How Business Climate and Political Climate Influence Economic Growth and Economic Development in the American States

Publication Year:
2010
Usage 293
Downloads 219
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Repository URL:
https://digitalcommons.library.umaine.edu/etd/544
Author(s):
Black, James H.
Tags:
Business enterprises; economic development; Business; Economics; Growth and Development; Public Affairs, Public Policy and Public Administration
thesis / dissertation description
Economist Joseph Schumpeter’s examination into the relationships between business cycles and periods of economic expansion defines the government’s role in markets as limited. However, he viewed government intervention as a precursor to improving the levels of economic growth and expanding an individual’s quality of life. This study examines how measures of business and political climate might explain variations in the level of economic growth and development across the states. Economic growth is gauged from the microeconomic perspective of the individual (per capita income) and from the macroeconomic viewpoint of the state’s economy (gross state product). Economic development is defined by changes in a quality of life index. The state’s political climate has a component of ideology, measured as state tax burden and by an index that compares the ratio of public to private sector employment and a component that captures the capacity of a state to manage the affairs of government. The ability of these non-economic, political variables to predict changes in levels of economic growth and development is compared to the explanatory power from six ii indices of a state’s business climate. While the institutions that publish these indices claim to have identified the socio-economic variables responsible for defining economic growth across the American states, none have identified how the richness of a state’s political climate might influence its level of economic growth or economic development. Each variable is defined in a lagged regression model and used to predict growth and development. The findings show that the ratio of public to private sector employment is the most reliable indicator of changes occurring across both measures of economic growth. While some of the measures of a state’s business climate were superior indicators of changes in per capita income, they fell short of predicting changes in GSP. None of the indicators used in this study were able to predict changes in economic development. The findings highlight how states with a high quality of life enjoy higher levels of economic growth. These same states exhibit higher tax burdens and possess smaller governments. It appears that lowering taxes is not a panacea for increasing economic growth and improving the quality of life.