California's Choice - Growth or Decline


I’ve been friends with Charlie Sena for almost two decades. Charlie, a longtime entrepreneur, Democratic political operative and fundraiser for former Gov. Gray Davis, recently chided me about what he sees as my “negativity” about California and its future. My response was that, given its natural advantages, this region should not be in such a weakened condition. Decline, I suggest, is not an imperative here, but largely a choice.

Last week, I decided to confront this issue over lunch at Citrus Grille in Orange, just down the block from Chapman University, where I teach. Charlie noted that the negative points I was making were correct, but I owed it to the readers to “write a piece on why California can be, and should be, a state with the right climate for business growth.”

So, we sat in the restaurant, working on a list of positive things for California to build on. We centered on working with our population, including many immigrants and entrepreneurs, reinforcing our connections to Asia and Mexico and, finally, taking advantage of our climate. “The great strength of California,” Charlie suggests, “is people – people who go out and make it on their own.”

Immigrant Edge

The first group Charlie pointed to are immigrants, a group for which California long has been a lure. Twenty percent of Californians are foreign-born, and one of four immigrants nationally lives in our state. Amidst a general downturn in overall entrepreneurial activities, notes a recent study, the foreign-born have continued to expand their business footprint. In 2011, notes the Kaufmann Foundation, immigrant start-up rates were twice those of the native-born.

Attitudes are important here. To succeed in a highly regulated, expensive state like California, you need to have more than usual perseverance.

Asians, for example, according to the Pew Research Center, are far more likely than other Americans to believe that “hard work” pays off. Not surprisingly, they also tend to have higher levels of education, income and business success than other Americans.

But equally important has been the entrepreneurial growth among Latinos, who became the state’s largest ethnic group in 2014, according to demographers, and could be close to 50 percent of the population by 2050. Indeed, a recent study of Latino business found that Hispanic entrepreneurs have more than tripled since 1990, from 577,000 to more than 2 million. Not only did this growth outpace that of the overall population increase among Hispanics, but at a rate of increase far above the national average.

Anyone who drives out into the vast expanses of the state can see these businesses – new markets, countless restaurants, small factories, farms, local banks and scores of smaller service firms. California’s new commercial signature is not the traditional mall or luxury shopping street, but, rather, multiethnic commercial areas, like the Diamond Jamboree center in Irvine.

Rise of Self-employed

But there’s also signs of greater growth in the ranks of self-employed people across the population. The self-employed proprietor is the one entrepreneurial category that has grown since the recession. This may well represent a pragmatic choice by business people who wish to make money, but avoid the ever-increasing regulations here that make having employees increasingly difficult.

This growth is particularly vibrant in the Riverside-San Bernardino area, notes a recent study by the economic modeling firm EMSI Inc. The inland region expanded its sole-proprietor ranks by 11.8 percent since 2008, second to booming Houston and more than twice the growth rate of either the Bay Area or Los Angeles-Long Beach. All these key California areas greatly outperformed such competitors as Denver, Greater Washington, D.C., Chicago or Atlanta.

Foreign connections

California also has enjoyed a unique connection to the fast-growing economies of the Pacific Rim and Mexico. Texas succeeded in luring Toyota, as Tennessee did with Nissan, but neither state possesses the intense cultural and historic ties California enjoys with Japan and other Pacific Rim countries. To be sure, places like Plano, outside Dallas, and around Houston’s Bellaire Road look increasingly like the San Gabriel Valley or Garden Grove in their ethnic flavor, but they are at least a generation – and an order magnitude – behind.

Where Texas eats our lunch, says Charlie, who lived in Houston years ago, is in forging ties with Mexico. Many Californians – particularly on the right but also on the “green” left – tend to regard Mexico as something of a threat to our social and ecological order. But supposedly less-enlightened Texas, where business is king, has developed a powerful passion for closer ties to Mexico, with a growing partnership between the Lone Star State and Mexico, which, for example, is already Houston’s foremost trading partner.

Political dilemma

So, why is California not taking advantage of these assets? One main reason lies with the regulatory and tax agendas of Charlie’s own party, something he is quick to acknowledge. “The Democratic Party,” he suggests, “is on a collision course with reality. They don’t realize that you need a broadly growing economy to support or expand social services.”

This is the dilemma that progressives need to confront in California. An over-regulated, overtaxed economy slows business growth and forces companies to look elsewhere to expand, particularly outside of very high-end functions. Superhigh income tax rates deprive small-business owners of the capital they need to reinvest and grow their enterprises. Under the current regime, many of them, particularly the young, may find starting a business in Colorado, Nevada, Utah or Texas easier and more financially rewarding.

Back to Pat?

Like Charlie, I admire many of the things we created during the great expansion of the Gov. Pat Brown era, a half-century ago – the higher education system, the freeways, the water projects, to name three. All these were paid for by broad-based economic growth, and contributed to accelerating that growth over time. Our success made California a model for other states – including Texas and North Carolina – which wanted to leave behind their feudal, and deeply racist, pasts.

Now, these people are essentially beating us at our own game, and unless we respond, they will continue to attract not only large businesses, such as Toyota and Occidental, but also talented people critical to the grass-roots economy.

Politicians in Sacramento, and many city halls across this state, seem to have little notion of, or even interest in, economic growth beyond serving the interests of public employees and crony capitalists, whether in subsidized “green energy” boondoggles or among rent-seeking developers. These kind of policies are simply transfers of resources from neighborhoods, suburban or urban, to the well-placed; they have not been significant economic drivers.

Charlie’s last point – climate – remains critical. This region is never going to become Detroit, no matter how misguided is our political class, simply because of its weather and topography. People and businesses will want to come here if they can make a decent living and enjoy the option of housing, largely single-family homes, that remains the ultimate goal of most upwardly mobile people, particularly immigrants.

