(Or Do We Mean the\u00a0Political Parties)<\/strong><\/p>\n The Second War Between the States<\/p><\/div>\n Everyone in economic development\u00a0has heard\u00a0about state\u00a0business climate and the ratings and rankings that are published\u00a0by virtually\u00a0every Think Tank, Trade Association and Policy Institute in the nation. You know, the one’s that are headlined on Yahoo News\u00a0\u00a0“East Lugwrench is Number One in the Nation for\u00a0UGGs found on the highway”. This headline\u00a0is usually followed by an ad in Area Development by the Economic Development Department of East Lugwrench urging all to relocate to the UGGs capital of the nation. “You “shoe’d come to East Lugwrench” “We’re not UGGly any more”!<\/p>\n The use of business climate rankings\u00a0as an economic development strategy is pervasive throughout the profession and its use is\u00a0certainly not in decline. Now that, for example,\u00a0we have\u00a0tip-toed into 2013, there will be\u00a0raft of these rankings telling us who\u00a0did what in 2012. Several are already published.\u00a0The Curmudgeon is writing this review because he believes you should make a New Year’s resolution not to enter into this silly and politicized minefield.<\/p>\n Having set the stage, the reader\u00a0probably expects that the Curmudgeon will\u00a0review and critique\u00a0several of the more prestigious business climate rankings such as State Business Tax Climate Index,\u00a0 the CNBC Annual Ranking, Milkin Institute , Quality of Environment Versus Quality of Life, Area Development’s States for Doing Business Survey, the State New Economy Index, or the US Chamber of Commerce’s Enterprising States. But it’s not quite that simple. The Curmudgeon has other ideas.<\/p>\n Specifically, the Curmudgeon has the following formal objectives for this review. First, he wants to make sure the reader understands that most of this literature reflects the polarized debate between blue and red and serves little purpose than to expose the stupidity of the other side. Secondly, the Curmudgeon suggests caveats regarding the methodologies that are frequently employed in the rankings and climate studies. Thirdly,\u00a0the corporate decision to accept or reject an incentive and the goals or quid pro quo the city\/state wants in return are both very badly understood. The result is a pathetic sense of how business climate investment decisions are made and what consequences follow. Finally, the Curmudgeon will review three studies of business climate rankings. The first, by\u00a0George Bittlingmayer, Liesl\u00a0 Eathington, Arthur Hall, and Peter Orazem, “Business Climate Indexes: Which Work, Which Don’t, and What Can They Say About the Kansas Economy”<\/em><\/strong>, prepared for Kansas Inc; the second, Gauging Metropolitan “High-Tech” and “I-Tech” Activity”, <\/strong>Karen Chapple, Ann Markusen, Greg Schrock, Daisaku Yamamoto and Pingkang Y, Economic Development Quarterly, Vol. 18 No.1 p. 10-29; Joseph Cortright & Heike Meyer, Increasingly Rank: The Use and Misuse of Rankings in Economic Development” <\/strong>Economic Development Quarterly, Vol. 18, No 1, February 2004, p. 34-39 & Response <\/strong>by Paul D. Gottlieb, p. 40-43, <\/strong>and the final study, “Business\u00a0 Climate Rankings and the California Economy, <\/em><\/strong>Jed Kolko, David\u00a0 Neumark and Marisol Cuellar Mejia from the Public Policy Institute of\u00a0 California. Each of\u00a0these studies will question a vital aspect of business climate rankings or analysis.<\/p>\n Isn’t this truly more than you ever wanted to know about economic development business climates?<\/p>\n The Preamble (Pure Curmudgeon Blather on the nature of business climates)<\/strong><\/p>\n Most rankings are little more than bullets fired at an enemy–and like all bullets, they should be dodged. When you follow an index the reader becomes a\u00a0willing reenactor in the second war between the states, and cannon fodder in the reds versus the blues polarization of America. Perhaps, if no one read this stuff, it might eventually go away.<\/span><\/p>\n In fact, we are reluctant to touch any state or city business climate studies–although we will.\u00a0With very few exceptions, most\u00a0should never be read. Period! Most rankings are\u00a0little more than bullets fired at an enemy–and like all bullets, they should be dodged. Most indexes and rankings will decide for you what is valued in a business climate and toss out\u00a0all the rest. You are playing their game in their ball park when you follow an index. And in the process\u00a0the reader becomes cannon fodder in the polarization of America. If nobody read this stuff, it might eventually go away.