Widely Cited Business Climate Rankings Flawed

News Release
June 30, 2005 Download PDF

Widely cited rankings of state business climates are so deeply flawed as to be meaningless, according to a new book released today by the Economic Policy Institute and the Oregon Center for Public Policy.

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Widely Cited Business Climate Rankings Flawed (PDF)

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Economic Policy Institute's Grading Places: What Do the Business Climate Rankings Really Tell Us?

The book, Grading Places: What Do the Business Climate Rankings Really Tell Us? by Dr. Peter Fisher of the University of Iowa and the Iowa Policy Project, analyzes the methodologies used in five widely cited business climate rankings. Fisher finds that, “The underlying problem with the five indexes is twofold: none of them actually do a very good job of measuring what it is they claim to measure, and they do not, for the most part, set out to measure the right things to begin with.”

Fisher concludes that ideological preconceptions, and not valid science, underlie the methodologies employed by the rankings. He writes that “the measures used must pass an ideology screen, so the validity and relevance criteria go by the wayside.”

Grading Places notes that the rankings emphasize low taxes and limited government, but businesses making investment and location decisions consider a wider range of factors, including labor costs, cultural and recreational amenities, climate, energy costs, transportation, educational attainment, school quality, and heath care. Fisher writes, “Tax levels are part of the equation, but only a small part.”

“Fisher points out that, by and large, businesses ignore politically motivated rankings and check out the facts that matter before making decisions,” said Chuck Sheketoff, executive director of the Oregon Center for Public Policy. “Public policy makers, the media, and public in Oregon should do the same.”

Oregon’s rank varies widely across the five studies analyzed in Fisher’s book, though the studies all claim to measure something important about state business climates. With a ranking of 1st being “best” and 50th “worst,” Oregon ranks 39th on the Small Business Survival Index, 10th on the State Business Tax Climate Index, 15th on the Competitiveness Index, 42nd on CATO’s Fiscal Policy Report Card, and 29th on the Economic Freedom Index.

Rankings of other states also vary widely across the studies. As Fisher writes, “Business interests in just about any state can find at least one ranking to support an argument for cutting business taxes to make the state more competitive. In all but eight states, one can find at least one index that puts the state in the bottom half of all states.”

“Public policy discussions in Oregon too often have been corrupted by these meaningless studies,” said Sheketoff. “It’s time to take these bogus rankings out of Oregon’s public policy debates and put them where they belong – in the garbage.”