In California, the Canary is Dead

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Canaries were used in early coal mines to detect deadly gases, such as methane and carbon monoxide. If the bird was happy and singing, the miners were safe. If the bird died, the air was not safe, and the miners left. The bird served as an early warning system.

Domestic migration trends play a similar early warning system for states. California’s dynamism was always reflected by its ability to attract newcomers to the state. But today California’s canary is dead.

Here’s the logic. If net domestic migration is positive, the state’s economy is reasonably sound. Economic growth, taxes, housing, and amenities are strong enough to keep people where they are and attract others. If net domestic migration is negative, it usually means that lack of economic growth, taxes, quality of life, and housing have deteriorated sufficiently to drive people away. This happens despite the inevitable pain of leaving the security and comfort of family, friends, and familiar surroundings.

California has been a destination for migrating workers and families since 1849. They came form every state and from around the world. Often the migrants faced tremendous challenges and hardship. Illegal immigrants from Mexico and other developing countries still must leap over such barriers. Often, California’s migrants came in waves. The 1850s, 1930s, and 1950s all saw huge surges tied to huge events – the Gold Rush, the Depression and the post-war boom. But even between these waves, California consistently experienced a steady inflow of new immigrants.

Immigration has been good for California. The new residents brought ambition, skills, and a willingness to take risks. They found a state with abundant natural resources, from oil to rich soil and ample, if sometimes distant water resources. Together with the people already there, they created an economic powerhouse. They built cities with amenities that rival any other. They fed much of the nation and large numbers overseas. They did this while persevering much of California’s unique endowment: the vast coastline, the Sierra Nevada, and the deserts.

California, with 12 percent of the United States population, became the world’s sixth largest economy while managing to maintain the aura of paradise at the same time. Opportunity and housing were abundant. California was a great place to have a career and raise a family.

Most recently, though, this has begun to change. California is no longer a preferred destination, at least for domestic migrants. The state’s economy is limping along considerably worse than that of the nation. Opportunity is limited. Housing is relatively expensive, even after the dramatic deflation of the past two years, except for some very hard-hit and generally less attractive inland areas. Taxes are high and increasing. Regulation is onerous and becoming more so. Many California communities are outright hostile to business.

Consequently, net domestic migration has been negative for 10 of the past fifteen years. International migration to California remains positive, but that reflects more on the weakness of the economies and the attraction of existing ethnic networks than the intrinsic superiority of California. This represents a sea change: anyone predicting it fifteen years ago would have been laughed out of the room.

What happened?

California’s economy was badly hit by the 1990s recession. The State’s aerospace and defense sectors were especially decimated. Middle-class families moved out by the hundreds of thousands.

The 1990s out migration caused some soul searching in California. There was lots of talk, and a little action on making the State more competitive. Then came the technology and real estate booms. Domestic migration turned positive. The half-hearted efforts to make California more competitive faded as policy makers were lulled into complacency by the strength of California’s resurgence.

But the problems that bedeviled the state in the 1990s – high housing prices and taxes, cascading regulations and a deteriorated infrastructure – had only been obscured by the boom. By 2005 migration began to turn negative, largely as soaring housing prices discouraged newcomers and encourage many residents to cash out and move to less expensive places. California had priced itself, and the dream, out of competitiveness. Since then, California has seen four consecutive years of increasingly negative domestic migration. The recent net outflow numbers have been smaller than in the 1990s, but it may be because other tradidional California migrant destination economies – like Oregon, Washington, Nevada and Arizona – have become less competitive as well.

Today, many argue that California will bounce back, but they can’t identify the reason. What sector will lead the resurgence? They seem to think economic growth will come with the sunshine, beaches, and mountains. There was plenty of sunshine in the 80 years between the founding of the first mission and the gold rush, and not much happened. Similarly, the differences between California cities and neighboring Mexican cities show clearly that successful economies need more than good looks and nice climate.

It's hard right now to assume California’s future will include the same predominance in technological innovation. Agriculture is running out of water, in large part due to environmental lawsuits, and the state no longer seems willing to invest in new water projects. Even the entertainment industry is increasingly looking outside of California for growth. You have to ask: what does California offer that will overcome the State’s high costs, regulatory environment, and antipathy to business?