<\/p>\n But the problem, as the reader well knows, is that there are only six of us in the entire nation, if not planet, who agree with the Curmudgeon (and four are dead, drunk or institutionalized). In the real world, the media, academia\/think tanks, blogosphere, and politicians constantly seize upon these “index-things” and publicize them to all heck,\u00a0rave on and on, yelling and screaming at the immoral and or just plain stupid folk and wasted communities\u00a0that are on the bottom of the rankings heap. Business climate “studies-rankings” and the subsequent reaction to them by economic developers, media, and the average Joe and Josephine bring little credit, or job creation,\u00a0to anyone.<\/p>\n A major reason for all this diatribe is that few understand the nature and characteristics associated with state, regional and community\u00a0business climates.<\/p>\n Enough of the Preamble<\/strong><\/p>\n For the Curmudgeon two take aways from the above paragraphs are (1) favorable business climates should be positively well received by firms and companies and as such should be understood\/employed by economic developers and ; but (2) what passes for almost all business climate indexes, rankings, commentaries, reviews and critiques should be ignored, but aren’t and, therefore, we need some really basic “101” review on how to approach and deal with this silliness.<\/p>\n In the discredited opinion of the Curmudgeon, the following “101” observations should be considered. The business climate “literature” needs to be judged by, evaluated by, tempered by\u00a0the following concerns<\/p>\n The Loosey-Goosey Nature of a Business Climate Transaction<\/strong><\/p>\n State business climate is important–it is not just a weapon in the ideological polarization of America. How can we better understand how business climate plays a role in the decision of a firm to stay, leave or enter a state?<\/span><\/p>\n The reader is probably desirous of striking back against this blatheresque diatribe by screaming “it does always have to be like this”. “States do have different business climates and some are more successful than others’. “State business climate is important–it is not just a weapon in the ideological polarization of America”! Actually, the Curmudgeon does agree and, wakes up each morning, sharing in the reader’s outrage and frustration. Business climate does exist and it can be a very important aspect and strategy\u00a0of economic development. How can we better understand how business climate plays a role in the decision of a firm to stay, leave or enter a state?<\/p>\n The goal of a favorable business climate is to encourage firms and companies to do “something” (locate and pay taxes, create jobs, innovate, pay\u00a0higher wages, etc)\u00a0which is regarded as desirable–in the particular state, not somewhere else. Stupidly, no doubt, the Curmudgeon believes that incentives or carrots, if regarded well by their eligible recipients, will\u00a0induce a positive response or action from the firm, though admittedly the response or action may\u00a0not necessarily\u00a0be\u00a0the desired behavior\u00a0 sought by the state (not create jobs originally promised,\u00a0reduce jobs or relocate, reduce shifts, not meet union demands, seek additional tax reductions).<\/p>\n Conversely,\u00a0regulation (the stick) will usually produce less of what is regulated although, admittedly, regulation can provide stability and predictability to a firm. It appears from this really simple expression of the dynamics unleashed by a business climate that already there are no simple answers. A favorable business climate can elicit, from the state’s perspective, some unwanted firm behaviors and regulation can be interpreted by different\u00a0firms differently and accordingly produce different\u00a0outcomes as well. This is not a good start. Then there is the law of unintended consequences and things can even get worse. State business climate is a transaction, as we said earlier, but\u00a0business climate\u00a0is like all transactions: it involves risk.