State and federal statistics released as recently as Friday make it clear: California is smoking hot, economy-wise.
The state gained 40,300 jobs in June and 461,000 over the year. With a gain of 2.9%, that was the best 12-month record of any large state except Florida, which won by a nostril with a gain of 3%, and much better than the nation as a whole (1.7%). According to the congressional Joint Economic Committee, California leads the nation in growth in its gross domestic product, which grew by 4.2% in 2015 — more than twice the national rate.
This record raises numerous questions, the most interesting of which is: So what’s all that guff about California being a “business-unfriendly” state?
We ask because grousing from business lobbies about California’s economic climate continues unabated. CNBC, which ranks all states according to “60 measures of competitiveness,” placed California way down at No. 32 in its 2016 rankings this week. In his “Rich States, Poor States” ranking for the conservative, pro-business American Legislative Exchange Council, or ALEC, conservative economist Arthur Laffer places California at a dismal 46th in economic outlook for 2016.
How can these figures be reconciled?
The most obvious answer is that the business-friendliness and competitiveness rankings are pretty much baloney. They don’t actually examine what makes a state successful; instead, they merely judge its adherence to right-wing economic orthodoxy. Laffer’s rankings are based on states’ devotion to “15 policy variables” as viewed through their top marginal income and corporate tax rates, whether they levy an estate tax (big demerit for doing so), whether they have anti-union right-to-work laws (having them is a plus) and a relatively low minimum wage. One of Laffer’s co-authors, incidentally, Stephen Moore of the Heritage Foundation, is a top economic advisor to Donald Trump. That should give you a clue about what economic policies a President Trump would favor.
It shouldn’t take much thought to recognize that most of these variables, taken singly or even together, don’t have much to do with whether a state is friendly to business or with its economic outlook. Rather, they’re just conservative shibboleths: low taxes, hostility to labor, etc., etc.
They ignore factors that may have much more to do with a business owner’s decision to enter or expand in a state. “The last couple of years have strengthened the idea that ‘it’s the industry structure, stupid,’ ” observes Stephen Levy, head of the Palo Alto-based Center for Continuing Study of the California Economy. North Dakota and Wyoming, which are ranked third and fourth, respectively, in Laffer’s reckoning of economic outlook, have both been riding high from the oil boom of the last decade. “It’s not that they were business-friendly, but that they had a resource,” Levy says.
That’s true, but it’s a double-edged sword and it’s cutting the wrong way at the moment: In 2015, those two states performed the worst on GDP — North Dakota’s economy shrank by an enormous 6.7%, and Wyoming was second worst at a negative 2.9%. If their economic outlooks are good, the only reason might be that they could hardly do any worse.
Interestingly, the state with the second-best ranking on Laffer’s curve is North Carolina, which may be guilty of the worst self-inflicted wound in the country. That’s its enactment of legislation that discriminates against LGBT individuals. The measure could cost the state $5 billion in federal funds and business investment. Major businesses have put expansion plans on hold, and just Thursday, the NBA pulled its 2017 All-Star Game out of Charlotte, the most high-profile desertion yet.
“That’s a metaphor for a different look at what business-friendly means,” Levy comments. “Could it be that being a welcoming community is a big positive for business?”
If Laffer and his colleagues would take their ideological blinkers off, they might notice the flaws in their own methodology. High marginal tax rates, for example, are often an indicator of fiscal responsibility; that’s the case in California, where Gov. Jerry Brown raised taxes to close a budget deficit, placing the state back on the course of fiscal stability after years of Republican knee-jerk tax cutting and debt issuance.
Laffer could examine his own rankings to discover the folly of his approach. Among the states he ranks above-average in economic outlook are Wisconsin (No. 9) and Kansas (No. 27), both of which have governors who treat the ALEC playbook as scripture. Yet Kansas Gov. Sam Brownback is a walking refutation of Laffer: He’s cut taxes to the bone, leaving the state unable to properly fund its government or schools. Kansas’ economy shrank by 0.8% last year and eked out a worst-in-the-nation 0.4% annual growth rate in 2013 through 2015.
CNBC’s rankings, which are based on judgments about 10 economic and social variables, demonstrate how list-makers can overemphasize some things and misunderstand others. California ranks 32nd out of 50 in its list of “top states for business”; plainly, it’s not a top state at all in CNBC’s view. California is marked down in such categories as “business friendliness,” a measure of litigation and regulation, in which it ranks 50th; the “cost of doing business” (taxes, wages, and the generosity of government incentives), on which it ranks 49th; and the cost of living. Its advantages include technology and innovation, and access to capital, ranking second in both. That’s Silicon Valley, both as a place and a state of mind.
Yet what do these categories really mean? Some aren’t contributors to the state’s business climate, but artifacts of its business climate. Sure, California is an expensive place to live, but that’s because it’s a desirable place to live. The state with the lowest cost of living is Mississippi, but who wants to live there? Taxes and wages are high in California in part because the state provides lots of services to a very diverse population, including many people who come in because of its opportunities. Yes, there are lots of regulations, but that’s because some of the elements that draw people in, such as its natural beauty, need protection so they don’t lose their appeal.
That doesn’t mean that California can afford to rest its case. Economic trends come and go, and the day will surely come when a slowdown in one sector will give the rest of the state the flu. There’s plenty of room to squeeze efficiencies out of government operations, including help for businesses with regulatory problems, and it’s no secret that the state’s transportation infrastructure (CNBC’s well-deserved ranking: 33rd) desperately needs investment. We cannot and should not ignore complaints from business owners that the state places unnecessary obstacles in their way. California’s growth is strong, but it could always be stronger.
But the record shows unmistakably that those who rank California low for business competitiveness can’t be right. They’re prisoners of business and political ideology, locked in a room so dark their eyes can’t adjust to the daylight.
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