That is the short term. The long term doesn’t look very good either. The public universities, a major source of innovation over the past two decades, are facing increasingly severe budget challenges. It is unlikely that they will be able to maintain their status even as other states – Texas, Colorado, New Mexico – eye further expansion. Even more ominous are gains in countries, such as China and India, who have long sent their best and brightest to the Golden State.

All this suggests a relative decline in California’s long-term prospects. What should we do? Part of California’s problem is its political process. The state’s chronic inability to do much of anything reinforces stasis. As Dan Walters says, “everyone has a veto on everything.”

But even improving the political process may not be enough. Much of Coastal California is dominated by rich, aging, baby boomers. The residents of this increasingly geriatric ghetto often don’t worry much about economic opportunity. They may have the money and votes to guarantee that growth does not impinge on their lifestyles. Unless these conditions change, it will be unlikely to see a renewal of strong domestic migration to California in the coming years.

Bill Watkins, Ph.D. is the Executive Director of the Economic Forecast Project at the University of California, Santa Barbara. He is also a former economist at the Board of Governors of the Federal Reserve System in Washington D.C. in the Monetary Affairs Division.



















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Domestic migration trends

Domestic migration trends play a similar early warning system for states. California’s dynamism was always reflected by its ability to attract newcomers to the state. But today California’s canary is dead. art history online

Similarly, the differences

Similarly, the differences between California cities and neighboring Mexican cities show clearly that successful economies need more than good looks and nice climate. The Worldtravel Guide

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RE: CA Still Dominates New High Tech Venture Formation

https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=region
http://graphicsweb.wsj.com/documents/NEXT_BIG_THING/NEXT_BIG_THING.html

I am not going to defend the disfunctional politics and leadership of the state (both parties) political culture. And yes, many economic sectors within the state (including more mature technology sectors) are stagnant or declining.

However, it is important to note that the state still maintains critical leadership in new patent generation as well new venture formation and financing. (I agree that it is unclear whether new technology and industries alone can provide enough broad-based prosperity for the overall state.)

The new "sunshine" high-value industries are biotechnology, medical devices/systems, advanced software, clean/alternative energy, new materials and micro-electronics. Advancements in these sectors will enhance our personal lives and transform many existing industries--and these are the sector's that an affluent region, state or nation needs wants to attract or develop.

Due to the present competitive environment, it is simply impossible for a small (but high potential venture) to reach critical mass without large amounts of external financing. In addition to human capital, supremacy in venture financing allows Silicon Valley to arguably dominate in a way it simply did not 20 or even 10 years ago.

In addition to leadership in patents and new venture formation, Silicon Valley-based top-tier firms such as Google, Intel, Oracle, HP, Apple and Cisco are all much stronger market performers (relative to non-CA based competitors) than they were in the past.

Outside of California, most of the other NEW ventures and more established technology leaders are located in places such as the Boston-Wash DC corridor or Seattle--not low cost leaders (and new geography favorites) such as Texas. Also, note that the high profile HQ transfers Hilton Hotels, CSC Corp, Northrup and SAIC all moved to the Wash DC region--hardly a low cost region by middle America standards.

The state of California may still have "potential" and a "future" given the state's continued leadership with broad-based technology generation and new venture formation...

Richard Rider, Chairman San

Richard Rider, Chairman
San Diego Tax Fighters

RRider@san.rr.com

BLOG: www.RiderBlog.NotLong.com

What JJ says is true. The same could have been said of Detroit 20 years ago. Probably was, as a matter of fact.

The existing large California corporations are doing their expanding in other states. California won't collapse, though the governments (staet and local) will soon be insolvent. A stately decline is the future of the Golden State.

