Learning Lessons from California
Posted on: May 24, 2012
By Richard Larsen
This past week California Governor Jerry Brown announced that his state is facing a “ballooning” budget deficit of more than $16 billion. In an interview on CBS News, Brown said, “We’re not some tired country of Europe. We’re a buoyant, dynamic society that will both discipline itself on a daily basis but it will on the long-term plant the seeds of future growth.”
What is inscrutably lost on the governor is that the policies that have brought California to the edge of a fiscal cliff are mostly the same ones of those “tired countries of Europe,” which have manifest the same degree of financial discipline that California has practiced.
Many trends, fads, and even governmental policies have originated in the Golden State that has even given rise to a widely accepted aphorism, “As California goes, so goes the nation.” It’s the verity of that truism that makes the state’s financial problems a portent of things to come for the rest of the nation if we fail to learn from their experience.
Joel Kotkin, one of the nation’s premier demographers, has identified the most significant contributing factors to California’s problems. He points out that four million more people have left California in the last two decades than have moved there from other states. This is in sharp contrast with the 1980s when 100,000 more Americans were settling in California each year than were leaving. Most of those leaving are young families.
They’re leaving because they can’t afford to live there. Everything from food, energy and taxes to real estate and housing, are beyond the financial reach of young families. Kotkin points to restrictions and massive regulations on development and housing that have artificially limited housing supply. As he explains, California’s so-called “smart growth” plans literally force middle-class families into less expensive, high-density housing, or out of state.
From his analysis, housing is merely one front of what he refers to as the “progressive war on the middle class.” The high cost of energy has had a dramatic impact on everyone, but especially on the middle class. Policies restricting traditional sources of energy, and state financed advantages granted to green energy producers have resulted in skyrocketing energy costs. The price per kilowatt hour of electricity is nearly twice what it is in Idaho, and more than 50% above the national average, according to Electricchoice.com.
Yet state policy makers are doubling down on green energy and on the restriction to traditional producers, which are expected to make the rates rise even more. For California has enthusiastically embraced cap-and-trade, with AB32, “…which will raise the cost of energy and drive out manufacturing jobs without making even a dent in global carbon emissions. Then there are the renewable portfolio standards, which mandate that a third of the state’s energy come from renewable sources like wind and the sun by 2020,” according to the Wall Street Journal.
Most of these costs are borne by the middle class since those below the poverty level get state assistance and the wealthy can afford it. But the high energy costs drive manufacturing and other blue-collar energy users either out of business or out of the state.
And not only are energy costs much higher, but with two decades worth of policy and tax-advantaged investment in green energy, the promised windfall of jobs has not occurred. Only 2% of the job force in California is in green energy, roughly the same as Texas, which maintains a vastly different green energy policy. Rather, in part due to the higher operating costs in California created by onerous regulation, companies, and their jobs, have been exiting the state. California currently has the third highest unemployment rate in the nation at 10.9%.
The Golden State has significant gas and oil resources, yet policy and regulation preclude utilizing them. An estimated 25 billion barrels of oil are sitting untapped in the vast Monterey and Bakersfield shale deposits. Over the past decade, Texas has created 200,000 oil and gas jobs, while California has hardly added any. The Wall Street Journal pointed out recently, that, “The state’s remaining energy producers have been slowing down as the regulatory environment becomes ever more hostile even as producers elsewhere, including in rustbelt states like Ohio and Pennsylvania, ramp up. The oil and gas jobs the Golden State political class shuns pay around $100,000 a year on average.”
“You see the great tragedy of California is that we have all this oil and gas, we won’t use it,” Mr. Kotkin says. “We have the richest farm land in the world, and we’re trying to strangle it.” The latter point references how water restrictions aimed at protecting the delta smelt fish are endangering Central Valley farmers. Kotkin asserts that is the kind of “anti-human” public policy that is driving agriculture out and is impacting so many of the state’s economic sectors.
Kotkin explains the demographic changes are occurring because of state policy. “Californians are voting much more based on social issues and less on fiscal ones…” Consequently, it’s a much less favorable climate for employers than ever before. “As progressive policies drive out moderate and conservative members of the middle class, California’s politics become even more left-wing. It’s a classic case of natural selection, and increasingly the only ones fit to survive in California are the very rich and those who rely on government spending. In a nutshell, ‘the state is run for the very rich, the very poor, and the public employees,’” Kotkin explained recently to the Wall Street Journal.
Middle-class families are fleeing California in droves. As a result, California is turning into a two-and-a-half-class society. On top are the “entrenched incumbents” who inherited their wealth or came to California early and made their money, and the self-made technology millionaires. Then there’s a shrunken middle class of public employees and, miles below, a permanent welfare class. As it stands today, about 40% of Californians don’t pay any income tax and a quarter are on Medicaid. It’s “a very scary political dynamic,” Kotkin laments.
Meanwhile, taxes are decimating the private sector economy. According to the Tax Foundation, California has the 48th-worst business tax climate. “The wealthy pay a top rate of 10.3%, the third-highest in the country, while middle-class workers—those who earn more than $48,000—pay a top rate of 9.3%, which is higher than what millionaires pay in 47 states. And state leaders want to raise tax rates even more,” according to the Wall Street Journal.
The reason taxes have been increasing to now unsustainable levels, is that Sacramento has been unable to curtail spending. State spending has more than doubled in the past ten years. Costs for state pensions have increased by over 150% in the same time period, as demands from state employee unions have required a greater percentage of the budget. Unable to muster the discipline to reduce spending to match economic realities, the only tool the state seems to know how to use is tax increases.
The lessons from California are many, and this analysis only scratches the surface. The question is, will we as a nation learn them before or after we’re in the same malaise?
AP award winning columnist Richard Larsen is a regular contributor to the Idaho State Journal. He is also President of Larsen Financial, a brokerage and financial planning firm in Pocatello, Idaho, and is a graduate of Idaho State University with a BA in Political Science and History and former member of the Idaho State Journal Editorial Board. He can be reached at email@example.com.