<\/p>\n This is why claw backs, penalties for failing to live up to the transaction’s quid pro quo are frequently employed in incentive programs; but it is very difficult to levy a claw back on a business climate-induced activity by a firm;\u00a0business climate\u00a0is not a contract and the quid pro quo is largely unarticulated by either party to the transaction. Indeed, just the opposite. Each party may have different, if not conflicting ideas, what the quid pro quo involves. Business climate is therefore very open-ended. Essentially the hope, and no mistake, it is at best an informed hope, is that the net, net of all firm actions and behaviors at any point in time is positive for the state.<\/p>\n Again, as mentioned above, business climate studies and rankings never, never study or rank the\u00a0total state environment any how the other factors in the state environment\u00a0affect the firm and its decision. Nor does the business climate study assess\u00a0the\u00a0total set of actions and behaviors of the firm relevant to the state as it evaluates how well the firm lives up to the implied quid pro quo.\u00a0Once more for emphasis: Business climate studies\u00a0select out only\u00a0a sub-set, sometimes only one element, of the firm’s state-related environment (taxes, right to work, innovation, specific favorable climate for a highly valued sector) and these state factors are then related to a desired goal or set of firm behaviors, such as job creation etc which is regarded as the quid for the favorable climate quo.<\/p>\n Optical Illusions: Are You Seeing the Same Thing I See?<\/p><\/div>\n The idea behind all this is that the state has chosen a specific firm behavior desired from the firm after it\u00a0locates in the state and that this is clearly transmitted to the\u00a0firm.\u00a0The assumptions underlying the business climate assessment also assume that\u00a0the firm has looked at the state business climate, assessed those aspects that were favorable, and balanced the favorable benefits with the costs of the quid pro quo, and then\u00a0made its decision to locate in the state. In essence, the business climate study\u00a0has built into its equation that the quid pro quo is clear, understandable\u00a0and acceptable to all parties in the business climate transaction. Failure on the part of either party to satisfy the quid pro quo is an abuse or an unwillingness to live up to the other’s side of the bargain.If you accept our loosey-goosey sense of\u00a0a business climate translation, no contract exists, neither side has a clear sense of what the other side expects from the transaction and no clear-cut sense of which output by the firm is the sine qua non of the state (or the indicator selected by\u00a0the business climate study\u00a0(and we must remember that firms have many outputs;\u00a0firms can reduce the number of jobs and increase the wages-benefits-working conditions\u00a0of existing employees for instance). Given that firms survive by making profits, not creating jobs (which is the usual measure of many business climate studies), it is quite likely that something is going to go wrong or that the study may be ignoring costs incurred by the state through firm behavior.<\/p>\n In essence, given the loosey-goosey impreciseness of the business climate transaction, the failure to appreciate the universe of outcomes produced by the firm which may result in a net, net benefit to the state, the conflict in goals (profit versus jobs) inherent to both parties, and the complete lack of clarity and understanding by each party of what quid pro quo involves–how can this transaction be measured at all.<\/p>\n he first review is written by George Bittlingmayer, Liesl\u00a0 Eathington, Arthur Hall, and Peter Orazem, “Business Climate Indexes: Which Work, Which Don’t, and What Can\u00a0They Say About the Kansas Economy”<\/em><\/strong>, prepared for Kansas Inc\u00a0 (Kansas Inc. is a state entity whose mission is to strategically build a strong and\u00a0diversified economy that promotes new and existing industries), June 2005.<\/p>\n Kansas Inc confirms the Curmudgeon’s perception that\u00a0 “Numerous organizations rank states on the basis of their business\u00a0 climates. These rankings are widely discussed in the media and are cited by\u00a0elected officials, business associations, and consultants…. However, the\u00a0rankings often conflict and there is little guidance as to which rankings are\u00a0valid or invalid” (P.1).<\/p>\n They\u00a0further support\u00a0our perception\u00a0that “the number and variety of\u00a0 indexes has increased since 1999” (P.3). The growth in the\u00a0 number of indexes is the consequence of (1) “advances in information\u00a0 technology that have lowered production costs” (they are cheap to produce), and (2) and an explosion in the use of such\u00a0indexes to affect public opinion and policy change (P.4). The latter observations offers support to our position that most of these indexes and rankings are political-ideological in nature and purpose.