EPI Book Explores Discrepancies in Business Indices

A new resource published by the Economic Policy Institute (EPI) argues that indices claiming to measure the same thing - namely, the capacity or potential for economic growth - often vary widely in their results and are not effective yardsticks of economic potential.

In Grading Places, the nonprofit research institute EPI critiques five major business ranking indices, examining their methodology and validity. EPI observes that the rankings used in each index are based on each organization's own version of an index. Such indices are designed to show which states or cities have the best business climate, for example, yet share only one thing in common -- the agreement that places with lower taxes and fewer government regulations are better.

Reports based on the rankings in these indices then go on to draw explicit policy recommendations such as cutting taxes and reducing regulations, leading states and cities to believe they will experience more business investment, more job creation, or more small business development, EPI states. The recommendations only hold true if the indices are valid measures of the growth climate in question, however. EPI attempts to answer three questions pertaining to these issues:

• Are the indices based on science?
• Do they have biases? And,
• Do they work as predictors of economic activity?

The indices described in detail are the Small Business Survival Index, the State Business Tax Climate Index, the Metro Area and State Competitiveness Report, the Fiscal Policy Report Card on America’s Governors, and the Economic Freedom Index.

In addition, the author analyzes the 50 largest metropolitan areas as ranked by Forbes: Best Places, Economy.com: Cost of Doing Business, Expansion Management: High Value Labor Quotient, and BHI: Metro Area Competitiveness.

Grading Places is available as a PDF at: http://www.epi.org/content.cfm/books_grading_places