Something doesn’t add up. People like me have been explaining that California is an example of policies to avoid. Depending on my mood, I’ll refer to the state as the France, Italy, or Greece of the United States.
But folks on the left are making the opposite argument.
A writer for the Huffington Post tells readers that California is proof that the blue-state model can work.
Many factors contribute to California’s preeminence; one being its liberalism. Republicans don’t like to acknowledge California’s success.
…The state’s job growth outpaced the nation’s in the first nine months of last year. California’s non-farm employment of 15.7 million people is at an all-time high. …California’s economy has thrived in spite of relatively high taxes and stringent regulations.
Meanwhile, a couple of columnists for the Washington Post are doing a victory dance based on recent California numbers.
…the…experiences of California…run counter to a popular view, particularly among conservative economists, that tax cuts tend to supercharge growth and tax increases chill it. California’s economy grew by 4.1 percent in 2015, according to new numbers from the Bureau of Economic Analysis, tying it with Oregon for the fastest state growth of the year. That was up from 3.1 percent growth for the Golden State in 2014, which was near the top of the national pack. …almost no one can say that raising taxes on the rich killed that recovery.
And let’s not forget that Paul Krugman attacked me two years ago for failing to acknowledge the supposed success story of job creation in California. I thought he made a very silly argument since the Golden State at that time had the 5th-highest unemployment rate in the nation.
But Krugman and the other statists cited above do have a semi-accurate point. There are some statistics showing that California has out-performed many other states over the past couple of years. Let’s look at the numbers. The St. Louis Federal Reserve Bank has a helpful website filled with all sorts of economic data, including figures from the Bureau of Economic Analysis on per-capita income in states.
I selected California for the obvious reason, but also Texas (since it’s often seen as the quintessential “red state”) and Kansas (which has become infamous for a big tax cut). And, lo and behold, if you look at what’s happened to per-capita income in those states, California has enjoyed the most growth.
Is this evidence that high taxes and a big welfare state are good for growth?
Hardly. California’s numbers only look decent because the state fell into a deep hole during the recession. And, generally speaking, a severe recession almost always is followed by good numbers, even if an economy is simply getting back to where it started.
So let’s expand on the above numbers and look at what’s happened not just over the past five years, but also since 2000 and 2005.
And if you look at California’s relative performance over a 10-year period or 15-year period, all of a sudden the Golden State looks a bit tarnished.
By the way, these numbers are not adjusted for either inflation or for cost of living. The former presumably doesn’t matter for our purposes since changing to inflation-adjusted dollars wouldn’t alter the rankings. Meanwhile, the data on cost of living would matter for comparative living standards (for instance, $46,745 in Texas probably buys more than $52,651 in California), but remember that we’re focusing on changes in per-capita income (i.e., which state is enjoying the most growth, regardless of starting point or how much money can buy in that state).
In any event, the numbers clearly show there’s more long-run growth in Texas and Kansas, and it’s long-run growth rates that really matter if you want more prosperity and higher living standards for people.
But let’s not stop there. Our left-wing friends frequently tell us that per-capita income numbers are sometimes a poor measure of overall prosperity since a few rich people can skew the average.
It’s better, they tell us, to look at median household income since that’s a measure of the well-being of ordinary people. And we can get those numbers (only through 2014, though adjusted for inflation) from the Census Bureau. What does this data show for Texas, California, and Kansas?
As you can see, California is in last place, regardless of whether the starting point is 2000, 2005, or 2010. In other words, California may have enjoyed some decent growth in recent years as it got a bit of a bounce from its deep recession, but it appears that the benefits of that growth have mostly gone to the Hollywood crowd and the Silicon Valley folks. I guess this is the left-wing version of “trickle down” economics.
Perhaps most interesting, the short-run numbers show that tax-cutting Kansas has a comfortable lead over tax-hiking California.
If that trend continues, then over time we can expect that the long-run numbers will begin to diverge as well.
Let’s close by looking at some analysis about those two states for those who want some additional perspective.
Victor David Hanson, a native Californian, has a pessimistic assessment of his state. Here’s some of what he wrote for Real Clear Politics.
