Jim de Bree | The Economic Paradox of California

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I have read with interest the discussion between Betty Arenson and Christopher Lucero on The Signal’s recent opinion pages concerning the situation in California. To be sure, both make valid points. 

As a CPA who has practiced in California for over 45 years, I am keenly aware of the California business climate. As a Californian, I have witnessed the enactment of numerous looney proposals by our state government. The California Republican Party has diminished to the point of increasing irrelevance as the Democrats control all statewide offices and both houses of the state Legislature.  

I have observed numerous clients, both businesses and wealthy individuals, move out of state. Several of my friends have also moved out of state. It seems if you are wealthy and rely largely on investment income, or if you are retired and live on fixed income, leaving California is economically advantageous. However, if you work for a living, salaries elsewhere are generally proportionately lower commensurate with the cost of living in those jurisdictions and workers who move don’t seem to get the bang for the buck they anticipated when leaving California. 

Despite its problems, California remains an economic powerhouse. 

If it was an independent country, California would be the world’s fifth largest economy. I was surprised to read last week that Los Angeles County has the largest economy of any county in the U.S. These rankings are based on Gross Domestic Product (GDP), which is how economists measure the value of all goods and services produced in a particular jurisdiction.

But the sheer size of the economy is not the only interesting metric. We need to also consider the GDP per capita — the amount of goods and services produced by the average person residing in the jurisdiction. 

According to the World Bank, the U.S. GDP per capita was $59,532 in 2018. By global standards, this is exceptionally high. The US Bureau of Labor Statistics calculates GDP per capita for states and counties. California’s GDP per capita in 2018 was $74,205 (6th highest). The GDP per capita for Los Angeles County was $65,354 (45th highest out of 3,142 counties and county-equivalents in the U.S). 

We are reasonably prosperous in comparison to other states and counties.

In a recent column, Ms. Arenson lamented, “California’s 40-year hostile business practices forced $76.7 billion ‘investment capital’ away at a cost of 275,000 jobs.” Although I do not know the source of that information, her premise is clearly correct because a significant portion of our business community has departed California. But this needs to be placed in perspective by looking at California’s overall economic picture.

From 2008 to 2018, the U.S. economy recovered from the Great Recession. Its GDP grew by 19% during that period when measured in inflation-adjusted dollars. GDP per capita grew at a slower rate, 14.3%, from $43,431 in 2008 to $49,627 in 2018 (again measured in inflation-adjusted dollars).

During this period, California has enacted numerous tax increases and has expanded its regulatory outreach. In spite of this, California’s inflation-adjusted GDP grew by 22% (4th highest in the nation). California’s GDP 24.1% per capita growth is even more impressive. It exceeds the overall national growth rate by nearly 10%. 

Despite the exodus of business from California, California’s employment growth for this period was 10.1% (12th fastest employment growth among states). So, if business is leaving California at precipitous rates, why is its economy growing so fast? 

The world is being recast by unprecedented disruptive forces led by technology. The highly profitable businesses are those that are able to implement technology faster than mainstream industries. Those ventures that are unable to rapidly deploy technology must find a way to reduce costs in order to remain competitive. California is a relatively high cost venue, so moving out of state is attractive for them.

I worked for a Big 4 accounting firm for nearly 45 years. Our local client base was incredibly dynamic. Of the 10 largest clients of the Los Angeles office when I started my career, few of them still operate in California. In spite of this, the office employs 10 times as many people today compared to when I started. That is because the contemporary clientele are technologically driven and have substantially higher profit margins than the clients of the 1970s.

California has maintained its status as a leading innovator. That is why many companies choose to be here and why California’s economy has outperformed most of the country. 

Furthermore, the departure of many California businesses has been subsidized by other state and local governments. From a long-term fiscal perspective, those other governments will ultimately have to increase taxes or cut services. 

When they reach that point, they will face many of the same issues California dealt with over the past several decades and are likely to engage in similar “hostile business practices.”

Jim de Bree is a semi-retired CPA residing in Valencia.

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