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Saturday, Sep 23, 2023

State’s low ranking in annual policy survey is a partisan attack

The American Legislative Exchange Council (ALEC) recently released its sixth annual “Rich States, Poor States” ranking of business policies in the 50 states. And guess what? California was once again ranked near the bottom. The ALEC report comes complete with the apocalyptic warning that our fair state may one day find itself “hollowed out like Detroit” unless it changes course. But before we all put our houses up for sale and start considering job options in Salt Lake City or Dallas, we might want to do something the authors of the report fail to do—look at the data in an intellectually honest way and consider recent growth trends. Once you do that, this so-called economic report is revealed as little more than a political attack ad on left-leaning states, rather than a useful guide of future U.S. growth trends. The first report by ALEC was released in 2007 – and may have seemed particularly prescient given the rough economic road that lay ahead for California at that time. But the state’s hard times were due to the nature of the last economic cycle (real estate and consumer spending based), rather than any fundamental, long-term problem. Texas’s relative prosperity over the last few years is associated almost exclusively with the strong performance of its commodity markets. Think oil prices and production. Indeed, if you take ALEC’s 2007 rankings and compare them to growth trends over the decade that preceded them, there is no correlation whatsoever. Given that they can’t seem to explain the past in any way, I would be hard pressed to think they could possibly predict the future. These ranking have no predictive power and the authors’ grim warnings are little more than partisan political opinions. Texas has indeed seen higher rates of population growth, but this is largely related to affordable housing, something California lacks. Multiple studies have shown that the out-migration of jobs from California to other states represents only a tiny fraction of job losses in the state – and is dwarfed by jobs being added by new and existing businesses. California has higher income (20 percent higher than Texas) and a faster pace of worker productivity growth. As for high-income households of $150,000 a year or more, California has the seventh-highest number of these households in the United States, at 12.7 percent, considerably higher than Texas (8.5 percent), Utah (7 percent) or any of the other “highly business friendly” states. So much for these households allegedly fleeing the state. And while California does have the highest marginal tax rate, taxes paid overall as a share of state income is just slightly above the U.S. state average and way below the highest tax state, Alaska (a wonderful irony that seems to be lost on Sarah Palin’s fans). That ‘tax and spend’ state feeds its public coffers with a substantial extraction tax on oil – something California does not do. And recently, California’s strengths are in evidence. The state has the seventh fastest rate of job growth in the nation, and that’s without counting the 100,000 or so jobs that are being missed by the Bureau of Labor Statistics’ Current Employment Statistics survey, according to the benchmarks. The unemployment rate is still higher than in the nation overall but it is also dropping much faster. Relative to 2003, California has about 5 percent more people with jobs today (based on household employment) putting the state at about average compared to the country overall. California has some distance to go to fully recover from the last recession – but it is well on its way. And I’m not being an apologist for the excesses of Sacramento. This state’s revenue system is truly broken – we are overly fond of high taxes on small bases while leaving large portions of our economy under-taxed. We also have some serious regulatory issues, CEQA and workers compensation come to mind, and long-term issues with pensions. When it comes to affordable housing and a less volatile revenue system based heavily on property taxes, we could stand to learn from a place like Texas. But at the same time these complaints are trumped by what California offers as a standard of living to its residents – a place that is truly extraordinary in terms of its global brand, stunning landscape, highly skilled work force, entrepreneurialism, and tempered climate. We need to fix how the state government manages California’s economy – but not because the place is going to empty out. We need to do it because it will make our lives easier and more prosperous. For the near future, sadly, this means that the 405 is liable to remain clogged, home prices too high and courtside seats at Lakers games incredibly expensive. But as for Rick Perry and his ilk coming here to poach jobs? Forget about it, it’s just an excuse to take a free trip to one of the best places on the planet. Christopher Thornberg is an economist and founding partner of Beacon Economics LLC in Los Angeles.

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