The basket of California state taxes — sales, income and gasoline — rates among the highest in the U.S. Yet California roads and K-12 education rank near the bottom. …One in three American welfare recipients resides in California. Almost a quarter of the state population lives below or near the poverty line. …the state’s gas and electricity prices are among the nation’s highest. …Current state-funded pension programs are not sustainable. California depends on a tiny elite class for about half of its income tax revenue. Yet many of these wealthy taxpayers are fleeing the 40-million-person state, angry over paying 12 percent of their income for lousy public services. …Connecticut and Alabama combined in one state. A house in Menlo Park may sell for more than $1,000 a square foot. In Madera three hours away, the cost is about one-tenth of that. In response, state government practices escapism, haggling over transgendered restroom issues and the aquatic environment of a 3-inch baitfish rather than dealing with a sinking state.
The bottom line is that he fears the trend line for his state is moving in the wrong direction.
John Hood takes a look at why the Kansas tax cuts have resulted in budget turmoil, while tax cuts in has state of North Carolina haven’t caused much controversy.
How did Kansas and North Carolina end up in such different conditions? For one thing, while the two states both enacted major tax cuts, they weren’t structured the same way. Kansas punched a large hole in its income-tax base by excluding self-employment income. North Carolina briefly created a version of this exclusion in the immediate aftermath of the Great Recession, but then wisely eliminated it in favor of applying a low, uniform tax rate on a broad base of personal income. In Kansas, lawmakers also allowed themselves to be bamboozled by some out-of-state tax “experts” claiming that cutting income taxes would generate so much new investment, entrepreneurship, and population growth that the revenue loss to the state would be substantially offset. This can actually be true, of course — in the very long run, counted in decades. In the short run of state budgeting, however, policymakers are better off making far more conservative assumptions about revenue feedbacks. …Our state policymakers didn’t just reduce and reform taxes. They also controlled expenditures. Since the enactment of the 2013 tax changes, their authorized budgets have never pushed spending growth above the combined rates of inflation and population growth. Actual spending, in fact, has often come in below even these budgeted amounts.
John’s message is that pro-growth tax cuts don’t generate overnight miracles. Lawmakers have to be prudent when calculating Laffer Curve feedback. And they also should make sure there is concomitant restraint on the spending side of the budget.
The bottom line is that the Kansas tax cuts are good for the state’s economy, but they might not be sustainable unless politicians don’t quickly make reforms to cap spending.
P.S. Closing with some California-specific humor, this Chuck Asay cartoon speculates on how future archaeologists will view California. This Michael Ramirez cartoon looks at the impact of the state’s class-warfare tax policy. And this joke about Texas, California, and a coyote is among my most-viewed blog posts.
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Excellent article
What I would like to see in addition would be a comparison of a few other items
1) Median household income VS State & Local Taxation
2) Median household income VS Cost of living items such as Transportation/Groceries/etc
3) Relationship of State GDP to State Government revenue
4) Historical view of the housing market and other investment assets
5) Business growth over the past couple of decades
I would expect to see California further decline in these measures when compared against other States in America. Just from those I have talked to who have exited California in the past 3-4 years, they cited these issues as their reason for leaving the state. They indicated that everything was declining in California, and its residents were simply crumbling from the excessive weight of taxation and regulation
Take this with a grain of salt as it was generated from the Marxist=Leninists of the New York Times. However the financial data indicates which states are failing in income in equality (a Marxist dialectical analysis). A Wise person can observe this chart as failure of the state’s economy for its poor and middle class. Take a look at disastrous California results where its poor and middle class are under water until the Very Wealth 10% of its population.
http://www.nytimes.com/interactive/2016/09/06/upshot/up-geo-inequality.html?smid=pl-share&_r=0
[…] I wrote recently to debunk the left’s claim that California is an economic success story. My main point was to share per-capita income data from the BEA to who that California has been losing ground over the medium-term and long-term to states such as Kansas and Texas. And even in the short-term as well if you look at Census Bureau data on median household income. […]
So this begs the 64 trillion dollar deduction:
What happens in the US first happens in CA.
