City Journal

Joel Kotkin
The Golden State’s War on Itself
How politicians turned the California Dream into a nightmare
Summer 2010

California has long been a destination for those seeking a better place to live. For most of its history, the state enacted sensible policies that created one of the wealthiest and most innovative economies in human history. California realized the American dream but better, fostering a huge middle class that, for the most part, owned their homes, sent their kids to public schools, and found meaningful work connected to the state’s amazingly diverse, innovative economy.

Recently, though, the dream has been evaporating. Between 2003 and 2007, California state and local government spending grew 31 percent, even as the state’s population grew just 5 percent. The overall tax burden as a percentage of state income, once middling among the states, has risen to the sixth-highest in the nation, says the Tax Foundation. Since 1990, according to an analysis by California Lutheran University, the state’s share of overall U.S. employment has dropped a remarkable 10 percent. When the state economy has done well, it has usually been the result of asset inflation—first during the dot-com bubble of the late 1990s, and then during the housing boom, which was responsible for nearly half of all jobs created earlier in this decade.

Since the financial crisis began in 2008, the state has fared even worse. Last year, California personal income fell 2.5 percent, the first such fall since the Great Depression and well below the 1.7 percent drop for the rest of the country. Unemployment may be starting to ebb nationwide, but not in California, where it approaches 13 percent, among the highest rates in the nation. Between 2008 and 2009, not one of California’s biggest cities outperformed such traditional laggards as New York, Pittsburgh, and Philadelphia in employment growth, and four cities—Los Angeles, Oakland, Santa Ana, and San Bernardino–Riverside—sit very close to the bottom among the nation’s largest metro areas, just slightly ahead of basket cases like Detroit. Long a global exemplar, California is in danger of becoming, as historian Kevin Starr has warned, a “failed state.”

What went so wrong? The answer lies in a change in the nature of progressive politics in California. During the second half of the twentieth century, the state shifted from an older progressivism, which emphasized infrastructure investment and business growth, to a newer version, which views the private sector much the way the Huns viewed a city—as something to be sacked and plundered. The result is two separate California realities: a lucrative one for the wealthy and for government workers, who are largely insulated from economic decline; and a grim one for the private-sector middle and working classes, who are fleeing the state.

Graph by Alberto Mena.

The old progressivism began in the early 1900s and lasted for half a century. It was a nonpartisan and largely middle-class movement that emphasized fostering economic growth—the progressives themselves tended to have business backgrounds—and building infrastructure, such as the Los Angeles Aqueduct and the Hetch Hetchy Reservoir. One powerful progressive was Republican Earl Warren, who governed the state between 1943 and 1953 and spent much of the prospering state’s surplus tax revenue on roads, mental health facilities, and schools. Another was Edmund G. “Pat” Brown, elected in 1958, who oversaw an aggressive program of public works, a rapid expansion of higher education, and the massive California Water Project.

But by the mid-1960s, as I noted in an essay in The American two years ago, Brown’s traditional progressivism was being destabilized by forces that would eventually transform liberal politics around the nation: public-sector workers, liberal lobbying organizations, and minorities, which demanded more and more social spending. This spending irritated the business interests that had formerly seen government as their friend, contributing to Brown’s defeat in 1966 by Ronald Reagan. Reagan was far more budget-conscious than Brown had been, and large declines in infrastructure spending occurred on his watch, mostly to meet a major budget deficit.

The decline of progressivism continued under the next governor: Pat Brown’s son, Edmund G. “Jerry” Brown, Jr., who took office in 1975. Brown scuttled infrastructure spending, in large part because of his opposition to growth and concern for the environment. Encouraged by “reforms” backed by Brown—such as the 1978 Dill Act, which legalized collective bargaining for them—the public-employee unions became the best-organized political force in California and currently dominate Democrats in the legislature (see “The Beholden State,” Spring 2010). According to the unions, public funds should be spent on inflating workers’ salaries and pensions—or else on expanding social services, often provided by public employees—and not on infrastructure or higher education, which is why Brown famously opposed new freeway construction and water projects and even tried to rein in the state’s university system.

The power of the public-employee lobby would come to haunt the recall-shortened gubernatorial reign of Gray Davis, Brown’s former chief of staff. The government workers’ growing demands on the budget, green groups’ opposition to expanding physical infrastructure, and Republican opposition to tax increases made it impossible for either Davis or his successor, Arnold Schwarzenegger, to expand the state’s infrastructure at a scale necessary to accommodate its growing population.

The new progressives were as unenthusiastic about welcoming business as about building infrastructure. Fundamentally indifferent or even hostile to the existing private sector, they embraced two peculiar notions about what could sustain California’s economy in its place. The first of these was California’s inherent creativity—a delusion held not only by liberal Democrats. David Crane, Governor Schwarzenegger’s top economic advisor, once told me that California could easily afford to give up blue-collar jobs in warehousing, manufacturing, or even business services because the state’s vaunted “creative economy” would find ways to replace the lost employment and income. California would always come out ahead, he said, because it represented “ground zero for creative destruction.”

