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Tuesday, Oct 3, 2023

Tarnished but Still the Golden State

The unusually weak economic recovery following the “Great Recession” has led to fierce ideological battles over the causes of sluggish U.S. growth. One view is that the nation is saddled with excessively high taxes and businesses are overburdened with pointless regulation. For those in this camp, the best evidence has often been to compare California’s struggles to gains in what they believe is almost recession-proof, business-friendly Texas – something regularly highlighted in the media by Texas Governor Rick Perry’s repeated trips to California to lure business to his state. The ‘business climate’ line of reasoning has never had much widespread support outside of the California-Texas comparison, particularly because other “business friendly” states such as Florida and Arizona face significant struggles. But even more problematic for the argument has been the strong growth in California’s economy over the last two years. California has ranked in the top 10 states for employment growth for more than two years running. The 340,000 jobs added in the state from May 2013 to May 2014 are second in number only to Texas in the nation, which added 380,000. And in a myth busting turn, by our most recent calculations, well over half the jobs created in California over the past year are in industries that pay average annual wages of more than $50,000 per year. While two of the fastest growing employment sectors in the state are in the relatively low pay leisure & hospitality and administrative support sectors, growth also has been very robust in the relatively high paid information sector and professional and technical services sector. Overall, from the end of the recession through 2013, average wages grew in California by 11.6 percent – faster than in the nation overall by a good margin. This data paints a much more nuanced picture than the good job-bad job paradigm that has garnered so much attention recently. Moreover, California’s solid employment trends are not constrained to Silicon Valley. While the tech-heavy San Francisco Bay Area economy has been and continues to be a star in the nation, strong employment growth has been occurring across the state. Much maligned Los Angeles County saw jobs grow by over 2 percent last year, and the hard hit Inland Empire’s employment base grew by 3.6 percent – both areas included growth in low and high income job sectors. And it isn’t just jobs that underscore the strength of California’s economy – overall economic output has also been on the rise. Since the recession ended, California has been among the top 10 fastest growth states in the nation in terms of output. A wide variety of industries are leading the growth—one of which, manufacturing, may be a surprise to many. In California, over the past decade, the manufacturing sector alone has been responsible for one-sixth of all economic output growth. The Los Angeles metropolitan statistical area (MSA) remains the largest manufacturing center in the nation, bigger than Houston, Dallas, or even San Jose. Indeed, the state manufactures over one-fourth of all computer and electronic goods in the United States. And although manufacturing employment has barely stabilized since the recession, this is because manufacturers continue to invest heavily in robotics and other forms of information technology – driving up worker productivity and eliminating lower-skilled jobs. None of this suggests the business climate is not a problem in California – it is. Our tax system is largely broken, relying on high taxes on small, unstable bases as many other parts of the economy fail to pay their fair share. And the regulatory environment often injects a degree of capriciousness into the process that creates unnecessary risks for businesses wanting to invest and operate here. But growth is about a lot more than just taxes and regulations, as seen by California’s strong recovery. If the state had more balanced tax and regulatory systems in place we might be the fastest growing economy in the nation, instead of just in the top 10. But the most important message to take away from these numbers is that the solution to the nation’s slow recovery overall is not as simple as slashing taxes and dismantling regulations. The problems lie in other places – not the least of which are political leaders who would rather kowtow to their radical, ideologically driven bases rather than study the evidence. Christopher Thornberg is an economist and founding partner of Beacon Economics in Los Angeles.

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