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Crunching rankings shows Az's low-cost economic model is outdated
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What the Devil won't tell you

Crunching rankings shows Az's low-cost economic model is outdated

CNBC's business friendly list accidentally shows way forward

  • www.SeniorLiving.org via teegardin/Flickr

So you may have heard CNBC released a report on the top states for business — one that saw Arizona tumble 20 spots to No. 34, but did you get the memo that Gov. Doug Ducey doesn't want bad news?

Shhhhhhhhh!

As far as lists go, I trust the U.S. Census Bureau, Motor Trend and Modern Drummer. Yes, Neil Peart is the best drummer since Buddy Rich and the Camry was a great ride. Typically, lists and rankings tend to be highly subjective because they include biases. In CNBC's case, it's all about the avarice. The network's ideal public policy would be more Oliver Twists. CNBC probably considers FOX News guilty of pagan idolatry for worshiping "God," and not "the Big Board" on Wall Street.

CNBC's list has a massive, honking and technicolor problem.

It defined "business friendly" based on how states sold themselves to business. Okay. Right. That's like defining what women want based on how guys write their Match.com profiles. I've had women friends show me what guys are selling and trust me when I say, women don't care how big your truck is but do they care that you can't spell.

OK, two problems. The news outlet rejiggered how it scored the states. Arizona didn't get bad at the game. The rules of the game changed out from under it. CNBC ranked the 10 categories it used by weighting each each with points (between 400 for quality of work force to 50 points for access to capital). The points awarded changed from last year, which means that comparing last year to this year is comparing apples to tangelos. Arizona didn't fall. The earth fell out from beneath it.

OK. Three problems. The survey includes "best economy" as one of the categories, which leaves me wondering why they even futzed with anything else. All the other categories are, in a way, bullshit. That's the ballgame. No governor and Legislature is going to torpedo a rocking economy to make it's environment more sexy to a site selector, right? (No, that's what Congress does to win back the White House).

What sets this list apart from the typical jiggery-pokery of Wallethub.com-level clickbait is how the list provides side-by-side comparisons across 10 categories. We can dispense with big data hickery-dickery and look at which states have good economies. We can figure out what traits they share and then see what states doing well in those leading indicators all have in common. 

Relationships emerge and direct relationships at that. Yes, it's just one study and one survey but still, the results are illuminating.

Given the fact that Arizona's economy ranks 36th on the list, it's worth checking out maybe how those states above us actually did it, rather than how politicians say it's done or how list makers concoct their tomfoolery. The only list on which we make the top 10 is infrastructure, where we're tied for ninth place with Minnesota, which was declared the "top state for business" overall.

Back in 1990, Fife Symington was elected governor and Arizona began pursuing an economic model that sought to keep the cost of doing business low, primarily through low taxes and deregulation. We haven't looked back.

The Northeastern states had overtaxed and over-regulated in snowy conditions, while the Sun Belt promised cheaper everything. The game started in the 1960s and 1970s when economists warned of "wage inflation." Yes, back then the average worker was making too much money and it threatened the economy. Maybe — just maybe — times have changed.

The "exodus economy" began and states from Arizona to Georgia cashed in on companies fleeing high costs, big labor and snow shovels.

That's just capital!

Are politicians in states like Arizona selling voters today on the idea of cutting taxes because it will improve the economy tomorrow? Or are leaders camouflaging a political argument in economic urgency?

Here's the difference: The root of the political argument involves the word "should." Every person should bear their own burden for their own success. Why should I pay for kids to go to school? I should not be responsible for anyone else who makes a bad decision. I should be able to keep more of what I earn.

That's all great, wonderful and a legit philosophy. It's just got nothing to do with economics.

Economics is the study of cause and effect. I remember Day 1 of Econ 101, when Professor Gerald Swanson told the packed house in Harvill Auditorium: "If you want to study the word 'should,' go study philosophy, Economics doesn't deal in 'shoulds.'"

I hear you "moral hazard" folks, but even the fear of rewarding counter-productive behavior only matters if it creates more counter-productive behavior.

The CNBC list is great for this because it provides a chart that shows where states ranked among all 10 categories. That's a veritable database of apples to apples. If we focus on the states with the 10 best economies, we can see what traits they share in how high or low rankings against the other states. So I took a whack.

Below are those categories ranked one through 10, based on the average ranking of the states with the 10 best economies. There are 50 states, so an average ranking of 25 would suggest to me that category has vague relationship with a strong economy. However, get much better than 20 and a more direct relationship emerges.