So, if maybe sometimes I get too negative about California, it’s in large part because we squander opportunities and seem determined to ignore all the basic economic data. In this shortcoming, the media, notably the Los Angeles Times, has been particularly gratuitous, acting as if the loss of key companies, such as Occidental and Toyota, was largely irrelevant and, indeed, inevitable.

This is not, in my mind, the California I moved to four decades ago. That we do things differently here is not a negative – it’s why many of us are here – but we need to recognize that you cannot support an ever-expanding welfare state or do much of anything about climate change simply by chasing people and individuals elsewhere. We need to start developing policies that exploit our advantages and not rest on our glorious past. We need to see, as Charlie would say, that decline is not inevitable, but only a choice that too many in the state seem determined to embrace.

This article first appeared in the Orange County Register.

Joel Kotkin is executive editor of and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

Photo illustration by krazydad/jbum.


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"Like Charlie, I admire many of the things we created during the great expansion of the Gov. Pat Brown era, a half-century ago – the higher education system, the freeways, the water projects, to name three. All these were paid for by broad-based economic growth, and contributed to accelerating that growth over time."
Actually, these things were paid for with a few massive tax hikes in the 1960s and early 1970s. Reagan's 1967 tax hike still stands as the largest state tax hike as a percentage of the budget in the history of the United States. And they were the sort of tax hikes that you and the other anti-tax cultists especially despise: top marginal rates hiked from 6% to 11% over the time period (Reagan wanted 13%!), tax withholding procedures, a spike in bank and inheritance taxes, etc.
As a larger point, we shouldn't look at the long-term movement of jobs and capital to red America as a symbol of the failure of blue America. Instead, they are exemplars of the collective action problems introduced by federalism. Mexico beats the hell out of Texas for cost of production. Perhaps New York should try to emulate Guadalajara then.

Bad and Getting Worse

The pluses in this article are wishful thinking. They don't address any of the problems the state faces and uses feel-good thinking instead of facts:

Immigration - Legal immigration brings motivated self-starters who propel an economy. Mass ILLEGAL immigration brings in large volumes of poorly educated, non-motivated workers who are a drain on the social system, schools and hospitals. For every illegal who starts a vegetable market, there are a dozen who will take in more benefits than taxes and economic activity they generate (and most of their purchasing power is due to transfers from the state or federal government).

"Great weather" - Fine for those who work or play outside, which is not that big a number. The vast majority of office workers sit in a cube all day then go home to family and watch TV. With modern air conditioning, pro-Californians who keep carping on weather being an "asset" are living in the 1950s and deluding themselves that this is some sort of draw for educated Americans (look at the obesity statistics).

Foreign Connections - Foreigners will invest and do business wherever it is profitable, and it is hard to make a profit in California with the regulations and taxes. The State government looks at companies as something to be extorted and fleeced, not something that is a net plus for the community for jobs, etc.

I have been living in California for 16 years and I am just waiting for a family situation to resolve before leaving. I am one of those high-paid white collar tech workers that California thinks are "captured" but we tech workers are very mobile (that whole internet thing) and most people I know in the industry wish to leave eventually. And no one I know in tech plans to retire here - everyone who made less than a few million (meaning everyone except a lucky few) plans to take their money and run. We'll be taking all those assets and stock options to be taxed at a lower rate somewhere else.

In the end California will be like a South American country - a very small, rich, crony upper-class, and a very large poor lower-class (both voting democrat) with nothing in the middle. And it is because of this dynamic that I don't see anything changing.

It takes a bit of motivation

It takes a bit of motivation to come to the U.S. even illegally rather than sit and accept an underperforming economy and political system. Illegal aliens don't qualify for many benefits other than emergency medical care but they do benefit from Americans who demand and consume on a daily basis the goods and services they produce. A market friendly way to decrease illegal immigration and increase legal immigration would be to increase the number of visas available to these workers. You might want to talk to folks in the Midwest and the East coast who went through a bear of a winter.

I think it is delusional to

I think it is delusional to fall back on the beautiful climate idea. Most Americans live at their jobs and in their homes. Personal location decisions are usually based on pay, opportunities for advancement, the quality of the job, the quality of the home they will live in, cost of living and schools. Companies look at workforce composition, schools, transport connections, energy costs, regulatory costs and proximity to markets. Climate is an afterthought, and only as it relates to the other factors.

Elon Musk is an interesting example of this dynamic. He located the assembly plant for his cars in California but he has already made statements to the effect that any expansion to the business will not occur in California. He is preparing to manufacture his own batteries instead of outsourcing them. The leading contender for this battery plant is San Antonio, TX. The reason is that the feedstocks for a battery plant, be they metals, chemicals, or people are all more cost effective and less of a regulatory hassle in Texas.

good article, but...

It's a good column, but Mr Kotkin is not fully correct in his statement that a choice is being made not to grow. I would define that further. A choice is being made by those in the well compensated white collar professions in technology, finance, law, entertainment and academia to inhibit growth in those industries that require facilities other than a nice office. They don't want more agriculture (save a few small organic farms). They don't want more building (save a few tradesmen for remodels or repairs). They don't really want more factories though they'll tolerate Tesla because it's cool and Musk is one of them). They don't shop at Wal Mart or eat much fast food, so while they acknowledge the need for some cooks, waiters and store clerks, they are happy to see most driven out. It's almost a perverse twist on Ayn Rand's novel when the businessmen all went off to form their own country.

I have no difficulties imagining that many people in SF or the Silicon Valley would be perfectly happy if the state emptied out aside from this little peninsula. It is a huge state, and those in the rest of the it need to figure out how to fight back against the Bay Area (and generally the western part of the Bay Area at that).