If you’re like me, your instinctive reaction to a
business climate (or quality of life or innovation) state-by-state ranking will
be to laud the ones with which you agree, and find fault with the ones that
don’t match your preconceptions. Sort of like your first-blush response to the
latest survey research.
But just like solid methodology can overcome your
skepticism about a poll, a better understanding of state-by-state business
climate rankings can shed light on what is useful for public policy and what is
merely entertaining. The Public Policy Institute of California (PPIC) has
recently released a study that provides a useful template
for applying state rankings to policy problems.
The PPIC authors, Jed Kolko, David Neumark and
Marisol Cuellar Mejia, posed a puzzle: why does California rank so poorly on
many business climate indexes even though our economy over time tends to equal
or occasionally outperform the national economy?
The answer is that the California’s economic
performance is most strongly influenced by factors beyond the control of public
policy, in particular by the mild weather and the mix of and composition of our
industrial base. PPIC found that our tax and business cost climate does indeed
retard our economic performance. But, for now anyway, our natural attributes
outweigh our self-inflicted disadvantages.
Interestingly, California’s ranking on the
productivity indexes were unrelated to any growth measures. These are the
measures of quality of life, human capital and infrastructure where California
ranks relatively high. But the indexes that demonstrated our abysmal ranking on
taxes and costs were associated with holding back the state’s economic growth.
The indexes with the clearest association with growth (or lack thereof) were
the structure of the corporate tax system and the proportion of the state budget dedicated to welfare and transfer payments.
Sometimes
the obvious bears repeating, especially in a state with an anti-growth
Legislature. The bottom line is that business climate matters and we do have
control over our destiny when it comes to economic growth. In the words of
PPIC, "… a better business climate would promote faster economic growth in
California."
Follow Loren on Twitter: @KayeLoren.