Immediately, things get interesting:

Average rankings of 10 states with the best economies

  • Access to capital 14.7
  • Business friendly 15.1
  • Innovation and technology 15.3
  • Infrastructure 17.6
  • Cost of doing business 20.9
  • Education 21.7
  • Quality of life 22.1
  • Cost of living 22.7
  • Quality of workforce 24.4

Access to capital is a vital cog in the economic machine. Who knew?! I mean, we may need a new economic school wherein the availability of capital is seen as paramount. What should we call it? Oooh! I know. We'll call it "capitalism."

That technology and innovation ranks highly should also come as no shock, as they are the key to a strong capitalist economy. Innovation spurs advancement and scuttles grand schemes for a few to control everything.

Didn't I just point out CNBC ranked quality of work force at the top of all the categories and access to capital at the bottom? The list above shows what CNBC says is based on what states are selling and not what businesses are buying.

It's the Match.com equivalent of "great job, great picture — please disregard my seven convictions for domestic violence." If states don't have access to capital, they aren't likely to broadcast the fact, and since they aren't broadcasting it, CNBC decided to rank it as less important. Right now, loans are still hard to come by, so no one is talking about it. Loans are still paramount to a strong economy.

Moreover, if everyone has a lot of unemployed/under-employed folks they may as well use it as a strength and sell their workforce.

You get what you pay for

But what about the "low-cost" model? Well, we can also look at the 10 cheapest states in which to do business (nope, Arizona isn't nearly one of 'em; despite our concerted efforts we're in the bottom 11, not the top 10) and see how they rank among the other categories. It gets more interesting:

Average rankings of 10 states with lowest costs of doing business

  • Cost of Living 9.7
  • Economy 23.0
  • Infrastructure 26.4
  • Business friendly 26.6
  • Access to capital 31.7
  • Quality of life 35.2
  • Education 35.2
  • Work force 35.6
  • Technology and innovation 39.3

The states that ranked the best for having a low cost of doing business were in the bottom half of eight of the other 10 categories CNBC says are important. Pursuing a low-cost model comes at a huge cost — even to the "business friendliness" of a state.

These states may be cheap to do business in, but compared to other places they have a lousy work force, crappy schools, a low quality of life, limited access to financing, and far less technological innovation. Aside from that ...

Maybe they're cheap because no one wants to live there.  

Such low rankings suggest an inverse relationship exists between a low cost of doing business and a whole bunch else.

Check out technology and innovation. After dorking out with a calculator for hours, I could not find a set of relationships among any other categories that had such a strong inverse correlation. What's remarkable about how badly innovation suffers in low-cost states is that those states are the ones with low taxes. Conservatives have long argued that high taxes stifle technology and innovation. So the top 10 states for low taxes should not also have lower rankings for innovation. Yet there it is.

Somehow, CNBC alleges Arizona ranks 40th in cost of doing business, which is largely driven by taxes. This is like finding out your father, who quit a good job 25 years ago to focus on competitive eating, just wolfed down fewer hot dogs in a minute than a bunch of vegans.

It's either wrong or makes me wanna cry.

The mother of invention

Even if Arizona were to improve remarkably in cost of doing business — still shaking my head — it would come at big price. Again, this should not come as a whalloping shock to businesses. Every business wants to keep expenses down but understands that some stuff just costs money. If not spending money is your only concern, your business won't get off the ground. It takes money to make money, remember?

So what would be a smarter path to pursue? Not all direct relationships are created equal. The 10 states with great infrastructure, for instance, rank 21.2 on average for best economy. A category like "business friendly" shows results as mysterious as the term. The 10 most business friendly states have an average economic ranking of 21.6. Pursuing a pure "business friendly model" shows little benefit either way in the other categories.

The trait most directly related to the most other good traits — including a strong economy — is technology and innovation. Those states have more access to capital, better schools, a stronger work force, healthier economy and cooler quality of life:

Average rankings of 10 states rated best in tech/innovation

  • Access to capital 10.9
  • Education 15.3
  • Work force 18.4
  • Economy 19.6
  • Qualty of Life 19.8
  • Infrastructure 27.6
  • Business friendly 30.0
  • Cost of living 30.5
  • Cost of doing business 34.9

I have to point out here if I haven't been clear, that a direct relationship doesn't imply causation. There is a correlation between access to capital and technology but is that because innovation leads to more capital, or vice-versa? It doesn't take a Sheldon Cooper to realize that ease in finding loans probably improves innovation.

The more direct relationship shows up in education. One of the key traits shared by booming economies would seem to require (or at least involve) technology and innovation. States showing strong in geekery also have good schools, which is likely causal.