Graph by Alberto Mena.

The second engine that could supposedly keep California humming was the so-called green economy. Michael Grunwald recently wrote in Time, for example, that venture capital, high tech, and, above all, “green” technology were already laying the foundation of a miraculous economic turnaround in California. Though there are certainly opportunities in new energy-saving technologies, this is an enthusiasm that requires some serious curbing. One recent study hailing the new industry found that California was creating some 10,000 green jobs annually before the recession. But that won’t heal a state that has lost 700,000 jobs since then.

At the same time, green promoters underestimate the impact of California’s draconian environmental rules on the economy as a whole. Take the state’s Global Warming Solutions Act, which will force any new development to meet standards for being “carbon-neutral.” It requires the state to reduce its carbon-emissions levels by 30 percent between 1990 and 2020, virtually assuring that California’s energy costs, already among the nation’s highest, will climb still higher. Aided by the nominally Republican governor, the legislation seems certain to slow any future recovery in the suffering housing, industrial, and warehousing sectors and to make California less competitive with other states. Costs of the act to small businesses alone, according to a report by California State University professors Sanjay Varshney and Dennis Tootelian, will likely cut gross state product by $182 billion over the next decade and cost some 1.1 million jobs.

It’s sad to consider the greens such an impediment to social and economic health. Historically, California did an enviable job in traditional approaches to conservation—protecting its coastline, preserving water and air resources, and turning large tracts of land into state parks. But much like the public-sector unions, California’s environmental movement has become so powerful that it feels free to push its agenda without regard for collateral damage done to the state’s economy and people. With productive industry in decline and the business community in disarray, even the harshest regulatory policies often meet little resistance in Sacramento.

In the Central Valley, for instance, regulations designed to save certain fish species have required 450,000 acres to go fallow. Unemployment is at 17 percent across the Valley; in some towns, like Mendota, it’s higher than 40 percent. Rick Wartzman, director of the Peter Drucker Institute, has described the vast agricultural region around Fresno as “California’s Detroit,” an area where workers and businesspeople “are fast becoming a more endangered species than Chinook salmon or delta smelt.” The fact that governments dominated by “progressives” are impoverishing whole regions isn’t merely an irony; it’s an abomination.

So much for the creative green economy. As for the old progressives’ belief that government shouldn’t scare away productive, competitive, long-term enterprise, that, too, has been abandoned by their successors. “Our economy is not inducing the right kind of business,” says Larry Kosmont, a prominent business consultant in Los Angeles. “It’s too expensive to operate here, and managers feel squeezed. They feel they can’t control the circumstances any more and have to look somewhere else.” The problem isn’t just corporate costs, either. The regulatory restraints, high taxes, and onerous rules enacted by the new progressives lead to high housing prices, making much of California too expensive for middle- and working-class employees and encouraging their employers to move elsewhere.

Silicon Valley, for instance—despite the celebrated success of Google and Apple—has 130,000 fewer jobs now than it had a decade ago, with office vacancy above 20 percent. In Los Angeles, garment factories and aerospace companies alike are shutting down. Toyota has abandoned its Fremont plant. California lost nearly 400,000 manufacturing jobs between 2000 and 2007, according to a report by the Milken Institute—even as industrial employment grew in Texas and Arizona. A sign of the times: transferring factory equipment from the Bay Area to other locales has become a thriving business, notes Tom Abate of the San Francisco Chronicle.

Optimists sometimes point out that “new economy” companies like Disney, Google, Hewlett-Packard, and Apple, as well as scores of smaller innovative firms, continue to keep their headquarters in the state. But this is to ignore the fact that many of these companies are sending their middle- and working-class employees to other locales. Evidence of middle-class flight: since 1999, according to California Lutheran University, the state has seen a far steeper decline in households earning between $35,000 and $75,000 than the national average. And blue-collar areas—Oakland, the eastern expanses of greater Los Angeles, and much of central California—have been hit even harder. California’s overall poverty rate has been consistently higher than the national average. In Los Angeles County alone, some 20 percent of the population—2.2 million people—receives some form of public aid.

Graph by Alberto Mena.

In short, the economy created by the new progressives can pay off only those at the peak of the employment pyramid—top researchers, CEOs, entertainment honchos, highly skilled engineers and programmers. As a result, California suffers from an increasingly bifurcated social structure. Between 1993 and 2007, the share of the state’s income that went to the top 1 percent of earners more than doubled, to one-quarter—the eighth-largest share in the country.

For these lucky earners, a low-growth or negative-growth economy works just fine, so long as stock prices rise. For their public-employee allies, the same is true, so long as pensions remain inviolate. Global-warming legislation may drive down employment in warehouses and factories, but if it’s couched in rhetoric about saving the planet, these elites can even feel good about it.

