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State business rankings aren't bunk

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By Richard S. Davis
Published:
Economist Peter Fisher doesn't think much of business climate studies. And he and the groups he works with hope you agree with them. If you do, they think it will make it much easier for them to convince legislators to raise taxes and expand regulation.
Dispensing with scholarly niceties, he calls competitiveness studies "ideologically charged pseudo-social science published to further the interests of corporations and rich people ... artifacts of corporate adequacy."
This is from a report he produced this month for Good Jobs First, a left-leaning advocacy group. It's largely an update of a 2005 piece he did for the Economic Policy Institute, another labor-backed outfit.
The report's combination of rhetorical riffs and academic analysis garnered some headlines. One memorable but not atypical example: "Why state business climate rankings are bunk."
Nationally syndicated columnist Neal Peirce picks up the theme, citing the rankings' ostensible "tilt toward pared-down, low-cost, minimal state government," which he says "seems perilous when the states, still struggling to restore pre-recession spending levels, face escalating Medicaid obligations plus massive needs for" education and transportation.
Fisher primarily rips four reports published by groups with a fiscally conservative or free-market policy orientation. Each creates an index that ranks a variety of factors, with an emphasis on taxes and business costs. Although Fisher indicts the groups' ideological tilt, he also gripes that they reach different conclusions, with 22 different states ranking in the top 10 among the four reports.
Like most good spinners, Fisher rests his claim on a truism. Business climate rankings are inherently and invariably flawed and subjective. I've written before that what we call a business climate has many dimensions. It's more accurately an assortment of micro-climates. For example, what makes a place good for tech (excellent universities, urban densities, innovative industries) doesn't make it great for low-skill manufacturing. Sometimes it makes more sense to compare metro areas rather than states.
It's easy, then, to criticize the rankings as being simplistic, one-dimensional misrepresentations. But that's a commonplace observation, not a revelation, not news. And it misses the point. As Tax Analysts editor Cara Griffiths writes, rankings "provide valuable information and they get noticed." By prompting debate, they advance policy development.
Scott Drenkard, a Tax Foundation economist, writes that Fisher's "main conclusion is that we should throw out all business climate rankings because they 'contradict' each other. This argument is a non-sequitur. States score differently in different indices because the indices measure different things."
Fisher dealt with research that primarily assessed taxes and business costs. Other studies stress states' economic performance or executive perceptions of "business friendliness." While they don't line up perfectly, there's more consistency at the top and bottom than the critics lead you to expect.
Consider two recent reports. Chief Executive magazine's CEO survey gave top marks to Texas, Florida, North Carolina, Tennessee and Indiana. Site Selection magazine, blending policy and performance measures, came up with a nearly identical ranking with Georgia replacing Florida in the top five.
Last September, the San Francisco Federal Reserve Bank published a review of 10 business climate indexes, half dealing with business costs and half with quality-of-life issues and assorted productivity measures. Significantly, the researchers found that "the economies of states ranked high on the tax-and-cost indexes tended to grow faster than the economies of states ranked low on these indexes."
It's nonsense to argue that there's nothing to be gained by looking at business climate indicators. States learn from the competition. The best approach considers the key factors contributing to business success, including taxes, regulation, infrastructure, and education.
The Washington Roundtable takes that approach and has crafted benchmarks looking at costs, quality of life and innovation. With relatively high business costs and middling education performance, our state gets mixed reviews. It's a useful guide for policymakers who want to spark job creation and expand opportunities for Washington residents.
Businesses seeking to relocate or expand don't rely on business climate indexes. But they do consider the array of costs, amenities and comparative advantages offered by competing suitors.
A state with competitive business costs that can also boast an enviable quality of life, excellent schools, and a superior transportation system will fare well. And it will dominate every business climate ranking.
Richard S. Davis is president of the Washington Research Council. His email address is rsdavis@simeonpartners.com


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