<\/p>\n To assess validity (i.e. whether the indexes actually account for\u00a0past\u00a0growth, and\/or predict future economic growth) the Kansas study tests eleven\u00a0well-known business climate indexes (over a thirty-two year period-1970-2002). Kansas Inc.\u00a0asks the rather elementary question as to\u00a0which indexes are positively correlated with various different measures\u00a0of economic growth. Accordingly, they draw four measures of growth from the Bureau of\u00a0 Economic Analysis’ Regional Economic Accounts: county-level wage bill, population and employment changes, and number of non farm proprietors (business\u00a0 formation) as their dependent variables. Interestingly, to explain the relative\u00a0economic performance between states, they study the neighboring counties (107\u00a0state borders) on the borders of each state where the impact of differing business climates should be most apparent and impactful.<\/p>\n “None of the business climate indexes can explain a large proportion of the variation in economic growth across counties. The best performing business climate indexes explained at most 5% of the total variation…, suggesting that most of the variation … is due to factors NOT CAPTURED by state-level business climate measures. This would suggest that business climate is relatively unimportant in driving relative growth among the states”<\/span><\/p>\n “None of the business climate indexes examined by Kansas Inc\u00a0can explain a large proportion of the variation in economic\u00a0growth across counties. The best performing business climate indexes explained at most 5% of the total variation…, suggesting that most of the variation … is due to factors NOT CAPTURED by state-level business climate measures. This would suggest that business climate is relatively unimportant\u00a0in driving relative growth among the states” (P.10); \u00a0Or it might suggest that the business climate indexes do not capture the totality of the entire business climate.<\/p>\n <\/p>\n Only two (Fantus, Grant Thorton) of the eleven indexes can consistently explain a small amount of the variation in one dependent variable (relative wage bill) over the thirty years (P.11); and three others (Clemson-Pacific, Small Business Survival, and Tax Foundation) explained smaller amounts of the variation in other dependent variables. Four of these five indexes mentioned in points 2 & 3 above placed between 70-100% of their weighting on tax and regulatory burden and size of government (P.11). “Therefore, it would seem that relative tax competitiveness seems to matter at the borders” and indexes that “place relatively high weight on tax policies had the most consistent positive effects on relative growth<\/span>” (P.13), albeit accounting for a fairly small percentage of the variation among states; [underlining=Curmudgeon]. Some indexes (Fraser Institute and Corporation for Enterprise Development) not only cannot explain growth at all, but are negatively correlated with all four measures of economic growth (P.12). Indexes that weigh industrial policies “have no ability to explain relative growth…”(P.13)<\/p>\n Kansas Inc discovers the obvious: that different indexes measure different things, implying that different variables create economic growth. In essence, the great number and variety of indexes measure different variables indicating some confusion and “flexibility” as to which core elements of business climate (and logically public policy) are critical to achieving a successful, competitive and growth-prone business climate. Business climate indexes do not measure or compare the same variables and each presupposes its often\u00a0unarticulated “theory” as to what causes economic growth.\u00a0 It should be no surprise that Kansas Inc concludes “most of the indexes are not highly correlated and clearly measure different things” … and “41 of 66 cross-correlations are negative” P.7. In short, there is no real consensus as to what actually prompts job creation and business climate prosperity.\u00a0\u00a0If so, picking an\u00a0index of business climate is almost a matter of self-interest or individual theoretical\/ideological choice. Despite the math and sophisticated methodologies, there is\u00a0only humbug\u00a0in business climate.