The report, “State Job Creation Strategies Often Off Base” takes advantage of new data accumulated over the last fifteen years “about which kinds of firms create jobs” and the data shows that the “vast majority of jobs are created by businesses that start up or are already present in a state — not by the relocation or branching into a state by out-of-state firms.”

The immediate takeaway from this report for Rhode Islanders is that Governor Gina Raimondo’s planned (yet not realized) trip to Davos and the time she spent trying to persuade General Electric (GE) to move to Rhode Island rather than to Massachusetts are wastes of time and money. Raimondo’s offer to GE was in the “same neighborhood” as Massachusett’s $140 million in state and city incentives and grants.  Given the conclusions in this report, Rhode Island dodged a bullet when GE turned Raimondo’s offer down.

I asked the authors of the piece directly about the governor’s plan to travel to the World Economic Summit in Davos and they told me, “That is not where state economic development comes from and that’s really not where policy makers should focus. They should focus on homegrown businesses and try to stimulate startups and helping their businesses that are already in the state to find customers and find the skilled workers they need. Business recruitment accounts for such a tiny share of job creation and that’s really a major point of this paper. It is not where the priority should be placed.”

In other words, we are, as a state, pursuing failed economic and job creation strategies, and we will continue to fail unless we take this new data seriously.

On average, 87 percent of new jobs are created by businesses already in the state. In the chart below, you can see that Rhode Island is no outlier in this department. The remaining 13 percent of jobs come from out of state businesses branching into the state (think of a restaurant chain in Boston adding a store in Providence) or a business actually relocating into the state, as GE recently did when they moved to Massachusetts.

What kind of businesses stimulate job creation? The report stresses that “startups and young, fast-growing firms are the fundamental drivers of job creation when the U.S. economy is performing well.”

The report quotes economist John Haltiwanger and his colleagues as saying, “Overall, the evidence shows that most start-ups fail, and most that do survive do not grow. But among the surviving start-ups are high-growth firms that contribute disproportionately to job growth. These high-growth young firms yield the long-lasting contribution of start-ups to net job creation.”

The firms that take off are called “gazelles.” Think Google, Amazon, Tesla or Under Armour, or, in Rhode Island, think NuLabel. These kind of firms accounted for about 15 percent of all businesses, but were responsible for half of gross job creation from 1992-2011.

Failed Policies

In trying to create a “business friendly climate” that will lure small businesses to the state, our leaders, like leaders in many other states, have pursued strategies that are “bound to fail because they ignore the fundamental realities about job creation revealed by the new data and research discussed above.” A favorite failed strategy is tax cuts for “small businesses.”

These tax cuts are not properly aimed at young businesses, they are aimed at small businesses.  Most small businesses don’t have employees or plan to add employees. And targeting tax cuts to young businesses has little effect because most young businesses spend so much money on new equipment, product testing and marketing that they have little in the way of taxable income in the first place.

Tax cuts don’t help a state’s business climate, but they do hurt a government’s ability to do the important work of funding education and maintaining a top notch infrastructure. The report cites an Endeavor Insight study that showed that only 5 percent of entrepreneurs cited low tax rates as a factor in deciding where to locate their company, whereas 31 percent cited access to talent (education) and a city’s quality of life as a factor.

Offering tax breaks and non-tax incentives to lure out-of-state companies to our state is also a losing game. In Rhode Island we are addicted to TSAs, Tax Stabilization Agreements, which allow companies and developers to avoid paying their fair share of taxes and shifts the businesses’ tax burden onto the rest of the city or state taxpayers. As the report clearly shows, “jobs gained due to firm relocation are such trivial factors in a state’s overall job creation record that they should not be a consideration in formulating state tax policy or economic development policy more broadly.”

A look at statements made at the recent Greater Providence Chamber of Commerce luncheon reveals that our elected leaders haven’t gotten this message yet.

Here’s Senate President Teresa Paiva-Weed talking about the importance of tax cuts:

Here’s Senate Majority Leader Dominick Ruggerio talking about tax stabilization agreements to spur development:

Here’s Senate Minority Leader Dennis Algiers on “broad-based” tax cuts, which we’ve seen are not only not effective, they are counter-productive:

Here’s Speaker of the House Nicholas Mattiello talking about how “incentives” (i.e. tax breaks) “attract new people to our state.”

Continuing to pursue strategies that have been shown to hinder rather than help in job creation would be foolish in light of the data in this new report. Instead, “policy needs to focus on encouraging entrepreneurship generally, helping new businesses to survive, and enabling businesses with the potential to become high-growth firms to fulfill that potential.”

When Governor Gina Raimondo attends the World Economic Forum (WEF) in Davos, Switzerland for four days this week, she’ll be one of many political leaders having private, off-the-record meetings “with high-ranking representatives of the world’s leading corporations.” Putting aside that many of the corporations that fund WEF and set the forum’s agendas “have criminal records, are under investigation for potential criminal activity (e.g., bribery), are mired in significant legal/ethical issues, or have blatant conflicts of interest,” there is the question of what, if anything, actually gets done there.

WEF attendees talk a lot about the problems of the world, such as Climate Change and Economic Inequality, (This year they plan to talk about “Mastering the Fourth Industrial Revolution” for instance) but the tools participants have at their disposal to deal with these problems, economic and political power, are not the tools that will effect real solutions.

“The governor’s top priority is creating jobs and turning around our economy so everyone has the opportunity to make it in Rhode Island,” said Raimondo spokesperson Marie Aberger, “An important part of her job is selling Rhode Island to attract new businesses and opportunities to our state.”

Sure, some billionaire may move a few jobs towards Rhode Island if Raimondo can catch the right ear, but this does nothing to address the systemic issues mentioned above.

Failed tax policies and wasteful investments in fossil fuel infrastructure can be dealt with through smart policy adjustments without having to travel to Davos. In a recent Brookings Institute report on inequality where Providence fared especially poorly, the authors suggested that, “Housing is an area where local officials—mayors, city councilors, county executives and commissioners—have somewhat greater scope to address needs, at least by influencing the supply side of the market.” This is something Raimondo could help begin to address from her State House office, no trip to Switzerland required.

But there is another reasons to make the pilgrimage to Davos.

WEF has been criticized for being populated with corporate “transnationalists” who “have little need for national loyalty, view national boundaries as obstacles that thankfully are vanishing, and see national governments as residues from the past whose only useful function is to facilitate the elite’s global operations.”

A journey to Davos, then, could be wasted on a gamble to court the favor of the criminal corporate elite and to beg financial indulgences from the masters of the universe, or the journey could be one of neoliberal salvation, a chance to transcend petty human concerns and perhaps join the ranks of the those who live far above the law and make decisions not based on compassion or human rights but on the basis of profit and power.

This is the apotheosis…

…transcendence though capitalism.

This is the true promise of Davos.