Republican governors' woeful economic records are crippling what would normally be the strongest chance the party has to capture the White House. Historically, the statehouse-to-White-House pathway is far more viable than the route through the Senate, yet GOP governors' records offer little to run on in a general election. Healthy state-level growth is—at least traditionally—a basic resume requirement.
I have argued that the GOP's perceived advantage on the economy is entirely a matter of illusion, citing Erik Zuesse's "They’re Not Even Close: The Democratic vs. Republican Economic Records," 1910-2010, a point that Salon's Sean McElwee has since reinforced, citing “11 reasons why America does worse under the GOP.” But the national picture is not the only place to look for such evidence. The failure of GOP ideology on the state level deserves further scrutiny as well, particularly with so many governors and ex-governors in the race. The 2012 study “Selling Snake Oil To The States,” which demolished the tax-slashing prescription package offered by ALEC (the American Legislative Exchange Council) and right-wing economist Arthur Laffer, helps to define the parameters of GOP state-level economic policy.
But ALEC is only one of several such organizations, and Peter Fisher, who is research director at the Iowa Policy Project and who co-authored the “Snake Oil” study, has studied their work as a whole, and found it dismally deficient. In 2005, he authored a book published by the Economic Policy Institute, "Grading Places: What Do the Business Climate Rankings Really Tell Us?," then in 2013, Good Jobs First published his updated analyis, which covered four state rankings still being published, as well as two more sophisticated guides which at least try to simplistically model actual tax costs—though with severely limited success.
The four indexes are the The ALEC-Laffer Economic Competitiveness Index; the Tax Foundation’s State Business Tax Climate Index; the Beacon Hill Institute’s State Competitiveness Report; and the Small Business and Entrepreneurship Council’s U.S. Business Policy Index. The last combines a broad range of 46 factors—but only 12 dealing with tax progressivity actually matter in the rankings—just one indication of how much confusion reigns in this field. Another indication: states ranking high in one index often rank low in another. Most importantly, there's no relation between scoring well and actual economic performance. The entire “business climate” cottage industry which drives so much of the GOP's state-level economic agenda is nothing but baseless pseudo-science.
Thus, ironically, at the same time that Republicans are at war with actual climate science, they are routinely invoking economic articles of faith, reflected in the bogus field of “business climate” studies which directly guides their policies on the state level, and defines their economic outlook more generally. It's a commonplace for Republicans like John Boehner to profess ignorance regarding climate science, while pretending to know that “every proposal that has come out of this administration to deal with climate change involves hurting our economy and killing American jobs.” Not only have recently emerging fossil fuel industry troubles, coupled with renewable advances, which I wrote about recently, made Boehner's job-killing claims look foolish on their face, the entire background for such economic self-assurance—reflected both in conservative orthodoxy and far too much of “conventional wisdom”—turns out to be nothing but hot air.
In the introduction to "Grading Places," Fisher writes, “The six reports we review in detail all purport to measure the competitiveness of a state for business activity, and all emphasize the importance of taxes. Three focus exclusively on some measure of state taxes on business; the others include nontax factors but state tax policy still plays a prominent role in their calculations.”
But as Fisher later notes, the reality is that tax policy plays a decidedly minor role in most business decision-making, because taxes themselves are a relatively minor cost: “[A]ll state and local taxes on businesses combined (including corporate and individual income taxes, sales taxes, plus local property taxes) represent only about 1.8 percent of total business costs on average for all states.” That's clearly not a dominant consideration, but the kinds of taxes these groups focus on represent an even smaller share: “Corporate income taxes, in turn, are only about 9.5 percent of that 1.8 percent, or 0.17 percent, according to one estimate.”
