How do you make a city perform? In other words, how do you get a city to keep generating jobs year after year, the keystone to a stable economy and a good quality of life?
The Milken Institute has tried to quantify this and again this year has ranked U.S. cities on the basis of their ability to create and keep jobs. Charlotte this year holds steady in the middle of the pack, which is both testament to its underlying strengths and a clear sign that there is room for improvement.
The Best Performing Cities Index measures both job and technology growth. Technology serves as a sort of proxy for investment and knowledge-intensive sectors, a key focus of Milken. The study found that high performing cities have a strong emphasis on service, as opposed to manufacturing jobs. This tilt helps explain why Florida has seven cities in the top twenty. That state’s strong tourism and health services sectors helped vault Fort Myers to the top of list.
No N.C. cities are in the top twenty with Raleigh-Durham falling from 12th to 34th this year. Charlotte has held a relatively steady spot at 50th after ranking 46th in 2003.
Charlotte does have a healthy service sector, but it is not particularly knowledge-intensive. For example, the top tenant as University Research Park near UNCC is Wachovia’s customer service back office. These are solid, white-collar jobs in the service sector but they are also not research oriented or likely to spin-off new nimble start-ups they way, say, a Microsoft development campus might.
One aspect of Florida’s high performance that contrasts sharply with North Carolina is the low marginal tax rate on high income earners. In fact, Florida does not tax income at all while North Carolina hits high incomes at 8.25 percent. This can be a powerful disincentive to small business formation and growth as many of what, for tax purposes, look like high incomes individuals are actually small businessmen and women.
And Florida’s lack of income tax means that there is little incentive to game your year-to-year income to avoid tax. In other words, you do not view “feast” years as including a component of higher marginal taxes. What this does is difficult to quantify, but it is not a stretch to see how by removing tax avoidance distortions you might wind up with more of a swing-for-the-fences, risk taking mindset. This is exactly what all healthy economies need – a core of risk takers to help find the next generation of job creators.
North Carolina, and by extension Charlotte, might want to consider how to cultivate risk talking. Milken report calls this the the “democratization of capital,” and it stands in sharp contrast to how North Carolina and Charlotte have operated recently. Locally the emphasis has been on using public dollars to seed the manufacturing and construction sector with economic incentives. This is the exact opposite of capital democratization, in fact.
Such incentives, in effect, nationalize capital and charge state and local official with being the risk takers, the ones who find new sources of jobs. This approach has the illusion of addressing economic needs but, in fact, does little to improve the long term performance of localities.
The Milken report holds that there is just no substitute for strong cadre of private-sector risk takers:
A metro must be able to innovate, start, grow attract new arms continually to augment the diversity of its economic ecosystem and replace larger, older firms that may stagnate, exit or even disappear. Entrepreneurial capacity and behavior are prime drivers of economic growth and job creation. Entrepreneurs are necessary visionaries of the economic potential of new technologies and how to apply them to business concept innovations.
Regional economic dynamism is epitomized by fast-growing, entrepreneurial companies. For a metro area to be successful over the long haul, it has to have capable entrepreneurs. The very foundation of the theory of clustered economies rests upon the dynamic rejuvenation capability of the cluster. Over the long-term, cities with strength in entrepreneurship will be among our Best Performing Cities — large and small.
The good news for the Charlotte area is that it already has a key component of such dynamism in its entrepreneurial activity, which the study rated the 24th best in the country. This is no doubt a function of the access to capital that comes with be a major banking and financial services center. But Charlotte can do better.
If state and local leaders were to put aside the top-down, incentive heavy model of economic development and commit to holding taxes and regulation at a minimum to coax out risk takers, Charlotte could find itself kick started into true high performance in no time.