The California Syndrome

STANFORD – California has long been a harbinger of national and global trends (both wonderful and overindulgent), a birthplace of innovation in everything from technology and entertainment to lifestyles. The world’s most important technology companies still make their start – and their headquarters – in California: Apple, Intel, Cisco, Oracle, Google, and Facebook, to name a few in the neighborhood where I teach and live.

California once was a source of widely shared rising standards of living and tremendous upward economic mobility. The state had America’s best public schools and state universities. Its citizens were less socially and economically stratified than in many other US states. After World War II, Americans migrated steadily to California, a land of opportunity, great natural beauty, and some of the world’s most fertile agricultural land.

But then something went radically wrong, and understanding why offers lessons for national and subnational governments everywhere. California’s economy, which used to outperform the rest of the country, now substantially underperforms. The unemployment rate, at 12.4%, is higher than in every other state except Nevada.

In recent years, net migration has reversed, with hundreds of thousands of workers and their families leaving the state in search of better job opportunities elsewhere. California’s public schools, from kindergarten to high school, rank poorly on standardized tests. The state is an epicenter of the housing bust and the foreclosure crisis.

Silicon Valley CEOs say they will not expand in California because of high taxes and burdensome regulation, which make the state uncompetitive. With 12% of America’s population, California accounts for more than 31% of its public-assistance recipients. It has a vast and growing prison population, with annual spending on each incarcerated inmate equivalent to a middle-income California household’s after-tax income.

Meanwhile, the state lurches from fiscal tragedy to fiscal farce. Governor Jerry Brown (who was also Governor in the 1970’s) inherits a budget deficit of $26 billion. And that’s before the coming deluge from generous public employee pensions and health costs. At the heart of California’s problem is its deranged progressive tax system, which includes among the highest personal-income, sales, corporate, and gas rates of any state. Only property taxes are below the US average.

California’s government collects about one-half of its income-tax revenue from the top 1% of the state’s taxpayers. But the system’s extreme progressivity makes proceeds so volatile that the state continually experiences boom-bust cycles of rapidly rising revenue, inevitably followed by collapse. The revenue is all spent on the upswing, forcing disruptive emergency cutbacks on the way down.

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