Oct 28, 2019

San Francisco, Entrepreneurs, and the Cost of Doing Business

Adam Thierer Senior Research Fellow

One of the keys to improving the standard of living for citizens is to make sure it isn’t too difficult for them to form new businesses or find good jobs. Unfortunately, some governments make that process harder than it should be. San Francisco serves as a prime example. An important new report just out from Arizona State University proves that.

“Doing Business North America,” is a wide-ranging comparison of six types of business regulations in Canada, Mexico, and the United States. The almost 200-page report was released by the Center for the Study of Economic Liberty, a joint endeavor of the W. P. Carey School of Business and the School of Civic and Economic Thought and Leadership. The effort was spearheaded by my old colleague Stephen Slivinski and a team of other scholars and students at the Center.

The report is a major undertaking that examines how 115 North American cities rank overall, as measured by six categories: starting a business, employing workers, getting electricity, registering property, paying taxes, and resolving insolvency. Among all US cities, San Francisco ranks dead last with a score of 59.04 out of a 100. Of the 115 cities evaluated in Canada, Mexico, and the US, San Fran ranked 77th. By comparison, Oklahoma City ranked first in overall ease of doing business with a score of 85.22.

Shockingly, things appear ready to get a lot worse for the citizens of San Francisco. In my latest column for the American Institute for Economic Research, I discuss the city’s newly proposed Office of Emerging Technology.  This new bureaucracy, which would be within the city’s public works department, would impose a new permitting system on anyone looking to launch new technologies that might somehow use public rights-of-way, such as sidewalks and roads. Innovators who fail to pursue and receive the appropriate permission slips will face civil and criminal penalties.

As I note in my column, this new permitting office “would discourage entrepreneurial efforts, consumer choice, and new employment opportunities,” because:

Whenever bureaucrats are in charge of an innovation-by-permission-slip regime, a line will form to get permits on the best terms possible. Whoever is the most clever and well-connected will get access first. Scrappy start-ups won’t have the resources to play the lobbying game or navigate the costly and complicated permitting system. Innovation will suffer.

Citizens respond to incentives and when laws and regulations raise the cost of doing business it stifles the entrepreneurial spirit. The problem with our ever-expanding “permission society,” as Goldwater Institute attorney Timothy Sandefur describes it in his latest book, is that “when told that they will have to undergo expensive and time-consuming permit processes before being allowed to pursue a new idea, many simply give up without trying.”

Or, they relocate. As I note in my column,

Innovation arbitrage is a phenomenon that the city should be worried about. It refers to the movement of ideas, innovations, or operations to jurisdictions that provide a legal and regulatory environment more hospitable to entrepreneurial activity.

Innovation arbitrage is becoming easier in the Internet Age than it was in the past. Many cities and states are experiencing an outflow of talent because of onerous policy regimes that prioritize red tape and vague notions of the public interest over worker opportunities and consumer choice. If San Fran’s new anti-innovation office is established, it wouldn’t be surprising to see many firms and individuals relocate to areas with greater freedom to experiment.

It may already be happening for other reasons. For example, Stripe, one of the world’s most valuable startups, is apparently considering moving out of the city. According to the San Francisco Chronicle, “the payments processing company, valued at $35 billion, is considering moving about 10 miles away to South San Francisco, said two people familiar with the company’s potential plans.” Apparently, Stripe is considering the move due largely to the lack of available office space and the seeming unwillingness of the city to address chronic office and housing shortages.

So, if you add together burdensome permitting processes, high costs of housing and office space, and high taxes (with new ones being proposed all the time), you get a recipe for economic stagnation and a lowered standard of living for your citizenry. What makes this particularly sad in San Francisco’s case is that the city is, at once, brimming with entrepreneurial potential but also chock full of serious social problems. Economic opportunity can be part of the solution to some of those problems, but opportunities of entrepreneurial dynamism won’t happen so long as the city makes it so costly to form new businesses and pursue new jobs. Hopefully, San Francisco and other cities learn this lesson and relax burdens to innovation and new business formation.

Photo by Justin Sullivan/Getty Images

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