Some conservatives regard California as a lost cause, its economy and society doomed to decline. Yet despite its awful regulatory regime, the state retains its natural bounty and an edge in many key industries. California’s atrocious business environment is the chief threat to its position—but if lawmakers can engineer a policy turnaround, then the Golden State’s ultimate demise is far from guaranteed.
California’s declining lead in tech reflects the erosion of an older consensus, when both parties supported economic growth by investing in physical and human infrastructure. The state recovered, for example, after the post–Cold War aerospace collapse, most notably in the San Francisco Bay Area. Even today, California holds on to much of its lead in innovative industries. We at Chapman University’s Center for Demographics and Policy recently examined the state’s relative strength, finding, according to the 2021 Census of Employment and Wages data from the Bureau of Labor Statistics, 43 industries in which California boasted at least double the national level of employment on a per-capita basis.
Many of these are cutting-edge industries. Take, for example, agriculture technology, especially products that boost yields amid increasingly onerous climate regulations. California’s farmers have suffered, until this year, through a drought and unstable water supplies. But no place has been more agriculturally innovative. Agrifood-tech startups in the state gathered $5.6 billion in venture capital in 2020, more than the next four states combined—and 20 percent of the worldwide total.
Next, consider the space industry. San Diego, Los Angeles, and Orange Counties have well over double the national average of space workers and companies. The intellectual capital created by these firms often spills over into other technology sectors. According to the Bureau of Labor Statistics, California is home to 115 space-related companies, well ahead of second-place Florida and more than five times as many as in Texas. This sector and aerospace provide 500,000 high-paying jobs.
Perhaps most critical is the computing industry, which includes the core technologies that come from semiconductor design, as well as associated applications and services. Semiconductors are the nation’s fifth-largest export and California’s largest. Overall, California employs 695,000 more computer-related workers than any other state, including 250,000 more than Texas.
Yet California is losing ground in virtually all the above areas. The state has experienced slower growth in the broad group of computer- and math-based industries. Occupational employment statistics from the Census Bureau rank California 22nd in percentage growth of jobs in that sector from 2017 to 2022, well behind the leading states (Tennessee, New Mexico, Utah, and Florida).
Research conducted at Chapman University finds no California metro placing in the Top Ten markets for growth in advanced industries. Nashville, the fastest-growing area for advanced industries, grew more than five times faster than relatively buoyant San Diego between the fourth quarter of 2019 and the fourth quarter of 2021. While San Jose, San Francisco, and San Diego remain in the Top Five in advanced-industry employment, business establishments, and wage levels, such cities as Salt Lake City and Phoenix are accumulating a critical mass to challenge California’s domination.
To maintain its claim to being the home of the future, California has to fend off growing competition from other states and foreign countries. An unprecedented exodus of people and firms, as chronicled in Hoover Institution research, is already underway. Middle-class Californians have been hit particularly hard, as the state has produced jobs largely at the low end of the wage scale.
This is likely to continue as long as companies find it challenging to stay in the state. Intel’s recent move to build its next-generation chip foundries in Ohio is a huge loss for California. Virtually all new semiconductor plants are being built outside the state that first nurtured the industry. High-tech hubs are attracting computer-industry talent.
With other major tech companies, such as Oracle and Hewlett-Packard Enterprises, moving their headquarters out of state, California could reach a tipping point. Consulting firm Deloitte estimates that, while direct chip revenue runs in the tens of billions, chips are involved in trillions of dollars in sales of products that use them. The Economic Policy institute estimates that every direct job in the industry affects an additional 1.92 jobs indirectly, through suppliers and other industries dependent on this sector.
Spurring on the exodus from the state are ever-more-stringent rules to accelerate the “energy transition.” Californians face the nation’s highest energy costs, and families and manufacturing firms suffer alike. California may have developed much of the technology for electric cars, but states like Tennessee are the ones wooing multibillion-dollar investment from major U.S. and foreign companies. Among the states hosting the 13 new battery plants planned for the U.S. by 2025 are Nevada, Georgia, North Carolina, Tennessee, Kentucky, Ohio, and Texas.
Of course, California is not losing all its tech jobs. Some companies that depart leave their engineering and design functions behind in the Golden State, as recently happened with Tesla. The rise of artificial intelligence is already precipitating a gold rush, as employers seek out the best software engineers; these workers can command salaries that can meet the state’s astronomical cost of living. But most Californians aren’t graduates of elite engineering schools, and a clearly failing education system won’t help turn out more of them.
The state’s increasingly bifurcated economy involves higher welfare expenditures—California spends a larger share of its budget on welfare than virtually any state, Governor Gavin Newsom’s go-to solution to the state’s embarrassing poverty rate—and growing dependence on the rich for tax revenues. Along with an exodus of middle-class families (mostly due to high housing costs), this stratification undermines California’s demographic future. Not surprisingly, the state now sees below-average birthrates. San Francisco has the lowest share of children of any major U.S. city. Los Angeles County once epitomized energy and creativity as the mecca of youth culture; between 2001 to 2021, L.A.’s over-65 population grew by more than half a million (59 percent), while its under-25 population shrank by nearly 750,000 (down 19 percent).
California cannot continue to ignore its worst-in-the-nation regulatory excess. Any recovery plan will first require a massive shift in the education system. While Ohio, Kentucky, and Tennessee emphasize skills education, California schools and universities are scrapping exit exams and logging some of the lowest test scores in the U.S. Nearly three in five California high schoolers are not prepared for either college or a career.
Of course, California’s elite economy can use foreign labor for skilled tasks. In Silicon Valley, foreign-born workers account for nearly 70 percent of the tech labor force. Yet if some workers find manna in AI heaven, many more are likely to lose their livelihoods.
The California conundrum is hard to untangle. The state depends on young talent and wealthy individuals to drive innovation and pay taxes, but both groups are increasingly leaving the state. Outmigrants not only outnumber but also earn more money than newcomers. Without expanding the economic base, and without some reform of regulation and taxes, the rich will keep leaving. California seems destined to epitomize what Fred Siegel labeled as “an upstairs/downstairs” economy.
Policymakers need to understand that they no longer can expect the world to come calling, regulatory or tax burden be damned. Other states are launching, growing, attracting, and retaining businesses. Utah, for example, develops custom plans for inbound companies to connect them directly to universities in order to develop industry-specific training programs.
Perhaps the current budget deficit, now estimated at more than $30 billion, will prove a wake-up call. The duopoly of oligarchic wealth and subsidized poverty clearly won’t work amid a weak IPO market, falling property values, and a lack of new investment. A radical shift in direction is clearly necessary, especially in regulatory and tax policy.
Yet the basis for a California recovery remains. “From the beginning, California promised much,” noted the late historian Kevin Starr. “While yet barely a name on the map, it entered American awareness as a symbol of renewal. It was a final frontier: of geography and of expectation.” In recent years, this promise has been greatly diminished, as other countries and states have begun to assert their own claims. Yet the state has recovered in the past, from the end of the gold rush to the decline of the defense industry to earlier tech busts. Smart policies, including those learned from elsewhere, could reverse much. California can still astound the world—but only if it begins choosing differently.