There's even a good case that these “pro-business” groups are exactly the opposite of what they purport to be, given how the needs of established big businesses and the far more numerous small startups diverge. “In fact, a state tax system that relies heavily on progressive income taxes is probably the most supportive of new business and innovation,” Fisher writes. “Start-ups and young firms typically lose money, and owe no income taxes as a result. By contrast, firms must pay sales and property taxes no matter what their level of profitability, so states that depend more heavily on those taxes create a heavier burden on start-ups and young businesses in those critical formative years.”
Even if the role of taxes weren't inflated and misrepresented, profound problems would still remain with these rating guides. “An examination of the four most prominent 'business climate' ratings of state tax systems finds them to be deeply flawed and of no value to informing state policy,” Fisher says in the executive summary, before ticking through a list of glaring flaws, starting with perhaps the most fundamental: “They produce state rankings that bear little relation to actual taxes paid in one state versus another.” Astonishing, perhaps, but when interviewed, Fisher quickly confirmed it. “These are purporting to measure business climate, or in some cases, more narrowly, business tax climate. But even when they're just narrowly focused on business tax climate, they're not measuring what businesses actually pay,” he said. They often total up “points” for various features of the tax code—number and width of brackets, for example—rather than looking directly at actual tax bills paid.
It's not rocket science, Fisher pointed out. “There are fairly simple ways of coming up with a rough average of how much business tax are in one state for another. You just look at business taxes collected as a percent of the state GDP for example or personal income.” But that's not what the “business climate” indexes do. “They often bear so little correlation that you really wonder what they are measuring,” Fisher said. “If their goal is to measure how much businesses paying what state versus another, why don't they just rely on one of these other approaches instead cobbling together this index number that turns out to not being much?”
As already mentioned, the U.S. Business Policy Index combines a broad range of 46 factors, but only 12 dealing with tax progressivity actually matter in the rankings. This little tidbit deserves more scrutiny for the insight it provides into how this field of “study” actually works, and what a real pseudo-science looks like. More specifically, the report states, “When the 12 measures of progressive taxes are combined, the state scores range from zero (in Wyoming, with no individual or corporate income taxes and no estate or inheritance tax) to 73.4 (in California).” In sharp contrast, “The ranges between the lowest and highest scores on the other categories is a fraction of this amount, ranging from just 3.7 points for the labor policy variables to 11.8 points for government regulation.” Indeed, a chart showing how states score from lowest to highest shows virtually no visible trend for any of the other categories.
In real social science—like all science—a major goal is to isolate the smallest number of factors that produce a given outcome. First you eliminate the extraneous factors, then you can study how the factors that matter interact with one another. That's how knowledge gets accumulated over time. There's nothing wrong with studying 46 factors in the first place, as the USBPI does, but there's a big problem with continuing to study them when most of them turn out to be irrelevant. Of course, in this case, nothing real is being measured—only an abstract aggregate “score”. But the principle remains the same: factors that only contribute noise to the score should be eliminated from calculating it. And yet, the USBPI remains overloaded with 34 items and all of three categories which are minor distractions at best, if not entirely irrelevant.
The reason for this should be obvious: the USBPI was created for political purposes, to serve multiple related, but not identical, agendas. The one that really matters is promoting regressive taxation, so the rest turn out not to really matter. But saying so outright would clash with the political agenda of crafting a broader appeal. So the index continues to include a large majority of irrelevant items. It goes without saying that nothing remotely similar happens with climate science. In climate science, tests of statistical significance are run all the time, and factors that fail to make the cut are eliminated from causal accounts—at least until some new evidence for them can be found.
While four of the measures are simple indexes, two are a bit more sophisticated, examples of what are called “represenative firm models,” prepared by brand-name accounting firms: the Council on State Taxation's Competitiveness of State and Local Business Taxes on New Investment, and the Tax Foundation's Location Matters. As Fisher wrote, “These mathematical models allow for more complexity and nuance because they acknowledge that different companies and facilities vary greatly in how they interact with tax codes and they are aimed at measuring how tax systems impact plant expansions or relocations.” But he went on to say “Unfortunately, both models have serious flaws and fail to take full advantage of the methodology,” and elsewhere, he wrote, “both are weakened by simplifying assumptions that lead to misleading results.” When I interviewed him, Fisher was even more critical of what they had done.
