The Golden State’s War on Itself (Part 2 of 2)

Joel Kotkin
Editor of and Presidential fellow in urban futures at Chapman University

Cross-posted on Read Part 1 here.

The second engine that could supposedly keep California humming was
the so-called green economy. Michael Grunwald recently wrote in Time,
for example, that venture capital, high tech, and, above all, "green"
technology were already laying the foundation of a miraculous economic
turnaround in California.

Though there are certainly opportunities in
new energy-saving technologies, this is an enthusiasm that requires
some serious curbing. One recent study hailing the new industry found
that California was creating some 10,000 green jobs annually before the
recession. But that won’t heal a state that has lost 700,000 jobs since

Graph by Alberto Mena.

At the same time, green promoters underestimate the impact of
California’s draconian environmental rules on the economy as a whole.
Take the state’s Global Warming Solutions Act, which will force any new
development to meet standards for being "carbon-neutral." It requires
the state to reduce its carbon-emissions levels by 30 percent between
1990 and 2020, virtually assuring that California’s energy costs,
already among the nation’s highest, will climb still higher. Aided by
the nominally Republican governor, the legislation seems certain to
slow any future recovery in the suffering housing, industrial, and
warehousing sectors and to make California less competitive with other
states. Costs of the act to small businesses alone, according to a
report by California State University professors Sanjay Varshney and
Dennis Tootelian, will likely cut gross state product by $182 billion
over the next decade and cost some 1.1 million jobs.

It’s sad to consider the greens such an impediment to social and
economic health. Historically, California did an enviable job in
traditional approaches to conservation-protecting its coastline,
preserving water and air resources, and turning large tracts of land
into state parks. But much like the public-sector unions, California’s
environmental movement has become so powerful that it feels free to
push its agenda without regard for collateral damage done to the
state’s economy and people. With productive industry in decline and the
business community in disarray, even the harshest regulatory policies
often meet little resistance in Sacramento.

In the Central Valley, for instance, regulations designed to save
certain fish species have required 450,000 acres to go fallow.
Unemployment is at 17 percent across the Valley; in some towns, like
Mendota, it’s higher than 40 percent. Rick Wartzman, director of the
Peter Drucker Institute, has described the vast agricultural region
around Fresno as "California’s Detroit," an area where workers and
businesspeople "are fast becoming a more endangered species than
Chinook salmon or delta smelt." The fact that governments dominated by
"progressives" are impoverishing whole regions isn’t merely an irony;
it’s an abomination.

So much for the creative green economy. As
for the old progressives’ belief that government shouldn’t scare away
productive, competitive, long-term enterprise, that, too, has been
abandoned by their successors. "Our economy is not inducing the right
kind of business," says Larry Kosmont, a prominent business consultant
in Los Angeles. "It’s too expensive to operate here, and managers feel
squeezed. They feel they can’t control the circumstances any more and
have to look somewhere else." The problem isn’t just corporate costs,
either. The regulatory restraints, high taxes, and onerous rules
enacted by the new progressives lead to high housing prices, making
much of California too expensive for middle- and working-class
employees and encouraging their employers to move elsewhere.

Silicon Valley, for instance-despite the celebrated success of
Google and Apple-has 130,000 fewer jobs now than it had a decade ago,
with office vacancy above 20 percent. In Los Angeles, garment factories
and aerospace companies alike are shutting down. Toyota has abandoned
its Fremont plant. California lost nearly 400,000 manufacturing jobs
between 2000 and 2007, according to a report by the Milken
Institute-even as industrial employment grew in Texas and Arizona. A
sign of the times: transferring factory equipment from the Bay Area to
other locales has become a thriving business, notes Tom Abate of the San Francisco Chronicle.

Optimists sometimes point out that "new economy" companies like
Disney, Google, Hewlett-Packard, and Apple, as well as scores of
smaller innovative firms, continue to keep their headquarters in the
state. But this is to ignore the fact that many of these companies are
sending their middle- and working-class employees to other locales.
Evidence of middle-class flight: since 1999, according to California
Lutheran University, the state has seen a far steeper decline in
households earning between $35,000 and $75,000 than the national
average. And blue-collar areas-Oakland, the eastern expanses of greater
Los Angeles, and much of central California-have been hit even harder.
California’s overall poverty rate has been consistently higher than the
national average. In Los Angeles County alone, some 20 percent of the
population-2.2 million people-receives some form of public aid.

Graph by Alberto Mena.

In short, the economy created by the new
progressives can pay off only those at the peak of the employment
pyramid-top researchers, CEOs, entertainment honchos, highly skilled
engineers and programmers. As a result, California suffers from an
increasingly bifurcated social structure. Between 1993 and 2007, the
share of the state’s income that went to the top 1 percent of earners
more than doubled, to one-quarter-the eighth-largest share in the

For these lucky earners, a low-growth or negative-growth economy
works just fine, so long as stock prices rise. For their
public-employee allies, the same is true, so long as pensions remain
inviolate. Global-warming legislation may drive down employment in
warehouses and factories, but if it’s couched in rhetoric about saving
the planet, these elites can even feel good about it.