<\/p>\n Another interesting finding revealed by Kansas Inc’s analysis is that whichever the index, and however the index index\u00a0defines business climate, the business climate itself does not materially change over time–that business climate is amazingly durable (“business climate is a very persistent phenomenon” (P.17) and does not exhibit meaningful variation as a consequence of changes in policy during the time period (P.6).<\/p>\n Do actual policy changes result in\u00a0subsequent changes in business climate? According to Kansas Inc. they don’t!<\/span><\/strong> Changes in policy do not seem to result in changes in how a state ranks in economic growth or interestingly on rankings by the same index over time. Winners and losers in\u00a0an index may move up and down a few notches each year, but the same winners and losers emerge–over decades– despite any changes in policy undertaken in each state.<\/p>\n Winners and losers in an index may move up and down a few notches each year, but the same winners and losers emerge–over decades– despite any changes in policy undertaken in each state.<\/span><\/p>\n This durability of business climate over considerable periods of time\u00a0seems counter intuitive in that some of them must, on occasion, change their policies to addresses their weaknesses and emphasize their strengths–but they don’t!\u00a0\u00a0On closer thought, the durability\u00a0makes sense if one recognizes that business climate of a particular state is\u00a0composed of many, many elements, from policies regarding taxes, regulation\u00a0to educational systems, and that incremental\u00a0 changes in any one policy are not likely to result in dramatic changes in the\u00a0state’s overall business climate or, claims to the contrary, economic growth. This durability may even suggest that policies are not the\u00a0most important\u00a0element in a state’s business climate–maybe, just maybe, the most important element in a business climate is the image desired audiences have of the business climate. Maybe, the reality just doesn’t matter? What a depressing thought that is!<\/p>\n Our second review article “Business\u00a0 Climate Rankings and the California Economy, written by Jed Kolko, David\u00a0 Neumark and Marisol Cuellar Mejia from the Public Policy Institute of\u00a0 California<\/em><\/strong> (mission is “to inform and improve public policy in\u00a0California through independent objective nonpartisan research), April 2011,<\/em><\/strong> asks a rather interesting question. Why is\u00a0California’s economic performance better than its\u00a0 business climate rankings suggest it should be? And if the rankings do not reflect California’s economic performance, what does this imply for\u00a0 the usefulness of these rankings? (P.2).<\/p>\n First, the Curmudgeon did some fast\u00a0fact-checking (using BEA)\u00a0of California’s performance relative to other states (and nations) and California, probably as expected, was\u00a0uninterruptedly the nation’s largest GNP throughout the last ten years. In fact, it is the seventh largest GNP in the world (assuming the USA is removed). In the period 2005-2009 the USA grew GNP by 11.7% and California, 16.1%. Whatever the business climate of California may be, the Public Policy Institute’s position is that California grew at rates exceeding that of the overall USA is supportable. Whether this is\u00a0a relevant comparison, should, for instance California be evaluated by comparing it to specific states with presumably different business climates, is more open to question.<\/p>\n Texas, with a\u00a0smaller base than California grew 26.7% during this period (interestingly the absolute growth in dollar terms was almost the same) and New York, 10.4% (below USA average and nearly one-third less than\u00a0California). Whether or not California is a super-growth machine (which the Public Policy Institute goes out of its way NOT to claim)\u00a0is certainly not open to question, but, in the war of bad business climates\u00a0California does quite well. California is always growing above the national average.