Breaking Bad: California vs. the Other States

Richard Rider, Chairman
San Diego Tax Fighters

RRider@san.rr.com
Phone: 858-530-3027

BLOG: www.open.salon.com/blog/Richard_Rider (beta)

Breaking Bad: California vs. the Other States
by Richard Rider, Chairman, San Diego Tax Fighters
Version 1.52 Revised 20 December, 2009

Here’s a depressing comparison of California taxes and economic climate with the rest of the states. The news is breaking bad, and getting worse (I keep updating this article):

California has the 2nd worst state income tax in the nation. 9.55% tax bracket at $47,055. 10.55% at $1,000,000
http://www.taxfoundation.org/files/bp59_es.pdf

By far the highest state sales tax rate in the nation. 8.25%. 7% is next highest (does not include local sales taxes)
http://www.taxfoundation.org/files/bp59.pdf Table #15

California corporate income tax rate is the highest in the West (our economic competitors). 8.84%
http://www.taxfoundation.org/files/bp59.pdf Table #8

2010 Business Tax Climate ranks 48th in the nation.
www.taxfoundation.org/files/bp59_es.pdf

Fourth highest capital gains tax 9.55%
www.thereibrain.com/realestate-blog/capital-gains-tax-rates-state-by-sta...

Highest gasoline tax (averaging 65.8 cents/gallon) in the nation (October, 2009). When gas hits $3.00/gallon, we are numero uno – because unlike many states, we charge sales tax on gasoline purchases (built into the price).
www.api.org/statistics/fueltaxes/

Third highest unemployment rate in the nation. (November, 2009) 12.3%. National rate 10.0%.
www.bls.gov/news.release/laus.nr0.htm

One of the highest state vehicle license car taxes. 1.15% per year on value of vehicle, up from 0.65% in 2008.
http://tinyurl.com/lrvmtd

California’s 2009 “Tax Freedom Day” (the day the average taxpayer stops working for government and start working for oneself) is again the 4th worst date in the nation – up from 28th worst in 1994.
www.taxfoundation.org/research/show/387.html

To offset lower state revenues, 29 states are proposing 2009 state tax and fee increases totaling $24 billion. California, with 12% of the nation’s population, is proposing 47% of that increase (6/5/09).
http://money.cnn.com/2009/06/04/news/economy/states_budget_crises/index....

1 in 5 in LA County receiving public aid.
www.latimes.com/news/local/la-me-welfare22-2009feb22,0,4377048.story

California has 12% of the nation’s population, but 36% of the country’s TANF (“Temporary” Assistance for Needy Families) welfare recipients – more than the next 7 states combined. Unlike other states, this “temporary” assistance becomes much more permanent in CA.
http://weblog.signonsandiego.com/weblogs/afb/archives/034662.html

California prison guards highest paid in the nation.
www.caltax.org/caltaxletter/2008/101708_fraud1.htm

California teachers easily the highest paid in the nation.
www.nea.org/home/29402.htm (CA has the second lowest student test scores)

California now has the lowest bond ratings of any state, edging out Louisiana.
www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/03/19/BA7F16JLKH.DTL

California ranks 44th worst in “2008 lawsuit climate.”
www.instituteforlegalreform.com/component/ilr_featured_tools/29/item/LAI...

In 2005 (latest figures), for every dollar Californians sent to D.C. in taxes, we got back 78 cents – 43rd worst.
www.taxfoundation.org/taxdata/show/22685.html

America’s top CEO’s rank California “the worst place in which to do business” for the fourth straight year (3/2009). But here’s the interesting part – they think California is a great state to live (primarily for the great climate) – they just won’t bring their businesses here because of the oppressive tax and regulatory climate.

Consider this quote from the survey (a conclusion reflected in the rankings of the characteristics of the state): “California has huge advantages with its size, quality of work force, particularly in high tech, as well as the quality of life and climate advantages of the state. However, it is an absolute regulatory and tax disaster.”
http://tinyurl.com/cyvufy

California, a destitute state, still gives away college education at fire sale prices. Our community college tuition is by far the lowest in the nation. How low? Nationwide, the average community college tuition is 4.5 times higher than California CC’s. This ridiculously low tuition devalues education to students – resulting in a 30+% drop rate for class completion. In addition, 2/3 of California CC students pay no tuition at all – filling out a simple unverified “hardship” form that exempts them from any tuition payment, or receiving grants and tax credits for their full tuition.
www.sacbee.com/static/weblogs/capitolalertlatest/020722.html
http://tinyurl.com/ybrc2kn

