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Here’s the Number One Reason States Fail

The number one determinant of a city’s success is regulations.
Jared Dillian is the editor of Bull’s Eye Investor, an investment advisory that uses a top-down approach and macroeconomic analysis to identify profitable investments, with a particular focus on behavioral economics. Bull's Eye Investor is a Mauldin Economic publication. Before joining Mauldin Economics, Jared Dillian had a successful career as one of Wall Street’s preeminent risktakers. He started his financial career as a clerk on the floor of the Pacific Options Exchange, where he fetched lunch and ran risk reports and learned everything there was to know about the derivatives markets. After receiving his MBA from the University of San Francisco, he traveled to New York to become a trader for Lehman Brothers. He worked there from 2001 to 2008, bookended by 9/11 and the bankruptcy, first as an index arbitrage trader and then running the ETF desk for a number of years. Under his leadership, Lehman’s ETF effort grew to be number two on the Street in terms of market share and was routinely trading over $1 billion a day in volume.
Jared Dillian is the editor of Bull’s Eye Investor, an investment advisory that uses a top-down approach and macroeconomic analysis to identify profitable investments, with a particular focus on behavioral economics. Bull's Eye Investor is a Mauldin Economic publication. Before joining Mauldin Economics, Jared Dillian had a successful career as one of Wall Street’s preeminent risktakers. He started his financial career as a clerk on the floor of the Pacific Options Exchange, where he fetched lunch and ran risk reports and learned everything there was to know about the derivatives markets. After receiving his MBA from the University of San Francisco, he traveled to New York to become a trader for Lehman Brothers. He worked there from 2001 to 2008, bookended by 9/11 and the bankruptcy, first as an index arbitrage trader and then running the ETF desk for a number of years. Under his leadership, Lehman’s ETF effort grew to be number two on the Street in terms of market share and was routinely trading over $1 billion a day in volume.

Seattle recently passed a 2.25% income tax for incomes above $250,000, and $500,000 for couples.

It was the latest in a number of attempts to levy some form of income tax in the state. Such an income tax is unconstitutional, and the courts blocked it. The city is considering an appeal.

But the bigger news is that the city council recently passed a $275 “head tax”—literally a tax on every job in the city. Or at least, a tax on every full-time employee in businesses with more than $20 million in annual revenue.

The head tax was even more controversial than the income tax.

Amazon AMZN, who obviously employs a lot of people in the city, stopped work on a construction project in town, putting a bunch of jobs at risk.

The point of the tax was to raise revenue to fight homelessness. But if what is going on in San Francisco is any guide, the effort to “fight” homelessness usually ends up encouraging it.

Jobs are a curious thing to tax. If you tax something, you get less of it, and I can’t imagine a government body anywhere that would explicitly be against jobs.

But this is Seattle—ops normal.

Why States Fall and Rise

Nobody wants to be Detroit, or the “new” Detroit. Or, for that matter, 1970s, Taxi Driver-era New York. I went to Milwaukee about a month ago—no fun.

Why do some cities succeed where others fail?

I’m going to answer that question with an admission: I don’t know the full answer.

We know in some cases what doesn’t work. In the case of my own hometown, Norwich, Connecticut, harassing businesses until they leave town and set up right outside of city limits doesn’t work.

In the case of old New York, spending money and bankrupting your city didn’t work.

People like saying that liberal politics did Detroit in, but Detroit is also obviously a victim of economic forces far outside of its control. So there is a bit of luck involved, too.

Here’s a short list of what makes for a prosperous city:

  1. Few and fair regulations
  2. Low taxes
  3. Good infrastructure/transportation
  4. Smart people
  5. Stable, predictable politics
  6. Good weather (it counts more than you think)
  7. Education
  8. Low crime
  9. Clustering (where several businesses in a particular industry cluster together: like San Francisco for tech, New York for finance)
  10. Supply of housing

Notice I did not say “price of housing.” If you have a good supply of housing, the price takes care of itself.

But the number one determinant of a city’s success is regulations.

Check out this great piece on former Washington D.C. mayor Marion Barry, written by the libertarian Jeffrey Tucker.

Barry was famously corrupt, and when his regulators would descend on businesses with citations, the businesses would pay them a little bit to go away, and they would go away.

After Barry’s fall from grace and his successor was appointed, the city ground to a halt because the regulators actually had to enforce all the ridiculous regulations. Really amazing.

You can do a lot of damage to a city if your City Hall is full of business-hating ideologues.

Seattle’s Future

Seattle probably won’t end up like Detroit. It’ll end up like San Francisco, filled with billionaires and vagrants.

The bodega owners, the cab drivers, the hot dog stand guys—those people work really hard for not a lot of money—they are the lifeblood of any large city. If you make things difficult for them, everyone’s quality of life goes down… and people leave.

Today’s New York is an interesting case study. In the de Blasio era, quality of life has been on a slight decline the last five years, but not enough to make people leave.

No, it is the elimination of the state and local tax deduction that will make people do that.

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