On the surface, California’s economy may look healthy, with home prices soaring, Silicon Valley booming, and the state government running big multi-year state budget surpluses thanks to skyrocketing capital gains tax revenue and income tax returns from tech stocks.
But this good news hides a dangerous period ahead.
Indeed, California’s heavy dependence on tax payments from the wealthy and on the continued strength of the tech economy makes the state extremely vulnerable in the event of a major slowdown—or worse, A complete global recession. According to Jim Dotti of the A. Gary Anderson Center for Economic Forecasting at Chapman University, the probability of a recession starting late this year or later is very high.
Real estate prices already began to decline In parts of the Los Angeles area. similarly underwriting market, a major source of capital gains, is cutting expenses. The financial setbacks of the wealthy are a problem for the state because the top 1% of Californians generate income pay 46.2% of all personal income taxes.
We’ve been here before. After the last recession ended in 2009, it took the state five years to return revenue from income taxes to pre-deflationary levels. During those five years, the state received about $50 billion less in revenue than if the recession had not occurred, and the government had to cut programs by about $45 billion to compensate, according to the California Franchise Tax Board.
Today, the state is more dependent on tax revenue than wealthy elites: Collecting capital gains Income taxes have increased nearly fivefold since 2010. Income taxes, mostly from the very wealthy, which made up barely a third of state revenue in 1980, now make up two thirds.
A new recession, or even simply a slowdown, would put California in a very difficult position, especially given that it continues to engage in what CalMatters columnist Dan Walters calls “Expansive party“of social spending and ever-increasing housing subsidies. Despite strong annual budgets, California has the highest debt of any state— 507 billion dollars. The cost of servicing the state’s debt in 2022 and 2023 is expected to be approximately $8 billion annually and could grow even higher as interest rates rise.
California’s pension obligations to its employees are, by some measures, the highest in the state.
Much of the state’s weakness reflects changes in its economy. In previous recessions, California benefited from a more diversified economy, including aerospace, agribusiness, energy, and an extensive manufacturing sector. This time, Governor Gavin Newsom’s ornate assertion that the state is too “return roaring” From the epidemic it was very narrow focus. It pretty much refers to Silicon Valley.
Even before the pandemic, California was already severely underperforming competitors like Texas, Washington, Arizona and Utah in areas such as construction, manufacturing, and professional and business services. Job growth in so-called innovation industries outside of Silicon Valley and, to a lesser extent, San Diego has been minimal, including in the Los Angeles area, despite hiring by companies like Amazon and the “Silicon Beach” hype. What job growth there is is concentrated in low-level occupations, such as in the Inland Empire and the Middle Valley.
California now has the fourth-highest unemployment rate in the country and has had one of the slowest job recoveries from the pandemic of any state. It has the highest adjusted cost poverty rate in the country and among the highest levels of income inequality.
Crucially, California’s dominance of the tech economy may be weakened. It owns Meta, the parent company of Facebook and Instagram and is headquartered in Silicon Valley It is said to be rented 33 stories in downtown Austin, while Cupertino-based Apple continues to expand into suburban Texas. Texas is where Tesla is building its new factory. Elon Musk’s plan to buy Twitter means the company may also end up moving there from California.
California is likely to continue its leadership in technology, but in a diminished fashion. Comptia’s “CyberState” report predicts that California will not make the top 10 states for tech growth by 2030, a list dominated by places like Utah, Texas, Florida and North Carolina. in 2019 In fact, Texas passed California in creating new technical jobs.
Meanwhile, more tech workers are likely to move out of the state as employers agree, after the pandemic, to allow them to work from home indefinitely. They will look for areas that are cheaper, safer, and less crowded.
It is definitely worrying. However, the current economic crisis also creates opportunities, if California is willing to seize them. For example, the current drive toward resettlement — the re-manufacturing of American companies and their services from abroad — has created enormous opportunities. Consider Intel’s decision to invest $20 billion in a massive new computer chip-making facility outside of Columbus, Ohio. (Computer chips are overwhelmingly made in East Asia.)
If California can adjust some of its policies that employers consider hostile or too costly, Intel’s next big factory, or something similar, could be located in South Los Angeles, Fresno, or Riverside, for example, where there is an untapped and trainable workforce. Keeping production here will help sustain California’s tech economy and create opportunities for Californians beyond the financial and engineering elites.
This is also a strategic issue. Companies that do not manufacture their products often find that they lack the capacity to innovate and compete. Like Researchers from Harvard University showedWhen production moves away, innovation often follows.
The energy and environment sectors can also play to California’s advantage. The state’s leadership, for example, can be leveraged in designing electric vehicles to expand the state’s auto industry. Currently, most batteries are produced in Nevada, the Midwest, and the South.
The Russian crisis and ongoing economic competition with China create expanded opportunities for California to benefit from its vast stock of natural resources, including natural gas and food production. As long as we’re still using fossil fuels, it makes economic sense to tap energy here, creating high-paying jobs — rather than importing it, at great cost, from Russia or the Persian Gulf. (It would also be less harmful to the environment to have fossil fuels extracted and purified where environmental standards are higher.)
The war in Ukraine is also a reminder that California needs to revitalize its military industries, which are still being born About 40 billion dollars in annual contracts.
And while we already have a large space industry that employs nearly 24,000 people, it’s showing signs of getting out of state. We must not give up on what is likely to be an important industry in the future.
California can survive, and even thrive, in the midst of a recession. But only if you develop a strategy that does not depend on a few companies and the wealthy. The state’s current approach is fundamentally unsustainable, but its potential to succeed – and restore the California dream – has never been greater.
Joel Kotkin is the Presidential Fellow in Urban Futures at Chapman University. Marshall Toplansky is a clinical assistant professor of management sciences at Chapman University’s Argyros School of Business and Economics.