100, wherein 100 represents the most favorable economic conditions for a state and 0 the least.

Finally, we calculated the overall score for each state using the weighted average across all metrics and ranked the states accordingly.

Economic Activity – Total Points: 40

• GDP Growth: Full Weight (~8.00 Points)
• Exports per Capita: Full Weight (~8.00 Points)
• Percentage of Fast-Growing Firms: Full Weight (~8.00 Points)Notes: This metric measures the number of firms in each state that are included on the “Technology Fast 500” list (Deloitte report) as a share of total firms in each state.
• Business-Startup Activity: Full Weight (~8.00 Points)
• Quality of State Legal System: Full Weight (~8.00 Points)

Economic Health – Total Points: 40

• Unemployment Rate: Full Weight (~3.64 Points)
• Nonfarm Payrolls Change: Full Weight (~3.64 Points)
• Civilian Labor-Force Change: Full Weight (~3.64 Points)
• Median Annual Household Income: Full Weight (~3.64 Points)
• State-Government Surplus/Deficit per Capita: Full Weight (~3.64 Points)
• Unfunded Liability (Public Pension Plans) per Capita: Full Weight (~3.64 Points)
• Percentage of Population Lacking Health Insurance: Full Weight (~3.64 Points)
• Percentage of Residents Living Below Poverty Level: Full Weight (~3.64 Points)
• Foreclosure Rate: Full Weight (~3.64 Points)
• Immigration of U.S. Knowledge Workers (Average Educational Attainment of Recent Migrants from Abroad): Full Weight (~3.64 Points)Notes: The educational attainment of recent immigrants aged 25 and older from abroad (“moved from a different country”) is classified as having either no high school diploma, a high school diploma (or equivalency), some college experience or an associate’s degree, a bachelor’s degree, or a graduate or professional degree. Each degree class was assigned a weight based on the equivalent average years of schooling the U.S. education system would require for the level of educational attainment:
  • 0 for no high school diploma,
  • 12 for high school diploma,
  • 14 for some college experience or an associate’s degree,
  • 16 for a bachelor’s degree, and
  • 18.95 for a graduate or professional degree (the average number of years of schooling of the U.S. population of graduate, professional, and doctorate degree holders)

  The number of recent immigrants in each education class was multiplied by its respective weight then divided by the total number of recent immigrants aged 25 and older for the final score.

• Migration of U.S. Knowledge Workers (Average Educational Attainment of Recent Migrants from Other U.S. States): Full Weight (~3.64 Points)Notes: The educational attainment of recent migrants aged 25 and older from other states within the U.S. (“moved from a different state”) is classified as having either no high school diploma, a high school diploma (or equivalency), some college experience or an associate’s degree, a bachelor’s degree, or a graduate or professional degree. Each degree class was assigned a weight based on the equivalent average years of schooling the U.S. education system would require for the level of educational attainment:
  • 0 for no high school diploma,
  • 12 for high school diploma,
  • 14 for some college experience or an associate’s degree,
  • 16 for a bachelor’s degree, and
  • 18.95 for a graduate or professional degree (the average number of years of schooling of the U.S. population of graduate, professional, and doctorate degree holders)

  The number of recent immigrants in each education class was multiplied by its respective weight then divided by the total number of recent immigrants aged 25 and older for the final score.

Innovation Potential – Total Points: 20

• Percentage of Jobs in High-Tech Industries: Full Weight (~2.86 Points)
• Percentage of Jobs Held by Scientists and Engineers: Full Weight (~2.86 Points)
• Number of Independent-Inventor Patents per 1,000 Working-Age Residents: Full Weight (~2.86 Points)
• Industry R&D Investment Amount per Total Civilian Employed Population: Full Weight (~2.86 Points)
• Nonindustry R&D Investment Amount as a Percentage of GDP): Full Weight (~2.86 Points)
• Venture-Capital Funding per Capita: Full Weight (~2.86 Points)
• Entrepreneurial Activity: Full Weight (~2.86 Points)

 

Sources: Data used to create these rankings were collected from the U.S. Census Bureau, Bureau of Labor Statistics, U.S. Department of Commerce Bureau of Economic Analysis, Deloitte, U.S. Chamber Institute for Legal Reform, State Budget Solutions, CoreLogic, U.S. Patent and Trademark Office, The National Science Foundation, National Venture Capital Association and Ewing Marion Kauffman Foundation.

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