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A `Good Business Climate' as Bad Economic News?

  • Author(s): Freudenburg, Wm R
  • et al.
Abstract

One common concern about strong environmental regulations is that they will detract from an area's "business climate," limiting or driving away economic growth. Ironically, while the usual assumption is that businesses focus more narrowly on economic factors than do persons holding environmental concerns, it appears that little if any systematic attention has been devoted to the logic or the facts behind such "business climate" claims; the connections have generally been assumed, not demonstrated. Systematic, national-level ratings of state "business climates" have now been available for more than a decade; using the upper midwest State of Wisconsin as a reference point, this paper examines the predictive validity of three of the best-known ratings. On average, "good" business climate ratings actually predicted worse economic outcomes; the states named as having "bad" business climates actually had better economic performance (growth in jobs and incomes) over subsequent five- and ten-year periods. The findings are particularly clear with respect to incomes: the low-ranked states experienced $585-$1100 more growth in per capita incomes for the five-year period following each of the three rankings than did the top-ranked states, and the income benefits associated with "bad" business climate ratings actually increased over time.

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