<\/p>\n The California Policy Institute (CPI)\u00a0generally sees business climate\u00a0 indexes as falling into one of two basic “types”: (1) “those that measure the business climate in terms of productivity, including measures of the quality of life and human capital, and (2) those that emphasize taxes, regulation, and other costs of doing business”<\/span><\/p>\n The Public Policy Institute generally sees business climate\u00a0 indexes as falling into one of two basic “types”: (1) “those that\u00a0measure the business climate in terms of productivity, including measures of\u00a0the quality of life and human capital, and (2) those that emphasize taxes,\u00a0regulation, and other costs of doing business” (P.2). In so doing, the\u00a0 authors acknowledge the\u00a0apple and\u00a0oranges aspect of this bi-modal\u00a0 distribution of business climate indexes. As to which set of measures actually constitutes the “real” core state business climate, CPI takes no position. They too do not sense a consensus exists as to what is the ultimate best generator of jobs and prosperity.<\/p>\n They very subtlely suggest (at least\u00a0 to the Curmudgeon)\u00a0an underlying tension\u00a0between these index-clusters. The two\u00a0index-clusters seemingly divide the fifty states into two covertly competing armies (dare we say the Red and\u00a0the Blue). Yet, despite a logic which may be evident to the Curmudgeon only,\u00a0this apparent zero-sum relationship can in real life,\u00a0at some points in time and under\u00a0certain conditions, permit both armies, under conditions favorable to each, to be victorious over the other in certain time periods.<\/p>\n The authors observe that the\u00a0California business climate\u00a0does much better in\u00a0the former (productivity), and miserably in the latter (taxes). They also\u00a0point out\u00a0that\u00a0California has grown wages and output at rates\u00a0exceeding the national average.<\/p>\n They then\u00a0systematically review eleven prominent indexes (including the Progressive\u00a0 Policy Institute, the Information, Technology & Innovation Foundation\u00a0 (Kauffman Foundation), the Corporation for Enterprise Development, the Tax\u00a0Foundation, the Milken Institute, the Small Business & Entrepreneurship\u00a0Council, the Pacific Research Institute, and the Cato Institute).<\/p>\n Their initial\u00a0observation was that every state in the Union did well in one or another of these indexes-clusters. And every state did poorly on one or another index-cluster. In other words, each index-cluster defines\u00a0 economic growth\u00a0differently, and\u00a0employs different\u00a0indicator-measures\u00a0to capture that version of economic growth. The reality is, however, that each\u00a0index winds up being able to prove their versions are correct because each has, in effect, stacked the deck. Choose an index, adopt\u00a0their definition of economic growth, and away you go. The reader is just along for the ride.<\/p>\n With so many ways to describe the business climate, the RIGHT QUESTION<\/strong> is<\/strong> not only whether the business climate matters for economic growth, but also which, if\u00a0 any, of the business climate indexes help predict economic growth, and which\u00a0 policies captured by the business climate indexes are the most important predictors of economic growth<\/strong><\/span><\/p>\n This\u00a0observation obviously leads to a second question:which index-cluster is the superior predictor of economic growth! Which particular index in the index-cluster really does produce “true” economic growth<\/p>\n “With so many ways to describe the business climate, the RIGHT QUESTION<\/strong>\u00a0is<\/strong>\u00a0not only whether the business climate matters for economic growth, but also which, if\u00a0 any, of the business climate indexes help predict economic growth, and which\u00a0 policies captured by the business climate indexes are the most important predictors of economic growth<\/strong>“. (P.8)<\/p><\/blockquote>\n The answer to this question is not easy or simple. Is there a consensual indicator of economic growth which uses the same database and the identical indicators to measure that growth used by the eleven separate indexes? No! So the Institute aggregate all the individual\u00a0 measures\u00a0 associated with\u00a0each of the eleven\u00a0separate indexes and groups them (factor analysis)\u00a0into fourteen\u00a0distinct variables. They\u00a0then rank the states on these fourteen variables, and using correlation analysis,\u00a0they further\u00a0construct thirty or so “sub-indexes”.\u00a0CPI then\u00a0correlate the entire barrage\u00a0of groups and sub-indexes\u00a0against commonly used measures of\u00a0 state economic growth drawn from the\u00a0National Establishment Time Series data, Dunn-Bradstreet and the Quarterly Census of Employment & Wages.