California Suggests Suicide; Texas Asks: Can I Lend You a Knife?

By Joel Kotkin
Forbes.com 

In the future, historians may likely mark the 2010 midterm elections as the end of the California era and the beginning of the Texas one. In one stunning stroke, amid a national conservative tide, California voters essentially ratified a political and regulatory regime that has left much of the state unemployed and many others looking for the exits.

California has drifted far away from the place that John Gunther described in 1946 as “the most spectacular and most diversified American state … so ripe, golden.”  Instead of a role model, California  has become a cautionary tale of mismanagement of what by all rights should be the country’s most prosperous big state. Its poverty rate is at least two points above the national average; its unemployment rate nearly three points above the national average.  On Friday Gov. Arnold Schwarzenegger was forced yet again to call an emergency session in order to deal with the state’s enormous budget problems.

This state of crisis is likely to become the norm for the Golden State. In contrast to other hard-hit states like Pennsylvania, Ohio and Nevada, which all opted for pro-business, fiscally responsible candidates, California voters decisively handed virtually total power to a motley coalition of Democratic-machine politicians, public employee unions, green activists and rent-seeking special interests.

In the new year, the once and again Gov. Jerry Brown, who has some conservative fiscal instincts, will be hard-pressed to convince Democratic legislators who get much of their funding from public-sector unions to trim spending. Perhaps more troubling, Brown’s own extremism on climate change policy–backed by rent-seeking Silicon Valley investors with big bets on renewable fuels–virtually assures a further tightening of a regulatory regime that will slow an economic recovery in every industry from manufacturing and agriculture to home-building.

Texas’ trajectory, however, looks quite the opposite. California was recently ranked by Chief Executive magazine as having the worst business climate in the nation, while Texas’ was considered the best. Both Democrats and Republicans in the Lone State State generally embrace the gospel of economic growth and limited public sector expenditure. The defeated Democratic candidate for governor, the brainy former Houston Mayor Bill White, enjoyed robust business support and was widely considered more competent than the easily re-elected incumbent Rick Perry, who sometimes sounds more like a neo-Confederate crank than a serious leader.

To be sure, Texas has its problems: a growing budget deficit, the need to expand infrastructure to service its rapid population growth and the presence of a large contingent of undereducated and uninsured poor people. But even conceding these problems, the growing chasm between the two megastates is evident in the economic and demographic numbers. Over the past decade nearly 1.5 million more people left California than stayed; only New York State lost more. In contrast, Texas gained over 800,000 new migrants. In California, foreign immigration–the one bright spot in its demography–has slowed, while that to Texas has increased markedly over the decade.

A vast difference in economic performance is driving the demographic shifts. Since 1998, California’s economy has not produced a single new net job, notes economist John Husing. Public employment has swelled, but private jobs have declined.  Critically, as Texas grew its middle-income jobs by 16%, one of the highest rates in the nation, California, at 2.1% growth, ranked near the bottom. In the year ending September, Texas accounted for roughly half of all the new jobs created in the country.

Even more revealing is California’s diminishing preeminence in high-tech and science-based (or STEM–Science, Technology, Engineering and Mathematics) jobs. Over the past decade California’s supposed bulwark grew a mere 2%–less than half the national rate. In contrast, Texas’ tech-related employment surged 14%. Since 2002 the Lone Star state added 80,000 STEM jobs; California, a mere 17,000.

Of course, California still possesses the nation’s largest concentrations of tech (Silicon Valley), entertainment (Hollywood) and trade (Port of Los Angeles-Long Beach). But these are all now declining. Silicon Valley’s Google era has produced lots of opportunities for investors and software mavens concentrated in affluent areas around Palo Alto, but virtually no new net jobs overall. Empty buildings and abandoned factories dot the Valley’s onetime industrial heartland around San Jose. Many of the Valley’s tech companies are expanding outside the state, largely to more business-friendly and affordable places like Salt Lake City, the Research Triangle region of North Carolina and Austin.

Hollywood too is shifting frames, with more and more film production going to Michigan, New Mexico, New York and other states. In 2002, 82% of all film production took place in California–now it’s down to roughly 30%. And plans by Los Angeles County, the epicenter of the film industry, to double permit fees for film, television and commercial productions certainly won’t help.

International trade, the third linchpin of the California economy, is also under assault. Tough environmental regulations and the anticipated widening in 2014 of the Panama Canal are emboldening competitors, particularly across the entire southern tier of the country, most notably in Houston. Mobile, Ala., Charleston, S.C., and Savannah, Ga., also have big plans to lure high-paid blue collar jobs away from California’s ports.

Most worrisome of all, these telltale signs  palpable economic decline seem to escape most of the state’s top leaders. The newly minted Lieutenant Governor, San Francisco Mayor Gavin Newsom, insists “there’s nothing wrong with California” and claims other states “would love to have the problems of California.”

But it’s not only the flaky Newsom who is out of sync with reality. Jerry Brown, a far savvier politician, maintains “green jobs,” up to 500,000 of them, will turn the state around. Theoretically, these jobs might make up for losses created by ever stronger controls on traditional productive businesses like agriculture, warehousing and manufacturing. But its highly unlikely.

Construction will be particularly hard hit, since Brown also aims to force Californians, four-fifths of whom prefer single-family houses, into dense urban apartment districts. Over time, this approach will send home prices soaring and drive even more middle-class Californians to the exits.

Ultimately the “green jobs” strategy, effective as a campaign plank, represents a cruel delusion. Given the likely direction of the new GOP-dominated House of Representatives in Washington, massive federal subsidies for the solar and wind industries, as well as such boondoggles as high-speed rail, are likely to be scaled back significantly.  Without subsidies, federal loans or draconian national regulations, many green-related ventures will cut as oppose to add jobs, as is already beginning to occur. The survivors, increasingly forced to compete on a market basis, will likely move to China, Arizona or even Texas, already the nation’s leader in wind energy production.

Tom Hayden, a ’60s radical turned environmental zealot, admits that given the current national climate the only way California can maintain Brown’s “green vision” will be to impose “some combination of rate heights and tax revenues.”  Such an approach may help bail out green investors, but seems likely to drive even more businesses out of the state.

California’s decline is particularly tragic, as it is unnecessary and largely unforced. The state still possesses the basic assets–energy, fertile land, remarkable entrepreneurial talent–to restore its luster. But given its current political trajectory, you can count on Texans, and others, to keep picking up both the state’s jobs and skilled workers. If California wishes to commit economic suicide, Texas and other competitors will gladly lend them a knife.