When state governments try to create a better business climate they run the risk of encouraging a more stratified society, according to a new study by David Neumark and Jennifer Muz of the University of California. The study compares two different policy approaches to improve the business climate of a state – those that attempt to increase growth by lowering business costs and those that work to improve the quality of life.
There was little exacerbation of wealth inequality when states enacted policies to improve their quality of life to create a better business climate, but when the method was lowering business costs to augment growth the wealth gap widened.
To gauge inequality, the study used standard measures of income differentials based on the differences between the 10th, 50th and 90th percentiles of the income distribution, as well as state poverty rates. The researchers also included a range of variables that other studies have found to be associated with economic growth, such as proximity, density and mild temperatures.
The big takeaway: There is a clear connection between economic inequality and low-tax, low-cost state business climates (or, more accurately, business climate indexes based on those factors). As they put it: “The same tax and cost related indexes that are associated with higher economic growth are also associated with increases in inequality.”
From a policy making perspective this does not mean states should never try to create a better business climate by lower business costs, but it does mean the trade-off between growth and inequality should be factored into that policy making process. It should be understood that the price of lowering business costs is not just less tax revenue but also increased inequality.
Whether this new information will have any effect on policymaking is hard to say. As John Oliver of Last Week Tonight points out, Americans continue to think they can somehow win a rigged game and all become the 1%. A more realistic view would side with the policy of focusing on boosting the business climate by improving the quality of life rather than hoping to get lucky in a growth spurt.