Wednesday, May 4, 2011

Is California's Business Climate As Bad As We Think? brings us this thought-provoking piece from Daniel Weintraub today. Citing a number of statistics, Weintraub attempts to convince us that California's economic climate isn't nearly as bad as we think.

California's economy: As sunny as a beach in San Diego. Right?
Weintraub points to several indicators of good times ahead for California. First off, he notes that California's job growth in 2010 was 1.5% (ahead of the national average of 1.3%) if you set aside losses in the government and housing sectors. And unlike the aerospace and high-tech losses of the past, he's optimistic that these lost housing and government jobs can come back. He then examines some research by the Public Policy Institute of California, and finds that the state only lost an average of 9,000 jobs per year from 1992 to 2006, hardly a dramatic decline. He also points to PPIC data suggesting that California's economic performance is better than its tax and regulatory environment would suggest. Finally, he points to the state's dominant share of venture capital investment, and suggests that investors' confidence in California's economy shouldn't be ignored.

We have a few problems with his argument. First, it's hard to discuss economic activity in a state as large as California without considering its many component parts. Some parts of California do better than others, and it's important to understand why. We wrote yesterday about tired Angelenos lured by the lower taxes and a lower cost of living in southern California's Inland Empire, and we've been following news of the resurgent growth in Silicon Valley these days as well. The point being that, while some California cities (we're looking at you, Los Angeles) have recently lost jobs and population, others have gained ground. So observations about the California economy as a broad aggregate aren't very helpful. We're also less than thrilled with his point about government and construction jobs. If the construction sector is going to pick back up, that would imply that lots of potential homeowners and businesses are waiting around to snap up a supply that isn't there; so why are prices continuing to plummet? And do we really need to answer the argument that government jobs add any economic value? We won't, but we'll guess that Weintraub is wrong about their reappearance any time soon. The state doesn't seem set for any hiring binges, and many of the jobs lost last year were temporary posts paid for by ARRA. Regarding his point about venture capital, others have pointed out the fallacy of noting California's large share of VC dollars without mentioning the precipitous decline in the overall volume of these dollars.

But the biggest problem we have with the piece is that its focus on broad statistics evades a pertinent question: if real economic growth is occurring in California, what parts of it are doing well, and why? Looked at this way, the picture is a bit less sanguine. At the forefront of the state's "growth" these days is what we fear will be a new bubble in green technologies. We noted this story in today's LA Times about Gerald Freeman, who bought the Mojave Desert ghost town of Nipton and has installed several rows of solar panels as well as the motto "Nipton, powered by the sun", in an effort to turn it into a clean-energy boomtown. We've noted the increasing prominence of government subsidies and public-private partnerships in the renewable-energy sector in California (see here, here and here), which is likely responsible for much of the "growth" we're seeing in places like Silicon Valley. But the experience of Spain should remind anyone that massive public subsidy for technologies without proven economic value can end very badly.

So how bad is California's business climate? Rather than looking at numbers that may or may not tell you what you want to know, try asking yourself instead: what would constitute a bad environment for conducting business? Here are a few criteria we'd suggest:

1. High taxes, a high cost of living, poor schools, and dangerous neighborhoods make it hard to attract and retain talented workers. California, of course, has all four in spades.

2. An uncertain regulatory environment. How can you realistically do business in a state where legislators and special interest groups might pass a new law at any time that cripples your firm? You know, something like a massive tax on oil companies, which could cause energy prices to skyrocket? Or a law giving an agency the power to tell you when your prices are too high?

3. Uncertainties about public finances, such as massive budget and pension funding gaps and poor reviews from bond rating agencies. Yep, California has all of those too.


Post a Comment