CA is in decline as any non poverty loving CA resident person will tell you
Therefore, in 15 years does the entire USA look like CA?
CA is to the USA much like the USA is to the rest of the world. The amount of wealth built up in the past is so large that even though it is now eating its capital It can still look shiny and strong from the carefully chose angles. However, on closer inspection the duct tape and holes are there.
Much of California’s statistics is masked by non-reporting of unemployment, and movement of people. I can explain a bit (but its not the whole story either). After a few months of gathering unemployment, those benefits disappear. At that point, the “unemployed” person disappears off the statistically counted masses. So, when unemployment continues long enough, there is a statistically large population out there who no longer take money from that public pocket, and are also no longer counted as unemployed. That skews the statistics.
Thanks in part to this fact- among others- as your cartoon shows, they move to Texas. In the process, they sell a hovel in California, and buy a mansion in Texas- usually Austin. The town of Austin has been seeing growth of 130 people per day for the last year. Talk about messing up the roads! And house prices skyrocket.
Now on the one hand that is a good thing, because it allowed me to sell my hovel in Austin and buy a nice place in a town north of there on the lake. And ended up with pocket money to boot.
The sad part is that when these Californians move into Texas, they bring their voting habits with them. How long can it be before our great state suffers the same fate as California?
The lesson here is that any time someone makes a claim about the before and after effect of any fiscal policies, you have to take into account whether any gains are the result of natural business cycle/post recession factors.
Clearly California had an edge in this area because of something that had nothing to do with bigger government policies (having more to gain due to bigger previous losses).
–
This is something minimum wage supporters mislead with. They pass increases only *after* it’s clear that employment is destined to rise over the coming time period anyway, so the negative effects are masked.
Definitely a methodological issue to be on the lookout for in any news article or policy study!
By the way, I’m glad to see you’re syndicated in FEE now Dan. You’re the most prolific wonk I’ve regularly followed for several years ever since I first encountered your YouTube videos. Keep doing what you do!
“Like almost every state, California’s population is at an all time high. It also has by far the largest population of any state in the country.”
And I’m just baffled that this incredibly obvious mistake is made in virtually every mass media report I read. They routinely pull out statistics that just aren’t remotely comparable.
What is the malfunction here? How does even the most junior reporter not see something wrong with this?
You could also add that the unemployment rate in California has been higher than the national average every month since the 1990 recession (no, that’s not a typo).
I’m also not sure what this sentence from that Huffington Post article is supposed to prove: “California’s non-farm employment of 15.7 million people is at an all-time high”
Like almost every state, California’s population is at an all time high. It also has by far the largest population of any state in the country. In percentage terms, the employment/population ratio in CA is currently lower than the national rate.
That is the quintessential drama of growth vs elections and democracy.
The redistribution of tax is immediate but fixed, while growth is longer term but exponentially compounding.
Growth is too slow to be noticed in the electoral cycle, yet its compounding relentless — either above par growth compounds you into orbit (America) — or subpar growth crushes you in the ditch (Argentina).
Very few — extremely rare — are the electorates that make the wise choice. But they are the ones that always forge the future of humanity amongst the ruins of the coercively collectivist masses.
Economic standard of living on more income in California is most often lower than standard of living in Texas on lower income — eg. when green housing policies have restricted housing supply to the point where you either pay over a million for a house or you live in an eight hundred square foot apartment building by the railroad tracks.
What accounts for most of the California advantage is the endowment of a superior climate. Attributing California’s (nominal) prosperity to high taxes is like praising monarchy for creating wealth in Saudi Arabia.
Perhaps most important: Jurisdictions endowed with natural beauty and pleasant natural living conditions naturally attract a disproportionate fraction of low productivity people who can benefit from the (free) non pecuniary benefits available. Eventually these people establish an environment of strong redistribution which eventually deadlocks society into a slower growth decline pattern — they have a tendency of becoming basket cases. The story of California is still evolving.
There is generally an inverse relationship between natural/geographical endowments and economic performance.
Good work. Would be nice to see comparison to national averages too.