Best & Worst States for Business Rankings Prominent in National Political Debates
February 2 2012 by Marshall Cooper
Chief Executive’s annual Best & Worst States for Business Rankings has become an important element this election year around the country, with successful governors touting their “executive” performance. Likewise, news outlet editorial boards and opposition candidates highlight weak ratings. The survey’s 2011 results are still causing controversy in Wisconsin, as Big Labor attempts to stem its long national decline.
Gov. Scott Walker, facing a recall battle after eliminating the collective bargaining rights of many public workers, frequently mentions his state’s improvement in Chief Executive’s annual Best & Worst States for Business survey. But the “non-partisan, non-profit” research center, BadgerStat, uses questionable methods to discredit Gov. Walker by suggesting there is “no evidence” of a positive connection between rankings and future economic outcomes.
Unfortunately, the BadgerStat analysis is so flawed it does little to further their mission of “informing public debate,” but rather clouds the discussion with false precision. In short, BadgerStat’s economists (led by a former Clinton White House economist) would have been well served to have spent a fraction of their time determining the correct data inputs as they did running correlates.
Instead of measuring the best and worst states for business, BadgerStat selected for analysis the six states with the largest gains or losses in rank. For the most current year they examined, 2009, this resulted in Mississippi, Pennsylvania and Florida being singled out on the “gain” side. Even with their relatively large gains, however, Mississippi and Pennsylvania still rank in the bottom half of states (#30 and #29, respectively). Their ranking gains merely demonstrate that they are “less bad.”
Using job trend growth as its measure of “economic results” is also flawed. While job creation is certainly a political hot potato on everyone’s mind, it is a byproduct of a healthy economy. A more meaningful measure of “economic results” would be change in state gross domestic product (GDP).
Had they used the actual Best and Worst States and GDP growth in 2009, the BadgerStat analysis would have come to a very different conclusion. The top 3 states rated by CEOs (Texas, North Carolina and Florida) produced 3-year average GDP growth of 7.31%. The bottom-ranked three states (California, New York and Michigan) saw 3-year GDP growth of nearly one-third less at 4.97%.
The differences are even more apparent in the previous years examined by BadgerStat. In 2008, the top 3 and bottom 3 ranked states produced GDP growth of 4.97% and 2.53%, respectively. In 2007 the top 3 were 4.57% while the bottom 3 were 2.13%. These are performance differences of 96.4% and 114.6% between top and bottom ranked states.
CEO opinions of state business-friendliness, while not without flaws, produce an extremely strong correlation with state economic performance. This makes sense, given that CEOs are the primary decision-makers on where and when to invest and hire, making theirs a causal relationship with performance. State policy makers, including those in Wisconsin, would be wise to heed CEO opinions if they are interested in producing private-sector job growth.