“I probably shouldn't have used the term mathematical model, when I think about it,” Fisher said, “because all they've really done in these other studies is reduce the state corporate income tax form, and property tax law to spreadsheet formulas.... It's like tax preparation software to you buy.” Put simply, the measures “model” the tax bill paid by “representative firms” in each state—with some glaring omissions (COST ignores tax incentives, for example)—but not the economic conditions in which they would do business, as the term “model” would seem to imply. The COST model “assumes every facility sells five percent of its output in-state, whether it is located in, say, California or North Dakota,” for example. Out-of-state sales levels are also set arbitrarily and unrealistically as well.
Still, compared to the four index measures, “that is a much better yardstick of what businesses are actually going to pay,” Fisher said. While the tax codes may not be completely modeled, and the business assumptions may be unrealistic in some ways, it still looks much better than how the index are created.
As Fisher described the typical process of analyzing tax features, “You just take each one by itself and add them up. So you say 'We're going to give you five points for having only two tax brackets. We're going to give you three points for having a top rate under 10%. We're going to give you one point for not having a state minimum wage.' Then you add the points up, and you might have 50, 75, 100 different tax features, and you just add them all up and you've got a number. Well, that's pretty meaningless number, and it's pretty arbitrary how you decide to weight those different features.” Suddenly, modeling a “representative firm” that sells as much in state in California as it does in North Dakota starts to look pretty good—even though it's still far from being realistic.
These models, though, are still far from the standard form of analysis used in social science.
This doesn't mean that indexes are necessarily misguided. Fisher goes on to say, “To a significant degree, the legitimacy of an index depends on how well it mimics a more sophisticated statistical approach.” However, “As we shall see, the indexes reviewed here fail this test.”
Another fundamental problem is the very existence of a “business climate,” as a meaningful concept, which Fisher also remarks on:
It is not clear that the very concept of “business climate” or “competitiveness index” for an entire state or metro area makes sense to begin with. Charles Skoro has argued that “the usefulness of the business climate concept depends on the existence of a set of indicators that are measurable, that have substantial effects on business outcomes, and that are truly generic—they influence business activity in a more or less uniform manner regardless of industry, region, or time period.”
As with the more limited example of the USBPI, there may be strong political reasons why talk about a “business climate” has a broad appeal, but that doesn't tell us anything about whether such general “business climates” actually exist. What may be good for one particular industry—at least in the short run—may not be very helpful for businesses in general, and could even be disadvantageous for some other industries. There is simply no advance guarantee, one way or the other.
Others have made similar arguments: that the factors important to location and expansion decisions are industry-specific, and that the conditions conducive to growth can vary tremendously within a state.
They also argue—and we agree—that metropolitan regions, not states, are the meaningful unit of competition for business investment decisions. New York City bears little resemblance to Buffalo; the same is true for El Paso and Houston and for San Jose and San Bernardino.
In short, the entire enterprise may simply be ill-conceived. On the other hand, there are some kinds of policies which do make broad-based sense—but they reflect a much broader mindset than just thinking about “business climate.” Elsewhere, Fisher writes, “In the long run of economic history, the only way to achieve broadly shared prosperity is to increase productivity. Only if more goods and services are produced per capita, can more goods and services can be consumed per capita (or the work week shortened without reducing the standard of living).”
He goes on to identify four ways this can be achieved: First, capital investments “make the economy more productive,” second, technological advances “increase the efficiency of production,” create “new uses of existing resources” or “new products and services,” third, “investments in 'human capital'” (education and training) make labor more productive, and fourth, an economy's overall productivity is maximized via full employment and “a labor force that remains healthy and on the job.” Such are the prescriptions for making an economy as productive as possible. But what makes sense for society as a whole is not necessarily what makes sense for individual actors, particularly greedy, selfish, sociopathic ones. And that's arguably the whole purpose behind the “business climate” racket—to bamboozle the public into seeing the world the way that greedy, selfish corporate sociopaths do.
