NC Is Number — Whatever | Eastern North Carolina Now

    Publisher's note: This article appeared on John Hood's daily column in the Carolina Journal, which, because of Author / Publisher Hood, is linked to the John Locke Foundation.

John Hood, president of the John Locke Foundation.
    RALEIGH  -  A friend of mine recently sent me an article from Area Development, one of many magazines that issues annual ratings of state business climates. According to Area Development's 2013 index, North Carolina is the fifth-best state in the nation to do business.

    My friend, an active Republican, noted that Democrats and liberal-leaning media outlets had previously trumpeted a recent decline in North Carolina's ranking on a different business-climate study produced by CNBC as evidence that Republican policies were harming the state's economic prospects. On the Area Development rankings, by contrast, North Carolina's relative position has been improving over time - it was fifth last year, seventh in 2011, and eighth in 2010.

    If Republicans were to blame for a downtick in the CNBC ranking, my friend suggested, shouldn't they - or at least the Republican legislators in power since 2011 - get credit for the uptick in the Area Development ranking?

    I suppose so. But neither side should be taking these media rankings all that seriously in the first place. If their goal is to predict business investment, job creation, and economic success across the United States, their track record isn't particularly good. Furthermore, because many of the measures in these indexes are backward-looking, often by several years, it makes little sense to use them to evaluate Democratic or Republican policy decisions in real-time.

    Perhaps the most-cited business ranking in economic-development circles comes from Site Selection magazine. Using both executive surveys and business statistics, Site Selection produces annual rankings for all 50 states. Incredibly, North Carolina has snagged or tied for the number-one ranking in 13 of the past 16 years. But North Carolina hasn't even come close to leading all 50 states in business investment, job creation, or economic growth during those years.

    Take the year 2009 - please! North Carolina ranked first in business climate according to the Site Selection ranking, ninth according to CNBC, and fifth according to Forbes magazine. But in the real economy, 2009 was a disastrous year for North Carolina, with more than 200,000 jobs lost, a 3 percent real reduction in per-capita GDP, and a 5 percent real reduction in per-capita income. As a matter of fact, 2008 was a pretty bad year for business in North Carolina, as well, with nearly 120,000 jobs lost and a GDP-per-capita decline of 2.3 percent. Yet North Carolina's 2008 rankings were also high: first from Site Selection, sixth from CNBC, and fourth from Forbes.

    More formal economic analysis also finds at best inconsistent relationships between state business climate rankings and state economic performance. The authors of the best recent study, published last year in the Journal of Regional Science, observed that given the large number of competing measurements, "nearly every state could be praised for having a good business climate or criticized for having a bad one, using evidence from at least one of these indexes." Comparing the rankings against actual data, they found that rankings focusing primarily on business costs, including taxes, were more likely to predict economic outcomes than were climate rankings that emphasize amenities or quality-of-life factors.

    As I have previously observed, to respond to criticism of North Carolina's recent economic performance by pointing to such business-climate rankings is to demand that we believe some media organization's formula instead of our own lying eyes. Rather that fixated on statistically meaningless variations in flawed national rankings, political leaders and voters should focus their attention on state and local policies that, according to the best-available research, will strengthen North Carolina's economic performance over time. These include tax reform, regulatory reform, and improving the productivity of taxpayer spending on roads, schools, and other core state services.

    The kinds of policies, in other words, that the legislature and McCrory administration enacted in 2013.

    Hood is president of the John Locke Foundation, which has just published First In Freedom: Transforming Ideas into Consequences for North Carolina. It is available at JohnLockeStore.com.
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