Grading Places: What Do Business Climate Rankings Really Tell Us?

June 30, 2005

How much credence should state and local legislators give to the picture of a state or city painted by business climate rankings? That’s the question University of Iowa economist Peter Fisher answers in Grading Places, published in June 2005 by the Economic Policy Institute. Fisher’s critique of five major business ranking indices reveals the biases that underlie them, disputes their methodology, and concludes they do not work as yardsticks of economic potential.

The five indexes critiqued at length are the Small Business Survival Index, the State Business Tax Climate Index, the Metro Area and State Competitiveness Report, the Fiscal Policy Report Card on America’s Governors, and the Economic Freedom Index. The indices vary widely in their outcomes, but have one thing in common: They claim that lower taxes and fewer government regulations are better, and draw policy recommendations from those conclusions. Fisher shows they do not 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. 

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