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California: Economic Laggard or Leader? – Pacific Research Institute

California: Economic Laggard or Leader?

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A just released 50-state ranking by WalletHub claims that California has the 5th best state economy in the nation. The glowing assessment would surely surprise the more than 500,000 people who left California over the past two years.

Digging into the analysis quickly reveals that California’s top five ranking results from the state’s past achievements, not its current economic health nor its future growth prospects. Documenting this reality is essential because the state’s top ranking can be easily misconstrued as confirmation that California’s current policy mix is promoting widespread prosperity.

The index ranks each state based on three categories: economic activity, economic health, and innovation potential. Economic health is comprised of nearly 20 economic indicators including each state’s unemployment rate, household income, poverty measures, numbers of new building permits issued, and fiscal health of the state budget. Unsurprisingly, California’s economic health is poor. It ranks 42 out of 51 (the rankings include Washington, D.C.).

Making matters worse for California, the fiscal health of the states were based on a 2018 analysis of the state’s fiscal environment. In other words, the ranking does not even include the more than $30 billion budget shortfall the state currently faces. Safe to say, California’s economic health is worse than this low ranking indicates.

While the state’s economic health ranking is poor, California’s economic activity (ranked #8) and innovation potential (ranked #3) rankings are strong, which is why WalletHub ranked California so highly. But in the case of California, these rankings reflect the state’s past achievements.

The innovation potential category is essentially a measure of the high-tech industry. Consequently, having the third best innovation potential should be disappointing to the state that is the home of Silicon Valley. As for California’s economic activity ranking, it is only strong because the IT industry performed so well through the Covid-19 economy. Therefore, it would also be surprising if economic activity in California was not strong.

It is clear that WalletHub ranks California as one of the nation’s best state economies because it has been the historic home of the innovation economy. It also implicitly assumes that past performance is an indicator of future returns. But the typical investor caveat applies equally to state economies as to financial assets.

Looking toward the future, the business exodus from the state is eroding California’s historic strengths. As an August 2022 Pacific Research Institute study detailing the exodus of businesses from the state noted, the

 “high-profile companies” that have moved in whole or in part just in recent years include HewlettPackard, whose founding is recognized as the birth of Silicon Valley; entrepreneur Elon Musk’s Tesla and SpaceX; Charles Schwab, founded in San Francisco in 1971; Mitsubishi; Nissan North America; Toyota Motor North America; Oracle; Palantir Technologies; and Jacobs Engineering.

A September 2022 paper by the Hoover Institution documented a comprehensive list of companies leaving California finding

that 352 companies moved their headquarters to other states just in the period from January 1, 2018, through December 31, 2021, based on either the date of the announcement or the date of documentation with the state, whichever came first. Every month in 2021, twice as many companies relocated their headquarters as in the prior year. The monthly average for 2021 also significantly exceeds the monthly averages for 2018 and 2019. California lost both very large companies, including eleven Fortune 1,000 companies between 2018-21, and small, rapidly growing companies with the potential to become transformational. From this perspective, California is not only losing current leading businesses, but potential future leading businesses as well.

Companies and families are deserting California because state policies make it too costly to conduct business, too expensive to raise a family, and too hard to have a high quality of life. All these problems are policy created. Optimistically, since errant policies create the problems, better policies can alleviate them.

It is essential to recognize that California qualifies as a top-five economy in WalletHub’s index because of its past achievements, not its future prospects. The exodus of businesses and people is a warning sign that the state cannot rely on its past indefinitely. Securing a prosperous future worthy of its past requires California to reform its anti-growth policy environment.

Dr. Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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