If California is such an ‘anti-business’ state, why is its economy booming?

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California Gov. Gavin Newsom


MAY 10, 2021 11:46 AM PT

Is there anything that breeds more cognitive dissonance in the heads of business prognosticators than the performance of the California economy?

The question is inspired by the release of yet another survey placing California in the basement among states as measured by their receptivity to business.

This one comes to us from Chief Executive magazine via its annual “best & worst states for business” survey.

In the 2021 survey, published April 28, California held its perennial spot as the worst state for business. The outcome was so predictable that the magazine’s editors turned it into a joke: “Just guess” which state ranked 50th, its headline said, with a knowing wink.

Indeed. The most foreseeable aspect of such surveys is that California will rank near or at the bottom. Unfortunately for their credibility, the most predictable aspect of economic growth in the United States is that California will rank at or near the top.

How can we reconcile these contradictory facts? The answer isn’t hard to find. It’s that these surveys don’t actually measure a state’s business climate or economic potential.

How can we reconcile these contradictory facts? The answer isn’t hard to find. It’s that these surveys don’t actually measure a state’s business climate or economic potential.

Rather, they’re concerned with a state’s conformity to right-wing shibboleths concerned with what makes a business-friendly environment.

Many of the particulars don’t have much to do with economic potential in the real world. The rankings favor states with low taxes and little regulation. They give states high marks for low minimum wages and low-staffed, if not understaffed, public services, as well as right-to-work laws, an obstacle to unionization.

Is there any wonder why CEOs prefer states that don’t tax their income and help them keep their workforce on the defensive — such as Texas and Florida, perpetual winners in the CEO survey?

Notwithstanding the dismissal of California’s business friendliness in the Chief Executive survey, the state’s economic growth outstrips the four states at the top of the magazine’s rankings.

From the end of the last recession through 2019, according to the Bureau of Economic Analysis, California’s economy grew 34.4%, Florida’s by 23.2%, Tennessee’s by 18.9% and North Carolina’s by 16.7%. The only one of the four to keep pace with California in that time span was Texas, at 34.0%.

This isn’t to praise California’s governance — the state’s inability to address its dearth of affordable housing is a scandal and an obstacle to future growth, for one thing — but to underscore the stupidity of business-climate surveys.

We’ve raised this issue before, in relation to the most prominent example. That’s the “Rich State, Poor State” series produced annually since 2008 by the Koch-backed American Legislative Exchange Council, a leading promoter of state right-to-work laws, deregulation and tax cuts.

The series bears the bylines of conservative economist Arthur Laffer and Stephen Moore, who has held posts at the Heritage Foundation, Club for Growth and other conservative think tanks.

As we reported in 2019, when Moore was nominated by then-President Trump for a seat on the Federal Reserve Board (he eventually withdrew), the survey purports to judge every state’s “economic outlook.”

By that standard, “Rich States, Poor States” has been dead wrong every year: In all but one edition, California ranked among the worst seven states, while outpacing the top-ranked states in economic growth year after year after year.

The Chief Executive survey bears the same flaw. The magazine says its surveyed CEOs place the highest priorities on “tax policy (37% rank it first), regulatory climate (35%) and talent availability (25%).”

Yet these factors don’t inherently have good or bad effects on business climate. Taxes that are too low to fund basic public services aren’t a virtue, and no intelligent CEO is going to prefer a state with potholed roads and dysfunctional courts to one with serviceable transportation infrastructure and efficient venues to work out their legal disagreements.

Tax structure matters too. One would guess that when CEOs complain about high taxes, they’re typically referring to income taxes, not the sales taxes that hit middle- and working-class households the worst. (As it happens, the “Rich State, Poor State” survey gives high marks to states with low progressivity in their tax brackets, which favors high-income individuals.)

Deregulation is alluring for CEOs who run polluting industries, not so much for those whose companies are incumbents in highly regulated fields — for them, regulation can be a way to raise the bar against new competitors.

As for “talent availability,” if that means access to a well educated workforce, it militates against low taxes, which often leave K-12 and public higher education systems starved for funds.

In any event, surveys such as these tend to undervalue the more inchoate factors in a state’s economic growth. These might include proximity to key markets and key suppliers — that would raise the ranking of California, which boasts both the largest consumer market in the country and easy access to Asian markets and vendors.

The state also boasts a self-reinforcing critical mass of high-level intellectual talent. California consistently shows a net inflow of individuals with bachelor‘s and graduate degrees.

The state also boasts a self-reinforcing critical mass of high-level intellectual talent. California consistently shows a net inflow of individuals with bachelor‘s and graduate degrees.

Naysayers often cavil that California’s economic growth depends almost entirely on Silicon Valley and the capital gains income of its wealthiest residents, but the state’s primacy in high technology encompasses fields outside Northern California, such as biotech.

“We have more scientists, researchers and engineers, more Nobel laureates, and the finest system of higher education anywhere in the world,” Gov. Gavin Newsom said in response to an earlier version of the Chief Executive survey.

The Chief Executive survey reads as if its respondents and its editors decided first which states they wished to praise or damn, then cooked up rationales to support their judgments.

The survey praises No. 2-ranked Florida for its “winning optics in a dismal year.” The reference is to the state’s determination to keep its businesses open during the pandemic, but it doesn’t factor in the costs.

As of this writing, in the most recent seven-day per capita averages, Florida ranks eighth among all states in new COVID-19 cases and fourth in its death rate. The Centers for Disease Control and Prevention place the state in its highest category of level of transmission of the virus.

Drill down deep enough into the survey, however, and one can find nuggets of reality.

“To all but the most hardcore fan, the scene in Texas isn’t pretty right now,” Chief Executive acknowledged in a state-specific sidebar to its main rankings. “The freak mid-February winter storm and collapse of its power system delivered a haymaker and wobbled the Lone Star State in the opinion of CEOs across the country for the first time since the 1980s.”

That was true as far as it went, but it didn’t go far enough: The Texas deep freeze exposed the fundamental inadequacy of the state’s deregulatory approach to energy, including sealing off its power grid from other states to evade federal oversight.

As for California, the magazine concedes that while “the Golden State often ends up at the bottom of Chief Executive’s list of the Best and Worst States, … there is no shortage of companies eager to invest in new projects and expand here. Despite the regulations, taxes and high cost of living, many find the availability of talent, access to ports and Asian markets and incentives attractive.”

California obviously has no call to rest on its economic laurels. Homelessness, high costs, climate change and myriad other factors could knock its economy off its nation-leading perch. The state’s uneven response to those issues is a disquieting aspect of the state’s position.

On the other hand, the state is a leader in efforts to improve air quality, in water conservation, in minority rights and other factors that can contribute to real economic growth. Those are the factors to keep one’s eyes on, not the self-interested grousing of CEOs and right-wing partisan litmus tests.

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