Making America California

January 16, 2021

Joel Kotkin

Washington Fellow

The Biden administration seems determined to run the country on the ruinous model of the Golden State.

As the Biden administration settles in and begins to formulate its agenda, progressive pundits, politicians, and activists point to California as a role model for national policy. If the administration listens to them, it would prove a disaster for America’s already-beleaguered middle and working classes.

Biden, suggests an ecstatic account in the Los Angeles Times, seeks to “make America California again,” and he will have plenty of help. Californians will run Health and Human Services, the Treasury, Homeland Security, and Energy. Former California senator Kamala Harris is vice president, and San Francisco’s Nancy Pelosi rules the House of Representatives. Progressives like Laura Tyson and Lenny Mendonca see the shift as embracing “California’s distinctive approach to market capitalism.” The Golden State, they insist, can “show the way forward” toward a more socially just future.

As a California resident for nearly half a century, I wonder if these worthies see the same state I do. California has its wonderful spots, great neighborhoods, beautiful vistas, amazing entrepreneurs, and great amenities, but it makes a poor advertisement for social democracy. It suffers the nation’s highest poverty rate and presents the widest gap between middle- and upper-middle income earners of any state. Minorities—notably African-Americans and Latinos—do worse in California’s metros than elsewhere in the country, according to a recent study that we conducted at the Urban Reform Institute. In Atlanta, African-American median incomes, adjusted for costs, are almost double those in San Francisco and Los Angeles; Latinos earn $20,000 more in midwestern and southern cities than in the enlightened metros along the California coast.

California’s vast inequality is sustained not by broad prosperity but by the presence of three of the world’s biggest technology firms—Apple, Google, and Facebook— whose shareholders generate huge capital gains. The state’s model depends as well on venture-capital firms, many of them the same funders of earlier start-ups. Rather than the dazzlingly innovative and diverse economy of its heroic past, the California economy is now dominated by giant information cartels that seem happy, like feudal lords, to divide the vast digital domain among themselves. This top-down model was embraced recently by Governor Gavin Newsom, who boasts that a new round of initial public offerings demonstrate that the state’s growing billionaire class is “doing pretty damn well.”

An economy dependent on the veritable drug rush of an IPO does not share its bounty widely. Incomes for California’s middle and working classes have been heading downward for a decade, and the poor, despite an elaborate welfare state celebrated by Tyson and Mendonca, have seen their incomes tumble, even before the pandemic. Only the top 5 percent of taxpayers have done well, while the middle quintiles, and especially the bottom quarter, have suffered negative income growth. These results, the state budget admits, are worse than in the rest of the country.

This has left the state increasingly dependent on a relative handful of taxpayers, usually beneficiaries of stocks or real-estate inflation, to fill its coffers; according to Franchise Tax Board data, 46 percent of all personal income taxes are paid by individuals in the top 1 percent, with the top 5 percent paying two-thirds of all personal income taxes. Capital-gains collections have grown five-fold since 2010, while income taxes, which made up barely one-third of the state budget in 1980, now constitute two-thirds.

Meantime, the old middle class continues to fade, and a new one is, for now, largely stillborn. California’s regulatory policies, shaped largely by climate concerns, have pushed housing prices so high that the state, according to a recent AEI survey, is home to six of the nation’s worst markets for first-time homebuyers. The state accounts for four of the nation’s six largest metros with the lowest homeownership rates and, according to a recent study by economist John Husing, unionized construction workers can’t afford any median-priced homes in any coastal California county. There is less construction going on in California—and even if you build it, you can’t afford it.

As major companies have left the state, fields like hospitality, which generally pay low wages, have become one of the few big growth industries. Over the past decade, 80 percent of the state’s new jobs, notes Chapman University business professor Marshall Toplansky, have paid under the median wage. Half of these paid less than $40,000.

The pandemic has widened class chasms nationally, but California’s gaps seem especially wide. For many working-class Californians, the harsh lockdowns have been a disaster. A state economy that produces few higher-wage jobs means the choice for many is between jobs that barely support a family and no job at all.