<\/p>\n The\u00a0results of these correlations further confirm their initial finding that there are in fact two macro-industry clusters emerge (actually three): (1) those indexes\u00a0which emphasize productivity\/quality of\u00a0 life\/human capital (5 indexes)\u00a0and (2) a cluster which emphasizes “taxes and costs” (5 indexes); and (3) a third which does not fit either classification (1 troublemaker). [The Curmudgeon urges those who are methodologically inclined to view their Technical Index which is quite exhaustive and descriptive of their methodology and which can offer a more precise description of their methodology]<\/p>\n When the thirty sub-indexes are individually correlated with these measures of economic growth, “three stand out in having a consistent, statistically significant relationship with our economic growth measures…. These three sub-indexes-the SBTC corporate tax index, the EFINA size of government index, and the EFI welfare-spending index–all fall within the taxes and costs cluster….<\/p>\n None of the sub indexes within the productivity\/quality of life cluster has a consistent {and statistically} significant relationship with economic growth….” \u00a0None of the sub indexes within the productivity\/quality of life cluster\u00a0exhibited a consistent {and statistically} significant relationship with economic growth…”.<\/span><\/p>\n Positively stated, if there is any policy\/industry cluster\u00a0associated with the business climate literature that has a\u00a0limited, but persistent,\u00a0statistical impact on economic growth, it is taxes and spending! This conclusion is congruent with Kansas Inc’s research. Also, CPI’s research supports Kansas Inc’s finding that business climate index rankings usually do not vary over time. The observable, but unseen and unrecognized,\u00a0reality of any\u00a0business climate index,\u00a0no matter how constructed or which side of the industry-cluster fence it is on, is that business climate\u00a0 change little, if at all, over decades. If so, the durability of business climates makes regression analysis only\u00a0 marginally useful in assessing and understanding individual\u00a0business climates. Yet, regression analysis is a common tool of many indexes.<\/p>\n Correlating the thirty sub indexes\u00a0with cluster-groups, CPI discovered that within each ranking or index\u00a0 “states often rank consistently well or poorly on indexes\u00a0WITHIN\u00a0each of the two clusters” (P.12) and\u00a0sub indexes and rankings within a cluster do not really change over time. The rankings of the various indexes also do not change meaningfully from year to year. \u00a0If you do well on an index this year, expect to continue to do so in future years. Other than marketing impact, what is the real difference in being first on a ranking in one year and third in another. Has the state slipped, someone else caught up, or has the arithmetic created a meaningless distinction? State business climates do not shift if one successfully alters a single\u00a0policy area–the Curmudgeon, going back to an earlier observation, observes state business climates are just too big and multi-variated to offer any hope that any one policy change can produce a meaningfully different business climate. The possible exception, suggested by both Kansas Inc and California Public Policy Institute, might be tax reduction. At the outset, the Curmudgeon does not wish to imply, or enter the fray as to whether any of these single policy\/related theme proposals that are usually advocated by each index or ranking can generate jobs or some limited economic growth. That very quickly becomes\u00a0a war of competing definitions and methodologies. The real issue is whether positive changes in any one public policy area (enhancing innovation or attracting tech firms for instance) can overpower everything else that is going on in the other policy areas of the state business climate. A second, and related point, is how long does that policy change have to be in effect before one can really see a measurable change in the employment or economic growth of the state (or region). If positive change requires a decade before it is evident some other economic developer (governor)\u00a0is going to take credit–not you.<\/p>\n There are\u00a0other ways to approach the question than “if” or how quickly a single policy can produce sufficient momentum to alter a state’s overall business climate.\u00a0CPI pursues another path. They\u00a0believe a key issue lies\u00a0in what one includes in the definition of a business climate.