California is undoubtedly blessed in many ways. We enjoy
access to Asian and North American markets, we have a well-diversified economy
ranging from basic agriculture to advanced research and development, and we’re
home to some of the world’s most prestigious universities, which serve as hubs for
high-tech innovation. We offer a hospitable climate with real lifestyle
advantages to our residents. And yet despite all these advantages, our state
economy is very ill.
A study recently published by the Pacific Research Institute, California
Prosperity: Assessing the State of the Golden State, empirically
documents the nature and extent of the state’s economic woes.
Comparative Results
The study examines the five most recent years of economic
data across four categories of economic performance: (1) income, (2) labor, (3)
migration, and (4) entrepreneurship.
California ranked 24th out of 50 states on the
income category, which examined real GDP growth, growth in per capita personal
disposable income (PDI) (income after personal income taxes), and the state
poverty rate. Put differently, California ranked in the middle of the states in
its ability to increase the incomes of its citizens and thus their standards of
living.
It is in the second category (labor), however, where
California performed worst: 48th. Over the last five years,
California outperformed only Michigan and Mississippi. Four measures were used
to assess the state’s labor performance, and California performed poorly in
each: growth in private-sector employment (33rd), private sector employment as
a share of total employment (42nd), average unemployment rate (43rd), and the
duration of unemployment (38th).
Two results stand out in the state’s labor analysis. One,
the state has a fairly large public sector compared to its private sector
employment base, which ultimately has to support the public sector through
taxes. Two, Californians have suffered from relatively high unemployment that
tended to last longer than in other states for at least the last five years.
A key economic indicator illustrating the seriousness of the
economic challenges facing California is domestic migration, the third category
of analysis. This indicator looks at the movement of existing residents (i.e.
it excludes immigration) both into and out of states. Over the last five years
of data, California had the seventh worst record of domestic migration of any
state. On average, 0.6 percent of California residents left the state every year, on net (balancing those coming in and
those leaving) over the last five years. This correlates with a net
out-migration of more than one million residents over the last five years.
This is an extraordinary measure of people choosing to leave
the state for other opportunities. During the same time, every other state in
the region, both on the West Coast and in the Southwest, were attracting
people. For instance, according to census data, other Southwest states
attracted a net inflow of more than 904,000.
The final category focused on one of the most important
aspects of any dynamic economy: entrepreneurship. There are a host of potential
indices that could be used to measure different aspects of entrepreneurship,
but the study relied on business creation. Specifically, the study examined net
business creation by subtracting business deaths from business births (and
dividing by the total number of businesses). Over the most recent five years of
data, California averaged a 1.2 percent annual increase in net businesses,
ranking 16th among the states, its highest ranking in the study. This ranking,
while respectable, does not conform to the general image of California as a
thriving bastion of entrepreneurship.
Combining the four categories allows for a single measure of
the state’s economic performance. Unfortunately, California ranked 38th out of
the 50 states for its overall economic performance over the most recent five
years of data.
Conclusion
There are three overarching conclusions from the analysis.
First, the economic problems of the state are broad-based and affect nearly
every aspect of the economy: income, labor, migration, etc. Second, they
pre-date the national recession and the bursting of the housing bubble. This is
particularly important as it shows that the state’s problems are not entirely
cyclical in nature. And third, California was out-performed by nearly every
neighboring state, including both the West Coast and the other Southwest
states, which indicates that the problems are not regional in nature.
California’s poor economic performance over the last five
years should not be acceptable to Californians. Given our natural resources,
location, and the skills and talents of our residents, California should be
leading the nation-indeed, the world-in economic prosperity and enjoying all
the benefits that such prosperity offers: job opportunities, increasing income,
low unemployment, and a generally robust and dynamic economy.
Thankfully, these results are reversible: much of the
distress seems to be grounded in poor economic policies. Better policies will
lead to stronger economic performance. Future volumes in the California
Prosperity series will focus on explaining these policy failures and pointing
to reforms that will lead to marked improvements in economic performance for
the state.