Saturday, April 13, 2024

Louisiana needs dynamism to fuel an economic comeback

by BIZ Magazine

Last year, personal income growth was 0.0%, the lowest in the country. And Louisiana had the third highest net out-migration in the country. Louisiana is in desperate need of a comeback.

Current so-called “solutions” to the problem are unlikely to work.

The Legislature increased spending to an unnecessary extent, ignored calls from some to use their surplus of funds from 2022 to go to a “rainy-day fund” in the event of unforeseen circumstances, and have spent as though we expect our population to grow in the future (which is very unlikely given previous trends).

Louisiana needs real solutions that actually increase personal income, bring people into the state (or at the very least, keep those who are already here) and encourage meaningful employment and entrepreneurship to the area.

In short, Louisiana needs to become more dynamic. What does it mean to be a dynamic economy?

The Economic Innovation Group’s 2020 Index of State Dynamism points to eight factors that lead to business dynamism: Startup rates, the share of workers at young firms, growth in total firms, patents, housing permits, reallocation (amongst firms) rate, labor force participation rate and migration rates.

In some way, they all deal with entrepreneurship, innovation and vibrant labor markets.

Louisiana scored quite low (46th out of the 50 states). Some nearby states scored substantially better (Texas, 7th; Florida, 11th; Georgia, 13th); others scored at similar ranks (Arkansas, 41st; Alabama, 45th; Mississippi, 49th).

While there has been a general trend towards less dynamism throughout the country, this impact is different across states.

For instance, Louisiana was ranked the 38th most dynamic state five years ago; looking back even further, Louisiana was the 17th most dynamic economy in 2007.

There are some points of optimism and some clear room for improvement.

Louisiana scored middle of the pack in four indicators: core start-up rate (new business start-ups, 28th), the share of workers at firms less than five years old (20th), housing permits (number of permits per 1000 residents, 27th) and reallocation rate (the churn of workers between firms, 25th).

Note that where Louisiana scores best here is still just middle of the pack—but this at least suggests that there is reason for some optimism. New companies are still being started here, which is likely linked closely to the fact that the share of workers at young firms is slightly above average. Workers are moving fairly easily from firm to firm, suggesting greater competition in the labor market.

Alas, there is much room for improvement.

Louisiana ranks only 40th in the growth of total firms, as well as 43rd in labor force participation rates. This suggests that fewer working-age people are working or looking for jobs. These numbers suggest an inactive labor market.

The declining growth of total firms suggests that places are closing faster than they are starting. Startup rates are in the middle of the road. Coupled with the firm growth data, these close-down rates indicate that many firms are shutting their doors early on.

Finally, there are 0.1 patents per 1000 residents, ranking Louisiana 47th. This measure is a commonly used indicator of innovation in the local economy, which drives long-run economic growth. In an ever-more technology-based economy, Louisiana is not catching up with the rest of the country.

So, what can be done?

As I (and others) have pointed out, we need to change how we conduct regulations, licenses and taxes to become more competitive. According to regulation stringency data from the Mercatus Center, Louisiana had the 10th most stringent regulations by the state Legislature.

Unfortunately, the state is not getting much help from the federal government. The same team at Mercatus also tracks how federal regulations influence states. Louisiana’s economy, as of 2017, was the most regulated state by the federal government. While this is outside the control of Louisiana directly, it does suggest that Louisiana could circumvent this to some degree by becoming a more diverse economy.

Louisiana has the 11th worst business tax climate, according to a 2023 report from the Tax Foundation. This report measures corporate, individual income, sales, property and unemployment insurance taxes. Louisiana ranks poorly in each category with only one exception: Unemployment insurance taxes. A decent dose of anti-corruption in this state could go a long way, too.

If Louisiana wants to achieve the comeback story put forth by the Pelican Institute’s Comeback Agenda, much work is left to be done. These suggestions would be great starting points to attract businesses to move to Louisiana, encourage residents to start their businesses here, and keep those who love this state here.

Justin Callais, Ph.D., is an assistant professor of economics and finance at the University of Louisiana at Lafayette and is a research fellow at the Archbridge Institute.

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