On top of that, California offers thousands of absolutely free adult continuing education classes – a sop to the upper middle class. In San Diego, over 1,400 classes for everything from baking pastries to ballroom dancing are offered totally at taxpayer expense.
www.sdce.edu

California residential electricity costs an average of 35.4% more than the national average. For industrial use, CA electricity is 56.2% higher than the national average (2007).
www.eia.doe.gov/cneaf/electricity/epa/fig7p5.html
www.eia.doe.gov/cneaf/electricity/epm/table5_6_a.html

It costs 38% more to build solar panels in California than in Tennessee – which is why European corporations have invested $2.3 billion in two Tennessee manufacturing plants to build solar panels for our state.
http://tinyurl.com/llussb

Consider California’s net domestic migration (migration between states). From April, 2000 through June, 2008 (8 years, 2 months) California has lost a NET 1.4 million people. The departures slowed in 2008 only because people couldn’t sell their homes.
www.mdp.state.md.us/msdc/Pop_estimate/Estimate_08/table5.pdf

These are not welfare kings and queens departing. They are the young, the educated, the productive, the ambitious, the wealthy (such as Tiger Woods), and retirees seeking to make their pensions provide more bang for the buck. The irony is that a disproportionate number of these seniors are retired state and local government employees fleeing the state that provides them with their opulent pensions – in order to avoid the high taxes that these same employees pushed so hard through their unions.

As taxes rise and jobs disappear, we lose our tax base, continuing California’s state and local fiscal death spiral. This spiral must stop NOW.

NOTE: If you would like to receive my free periodic “Richard Rider Rant” e-newsletter with more of this type of information and analysis, just drop me an email at RRider@san.rr.com. To see the latest version of this “Breaking Bad” column, plus samples of my free “Richard Rider Rant” e-newsletter, go to my blog at www.open.salon.com/blog/Richard_Rider. This report also is available as a 2 page Word file for printing.

California's economy

You hit the nail on the head.
Where IS the next boom coming from? Installing solar panels? What, the dish TV guy can't handle it?
My career in Silicon Valley began in the late 80s at Applied Materials. The valley had already ridden Cold War defense budgets and the telecomm explosion after the ATT breakup. PC computers and the rise of the internet and wireless carried us through the 90s. Now...What???
I remember in the 80s, my older co-workers used to always complain about "bean counters." I was too young to know whether or not they were just whiny old farts or were on to something.
Part and parcel of the "free trade" argument is the drive to "reduce costs." Once the "bean counters" totaled up all the costs, "labor" became the bogeyman in corporate boardrooms and accounting seminars.
Unfortunately, once you start laying everybody off, you get to a point where you begin to layoff your own customers and your customers' customers, etc.
We have accepted a new world of labor where we get laid off every 3 years and then go back to school to learn a new skill. Say goodbye to seniority, pensions and everything our fathers and grandfathers worked to preserve for us. 100 years of American manufacturing excellence flushed down the toilet in ten. Now, all American business has to do is move their factory to China and you reverse 100 years of American workplace safety and wage laws overnight. Your "costs" disappear.
This is "The Future?"

California, overegulation and the population hemorrhage

Let's just say that the economy in Southern California, what with the housing crash and the national-level and state-level economy in the deep dumps, truly sucks. My wife and I are in the process of moving, to see if we can find jobs to replace those we had that we lost a couple years ago (we're both currently unemployed and haven't been able to find anything other than temporary, short term jobs, and even those were hard to come by).

Srgothard, It's sad to read

Srgothard,
It's sad to read your comment. While our country creates new working places in China our own unemployment rate is growing continuously.
Completely agree with you, Southern California's economy sucks. Without reforms nothing can be solved.
Jane from ACCA Courses

Aren't high housing prices

Aren't high housing prices evidence of a resilient economy, not the other way around?
This makes me think of a great quote from Yogi Berra: "Nobody goes there anymore; it's too crowded."

Richard Rider, Chairman San

Richard Rider, Chairman
San Diego Tax Fighters

RRider@san.rr.com

BLOG: www.RiderBlog.NotLong.com

High housing prices in California are primarily the result of artificial housing shortages caused by intense limitations on land use. And, oh yeah, our housing prices have dropped 40% or more lately.