Entrepreneur-Friendly Ranking Meaningless: Pro-Biz Policies Not Driving SD Success

Todd Epp reports that the Small Business and Entrepreneurship Council has ranked South Dakota number one for entrepreneur friendliness. Dakota War College parrots this report without analysis and draws no more discussion from its addled audience than one anonymous meatball who says the report "will surely make Heildeburger's head explode."

Permit me to analyze and spell things correctly.

The SBE Council rankings didn't make my head explode five years ago, when I dismantled their propaganda in a series of four posts:

1. The SBE Council is another head on the hydra of right-wing organizations created to wage war against liberal democracy and the working class. These rankings are based on a Republican/crony-capitalist ideological wishlist, not analysis of actual business performance. Since my analysis of their 2009 propaganda, the SBE Council has at least changed the name of its index from the "Small Business Survival Index" to the more accurate "Small Business Policy Index."
2. I found South Dakota businesses performing well below Minnesota and national averages on receipts and payroll.
3. I found that the SBE Council's anti-tax agenda ignored the results of research showing tax policy doesn't have the impact on entrepreneurship that the council assumes.
4. I found that investment in public services can be at least as good for business as the SBE Council's preferred anarcho-capitalism.

I stand by all four of those critiques and add two more.

First, in the only whiff of reality-based analysis, SBE Council economist Raymond J. Keating asserts the validity of the Small Business Policy Index by reporting that "when it comes to economic growth, population growth, and shifts in population among the states, for example, the top 25 states on the Index perform, on average, far better than the bottom 25 states.” You can check Keating's numbers in the full report, but order your carts and horses. Population growth itself drives economic growth, and economic growth could draw migration. That model by itself could drive good numbers, while the SBE Council's index sit cheering uselessly on the sidelines for policies that don't figure in the equation.

Second, actual small-business survival rates show the Small Business Policy Index is practically meaningless. The Small Business Administration measured survival rates in 2012 for small firms started two years, five years, and ten years previously. (Yes, I'm comparing Keating's 2014 calculation with SBA's 2012 data. Salt accordingly, and feel free to work up your own chart.) Nationally, 67.7% of small firms lasted two years, 45.5% lasted five years, and 34.4% lasted ten years. The comparable survival rates for South Dakota firms are 72.7%, 55.0%, and 43.9%. We're fourth best on two-year and second best on five and ten. That's pretty good!

But on ten-year survival, Hawaii, which ranks 47th on SBE Council's policy index, comes in 4th for small business survival with 42.3%. Six of the top ten states for ten-year survival are in SBE Council's bottom 25.

Here are the average small business survival rates for the SBE Council's top 25 and bottom 25 states:

	2yr	5yr	10yr
SBE top 25	67.4	46.1	35.9
SBE bottom 25	68.2	46.8	35.7

A larger percentage of small businesses fail in their first two years in SBE Council's top 25 states than in the bottom 25. The bottom half see a few more new firms hang on for five years. The tide turns by year ten, when the percentage of small firms surviving in SBE Council's more entrepreneur friendly states finally beats those surviving in the less entrepreneur friendly states... by two tenths of a percentage point.

Scientifically, the numbers Keating cooks up have little to do with real-world outcomes for small businesses. Check the correlations:

correlations	2yr	5yr	10yr
SBEC policy rank	0.1037	0.0966	-0.1034
SBEC policy index	0.0885	0.0733	-0.1470

Remember, when we're talking correlations, we're talking numbers from –1.0 to +1.0. Zero means there is no predictable relationship. +1.0 means a perfect correlation, with one variable rising consistently as the other rises. –1.0 means a perfect negative correlation, with one variable decreasing consistently as the other increases. The closer the numbers get to zero, the less reliable the relationship.

Short form: the correlations you see here, with magnitudes between 0.07 and 0.15, don't amount to a fart in a wind storm. Those negative numbers in the ten-year column suggest that if anything, the policies Keating and the SBE Council like actually predict that small firms are slightly more likely to go under in the long term. The correlations are so small that a good statistician will march in and tell you we can't distinguish these numbers from throwing darts at a spreadsheet (printout, please, not the screen!).

South Dakota's small businesses have better survival rates than the national average, but that performance does not arise from the policy preferences Keating and the SBE Council advocate.

The Small Business and Entrepreneurship Council is in the business of propaganda, not real analysis. Their ideological wishlist ranking of states for entrepreneur friendliness tell us nothing about actual business results in each state.

p.s.: You can view the SBE Council ranks and indices alongside the SBA's survival rates on this spreadsheet. Enjoy!