One final point drives home just how bogus “business climate” studies are: their lack of development in response to criticism over time. Once again, the contrast with real climate science is instructive. In the climate modeling field, there has been long-term interaction between model-building and criticisms, most notably focused on important elements of the physical climate system which were missing from climate models at various stages. Over time, more elements were added to climate models, their integration has improved, and the models have become more fine-grained, producing specific outputs for smaller and smaller geographic areas. All these have been clearly recognizable signs of progress,. Researchers have also undertaken significant studies relying on the results of a whole suite of models, reflecting the fact that there are reliable similarities in their results. This is what a successful model-development process looks like.
In contrast, Fisher said, “I see very little change in these models over the years.... In fact, the accompanying text in these reports hardly changes year-to-year. So, for example, the latest Tax Foundation report that came out in December last year still has exactly the same wording attacking my 2005 first edition of Grading Places. So they haven't even bothered to note the second edition. They haven't acknowledged any of the specific criticisms of their model, really.”
The indexes themselves aren't improved, in part because it would interfere with their propaganda usefulness, Fisher believes. “The measures stay the same. I think, in part, because when they issue a new one they want to say, 'Well look what North Carolina jumped 15 places in the ranking this year. Why? Because they cut all these taxes.'” That sort of comparison would be harder to make if the index itself were to change. “So in part I think it's because they're not really serious attempts to measure something meaningful. They have a policy agenda in mind, and the way they constructed it serves that policy agenda, and they have no real incentive to change. Part of it is because they just want to have a consistent one from year-to-year, they don't want to admit, probably, that there's anything wrong with the earlier ones, and they want to be able to make year-to-year comparisons.”
In short, there's nothing serious involved in what they do. “They are basically recipes for state fiscal austerity, for cutting government spending across the board, and reducing taxes on business, but also on individuals,” Fisher summarized. That's what they are designed to advocate for, so why bother with anything else?
Speaking specifically about ALEC's index, he noted, “They acknowledged no positive role for government whatsoever. There's nothing the government does that's important in promoting economic growth, it only enters negatively. So, the more government employees you have, the worse your ranking. It doesn't matter what they're doing. They could be elementary school teachers, firefighters, it doesn't matter, the more you have, the worse your economy is going to be according to these measures.”
It is, in short, a rationale for austerity without end—which simply cannot work. “It's largely states that are responsible for education at all levels, not the federal government. It's largely states they have responsibility—states and localities—have responsibility for investing in infrastructure. You can't have an economy without a transportation system, without public utilities, water and sewage, high-speed Internet in rural areas, everybody acknowledges they're important. And so, when you undercut the funding source for those kinds of public investment, you're undercutting the ability of the state to increase productivity and support economic growth in the long run.”
But that's the playbook that state-level Republicans have embraced, legislators and governors alike. Which is just one more reason why today's crop of presidential wannabes are so weak on the economy. The political press won't tell you so, of course. But it's a profound vulnerability just waiting to be exploited—and it's only likely to get worse as different GOP governors and ex-governors compete with one another in the GOP primary.
Fisher leaves us with one final thought worth stressing—the short-term strategies these measures push are, in the long-run, ultimately destructive of income growth and wealth-creation:
Increase in productivity is what is required for increase in incomes. And what we see with these indexes is they're promoting, almost exclusively, a competitive strategy of your state capturing a bigger share of investment, this really what it's about. How can you, in effect, steal capital investments from your neighbors? That does nothing for the national economy, to have states competing for investment that's going to occur somewhere anyway. What it does is undercut their ability to fund that traditional state role in supporting economic growth through investments in education, infrastructure, and even health.
In short, it's not a prescription for growing an economy of the future. But some version of it or another will be the GOP vision for 2016.