According to CNBC Arizona ranks 49th in education, which is where it ranks among the states in per-pupil K-12 spending. Good schools are also related directly to a quality workforce, as states with the top 10 work forces have an average ranking of 16.1 in schools. States with strong workforces don't rank higher in any other category.

As K-12 has taken on (finally) a life of its own in Arizona politics, it would be unfair for me not to point out that states with the very best schools tend to have crappy economies. The states ranking in the top 10 for education average 29.6 in economic strength. Only Minnesota, which ranks fifth in quality of schools, ranked among the top 10 economies. Minnesota ranks 21st in K-12 funding per student. (the good folks at CNBC took more into account than just dollars dropped on schools).

However where schools rank may have as much to do with states providing good education without business opportunities, forcing the best and the brightest to bail over hill and dale.

Now that's not to say that there is no correlation between schools and economies. You just have to look further down the list to see the states ranking in the middle of the pack (21-30) saw their economies on average ranked 9.7 in the country. The schools within that middle fifth of spending per-pupil also tend to do better than the schools that spend the most.

Arizona ranks 49th in both.

In looking for a model to pursue, maybe Arizona would be better suited looking for ways to improve financing for business, invest in infrastructure, promote technology and innovation, while keeping an eye on costs.

This is just one study and there are no magic bullets. Economics is a always a bit of a guessing game with an advanced degree. If it were easy, every economist would be rich.

Economics is the study of how to convert raw materials into consumable goods. For this there are the classical school, the neoclassical school, the liberal school, the neo-liberal school and the Austrian school, among a host of "heterodoxes" that are off-the-beaten-path subgroups. They all study the same thing, but still don't have it figured out. The International Monetary Fund is still pondering if Keynsian economics works and why austerity hasn't.

However, when making arguments in the political realm about the economy, maybe the conservatives should get back to basics in a changing marketplace. Focus on the conservative economic arguments. Protecting available capital, remember, is why taxing the rich can get dangerous. Investing in infrastructure is why some Tucson businessmen want a crosstown freeway. Technology? Innovation? That's the better mousetrap you haven't invented that will one day make us all rich.

The Left spent years preaching the Athenian ideal and then Ronald Reagan kicked their asses with it for good decade. Idealism never recovered. So leaders emerged like Bill Clinton who argued that public investment mattered largely because it improved economies. Conservatives, having won the argument against the Athenian ideal, have never pivoted successfully to a cause-effect model because the Leave-Me-Alone pitch keeps winning elections.

The "low cost of business" model we've pursued in Arizona just seems to pay fewer dividends than it once did, even if you believe it should pay more. Even Neil Peart's moved on from Ayn Rand and penning lyrics like "Live for yourself ... there's no one else."

Blake Morlock covered Arizona government and politics for 15 years, including 11 in the Tucson Citizen. He also worked on Democratic Party campaigns in the field of political communications. Now he’s telling you things that the Devil won’t.


How Arizona ranks

After a quarter-century of pursuing a "low cost of business" economic strategy, Arizona finds itself between a rocky knowledge economy and the hard reality of crappy public schools.

CNBC's list of the best place to do business ranks Arizona in the top 10 in just one category: infrastructure, because the authors of the list never made it south of Chandler. But we're in the 40s out of 50 in two: Cost of doing business (40) and schools (49). Not even that old sun-drenched standby "quality of life" helps us much, as we rank 31st.

Overall the state ranks 34th as the best place to do business with just the 36th best (or 15th worst) economy in the country.

Here's how Arizona breaks down across CNBC's categories:

Quality work force: 14

This is a bit tricky for Gov. Ducey. He seems to want only good numbers. So, Arizona's high under-employment rank needs more – not less – sunlight on it to improve the state's desireability.

Cost of doing business: 40

How the hell is this possible when the Legislature has done little but cut taxes for 25 years? Something has to be wrong. It can't be air conditioning because Nevada ranks 27th and Mississippi ranks 2nd.

Infrastructure: 9

If all you see is Phoenix, then this makes sense.

Economy: 36

California (7) and Florida (11) got hit by the housing bubble too. They've recovered nicely.

Quality of Life: 31

Ah, long were the days that this was a strength. We now rank behind New Jersey and Delaware. When was the last time anyone took a vacation to visit Wilmington?

Technology and Innovation: 24

Hmmm. Opportunities.

Education: 49

Just put it on our license plates at this point.

Business friendliness: 13

We better be given how few rights any non-business owner has in dealing wth business.

Cost of Living: 28

See quality of life. We rank behind all the states with lower salaries.

Access to capital: 25

We actually do pretty well in this department, considering Arizona is one of the few states constitutionally barred from using public money to assist private companies.

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