Propped up by media idolatry, California is moving from denial to delusion. Case in point: A recent AP story claimed that the state “flush with cash from an expanding economy” would consider spending an additional billion dollars on health care for the undocumented, as well as a raft of new subsidies for housing and the working poor.
All this wishful thinking and noble intentions ignores a slowing state economy, and a structural deficit, keyed largely to state worker pensions, that may now be headed towards a trillion dollars. Perhaps the widely celebrated, although poorly distributed “good times” of the past few years, have clouded Sacramento’s judgement.
Jerry Brown, repeatedly lionized in the national press, finally leaves office next year, he will likely leave his successor both a totally out of control legislature and looming fiscal crisis. Brown’s replacement will also have to deal with a state that, according to the Social Science Research Council, suffers the greatest income inequality in the nation and the third worst economic environment for middle class families. Worse yet — upwards of one-third of the state population subsists near or in poverty.
A fading boom
It’s clear that period of tech-driven rapid growth is coming to an end. In the most recent quarter, BEA reports, California’s GDP growth ranked a meager 35th in the nation; just last year the state’s growth was twice the national average and among the highest in the nation.
Two factors are driving this turnabout — the fading of Silicon Valley’s boom and a hyper-inflated real estate market. After soaring for year, the tech economy has slowed dramatically. The San Jose Mercury recently reported that even as the country overall enjoyed strong job gains, the Bay Area lost 4,700 jobs in the last quarter, at least 1000 in the tech sector.
California has suffered from other tech busts before but this time there’s no suitable alternative — such as manufacturing or homebuilding — to create new source of high wage jobs. Overall blue collar jobs have declined for a decade; the state has lost a net 160,000 manufacturing jobs. In 2015-2016, sadly, near minimum wage jobs for almost two-thirds of the state’s net growth.
The unending housing crisis
California’s other primary driver has been escalating property prices. The rapid appreciation in housing, which has been more than 3.5 times faster in coastal California than the national average since 1969, even after adjustment for incomes. This has certainly enriched many older, mostly white Californians, like me, but also propelled both house prices and rents to unsustainable levels for a population that increasingly earns far too little to pay for it.
No surprise then that we see a plunging rate of homeownership, particularly for younger people and a continued upsurge in homelessness. High-housing prices have contributed to driving important headquarters such as Toyota, Jacobs Engineering and Occidental Petroleum out of state. Similarly many of our top tech firms — Google, Facebook, Amgen, Apple — continue to shift more jobs to less expensive states. One persuasive fact to corporate relocators: to buy a median priced house in Atlanta, Dallas-Fort Worth or Houston is between one-half and one-third the cost in the Bay Area or Los Angeles.
More serious still is the impact on migration and population growth, which last year was 9 percent less than the U.S. average. High housing costs — you need to earn over $200,000 annually to buy a median priced house in Silicon Valley — may well explain dropping millennial populations in both Los Angeles and San Francisco. On a per capita basis only four states — Michigan, Ohio, Wisconsin and Illinois — fared worse in bringing in new residents.
Insanity in the Age of Trump
The elevation of California-unfriendly President Trump should have chastened legislators, but the Donald’s antic have only made them more extreme in their strident embrace of the self-described “resistance.” The people running Sacramento might do better to consider the impact of the new GOP tax bill; the now greatly reduced write-offs for local taxes in California were worth some $100 billion in 2014. Some believe these changes will drive more high-income earners out of the state.
It would seem sensible to show these residents at least some commitment to frugality and moderation. California gains half its income tax revenues from its top one percent of earners while the top 10 percent of taxpayers supply nearly 80 percent of all personal income tax revenue, up from 70 percent two decades ago. Yet instead, the state legislature seems intent on ramping up new social spending, considering expanding the scope of rent control statewide and adding ever more draconian environmental regulations. These are likely to swell the budget deficit, accelerate de-industrialization and lead to, most likely, yet another round of tax increases.
Similarly, a state with an existing massive poverty population should not be hanging up a welcome sign to other poor people by proposing state health care for the undocumented likely to put even more pressure on the state budget. At some point, there may be only so many taxpayers willing to fund these mounting bills. But this is not an easy argument to make in a one-party, one-ideology state where self-righteousness repeatedly triumphs over common sense.
Originally published in the Orange County Register.
Cross-posted at New Geography.