Snaky Politicians Doom the New Hampshire Advantage

In "Snake Market Crash," the Wall Street Journal reports that even though stock prices are getting back to something approaching normal, the market for exotic snakes has collapsed:

Early in 2009, "investment grade" big snakes - critters with genetic mutations that create rare colorings - still held their premium values. But since last spring, the mutant-snake bubble has burst.

Premium pythons that could fetch $40,000 in 2007 now go for half that sum, breeders report. The price for a hypomelanistic boa constrictor, one with a mutation that lightens its skin tone, was $99 on Feb. 1, down from $5,000 in 2007, on Kingsnake.com, a classified-ad site that acts as a market-maker for snakes.

People want snakes as pets.  The rarer the snake's coloring, the higher the price used to be, until the government destroyed the market.

The turning point: Senate Bill 373, which Florida Democrat Bill Nelson proposed in February 2009 to prevent situations like one in the Everglades, where escaped Burmese pythons have devoured native animals. The bill would ban importation and interstate transport of boa constrictors, anacondas and large pythons. A similar antisnake bill followed in the House.

Neither bill has passed yet, but "no one is willing to give me $10,000 for a snake when they think they may be added to an injurious-species list," says Mike Wilbanks, 41 years old, an Oklahoma python breeder.  [emphasis added]

The government doesn't have to pass a law to destroy a market along with many people's livelihoods.  This bill hasn't passed, but just having legislators talk about a new law wiped out the market.

This is a perfectly natural consequence of our conceding that the government has the right to regulate pretty much anything it chooses.

The Massachusetts Miracle

When I entered college in Boston many decades ago, Route 128, the circular beltway around Boston, was booming.  Graduates of MIT, Boston University, Harvard, and many other Boston-area universities were starting businesses as they graduated from college.  At the time, believe it or not, there was no Massachusetts sales tax!

All good things come to an end, of course.  Over time the Massachusetts legislature harmed many businesses and drove entrepreneurs to California by boosting taxes to the point that it was better to move 3,000 miles and find a whole new set of business contacts than to stay in Massachusetts and pay Massachusetts taxes.

As taxes went up, some entrepreneurs moved to New Hampshire which had neither a sales tax nor an income tax.  Although New Hampshire had no major airport and there were no banks that could handle a growing business with international sales, a significant number of entrepreneurs took advantage of what became known as the "New Hampshire Advantage" of lower taxes and much cheaper real estate.

Loose Lips Sink Economies

I was recently talking with a friend who's been involved in over 100 start-ups.  His first forays into entrepreneurial capitalism were in Massachusetts; I worked for him at one of his Massachusetts start-ups before he moved north.

When he left the People's Republic of Taxachusetts about 30 years ago, I thought it was because taxes were going up; that was the reason I moved a few years later.  In our recent conversation, however, he told me the real reason he'd left.

It wasn't because taxes were going up.  They were, he said, but the rate hadn't gotten to the point that it was worth the trouble for him to move quite yet.  What drive him out, then?  It was a law that didn't pass.

Massachusetts legislators had noticed that more and more entrepreneurs were moving to California and fewer were starting businesses in Massachusetts.  What's worse, some entrepreneurs who'd started in Massachusetts were moving their business west as the owners realized how much money the move would save them at tax-time.

It's the nature of legislators to legislate regardless of consequences.  The Democrat's determination to ram Obamacare through regardless of the public's views and regardless of the fact that it will make our entitlements crisis a lot worse shows that politicians don't care how their laws work out, they just want to pass laws.

There was no need for the legislators to ask why entrepreneurs were leaving - the entrepreneurs had told them, over and over, that taxes were getting too high.  Nobody even thought about lowering taxes; the state employee unions who supported the legislators would have a cow.  So they proposed a law making it illegal to move a business from Massachusetts to another state.

"Yipe," you may say, "they can't do that!"  Well, maybe the Commerce Clause of the US Constitution means they can't actually, but what entrepreneur wanted the hassle of a lawsuit?

Starting a new business is very hard.  Investors figure that if one new venture in 10 succeeds, they're doing well.  The last thing a busy entrepreneur needs when he's laboring to earn enough money to be able to pay more taxes is regulatory hassles.

The law against businesses moving out of Massachusetts never went anywhere, but the fact that they talked about it at all panicked the Massachusetts investor community.  The venture capitalists advised would-be entrepreneurs to start the business anywhere but Massachusetts; they didn't want to run the slightest risk of being told they couldn't sell the business to someone who wanted to move it to Chicago.