By contrast, many well-capitalized, larger tech and service businesses that can afford to comply with the mandated restrictions have thrived, but overall, the state in 2020 suffered among the nation’s highest unemployment rates, outdone only by tourism-dominated Hawaii, Nevada, and New Jersey. Particularly hard-hit has been Southern California, which lacks the vast tech economy of the Bay Area and has been buffeted by the shuttering of tourist facilities—over 25,000 jobs have been lost in Anaheim, for instance, home to Disneyland. Arizona State University’s Seidman Institute reports that out of the 36 U.S. metros with more than 1 million people, San Francisco and greater Los Angeles ranked toward the bottom in terms of job losses, surpassed only by Las Vegas, Detroit, and northeastern cities like Boston and New York. Los Angeles now has the highest unemployment rate of the nation’s top ten metro areas, higher even than New York’s.

Small businesses have been especially hurt by the lockdowns. One quarter of California’s small businesses, according to Opportunity Insights, an economic indicators tracker based at Harvard University, have closed since January 2020. Given the recent surge in Covid cases and intensifying lockdowns, many more are likely to disappear. The pandemic has been far kinder to the wealthy, who, according to the leftist blog The Bellows, have seen their revenues and profits soar, boosting their wealth by an estimated $1 trillion since March. Alphabet, Apple, Facebook, along with Puget Sound-based Amazon and Microsoft, now make up 20 percent of the stock market’s total worth.

The embrace of California as a model, particularly of social justice, seems badly timed. The current “boom,” centered on a handful of social media and consumer service firms, is creating nothing like the middle- and working-class prosperity of the past. More important may be the demographic evidence: for the first time in its modern history, California is losing population, not just from out-migration but from a stunning reduction of in-migration of young families and immigrants, even before the pandemic. Once the land of youth, California is now aging 50 percent faster than the rest of country, notes demographer Wendell Cox, according to the American Community Survey.

Rather than seek to expand middle-class opportunity and restore the attractiveness of the state to a broad array of industries, many, including Governor Newsom, who faces a determined recall campaign—he compares it with the Capitol riot—insist that the state “always comes back” with new companies, opportunities, and avenues for growth. This may explain their relative indifference as companies have moved out, a blasé attitude that may persist even as other iconic firms—DisneyVisa, Chevron, Uber, and Levi Strauss—consider major relocations.

Simply put, California’s performance economically, particularly for its middle and working classes, hardly constitutes a model of social justice or green accomplishment. In actual reductions of greenhouse gases, California is not the environmental icon that it pretends to be. If the largely preventable wildfires are included, the state has increased its emissions; the smoldering fires, as one environmental analyst puts it, “dwarf the state’s fossil fuel emissions.”

The apparent decision of the Biden administration to model its policies on California, particularly in terms of regulation, augurs, if anything, far worse for the rest of the country. The assault on fossil fuels—starting with the announced end of the Keystone XL Pipeline—will destroy a large number of generally well-paying union construction jobs. The banning of fracking, already endorsed by Vice President Harris, would devastate economies in less climactically blessed states like Texas, Pennsylvania, or Ohio. Similarly, California-style regulation already makes it difficult for industrial firms to reshore to the Golden State; imposing similar strictures would slow and even end the gradual shift of industry to the Midwest and other parts of the Heartland.

Under what Tyson and Mendonca call “a capitalism we can believe in,” the middle of the country will see its economies threatened even as digital revenues continue to pour into Palo Alto or San Francisco. To be sure, if intentions and rhetoric are measured, the state’s commitment to “social justice” is second to none, but the realities on the ground—in terms of income, poverty, homeownership, and minority progress—tell a different story.

In the end, the California model works only for the few—but if enough of these super-wealthy few stay put, then the Golden State might yet pretend that it can survive the effects of its policies. It’s doubtful that the rest of the country could enjoy that luxury.

Originally published by City Journal.