Misrepresenting Fantus on Right to Work

February 13, 2011

It has come to our attention that certain interests advocating “Right to Work“ legislation in some states are citing a 1975 study by a consulting firm known as Fantus, claiming it proves that states with such a law have a “better business climate.”

Aside from the intellectually dubious idea of quoting a 36 year-old study about anything, given how much the U.S. economy has changed over that time, and not to mention that only seven percent of private-sector jobs in this country are unionized, those making this claim about the 1975 Fantus study are just plain wrong.

First, the study cited was actually only one third of a 50-state comparison study; the other parts of the study rated the states quite differently. Second, Fantus refused to repeat the study and one of its executives correctly ridiculed “business climate” studies as “a Trojan horse for a certain ideological position.” Third, paid by state manufacturers associations, the Chicago accounting firm Grant Thornton picked up the work, but its methodology was discredited in 1986 by economic development experts and it also abandoned the work.

Below is an excerpt from my 2005 book The Great American Jobs Scam (Chapter 3, pages 79-83) (Berrett-Koehler Publishers) which details this history. You can see the whole book free online here or buy it on sale for just $7.98 here.

“Business Climatology” and the Second War Among the States

By the time [Fantus founder Leonard] Yaseen retired in 1977, a new term had started to take root: “business climate,” and Fantus helped define it to serve corporate financial interests. The term was often invoked in ways that reflected rising regional tensions. The Rustbelt was beginning to show its tarnish and the Sunbelt was booming. In the early 1970s, the populations of some states in the South and Southwest grew at 6 to 10 times the rate of the Northeast and Midwest.

Business Week declared “The Second War Among the States.” “The nation’s disparate economic growth is pushing the regions towards a sharp conflict” that “will take the form of a political and economic maneuver,” it warned. Major articles also ran in Fortune and the National Journal; the latter suggested that federal spending was also biased against the Rustbelt. A new Northeast-Midwest Congressional caucus was formed to address regional injustices.29

Public officials were looking for explanations about the growth disparities, and Fantus supplied one, shaped to serve corporate lobbyists. In 1975, Fantus authored the first 48-state “business climate” study, commissioned by the Illinois Manufacturers Association. Copies of the study itself may not survive, but a business publication reproduced the study’s key data: Fantus rated Texas #1, followed by Alabama, Virginia, South Dakota and the Carolinas. Only one Northern state, Indiana, made the top 10. New York, Yaseen’s nemesis, came in last.30

The very term “business climate” is brilliantly vague. Because the needs of different businesses vary so much, one size cannot fit all. And technology changes how work is structured, so the concept is always evolving. But the publicly understood version of “business climate” that was first established by corporate interests was a selective, politicized one. It remains an ambiguous, malleable term readily available for corporate use. Are we talking about the corporate income tax rate here, or is it how “business-friendly” people are, or how loose environmental enforcement is, or how generous the property tax abatements are? Companies and their lobbyists can always decide which part of the “climate” matters most today and whale away on it, insisting that if companies don’t get their way, the area has a “bad business climate.” Since the real decision-making process remains a black box, public officials have no way to judge such claims.

The Fantus/Illinois Manufacturers Association study was a highly political document. In both the way it was structured and the way it was reported, it apparently exaggerated the importance of taxes and unions. It actually ranked the states based on three groups of criteria: “population characteristics” with 8 underlying factors, “quality of life” with 10 factors, and “business legislative climate,” with 15 factors. However, the business legislative climate rating got the most attention; it included various corporate and personal taxes, per-capita debt, union regulation (whether a state was “right to work” or had a state labor relations board) and other factors (not reported). So even though Minnesota came in #1 for quality of life and #5 for population characteristics, it was rated #41 for business climate. And Alabama, ranked #47 on quality of life and #42 on population, was rated #2 for business climate.31

