Taking a Peek Behind the CNBC Best-State-for-Business Ranking

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Governor Terry McAuliffe said yesterday that he was “thrilled” Virginia had moved up six spots to 7th place in CNBC’s Best States for Business 2017 rankings — and when McAuliffe says he’s thrilled, you can take that to the bank. Whatever else you think about the job he’s done as governor, there is no denying his ardor for his job as Virginia’s chief economic-development salesman and his enthusiasm for every Virginia accomplishment large and small.

In a prepared statement issued yesterday, McAuliffe put his spin on what the news said about his leadership as governor.

“The effects from federal sequestration in 2013 did substantial damage to our economy. When I took office, we came in with a clear and simple plan to diversify our industries and make Virginia less dependent on the whims of Washington. Thanks to significant reforms and historic investments in our education system, innovative workforce development strategies and the record-breaking recruitment of new business capital and jobs, we are mitigating the damage of federal dysfunction and building an economy that works better for everyone.”

McAuliffe isn’t doing anything that any other governor wouldn’t do — taking credit for good news — but the public should take assertions like this with a grain of salt. Dramatic rises and falls in CNBC’s rankings could reflect changes in the economy and CNBC’s scoring methodology as much as anything that McAuliffe (or his peers and predecessors) did.

Take a look at the chart above, which breaks down CNBC’s overall score by 10 categories. Virginia performs worse in five categories since McAuliffe took office in 2014: infrastructure, cost of business, technology & innovation, education and business friendliness. Despite what McAuliffe terms the state’s “historic investment in education,” Virginia’s education rank is lower than when he became governor.

McAuliffe can claim credit for improvements in access to capital, cost of living, and quality of life if he wants to, but it strains credulity to suggest that the incremental policy changes he made as governor had much effect on them. 

Virginia’s gain as a best state to do business – from No. 8 to No. 7 — over McAuliffe’s tenure can be attributed mainly to the Old Dominion’s higher rankings for “workforce” and “economy.”

CNBC gives “workforce” the heaviest weight in its ranking — 425 out of 2,200 points, reflecting the increasing emphasis that businesses give the attribute. Fortunately for us, that is Virginia’ top-performing category. The Old Dominion ranked No. 2 in the country this year. As a bonus, the weight that CNBC assigned the category increased from 400 points last year. To some degree, Virginia owes its better best-place-for-business rank to changes in the way the network calculates its scores.

Now, it’s also true that Virginia’s workforce rating improved as well. Here’s what goes into CNBC’s scoring for that category (my emphasis):

We rate states based on the education level of their workforce, the numbers of available employees and the states’ demonstrated abilities to retain college-educated workers. We consider each state’s concentration of STEM (science, technology, engineering, and math) workers, increasingly in demand by business. We measure workforce productivity based on each state’s economic output per job. We look at the relative success of each state’s worker training programs in placing their participants in jobs. We also consider union membership and the states’ right-to-work laws.

Virginia scores well in the “workforce” ranking in large part because of the state’s ability — or perhaps I should say Northern Virginia’s ability — to recruit educated workers from outside the state. It is true that Virginia’s higher-ed system is producing more STEM degrees than ever before, but producing STEM degrees is no guarantee of keeping STEM degrees in the state — just ask the state of Michigan. It is also true that McAuliffe signed the Virginia GO workforce legislation, but that program has not been in effect long enough to have a material influence on workforce training programs.

Clearly, Virginia is doing something right when it comes to building a 21st-century workforce, but it’s far from clear that recent actions emanating from Richmond can explain the short-term fluctuations in the CNBC scoring for the workforce indicator.

Virginia’s “economy” rank has improved as well in the past year, accounting for 300 points in CNBC’s 2,200-point ranking. McAuliffe has done an effective job as Virginia super-salesman. And he has worked to diversify Virginia’s economy from its reliance upon federal defense spending, touting everything from drones and cyber-security to Virginia’s ports and renewable energy. But have his actions been so extraordinary as to move the needle on Virginia’s “economy” score?

Here’s how CNBC computes its score for that category:

We look at economic growth, job creation, consumer spending, and the health of the residential real estate market. We measure each state’s fiscal health by looking at its credit ratings and outlook, as well as its overall budget picture. Because of their own economic impact as well as the ripple effect, we consider the number of major corporations headquartered in each state.

