When a respected accounting firm such as Chicago's Grant Thornton talks about "business climate," people listen. Grant Thornton recently published its seventh annual survey of "general manufacturing climates." It ranks the 48 contiguous states according to their supposed hospitality to business.
This year, California ranked 26th, despite a 13.5% increase in new jobs since 1980. (Overall, the United States has 8.1% more jobs now than in 1980.) Massachusetts, the East Coast home of high-tech industry, came in 27th despite an 11.6% growth in jobs. New York ranked a dismal 42nd on the index, despite adding 9% more jobs.
What's going on here?
The problem is that Grant Thornton's definition of a good business climate really doesn't reflect reality.
That becomes clear when you consider that for the second year in a row, the accountants in Chicago have decided that South Dakota is the No. 1 place in America for business to be. South Dakota? The Coyote State is known to most of us as the home of Mount Rushmore and of big bison herds.
What makes it a better place than California, New York or Massachusetts (states with high growth rates but low Grant Thornton ratings) for business?
South Dakota is isolated from major or even mid-size markets. It has brutal winter weather. Its population is surely virtuous but is also tiny. Nevertheless, Grant Thornton likes South Dakota.
Why? Because it has virtually no unions, no business taxes and no environmental controls. Cheap coal does keep energy costs low--but more important to Grant Thornton are low wage, unemployment insurance and workers compensation costs. That's the story in a nutshell. Grant Thornton's index praises the "good business climate" of an underdeveloped heartland state that has little prospect of seeing the kind of growth that continues to happen on both the Atlantic and Pacific coasts.
But when the media pick up on the story, they want to know why individual states end up in Grant Thornton's basement. And in these conservative times, it is easy to believe that big government and big labor are part of the problem, not part of the solution.
Legislators start talking about cutting business taxes. Governors start promising "regulatory relief."
Editorials pop up like dandelions after a rainstorm, scolding state officials for fostering a "bad business climate" or offering advice about how to improve the economic weather. To get a good rating from Grant Thornton, state officials and the public at large are being encouraged to think that economic growth requires surrender to the business lobby's wish list.
Indeed, the business lobby's wish list is exactly the source of the Grant Thornton index. The index is compiled simply by asking state manufacturing associations what they think is important. Those whom economists have identified as the real engines driving economic growth (new entrepreneurs, international investors and the inventors of new technology) are not consulted by Grant Thornton.
The annual publication of the index has become a political nightmare for state officials who disagree with the idea that South Dakota, Mississippi or, for that matter, Guatemala should be held up as models for economic development in America.
Elected officials who protest that corporations should pay their fair share of the tax burden, to help hard-pressed property tax payers keep the roads up and buy new books for the public library, risk being branded "anti-business."
The happy truth is that business doesn't behave much like Grant Thornton's index says it should.
Notwithstanding Grant Thornton's insistence that taxes, unions, workers comp and environmental regulations are anathema to profit making, executives stubbornly insist on locating their factories in California and Massachusetts--states that Arizona Gov. Bruce Babbitt, in criticizing Grant Thornton, archly called "those great over-governed, high-tax states that are continually cited by all of us as paragons of industrial rebirth." Why do businesses constantly confound the Grant Thornton definition of "good business climate" in real life? The answer can be had in a phrase: quality of life.
Grant Thornton explicitly excludes consideration of any quality-of-life issues from its index, pleading that it can't quantify and compare them.
The accountants don't consult executives who make business investment decisions--executives who, by their actions in the great marketplace of states, demonstrate conclusively that quality-of-life issues are at the heart of the matter.
For example, rather than assessing how a state's educational system measures up, Grant Thornton's index proceeds on the assumption that state and local business taxes (which study after study have shown to be minuscule in comparison to federal business taxes) are of overwhelming significance to executives. And rather than waking up to the public's overwhelming support for tough environmental rules, Grant Thornton cuts a state's ratings if it guards the public from polluters.