California economic climate sunnier than thought

May 19, 2011

(PhysOrg.com) -- Location, location, location. That's what UC Irvine economics professor David Neumark says is key to understanding how California's economy has managed to stay in line with or surpass the national growth average, despite the Golden State's less-than-favorable rankings in popular business climate indexes.

In a study released last month by the Public Policy Institute of California, Neumark and his co-authors found that non-policy factors such as weather, geography and industry mix more accurately predict a state's economic growth than traditional business index measures, which focus on productivity and tax policy.

"Business climate rankings give a conflicting picture of whether public policy in California is hostile to business, with some placing the state high and others near the bottom," said Neumark.

"As it turns out, the business climate rankings that rate California poorly are the ones that predict economic growth, implying that California's business climate may be problematic. Yet over the past 30 years, the state's economy has managed to grow at roughly the same rate as the nation because its many natural advantages help offset its poor business climate," he said.

The study compared the average results of 11 popular business indexes from 1992 to 2009, including the State Business Tax Climate Index, the Small Business Survival Index, and the Cost-of-Doing-Business Index — on which California ranked 45th, 46th and 47th, respectively, out of all states. The researchers also collected data on amenities and other geographic or economic conditions that could influence growth, such as average temperature and precipitation.

"Factors like a nice climate may make it easier to attract workers and may also affect productivity directly, providing a boon to businesses that locate here," Neumark said.

He and his colleagues found that, over time, there was no relationship between actual economic growth and business indexes that used productivity or "quality-of-life" measures such as equity or infrastructure in developing rankings.

The indexes that focused on taxes, regulations and fiscal policy — the Small Business Tax Climate Index and the Index of Economic Freedom, for instance — fared better as predictors of economic growth, Neumark said. Study findings, he noted, indicate that a more complex corporate tax structure and higher welfare and transfer payments, in particular, contribute to slower economic growth.

What does this mean for policymakers? "Many business climate indexes do not capture factors that appear to drive state , and those that do suggest that lowering taxes and the costs of doing could help," Neumark said.

"But the importance of state differences in policy is often overstated, as these are substantially outweighed by natural advantages or disadvantages that states face, and over which policy has little or no influence."

Explore further: Performance measures for CEOs vary greatly, study finds

More information: The full report — co-authored by Jed Kolko, PPIC associate director and research fellow, and Marisol Cuellar Mejia, PPIC research associate — is available online.

Provided by University of California

2 /5 (1 vote)
add to favorites email to friend print save as pdf

Related Stories

Bank relationships matter

May 18, 2010

In the current economic climate, many small businesses face difficulties when applying for loans. However, the process may vary depending on the business' previous relationships with financial institutions. In a recent study, ...

ESRC report examines the pathway to economic recovery

Jan 27, 2011

Authored by Economics writer Romesh Vaitilingam, Recovery Britain: research evidence to underpin a productive, fair and sustainable return to growth examines some of the challenges the UK faces after the longest and deepest ...

Pollution tax rebates little help for low-income workers

Feb 22, 2011

Although policymakers believe the regressiveness of pollution taxes can be offset by returning revenue to the low paid through a reduced labor tax, that approach may not work, and also could have the unintended consequence ...

Recommended for you

Performance measures for CEOs vary greatly, study finds

13 hours ago

As companies file their annual proxy statements with the U.S. Securities and Exchange Commission (SEC) this spring, a new study by Rice University and Cornell University shows just how S&P 500 companies have ...

Investment helps keep transport up to speed

18 hours ago

Greater investment in education and training for employees will be required to meet the future needs of the transport and logistics industry, according to recent reports by Monash University researchers.

Sharing = Stealing: Busting a copyright myth

Apr 11, 2014

Consumers copy and share digital files. This has been blamed for a potentially catastrophic decline in certain markets. But why do consumers copy? And is it as economically harmful as often thought?

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

christian_physicist
not rated yet May 19, 2011
And how about the fact that a huge number of our Chinese (and other) imports go through Californian ports? I suspect that matters a lot.

More news stories

New clinical trial launched for advance lung cancer

Cancer Research UK is partnering with pharmaceutical companies AstraZeneca and Pfizer to create a pioneering clinical trial for patients with advanced lung cancer – marking a new era of research into personalised medicines ...

More vets turn to prosthetics to help legless pets

A 9-month-old boxer pup named Duncan barreled down a beach in Oregon, running full tilt on soft sand into YouTube history and showing more than 4 million viewers that he can revel in a good romp despite lacking ...