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Policy and Politics: Taxes and regulation still matter |
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Written On: November/December 2007 |
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Written By: by Richard S. Davis, VP Communications |
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Ranking business climates has become a pretty good business itself. Think tanks, magazines, consulting firms, and others routinely weigh in with their take on what makes a state or city a great place to invest and create jobs.
While we know that there's more than a little subjectivity in these things—rankings reflect the ranker—we're still drawn to them. They simplify complex issues for us. Rather than sort through the hundreds of factors that make a place better or worse for business, we cut to the chase: Who's number one? And, where are we? If we're on top, we feel good. If we're down below, we challenge the data.
At AWB, we've generally shied away from the ranking game. In the Redbook, published by the Washington Alliance for a Competitive Economy, we include 54 separate ranking tables ranging from business taxes to science and engineering doctorates.
Washington Research Council economist Kriss Sjoblom, who guides production of the Redbook, says, "Too often, the main goal of index authors is to grab headlines or sell magazines rather than to provide guidance to policy-makers." We prefer to give people the data and let them draw their own conclusions.
Still, the popularity of these measures makes it worthwhile to understand how well they match up with reality. Kansas Inc. (KI), the quasi-public group heading that state's economic development efforts, wanted to know which of the various indexes, if any, had value. The research was conducted by three faculty members from the University of Kansas business school and an industry specialist at Iowa State University. Released in 2005, their study is a rare academic look at the rankings game and easily stands the test of time. It also confirms what most Washington Business readers know intuitively.
When the report was released, the analysts noted that a Google search on "business climate index" produced 11,000 hits. I just checked and got 33,400.
The Kansas researchers offer two reasons for the boom in business-climate rankings. They're easy to produce with information readily available on the Web. And, perhaps more important, lobbyists and policy advocates have discovered that the indexes move public opinion. So, to promote their agenda, interest groups construct indexes showing that their goals are positively associated with a good business climate.
Absent a skeptical review, the rankings make the news, get touted on the floor of the Legislature, and drive the debate for a while. KI made an important and often-overlooked distinction, differentiating between structural measures and performance measures. Structural measures look at factors that influence economic growth; performance measures, like job growth, are more properly viewed as outcomes. Mixing inputs with outcomes can make for a messy index, one that confuses cause with effect.
In our state, for example, great job growth from a ramp-up in aerospace and software production will make us look good on any performance-based business climate index. But it says nothing about the policy and environmental factors influencing our economic competitiveness. KI dropped performance-based indexes from its evaluation, rightly believing they had little to offer.
As they point out, indexes vary in the factors they emphasize, from traditional business cost measures (taxes and regulation) to expansive measures that include location incentives and public investment in education, roads, and the like.
The KI research uses a variety of statistical techniques to analyze how well the various business climax indexes explained economic growth from the 1970s through 2002. A good index would be one that properly weights those factors that influence business success, measured by employment and wage growth. Most fall short. What makes a dynamic, competitive economy is simply too complex to capture in a quick and dirty ranking.
In the end, after all the sophisticated data analysis, the KI study concludes: "The most important elements of business climate appear to be tax and regulatory burdens imposed on firms." In other words, the bottom line is still the bottom line.
It's worth remembering.
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