When I look back on it, I remember that the Massachusetts Miracle withered away awfully fast, virtually overnight.  I now know why - Massachusetts venture-capital start-ups suddenly ceased absolutely.  Why start a business in Massachusetts if the state might give you grief if you decide you have to move?

The End of the New Hampshire Advantage

My friend moved to New Hampshire and helped to start another 70 or 80 companies.  Maybe 1 in 10 or 20 succeeded, but what about the rest?

A few, maybe 1 or 2 out of ten, disappear entirely.  The money goes down the drain, the doors shut, and it's all over.  If 1 succeeds and 2 disappear, what about the other 7?  They hang on, making no profit, but the entrepreneur can't let go because he knows he can make it work with just a little more effort.  The investors won't put in any more money, but as long as the entrepreneur covers his costs, he can go on forever.

Some of us call them "zombie corporations" because they're the walking dead - they neither grow nor fail.  From the government's point of view, a zombie corporation is no bad thing; it has no taxable profits but it employs people, if only a handful, who pay taxes.  No individual zombie corporation is any big deal, but a lot of them together can make a noticeable difference to unemployment.

My friend ended up with stock in a lot of zombie corporations operating in New Hampshire.  He kept them going hoping that lightning would strike because you never know.  It didn't cost anything to keep them alive, so why not?

Unfortunately for New Hampshire, Massachusetts taxes and housing costs got so high that many people who were perfectly happy with Massachusetts liberalism left for New Hampshire just to find housing they could afford.  Most of them didn't realize that liberal policies were what had made it impossible for them to afford to live in Massachusetts; they started voting for liberals in their new homes.  Massachusetts refugees gradually turned New Hampshire blue until we now have a Democratic legislature and governor.

State spending went up because that's what liberals do, although nobody besides state employee unions noticed any benefits from the added spending.  With the financial crisis, New Hampshire ran out of money, but, as with Massachusetts, cutting spending was abhorrent.

Early this year, the legislature introduced a law to tax businesses on their total sales whether they made a profit or not.  Even if a business made a loss, it would have to pay a tax on total sales.

That law didn't pass because business owners raised Cain, but it came a lot closer to passing than the Massachusetts law against moving businesses out of Massachusetts.

That was the last straw for my friend - his zombies couldn't operate any more.  Although the law didn't pass, it would probably be back next year because the chances of Democrats cutting spending are close to nil.  The law as written was retroactive - he would have had to pay taxes on past sales even in years when he ran at a loss.

Not having any idea what his retroactive liabilities might be, my friend did the rational thing and shut down his zombies, laying off all their employees.  The businesses weren't paying any taxes, but the employees had been earning money; now they're collecting unemployment.  More jobs lost, thanks to ill-considered palaver by politicians.

"But," we can hear the politicians saying, "we didn't raise the tax, and it doesn't apply until a business gets big enough to afford it."

Politicians have no clue how long it generally takes for a business to turn profitable.  Some businesses need a lot more sales volume than expected because there are lots of unanticipated expenses; that's why so many start-ups turn into zombies.  The fact that the legislature would talk about a tax on businesses that lose money and that they planned to make it retroactive means that they have no idea why entrepreneurs would start businesses in New Hampshire - low taxes and lower rents make it more likely they can make the business profitable before they run out of investment money.

Entrepreneurs don't know much about politics as a general rule, but Mark Twain's observation that no man's life, liberty, or property are safe while the legislature is in session is burned into their souls.  New Hampshire lacks the legal, banking, and technical infrastructure to support start-ups; low taxes and a business-friendly government made up for enough of that for my friend and many of his associates to partake of the New Hampshire Advantage.

Now that the government has demonstrated that it can't be trusted, New Hampshire shouldn't expect many new investment-driven businesses to choose New Hampshire.

Killing the National Advantage

Everyone knows, or should know, that America prospered in the past because people such as Bill Gates, Henry Ford, H.J. Heinz and countless others founded businesses that grew, sold products people wanted to buy, and hired workers to meet customer needs.  That works only so long as entrepreneurs and businessmen believe that conditions won't change on them.

