California’s decline is a warning to the rest of the world
Joel Kotkin, zvg.

California’s decline is a warning to the rest of the world

The state has been at the forefront of tech capitalism. But the downsides of its economic model become increasingly glaring.

 

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Since becoming the 31st state in 1850, California has been on the cutting edge of change in America – the home of Hollywood, surf music, space travel, the digital revolution, and the forging of a new multi-racial culture. It is still the place where the occasional college dropout gets rich off his tech innovations; the Steve Jobs spirit has not been totally lost.  California still dominates high-tech more than any place on the planet.

Yet increasingly the state also demonstrates that for all the massive wealth created the downside of a neo-liberal society dominated by tech oligarchs, green policies, and offshoring of industry. To be sure, globalism and tech growth has enriched many California businesses – Apple, Google and Meta are prime examples – and created a new generation of youthful billionaires, but with relatively little benefit for most Californians.

Underperforming economy

Overall, the California economic model seems more out of the gilded age than the kind of kind, advanced capitalism hailed by the state’s progressive admirers. Even when the state economy looked good from an aggregate point of view, it was providing vanishingly little opportunity for most of its citizens. And now, while Governor Gavin Newsom and his PR team crow about that state’s economy «roaring back», California suffers the nation’s fourth highest unemployment rate and one of the nation’s slowest job recoveries. Los Angeles and San Francisco are near the bottom of all metropolitan areas in job recovery.

Even before the current downturn, however, the state’s economy, outside of tech, was remarkably weak. For years, the state has been severely underperforming its main rivals in such areas as construction, manufacturing, as well as professional and business services. Overall, roughly 80 percent of all jobs created in California in the last decade paid below the median income, creating an ever-expanding class of working poor in low end service industries and fewer middle income positions.

The young go, the elderly stay

As a result, the state has suffered the nation’s worst cost-adjusted poverty rate and the fourth-highest Gini index – a measure for inequality – behind New York, Connecticut, and Louisiana. Ironically, just as the state has passed a bill backing reparations for descendants of slavery (California was never a slave state), a new report for Chapman University found that African-American and Latino Californians’ real earnings ranked between 48th and 50th among the states. Blacks in California earn roughly the same, or slightly less, than do their counterparts in Mississippi.

The drivers of California’s economy – minorities, immigrants and young people – have all been going elsewhere. Population growth, already slowing in the last decade, has now turned negative for the first time in the state’s history. Over the past twenty years, the state’s largest city, Los Angeles, long associated with youthful enthusiasm, has lost 750 000 people under 30 over the past twenty years, while the elderly population surged by 500 000; this was the biggest decline in youth among all big US counties. Between 2010 and 2020 the number of foreign-born residents even dropped.

Costly green policies

California’s transformation from a middle-class haven to an increasingly neo-feudal society is no mere accident but driven by policy choices, particularly on climate-related issues, which utterly obsess the state’s cognitive elites. As a recent MIT report suggests, overreliance on renewable energy imposes high prices, whether in Europe or California. Big-tech executives can locate energy-intensive work elsewhere. But   energy poverty, defined as energy expenditures exceeding 10 percent of household income has spread dramatically in recent years. Although some investors have done well from this transition, it does not much help the global climate as the people and production driven elsewhere all but cancel out the gains made within the state.

These effects may be felt most acutely in California, but they also reflect an ongoing problem as Western nations adopt desperate policies to curb emissions. The problem is while they impose burdens on local producers, countries like China, the world’s biggest emitter, and India are building new coal and gas plants, and are looking towards nuclear power, a bête noir among most Western greens.

This economic pattern – common across the West – has severe social consequences. Even in good times, when the state’s aggregate wealth made one writer suggest it has the «best economy» in the world, the levels of poverty, destitution, crime and homelessness reflect what the effects of an economy totally dominated by tech and high-end real estate looks like. Poverty is particularly evident in the state’s interior, which is home to many of America’s poorest counties. They have suffered most from state water, energy and housing policies.

Yet the social consequences are also evident in Los Angeles and San Francisco, the cities that dominate global visions of California. In tech-rich San Francisco, decades of tolerance for even extreme deviant behavior have helped create a city with rampant crime, more drug addicts than high school students, and so much feces on the street that one website has created a «poop map». In Southern California’s far more proletarian city of Los Angeles, downtown – a UN official last year compared conditions on Los Angeles’s Skid Row to those of Syrian refugee camps. Los Angeles city workers have been infected with typhus – which has begun to resurge in California – and some now demand elaborate protective gear when asked to hose down the putrid streets.

Limits to welfare state expansion

The question facing California is how to deal with these problems. Until the current crash in tech stocks, California was able to address these issues through ever expanding welfare and subsidies. Now a state dependent heavily on capital gains is deeply exposed to the recent decline of the stock market, concentrated heavily in tech stocks, and dubious short-term prospects for start-ups – the IPO market is clearly retrenching signs of weakening property values – which have filled the state’s coffers.

Indeed even as state offices and their media megaphones crow about its nearly $100 billion surplus, the state Legislative Analyst’s Office, predicts the likely reappearance of budget deficits. This will leave Governor Newsom, once his re-election in November is assured, a difficult choice. The surpluses generated by tech firms allowed for the expansion of state welfare payments and an extraordinary benefit plan for public employees, including free health care in perpetuity, policies that guarantee that California remains among the most fiscally challenged of the states.

Newsom will not run on increasing taxes, preening as a fiscally conscious moderate, but after November, businesses can expect a rash of new taxes and regulations. Faced with budget shortfalls, the state public unions are already preparing a host of new proposals to raise the state’s income tax, already the nation’s highest, as well as payroll taxes to pay for universal health care. Worse yet is the prospect of wealth taxes, with plans to force people to pay even if they leave the state. There’s even a proposal to reduce the workweek to four days and 32 hours with all additional work counted as overtime.

For some, in other states and abroad, California’s dilemma might be seen as a cause for schadenfreude. Yet this would be misplaced. The future being minted in California is yours as well, and most of you do not have an Apple, Meta, or Alphabet to prop you up even in good times. The influence of the tech oligarchs are not limited to the space between the Sierra Nevada and the Pacific. The post-industrial, dystopian high-tech future may have arrived first in California, but its course seems likely to be followed by other Western countries in the decades ahead.

«Liberal ist, wenn man ‹Schweizer Monat›
heisst und Themen, die die Welt
für Jahre bewegen, aufgreift.»
Thorsten Hens, Professor für Finanzmarktökonomie,
über den «Schweizer Monat»