Consumer spending and the residential real estate market are not sectors that state policy affects. Overall economic growth is influenced mainly by (a) the level of federal spending and (b) Virginia’s mix of fast- and slow-growth industries. As for the state’s fiscal health, well, the governor shares responsibility for that with the General Assembly.

Bacon’s bottom line: My purpose is not to discredit McAuliffe’s performance as economic-development chieftain, which has been pretty good overall, but to dampen expectations that this governor (or any governor) has much impact on year-to-year changes in Virginia’s business climate. Burnishing a state’s business climate takes a long-term commitment from governors, legislators, business and civic leaders, and local government officials. I’ll have more to say about that in my next post.

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7 responses to “Taking a Peek Behind the CNBC Best-State-for-Business Ranking”

  1. ssurovell Avatar

    Three of six states ahead of us have higher minimum wages than Virginia – WA, CO, and MN.

    Maybe if we had a higher minimum wage, we would have been ranked higher?!

  2. LarrytheG Avatar

    well… from a business perspective… higher minimum wage is not a plus!

    but McAuliffe is basically just saying “Hey.. I KNKNOW these things are important… and I’ve obviously supported them… and some of them have gotten better under my tenure..

    I think the main thing is to have a Gov who knows and puts his/her money here their mouth is…. i.e. .. a step above “lip service” perhaps.

  3. TooManyTaxes Avatar

    No one can fairly criticize McAuliffe’s efforts towards attracting more businesses and jobs for Virginia. He has worked very hard and kept a strong focus.

    But his results have been lackluster. According to the Bureau of Economic Analysis (US DoC), “In 2016, Virginia real GDP grew 0.6 percent; the 2015-2016 national change was 1.5 percent. The 2006-2016 compound
    annual growth rate for Virginia real GDP was 0.7 percent; the compound annual growth rate for the nation was 1.1 percent.”

    Even adjusting for the fact that post recession economic growth under Obama was historically weak, Virginia’s performance was anemic. All is not well in the Old Dominion.

  4. LarrytheG Avatar

    There’s only so much any Gov (or POTUS) can do compared to what the legislature can… and in Va limited to one term… it’s as much an exercise in cheerleading as anything else.

    Realistically – what actual tools are available to the Gov of Virginia to affect it’ economy?

    McDonnells signature achievement – that Conservatives don’t consider an achievement was the fundamental changes to transportation taxes but none of it was his doing – it was the General Assembly … and Bill Howell..

    McAuliffe, like Obama was going to be denied any proposed legislation by the GOP.

    So he just did the best he was able to do which more than anything was demonstrate support for economic opportunities … and education and workforce training… and some level of funds that he had at his disposal.

    We shouldn’t ding him for what he could not do and the Va GA would not let him do.

    1. TooManyTaxes Avatar

      Larry, generally what a Governor can do to attract specific businesses to come to a state or expand there has nothing to do with legislation. It’s more a matter of marketing, reaching out to businesses located elsewhere and trying to persuade them to move or expand. In this area, cheerleading is a good thing.

      Effort wise, McAuliffe has done a commendable job. He’s traveled and hosted and pitched the Old Dominion. Results wise, not so good. Growth has been anemic. That is, as you note, somewhat beyond the control of a Governor or a President. But tell that to Herbert Hoover.

  5. LarrytheG Avatar

    TMT – what the Gov can offer beyond cheerleading – substantiative things like incentives, tax-credits, workforce training.. etc.. those things require legislation and funding. In other words – if you want more than cheerleading by one guy – the govt – the legislature needs to step up also.

    That’s basically what is meant by “business-friendly policies”.. it’s more than “marketing”… take a look at the Economic Development guy that Va got from Louisiana… their legislature had given him some wide latitude and other business-friendly “goodies” for him to do his magic.

    “Marketing and cheerleading” can only get you so far – especially when you are in competition with other states… and in my view… I’m wanting to see Virginia land more major companies who are not tied to the Federal govt for their business model…

    1. TooManyTaxes Avatar

      The best thing Virginia could do to attract more businesses and business growth is to operate efficiently. The State should benchmark its operations by best practices from other states, starting with the big ticket items, transportation, police services, welfare/health care, higher education. Find ways of doing more with less.

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