Fantus declined to perform the business climate study again after issuing the 1975 report.32 The Conference of State Manufacturers’ Associations (COSMA) hired the Chicago-based accounting firm of Alexander Grant & Co (later named Grant Thornton) to pick up the job. Starting in 1979, Grant Thornton issued the ratings annually. Like the original Fantus study, the Grant Thornton studies generally rated states in the South and the Plains as having the best business climates. Despite profound methodological flaws and political biases, the studies received broad media attention.33

Even Fantus became an articulate, though seldom-quoted, critic of the COSMA/Grant Thornton studies. “These surveys do a lot of harm” and are not a good basis for changing public policies, said Fantus vice president Charles Harding. He called them “a Trojan horse for a certain ideological position” because they are based upon business executives’ opinions, not economic statistics. “Is there any empirical evidence that a high level of welfare expenditures is inversely proportional to the business climate?” he asked. And in a consulting report to a state, Fantus referred to “the popular generic study that purports to rank state business climates” and a “poorly conceived generic study.”34

Grant Thornton’s business climate ratings system was finally dissected and demolished in 1986 by a major study authored by the Corporation for Enterprise Development (CFED), a non-profit think tank, and two other groups. Taken for Granted: How Grant Thornton’s Business Climate Index Leads States Astray cataloged a series of omissions and biases that made the studies misleading and largely invalid.35

For example, CFED explained, the index punished states that had good jobs. By giving negative weight to states with the best wages, Grant Thornton was penalizing every state that had lots of high-skill factory jobs, since those pay well. So even though a state must have been attractive for manufacturers to land a lot of good jobs, in the ratings, that was a negative. Two of Grant Thornton’s labor cost factors had to do with unions, but neither accounted for higher skills or lower turnover in union shops. A key factor used to measure productivity was botched; it measured capital intensity or low wages instead. The index over-weighted energy costs and ignored key issues like access to capital and quality of life.

The index was also blatantly anti-tax and anti-social safety-net. Despite the fact that state and local taxes are a tiny business expense, 5 of the 22 factors Grant Thornton used were tax and budget issues. However, only one of them measured what states did with their revenue, and then only to give a negative weight to welfare spending. Nothing else that employers and taxpayers get for their money was counted: not the quality of infrastructure, education, training, recreation, public safety or cultural amenities. Four more factors had to do with workers’ compensation and unemployment compensation, which are among the smallest of business taxes, but are common hot-button issues for manufacturing lobbyists.

Not only did Grant Thornton use poorly-chosen and biased data as the foundation of its ratings, CFED found, but it then put the numbers through a weighting process that made the results completely subjective and political. It sent the list of the 22 factors to the state manufacturing associations and allowed them to allocate 100 points among the factors, based on their beliefs about the relative importance of each. The responses were then averaged and weights assigned. So if a state association was in a big fight that year about workers’ comp rates, it might assign high weights to those two factors – even though there was no evidence that workers’ comp rates was having any effect on jobs.

Basically, CFED concluded, the Grant Thornton index was at best a very crude measure for a tiny share of companies: only manufacturers, and more specifically, only manufacturers in mature industries with low profit margins who are most sensitive to costs such as labor and are looking to site a branch plant. It didn’t really apply to the much larger service sector, or to what we today call the New Economy: high technology, life sciences/biotechnology and other knowledge-intensive industries.

Borrowing Oscar Wilde’s witticism about cynics, the CFED study concluded that the “Grant Thornton index knows the price of everything, but the value of nothing. It emphasizes the costs of labor but not its productivity. It calculates the expense of government but not its benefits.” In short, the Grant Thornton index that dominated public perceptions of the states’ attractiveness to business from the late 1970s to the late 1980s (when it ceased) was anti-tax, anti-public goods, anti-social safety-net and anti-union. Besides receiving national media coverage each year, the ratings were recycled in lobbyists’ testimony, fact sheets and newsletters. After the CFED study was issued, Grant Thornton revised its methodology, issued a few more reports, then ceased.

[end of excerpt]

Ideologically loaded “business climate” rankings are still with us. For a more recent dissection of several of them, see Prof. Peter Fisher’s study “Grading Places: What Do the Business Climate Rankings Really Tell Us?” published by the Economic Policy Institute in 2005.