Plenty to learn from the booming economy of 'Taxifornia'

Plenty to learn from the booming economy of 'Taxifornia'
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California, were it a separate country, would now be the fifth-largest economy in the world after the rest of the United States, China, Japan and Germany. The leap over the U.K. is a consequence of a robust California economy and a faltering U.K. economy.

Though the U.K. is still growing, Brexit has cut a percentage point off U.K. GDP growth, allowing a faster growing California to catch and surpass it.


This is a remarkable recovery from the disastrous housing collapse in 2008 and the loss of the entire subprime mortgage finance sector.

Nevertheless, to some, a state that has been routinely characterized as “failing” and not “business-friendly,” is still thought to be underperforming. However, the sources of the recovery and dynamism in the Golden State are quite clear. 

The world economy is transforming to a post-industrial information economy, and California is one of the leaders of this change. Tech in the Bay Area has dramatically out-performed, both in jobs and in the production of information services.

In Southern California’s Silicon Beach, an astounding revolution in the entire production and distribution of entertainment and communication has taken place. This is not all of the story, but illustrative of it.

How did this happen? It helps to have a critical mass in technology and entertainment, and California has had both for a long time. It also helps to have beaches, mountains and a mild climate that make it a very attractive place to live.

But all of this is not enough. The information economy requires a skilled and dynamic workforce, and immigration and education are central to this. 

California has always been a magnet for domestic and foreign immigrants. Of late, a significant number of entrepreneurial and skilled technical people have found the two different but equally supportive cultures of the Bay Area and Southern California attractive. 

As important as immigration is, a skilled workforce is also critical to support growth. With research powerhouses Stanford and Cal Tech; research laboratories Sandia, Lawrence Livermore, JPL and many more; 30 percent of the top research medical schools in the U.S.; and the 10-campus University of California ranked as the best public university system in the world, California is rich in this regard.

The 23 campuses of the California State University and the state’s 113 community colleges have also been critical in generating a skilled workforce for continued growth. To be sure, it is not enough and there are Californians left behind, but it is more than most and that is not trivial. 

One would think that a growth rate more than a full percentage point higher than the rest of the U.S. would provide an example for policymakers. However, the belief remains that California is horrible for business growth.

This narrative begs the question: If the California economy is bad for business, why did the state leap forward to be the fifth-largest economy?

Again, part is due to U.K. GDP growth slowing to 1.8 percent. But that does not change the fact that California has caught up and surpassed it. Nor does it change the fact that California is one of the most rapidly growing states in the U.S. 

Why is there such a negative view? The answer seems to lie in a number of indexes and articles that describe California as not being “business-friendly.” The metric for this description equates “business-friendly” with low taxes and minimal environmental and land use restrictions. The logic error stems from the fact that the two are not synonymous as California clearly demonstrates.

To see this, consider an index from the Tax Foundation. From it we find that, on average, the less “business-friendly,” the better a state’s recent five-year economic performance has been. This is particularly true for the largest states.

Do the same correlation on the FBI crime statistics, the ranking of public universities or the amount of park space per capita and the same result holds. These are not just cherry-picked statistics but are suggestive of indexes missing something important. 

The reason these metrics are misleading is that taxes are not levied in isolation. Taxes enable the provision of public services that support business growth and that create communities that business owners want to live in. Now it may be that states are not good at providing these services, but without money and environmental regulation, they are worse.

Moreover, talented people who can earn high incomes gravitate toward high-tax states, not because they like paying the taxes, but because they like the lifestyle that goes with it. And these are the innovators who are driving economic growth in California in the 21st century. 

This is not to say that California is without problems, including K-12 education, infrastructure, homelessness and the high cost of housing. These problems, most of which are not unique to California, along with the aforementioned “business-friendly” metrics, provides fodder to those who wish to push a low-tax agenda.

But California’s leap into the top-five economies in the world should be instructive, and we should not be led astray by the nomenclature “business-friendly” for metrics which are in fact describing a particular tax and regulatory environment.

If we don’t, we risk being led to policies like the Brownback tax-cutting debacle that wrecked the economy of Kansas, rather than learning the lesson of California’s surprising economic resilience.

Jerry Nickelsburg is the forecast director at UCLA's Anderson School of Management.