As California’s economy struggles to regain its footing and lawmakers remain vexed over how to balance the state’s budget, the idea that the Golden State has lost its luster is beginning to take hold. The public’s mood is gloomy, and policymakers from the left and right are looking to other states with stronger employment growth in search of answers to what ails California.
But even as the state’s collective psyche turns deeply pessimistic, recent economic indicators hint that a turnaround may already be taking place. And some serious research suggests that California’s “business climate” might not be as bad as critics say.
Consider the recent numbers. Figures for all of 2010 show that California added a net of about 82,000 nonfarm jobs last year. That’s a growth rate of just .6 percent, a little slower than the nation as a whole and not fast enough to provide jobs for all those who want them. The unemployment rate remains stubbornly high, at 12.3 percent.
But the overall growth in jobs last year was skewed downward by two sectors that continued losing employment – government and the construction industry – while the rest of the economy began to turn around.
Government – perhaps contrary to popular belief — cut 51,000 jobs last year. The construction industry, particularly hart-hit in California because of the housing bust, lost 26,000 jobs.
Remove those two sectors from the picture and California’s job growth was a respectable 1.5 percent in 2010. That’s a rate that compares favorably to the nation as a whole, which on the same measure grew by 1.3 percent. Professional services, health care, tourism and trade all posted job gains in California, as did the entertainment industry and Internet-related businesses.
In fact, unlike past recessions, where industries such as aerospace and computer technology took major and permanent hits, this downturn was driven largely by the decline in housing and related industries, including finance. Many of those jobs will return once demand for housing rebounds, and the state’s core industries remain, for the most part, healthy.
So while there may be widespread fear that jobs are fleeing California, the evidence indicates that most of the jobs lost in recent years did not move outside the state as much as they simply vanished during an unusually tough downturn in the business cycle.
That hasn’t stopped politicians from suggesting otherwise. Dan Logue, a Republican assemblyman from Northern California, had led two fact-finding trips to other states to interview business owners who have moved from California and to hear state officials from elsewhere tout their economic prowess.
Logue’s first trip was to Nevada, but the Silver State suddenly looks even more tarnished than the Golden State. Nevada lost a bigger share of its jobs during the recession than did California, and its unemployment rate is higher than 13 percent.
So last month Logue went further afield, to Texas, where the unemployment rate is 8.1 percent and the employment base has grown while California’s has declined. He notes that Texas added 165,000 jobs between 2008 and 2010 while California lost more than a million. Surely their state policies have something to do with that.
Perhaps. After all, Texas was ranked by chief Executive Magazine as the best state in the nation for business and job growth, while California ranked worst. California was 39th in a Forbes Magazine ranking of the best states in which to do business, while Texas was seventh. Texas has relatively low taxes while California has an above-average tax burden.
Even Gavin Newsom, the Democrat and former San Francisco mayor who is now California’s lieutenant governor, is jumping on this bandwagon. Newsom joined Logue on the Texas trip and returned extolling the virtues of making his home state more friendly to business.
But research by the non-partisan Public Policy Institute of California has shown that relatively few jobs move into or out of the state in any given year. Although numbers are not available for the most recent years, data for 1992 through 2006 showed that about 16,000 jobs per year moved into California from elsewhere while 25,000 moved out. That’s a net decline of about 9,000 jobs per year, a tiny fraction of the state’s base of more than 15 million jobs overall.
Another more recent study by the PPIC looked at 11 state-by-state rankings to assess their connection to economic growth. It found a connection between economic growth and rankings based on taxes and the cost of doing business. And it found that California ranked poorly on most of those rankings. But it also found that California’s economic growth was better than those rankings would predict.
One reason could be that while the rankings are correlated with economic growth, they do not necessarily reflect a cause and effect relationship. The opposite could even be true. Strong economic growth, in other words, could lead legislators to reduce taxes, rather than the other way around. After all, that is what happened in California during the dot-com boom, when an economic boom produced a surplus that then prompted lawmakers to cut taxes.
Beyond that, the PPIC study found that simplified corporate taxes were more closely linked to economic growth than lower taxes, and state spending that created a disincentive for people to work was more of an issue than the level of spending overall.
But even if a state’s tax code can lead to economic growth, other factors, including the state’s weather and its mix of industries, appear to be more influential than government policies, according to the PPIC study. So while California might do even better if it simplified its corporate tax code or restructured its welfare programs, the study found, those issues do not appear to be the reason for the recent doldrums.
“The clearest policy recommendations resulting from this study would be for California to examine its welfare and transfer policies, with an eye toward reducing work disincentives, and to simplify corporate taxation by better aligning the state tax with the federal corporate tax and by reducing credits and other non-uniform treatment of corporate income,” the PPIC report said. “These features—not the overall tax rate or the overall size of government—demonstrate the strongest relationship with economic growth in our analysis.”
But the authors added that state policy, especially in the short- and medium-term, only partially explains why some states grow faster than others.
“Political debate over the business climate, in California and elsewhere, likely overemphasizes the role of policy and policymakers in determining their states’ economic performance,” the report concluded.
Investors, meanwhile, don’t seem to have lost confidence in California’s dynamic entrepreneurial culture. The state led a national resurgence in venture capital investments in the first quarter of 2011.
According to Dow Jones VentureSource, which tracks investment in start-ups, 40 percent of venture capital investments nationwide between January and March went to California companies. The state’s firms recorded 262 deals during that period. The state with the next largest number – Massachusetts – had just 75.
Those numbers bode well for California’s economic future, no matter what you might think of the governor, the Legislature and the state’s oft-maligned regulatory bodies.