Business Costs, the Economy, and Happiness – Part I

Competing  for the  brass ring

Competing for the Brass Ring

Is there a close relationship between the cost of doing business in a state, and the state’s economy, as the “business climate” gurus and lobbyists, would have us believe?  And we do believe it,  as witnessed by the legions of cities and states with economic development policies that make lower business costs, lower taxes, and less regulation the focus of governance.

That’s certainly not all bad; and can work to lure a specific company to a particular place, at a given time; not to mentioned what it can do for politician’s career.  But viewed from 10,000 feet, and with a longer view – which no one seems to take any more – the results may be surprising.  (I’ve whined about the business climate gurus before,  here).

I’m also asking a second question, which neither the business climate crowd nor the politicians (since Plato’s time) hardly ask anymore: “Do lower business costs or a better economy make us any happier” or improve our “well being?”

Happiness as the ultimate goal for a society is not just some nutty, woo-woo, “touchy-feely” 1960s hippie concept, or a Green version of the Gross Domestic Product.  It was, as you know, consecrated by Thomas Jefferson in the declaration of independence, with the famous phrase about “Life, Liberty and the Pursuit of Happiness.”

Jefferson said he was an Epicurean. The Epicureans were once ridiculed as hedonists. But neither Jefferson nor the other founders were hedonists.  (Although some of the stories about Franklin in Paris may raise an eyebrow, as would Jefferson’s biography).  Epicureanism seriously amended hedonism.  It urges  “simplifying your life” and “limiting your worldly and material desires”  as a means toward well being.  As you might guess, both sides of today’s vast political divide have a hugely different interpretation of what Jefferson may have meant by happiness.  (Am sure Mr. Justice Scalia, for one, has given lots of thought to what Jefferson meant).

So, is there a close relationship between the cost of doing business in a state, and the state’s economy?  And does any of that have anything whatsoever to do with happiness or well being?

The short answer is:  Business costs and the strength of a state economy are inversely proportional (negatively correlated).  Prosperous states are associated with higher business costs; and poorer ones, with lower business costs. Huh?  That’s exactly the opposite of what the “business climate” gurus keep telling us. 

If you don’t believe me, compare state rankings by Forbes for the “cost of doing business” by state,  with the rankings of states by median household income from the U.S.Census Bureau.  These measures were taken in the 2012-2013 time frame.

And,  how do these business climate and economic ranks comport with state ranks on “well being” or “happiness” as measured by Gallup?   (also from the 2012-2013 period).  It turns out there is no discernible relationship between business costs and well being (positive or negative).  But there is a moderately positive one between a state’s household median income and the happiness of its residents . That’s consistent with the common belief that more money tends to make life better (or at least, reduce suffering), but that money can’t buy everything.  But the bridge, from business climate to well being, via a strong economy, is swaying in the wind.

correlation2Here is a little table that shows you the specific “correlations” (you may recall that from Stat 101) among the three “variables.”  If Stat 101 is a bit foggy,  the correlation coefficient is a numerical value indicating the degree and direction of relationship between two variables; the coefficients range in value from +1.00 (perfect positive relationship) to 0.00 (no relationship) to −1.00 (perfect negative or inverse relationship).  Yes, we get a minus 0.43 correlation between Business Costs (others call this or include it in Business Climate) and Median Household Income.

rankings2Here is a busier chart which show each state’s rank on all three dimensions. The Yellow Shaded states are the ones which have amongst the lowest business costs, but a population that told Gallup surveyors it was (relatively) unhappy (with a subdued level of well being).  That’s Column #1 compared with Column #3.

The Green Shaded states are the reverse –high business costs, but happy.   Part II (the next blog post) will look at some of the possible reasons for these relationships.

Am not sure why yet, but it’s easy to see that a lot of Border and Deep South states are shaded yellow; while Northeastern and New England states are over-represented in the Green.

California is also shaded Green. That gives some support to the observations of Lisa Halvestadt and her associates in the Voice of San Diego about trade-offs in California between high business costs, taxes, and stiff regulations, on the one hand, and “well being,”  on the other. (The alarmingly high poverty rate in California notwithstanding).

The value of looking at this from 10,000 feet and with simple measures, and at one point in time, is that all of these indicators – business costs, median income, and happiness in 2012-2013 — are the cumulative effects of decades of private and public decisions in those states. Not just a headline in a news paper about the taxes that need to be cut right away in LA to keep the film industry in tow.

The business climate gurus will surely dismiss  these correlations as simplistic.  That’s fine! If it moves them to make their own message less cartoonish, and more nuanced,  it will be an accomplishment.  We’ll talk a lot more about this in Part II.


4 thoughts on “Business Costs, the Economy, and Happiness – Part I

  1. Gerry O'Keefe

    OK, I get tired of the business climate whine, too. But your analysis is a little narrow, Irv. Business climate is about more than Boeing, Microsoft, and Paccar. And policy makers ought to think about it at the community, as well as the state, level.

    Let’s consider an investment in Grays Harbor County that is marginally capitalized. Can that startup concern, reaching for a share of a regional or national or even international market, get up and running? The B&O isn’t exactly the friendliest startup tax scheme. And there are a myriad environmental process hurdles that require expensive, experienced consulting and legal expertise to navigate. Tribal entanglements are often present and take years of relationship building to develop into something constructive.

    The element of the negative business climate argument can I accept is that WA policy sets a high bar for entry for smalt to mid-sized and non-“new economy” firms that may be new to the state. As a result we see a heavier bias to well-capitalized firms concentrating in Central Puget Sound. (There are other reasons for this: workforce, housing, etc.). Grant County’s cheap electricity notwithstanding.

    If you live in Pend Oreille or Wahkiakum Counties, the odds that you can attract new businesses are long indeed. Is this what we want our policy outcomes to favor? Why?

    Again, I recognize there are other factors in play, but state policy isn’t offsetting these inherent disadvantages. Maybe it should. If it doesn’t there will always be a constituency for the business climate whine.

    Finally, I am a happy guy. But when I assess that ephemeral quality in myself, or even others I have been around, I have yet to see a positive correlation between the bank account and joie de vivre. Indeed, I may well be happiest while on an inexpensive vacation in Montana where no one lives and the business climate is terrific but largely irrelevant.

    It is interesting that one does not see successful entrepreneurs testifying about business climate or choosing to accept a position with AWB to change the State’s regulatory context.

    Thanks for jump starting my brain this morning, buddy. When are you planning a visit to Oly?


    1. Irv Lefberg Post author

      Great comment and observations, Gerry, by a guy who really knows something in this field , unlike the dabbling blogger. You make good points. I did say that I hoped the business climate folks would mAke their views more thoughtful and nuanced. I should distinguish more between the business climate ranking industry and the people working on the ground in communities like you mention. The real working Econ developers. Different animals. I will talk about that in Part II. Great to hear from you


  2. Rosemary Ryan

    Hi Irv,

    Another interesting column! However, I think there is a typo in your narrative. The second chart says that “green” states are high business costs and high happiness states. But the narrative says they are have high business costs and low happiness.

    Best, Rosemary



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