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Business climate rankings are meaningless

An article posted this week on the governor’s office websites states that “North Carolina continues to have a top-ranked business climate.” That is certainly true. Unfortunately for the governor, however, doing well in business “climate” rankings will do absolutely nothing to improve the state’s economy. In fact, it could worsen it. Here’s what I mean.

“Climate” studies, indices, etc. are basically lists of characteristics that someone somewhere thinks businesses would like but that are not proven by research to actually correlate with economic growth. Most business climate rankings heavily favor states with low regulations such as “right to work states” and states with low minimum wages and states with low taxes (ignoring the fact that taxes pay for public investments like education and transportation that have actually been proven to grow the economy). Case in point, two weeks ago Forbes magazine released its rankings of “best states for business.” Virginia topped the list. North Carolina ranked 3rd – as in only two states are better for business.

I performed a quick test of the Forbes model by comparing the average employment loss, in percentage terms, in the ten states that are supposedly the “best states for business” with employment losses in the ten states with the worst business climates. Low and behold, the states that rank in the top ten for business climate have lost, on average, 4.9% of their jobs since the current recession began. The ten states with the worst business climates have shed, on average, 4.1% of their jobs. Time and time again these rankings prove to be hollow predictors of state economic performance. They are more like big business wish lists than they are genuine economic predictors. For more on how these various indices work and to read about their flaws, you can check out this book.

For a meaningful list of economic indicators and predictors check out CFED’s Assets and Opportunity Scorecard of states that was also released recently. Seeking to be number one in CFED’s scorecard might actually improve our state’s economic performance, particularly when it comes to improving prospects for working families. Seeking to be number one in the Forbes ranking and others like it is not likely to pay off for NC. Incidently, NC’s grade from CFED is a D which does seem to correspond with the fact that only ten states have lost more jobs, in percentage terms, than NC since the recession began.

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