Under the new progressives, it’s always hoi polloi who need to lower their expectations. More than four out of five Californians favor single-family homes, for example, but progressive thinkers like Robert Cruickshank, writing in California Progress Report, want to replace “the late 20th century suburban model of the California Dream” with “an urban, sustainable model that is backed by a strong public sector.” Of course, this new urban model will apply not to the wealthy progressives who own spacious homes in the suburbs but to the next generation, largely Latino and Asian. Robert Eyler, chair of the economics department at Sonoma State University, points out that wealthy aging yuppies in Sonoma County have little interest in reviving growth in the local economy, where office vacancy rates are close to those in Detroit. Instead, they favor policies, such as “smart growth” and an insistence on “renewable” energy sources, that would make the area look like a gated community—a green one, naturally.

Graph by Alberto Mena.

California’s supposedly progressive economics have had profound demographic consequences. After serving as a beacon for millions of Americans, California now ranks second to New York—and just ahead of New Jersey—in the number of moving vans leaving the state. Between 2004 and 2007, 500,000 more Americans left California than arrived; in 2008, the net outflow reached 135,000, much of it to the very “dust bowl” states, like Oklahoma and Texas, from which many Californians trace their origins. California now has a lower percentage of people who moved there within the last year than any state except Michigan. Even immigration from abroad seems to be waning: a recent University of Southern California study shows the percentage of Californians who are foreign-born declining for the first time in half a century. For the first time in its history as a state, as political analyst Michael Barone has noted, California is not on track to gain a new congressional district after the 2010 census.

This demographic pattern only reinforces the hegemony of environmentalists and public employees. In the past, both political parties had to answer to middle- and lower-middle-class voters sensitive to taxes and dependent on economic growth. But these days, with much of the middle class leaving, power is won largely by mobilizing activists and public employees. There is little countervailing pressure from local entrepreneurs and businesses, which tend to be poorly organized and whose employee base consists heavily of noncitizens. And the legislature’s growing Latino caucus doesn’t resist regulations that stifle jobs—perhaps because of the proliferation of the California equivalent of “rotten boroughs”: Latino districts with few voters where politicians can rely on public employees and activists to dominate elections.

Blessed with resources of topography, climate, and human skill, California does not need to continue its trajectory from global paragon to planetary laughingstock. A coalition of inland Latinos and Anglos, along with independent suburban middle-class voters in the coastal areas, could begin a shift in policy, reining in both public-sector costs and harsh climate-change legislation. Above all, Californians need to recognize the importance of the economic base—particularly such linchpins as agriculture, manufacturing, and trade—in reenergizing the state’s economy.

The changes needed are clear. For one thing, California must shift its public priorities away from lavish pensions for bureaucrats and toward the infrastructure critical to reinvigorating the private sector. The state’s once-vaunted power system routinely experiences summer brownouts; water supplies remain uncertain, thanks to environmental legislation and a reluctance to make new investments; the ports are highly congested and under constant threat of increased competition from the southeastern United States, the Pacific Northwest, and eventually Mexico’s Baja California. Fixing these problems would benefit the state’s middle and working classes. Lower electrical costs would help preserve industrial facilities—from semiconductor and aerospace plants to textile mills. Reinvestment in trade infrastructure, such as ports, bridges, and freeways, would be a huge boon to working-class aspirations, since ports in Southern California account for as much as 20 percent of the area’s total employment, much of it in highly paid, blue-collar sectors.

Another potential opportunity lies in energy, particularly oil. California has enormous reserves not just along its coast but also in its interior. The Democrats in the legislature, which seems determined to block expanded production, have recently announced plans to increase taxes on oil producers. A better solution would be a reasonable program of more drilling, particularly inland, which would create jobs and also bring a consistent, long-term stream of much-needed tax revenue.

These shifts would likely appeal to voters in the areas—such as the Central Valley and the “Inland Empire” around Riverside—that have been hurt most by the recession and the depredations of the hyper-regulatory state. Indeed, the disquiet in the state’s interior could make the coming gubernatorial election the most competitive in a decade. Jerry Brown, the Democratic candidate, certainly appears vulnerable: his campaign is largely financed by the same public-sector unions whose expansion he fostered as governor; more recently, serving as state attorney general, he was the fiercest enforcer of the Global Warming Solutions Act, which opens him to charges that he opposes economic growth. One hopeful sign that pragmatism may be back in fashion: a new proposed ballot measure to reverse the act until unemployment drops below 5.5 percent, where it stood before the recession. Since unemployment is currently near 13 percent, that would take radical change off the table for quite a while.

Still, it isn’t certain that California’s inept and often clueless Republicans will mount a strong challenge. For them to do so, business leaders need to get back in the game and remind voters and politicians alike of the truth that they have forgotten: only sustained, broadly based economic growth can restore the state’s promise.

Joel Kotkin is a fellow at Chapman University in Orange, California. He thanks the Economic Research and Forecasting Project at California Lutheran University for providing analysis and charts.

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