\u00a0CPI then posits that\u00a0what is usually left out of conventional definitions of business climate may be more important, than the public policies usually at the core of these indexes. They suggest that non-public policy factors shape the state\u00a0business climate, and arguably,\u00a0are more important in\u00a0 affecting the rate of economic growth\u00a0of that state.<\/p>\n Kolko et al\u00a0note that\u00a0 California does not do well with either of the two index-clusters. Admitting in their\u00a0 own, more tasteful, way that California stinks in the tax and costs\u00a0cluster, and is mediocre in the quality of life cluster. Yet, despite recent setbacks in the Great Recession period,\u00a0 California’s economic growth has been consistently above the national average\u00a0 for decades. In essence, the authors logically question whether business climate, as measured\u00a0 by most existing business climate indexes, really captures the driving forces\u00a0 behind state economic growth.\u00a0 What gives?<\/p>\n Kolko et al state that business climate indexes “overlook the possibility that California’s economic performance may depend on factors beyond the reach of policy, such as weather and geography” (P.13) which can offset other favorable and negative policies. This kind of talk is heresy to political-economic junkies. CPI identifies\u00a0other non-policy drivers of economic growth such as: disproportionately concentrated sectors (clusters if you must) which prosper or slump depending on the time period; natural features such as climate, and proximity to waterways (i.e. current transportation modalities); also listed are the shift in the national economy to a service sector economy; the location of natural resources; population density (i.e. rural versus urban); and a natural attractiveness for human interaction (i.e. attractive to tourists). Kolko et al also remind their readers that these frequently overlooked\u00a0factors VARY WITHIN THE STATE as well as between states (P.14).<\/p>\n “Taking the evidence on business climate indexes at face value, California’s economic growth is held back because of policies that lead to a poor ranking on these indexes. But California is also fortunate to have natural advantages with regard to other factors that boost economic performance. The two forces are offsetting, so despite its relatively poor business climate, California’s economic growth comes in near or above the national average (P.18).<\/p><\/blockquote>\n The Curmudgeon would expand still further\u00a0the\u00a0definition of business climate to include: governmental structure and processes, demographic configuration, political culture, natural resources, settlement and immigration patterns,\u00a0geographic location and population distribution among\u00a0city, suburb, small town and rural environments. This is a hodge-podge to be sure, but their listing force the reader to move beyond the narrow, policy-limited world in which most indexes and rankings exist.<\/p>\n![\"\"](\"https:\/\/journal.c2er.org\/wp-content\/uploads\/2013\/02\/US_Secession_map_1863_BlankMap_derived.png\" "\\"US_Secession_map_1863_(BlankMap_derived)\\""){kind=spacer}
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<\/a>In this perspective the sad reality is that business climate is\u00a0irretrievably, deeply enmeshed in polarized ideologies with\u00a0conflicting values, a preference for red or blue,\u00a0and contrasting\u00a0perspectives toward business. The literature of business climate is produced by authors and institutions\u00a0that are anything but neutral from the get go.\u00a0 There is little to no objectivity and no matter how sophisticated the methodology or the statistics, their numbers do not necessarily mean what the rankings suggest.<\/p>\n\n
<\/a><\/a><\/p>\nThe Three Reviews<\/strong><\/h3>\n
<\/a>This plethora of indexes which compare apples to nails\u00a0provides support for Kansas Inc’s observation that indexes have multiplied in part as yet another\u00a0 mechanism by policy advocates and ideologues urge their desired policy changes be implemented\u00a0throughout the fifty states. Indexes most certainly possess a political and ideological dimension, but the only indexes which can claim some small<\/strong><\/span> measure of credibility, according to Kansas Inc, are those which focus on tax and regulation.<\/p>\nIf taxes and regulation are\u00a0so important, why are some high tax\/regulated states economically prosperous?<\/strong><\/h2>\n
<\/a><\/p>\n<\/a><\/p>\nHow Important\u00a0is Public Policy Change in Materially Affecting a State\/Region’s Business Climate?<\/strong><\/h3>\n