Like the New Hampshire and Massachusetts legislators who created economic uncertainty and killed existing jobs, the Obama administration is creating uncertainty that's killing future jobs. The Wall Street Journal documented this phenomenon:

In a letter to his shareholders, Edward S. "Eddie" Lampert, chairman of Sears Holdings, summed up how Washington's political obstacles may impede a robust recovery:

"Sears Holdings shares the stated goal of many public officials of creating jobs. But, we don't believe that we need large government programs to generate these jobs. Public officials often fail to recognize the obstacles they place in the way of job creation. For example, over the past year proposal after proposal has been put forward to reform health care, reform the financial system, increase taxes, and add regulations, all with the intention of making the United States a better and stronger country.

"Yet, as a business, trying to understand which of these proposals might become law, what their impact might be on business prospects and competition, and what additional costs they might impose creates a great deal of uncertainty. It has led our management team and board (and I am sure those managements and boards of other companies) to spend inordinate time trying to determine which investments we should make, defer, or cancel and which jobs to create, maintain, or eliminate. The removal of this uncertainty and the constant drumbeat of new threats against various businesses would go a long way to allowing American entrepreneurial energy to be unleashed." [emphasis added]

Here's a businessman explaining to his stockholders why their business can't grow - there's so much uncertainty that they can't decide which jobs to "create, maintain, or eliminate."  That's bad enough for an established business, but when an entrepreneur's working 18-hour days getting a business off the ground, there's no way he or she can "spend inordinate time" figuring out how to cope with upcoming regulations.  If regulatory uncertainty can stop an existing business from creating jobs, what do you think it does to companies that aren't even founded yet?

It's Not Just New Hampshire

New Hampshire legislators are not the only ones who cavalierly destroy jobs.  Governments have been looking greedily at taxing Internet sales since there were Internet sales.  Fortunately, the federal government passed a law against taxing internet sales unless the vendor had a site in the state.

Several scandals ago, New York's (now ex-) Governor Spitzer proposed a law that would force Amazon to pay New York sales tax.  This was because Amazon allows affiliated merchants to advertise through their web site.  Amazon provides a guarantee, so customers are willing to buy from tiny vendors whom they don't know.  This is good for economic activity, but governors lust to tax the money.

Spitzer's position was that all these Amazon affiliates who were located in New York State meant that Amazon had locations in New York and therefore had to pay sales tax.  That proposal disappeared along with Spitzer, but other governors took notice.

In "Amazon Hits Back at Colorado Web Sales Tax," the Wall Street Journal reports that the State of Colorado tried to get around the prohibition against taxing internet sales by requiring that Amazon report all sales to Colorado residents to the state government so that the state could go after them to collect the tax.  Amazon emailed its Colorado retailers and pulled the plug on them so that they could not be said to have locations in Colorado.  The Journal reported:

Colorado Governor Bill Ritter said, "Amazon has taken a disappointing-and completely unjustified-step. Amazon is simply trying to avoid compliance with Colorado law."

Well, duh!  Of course Amazon is trying to avoid compliance with Colorado law!  Amazon knows how their customers would feel about having their purchases reported to the state government; pulling the plug on their Colorado affiliates was much less damaging than reporting their sales to the state would have been.

I have friends in the book business who tell me that Internet sales make the difference between closing the doors and surviving.  How many jobs has Colorado destroyed?

Most states increased their budgets by hiring lots of new state employees during the boom times.  Why not cut state workers pay now?  Why not eliminate a few government jobs?

Words Have Meaning

The Wall Street Journal told us how the government wiped out the market for exotic snakes, killing jobs at snake breeders and at the businesses which sold rats to feed the snakes, simply by introducing a law that hasn't gone anywhere.

Most of the proposed regulations cited by Mr. Lampert won't become law but there is no way to tell in advance: talking about new regulations creates uncertainty.

Years ago, Massachusetts forced the Massachusetts Miracle into cardiac arrest by talking about a law.

We've seen New Hampshire do its very best to drive away job-creating new businesses by proposing a retroactive tax on businesses even if they lose money.

Never having earned any money by creating value themselves, politicians evidently have no idea how hard it is.  Having confidence in their ability to get more money by raising taxes, they can't understand how easily investors can lose confidence in their businesses' ability to sell products.

Entrepreneurs labor mightily to put themselves into positions where they'll have to pay lots of income tax and to hire lots of employees who'll pay lots of income tax; so do the leaders of established businesses.  The head of Sears Holdings says his company wants to create jobs.  What's wrong with that?

Politicians need to watch what they say.  They don't have to pass laws to destroy jobs.  Just talking about raising taxes or new regulations can shut businesses down on the spot.