Under the new progressives, it’s always hoi polloi who need to lower
their expectations. More than four out of five Californians favor
single-family homes, for example, but progressive thinkers like Robert
Cruickshank, writing in California Progress Report, want to
replace "the late 20th century suburban model of the California Dream"
with "an urban, sustainable model that is backed by a strong public
sector." Of course, this new urban model will apply not to the wealthy
progressives who own spacious homes in the suburbs but to the next
generation, largely Latino and Asian. Robert Eyler, chair of the
economics department at Sonoma State University, points out that
wealthy aging yuppies in Sonoma County have little interest in reviving
growth in the local economy, where office vacancy rates are close to
those in Detroit. Instead, they favor policies, such as "smart growth"
and an insistence on "renewable" energy sources, that would make the
area look like a gated community-a green one, naturally.

Graph by Alberto Mena.

California’s supposedly progressive
economics have had profound demographic consequences. After serving as
a beacon for millions of Americans, California now ranks second to New
York-and just ahead of New Jersey-in the number of moving vans leaving
the state. Between 2004 and 2007, 500,000 more Americans left
California than arrived; in 2008, the net outflow reached 135,000, much
of it to the very "dust bowl" states, like Oklahoma and Texas, from
which many Californians trace their origins. California now has a lower
percentage of people who moved there within the last year than any
state except Michigan. Even immigration from abroad seems to be waning:
a recent University of Southern California study shows the percentage
of Californians who are foreign-born declining for the first time in
half a century. For the first time in its history as a state, as
political analyst Michael Barone has noted, California is not on track
to gain a new congressional district after the 2010 census.

This demographic pattern only reinforces the hegemony of
environmentalists and public employees. In the past, both political
parties had to answer to middle- and lower-middle-class voters
sensitive to taxes and dependent on economic growth. But these days,
with much of the middle class leaving, power is won largely by
mobilizing activists and public employees. There is little
countervailing pressure from local entrepreneurs and businesses, which
tend to be poorly organized and whose employee base consists heavily of
noncitizens. And the legislature’s growing Latino caucus doesn’t resist
regulations that stifle jobs-perhaps because of the proliferation of
the California equivalent of "rotten boroughs": Latino districts with
few voters where politicians can rely on public employees and activists
to dominate elections.

Blessed with resources of topography,
climate, and human skill, California does not need to continue its
trajectory from global paragon to planetary laughingstock. A coalition
of inland Latinos and Anglos, along with independent suburban
middle-class voters in the coastal areas, could begin a shift in
policy, reining in both public-sector costs and harsh climate-change
legislation. Above all, Californians need to recognize the importance
of the economic base-particularly such linchpins as agriculture,
manufacturing, and trade-in reenergizing the state’s economy.

The changes needed are clear. For one thing, California must shift
its public priorities away from lavish pensions for bureaucrats and
toward the infrastructure critical to reinvigorating the private
sector. The state’s once-vaunted power system routinely experiences
summer brownouts; water supplies remain uncertain, thanks to
environmental legislation and a reluctance to make new investments; the
ports are highly congested and under constant threat of increased
competition from the southeastern United States, the Pacific Northwest,
and eventually Mexico’s Baja California. Fixing these problems would
benefit the state’s middle and working classes. Lower electrical costs
would help preserve industrial facilities-from semiconductor and
aerospace plants to textile mills. Reinvestment in trade
infrastructure, such as ports, bridges, and freeways, would be a huge
boon to working-class aspirations, since ports in Southern California
account for as much as 20 percent of the area’s total employment, much
of it in highly paid, blue-collar sectors.

Another potential opportunity lies in energy, particularly oil.
California has enormous reserves not just along its coast but also in
its interior. The Democrats in the legislature, which seems determined
to block expanded production, have recently announced plans to increase
taxes on oil producers. A better solution would be a reasonable program
of more drilling, particularly inland, which would create jobs and also
bring a consistent, long-term stream of much-needed tax revenue.

These shifts would likely appeal to voters in the areas-such as the
Central Valley and the "Inland Empire" around Riverside-that have been
hurt most by the recession and the depredations of the hyper-regulatory
state. Indeed, the disquiet in the state’s interior could make the
coming gubernatorial election the most competitive in a decade. Jerry
Brown, the Democratic candidate, certainly appears vulnerable: his
campaign is largely financed by the same public-sector unions whose
expansion he fostered as governor; more recently, serving as state
attorney general, he was the fiercest enforcer of the Global Warming
Solutions Act, which opens him to charges that he opposes economic
growth. One hopeful sign that pragmatism may be back in fashion: a new
proposed ballot measure to reverse the act until unemployment drops
below 5.5 percent, where it stood before the recession. Since
unemployment is currently near 13 percent, that would take radical
change off the table for quite a while.

Still, it isn’t certain that California’s inept and often clueless
Republicans will mount a strong challenge. For them to do so, business
leaders need to get back in the game and remind voters and politicians
alike of the truth that they have forgotten: only sustained, broadly
based economic growth can restore the state’s promise.

This article originally appeared at The City Journal.

Thanks to the Economic Research and Forecasting Project at California Lutheran University for providing analysis and charts.

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