Ideology Isn't Good Business.

CNN Money offers us the 10 best states to start a business in, which can teach us that blind obedience to ideology doesn't make for a smart business strategy. CNN is basically reprinting a report from the Small Business and Entrepreneurship Council, whose definition of a good state to start a business in is "any state with a minimum of regulation and taxation." For that reason, South Dakota, Nevada, and Wyoming top the list.

Not to knock any of those fine states, but there's a reason we don't necessarily think of those states as business meccas, and it's because there's more to making a profit than avoiding government interference. In fact, government interference is often helpful.

Why did Silicon Valley emerge as a top business center? The U.S. Navy established a research site there and the Department of Defense provided a good deal of initial funding for tech research, Stanford University made a point of encouraging high-tech start-ups, and public universities like San Jose State supplied a stream of engineers. Other things that make for good business: Available financing, transportation and technological infrastructure, well-trained employees, a large customer base and prospects for economic growth. Those states that don't bother businesses with rules and levies are also those that might be missing all those other factors.

A more holistic ranking of state economies would be more helpful to entrepreneurs. The 2008 New Economy Index (sorry there's not a more recent version that I could find) factors in "knowledge jobs, globalization, economic dynamism, transformation to a digital economy and technological innovation capacity," and finds the best states are Massachusetts, Washington, Maryland, Delaware, and New Jersey. Other factors matter, like unemployment (Nevada and Wyoming, two of CNN's picks, both have high unemployment; Nevada's is the highest in the country) and economic growth. Even CNBC, a network not known for setting aside its libertarian ideology, included factors like these for its recent state business ranking.

In fact, CNN's recipe is one that leads to businesses establishing their corporate headquarters in a state to avoid regulation -- see credit card companies in South Dakota -- but bringing little economic benefit to the state's residents. On the other hand, CNN calls Washington, D.C. one of the worst places to start a business, but by and large the city's business has thrived during the recession thanks to its proximity to government -- it's main unemployment problems come from long-standing structural inequality in race and education.

There's no doubt that taxes and regulation impose real costs on business, and good policy-makers will take into account the incentives their decisions create. Good business people, though, are smart enough to know that there's much more to making money than bearing an ideological grudge and that public investments can help lay the groundwork for a successful economy.

-- Tim Fernholz

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