1 00:00:00,280 --> 00:00:03,920 California has the largest economy in the United States, 2 00:00:04,080 --> 00:00:07,640 with a gross state product of over $4 trillion. 3 00:00:07,920 --> 00:00:11,000 If it was its own country, it would have the world's 5th 4 00:00:11,000 --> 00:00:14,720 largest economy, behind Japan and ahead of India. 5 00:00:15,120 --> 00:00:17,960 California is home to some of the world's most valuable 6 00:00:17,960 --> 00:00:21,320 technology companies. It's the center of the global 7 00:00:21,320 --> 00:00:24,640 entertainment industry and its farms are amongst the most 8 00:00:24,640 --> 00:00:28,120 productive in the world, growing over half of America's 9 00:00:28,120 --> 00:00:32,920 vegetables, fruits and nuts. California's workers are hugely 10 00:00:32,920 --> 00:00:36,600 productive too. The state has AGDP per capita of 11 00:00:36,600 --> 00:00:41,520 $104,000, which would rank it as number six in the world if it 12 00:00:41,520 --> 00:00:44,560 was a country. Tax havens, which California 13 00:00:44,560 --> 00:00:49,560 definitely is not, often have distorted GDP as multinational 14 00:00:49,560 --> 00:00:53,520 companies frequently transfer intellectual property assets to 15 00:00:53,520 --> 00:00:57,880 tax havens like Ireland, which get counted as that country's 16 00:00:57,880 --> 00:01:01,000 GDP. Income on foreign owned capital 17 00:01:01,000 --> 00:01:05,200 held in tax havens also gets counted as GDP because the 18 00:01:05,200 --> 00:01:09,400 income originates in that country, even if the financial 19 00:01:09,400 --> 00:01:12,280 firm has nothing but APO box to show for it. 20 00:01:12,640 --> 00:01:16,400 If we exclude tax havens from the list to remove these 21 00:01:16,400 --> 00:01:20,400 distortions, California really stands out as the most 22 00:01:20,400 --> 00:01:25,040 productive place in the world. Unfortunately, some of the shine 23 00:01:25,040 --> 00:01:28,680 has started to come off the Golden State in recent years as 24 00:01:28,680 --> 00:01:31,240 companies and workers have been leaving. 25 00:01:31,560 --> 00:01:35,040 Elon Musk famously announced this summer that he would move 26 00:01:35,040 --> 00:01:38,200 the headquarters of his companies from California to 27 00:01:38,200 --> 00:01:40,880 Texas. He has long complained about 28 00:01:40,880 --> 00:01:45,560 over regulation and excessive taxation in California, but said 29 00:01:45,560 --> 00:01:49,680 that the final straw was a new law relating to parental rights. 30 00:01:50,160 --> 00:01:53,800 Critics argued that Musk was attacking the state after years 31 00:01:53,800 --> 00:01:57,640 of benefiting from its abundant government support, which was of 32 00:01:57,640 --> 00:02:00,160 course paid for by the high taxes. 33 00:02:00,440 --> 00:02:04,120 The president of the California Labour Federation told the LA 34 00:02:04,120 --> 00:02:07,960 Times that California, through tax credits, electric vehicle 35 00:02:07,960 --> 00:02:11,920 subsidies, and training grants, made Elon successful. 36 00:02:12,440 --> 00:02:14,760 It's not just Elon Musk, however. 37 00:02:14,960 --> 00:02:18,640 Companies like Chevron, Hewlett Packard, Palantir, and Charles 38 00:02:18,640 --> 00:02:21,800 Schwab have all left the state in recent years. 39 00:02:22,080 --> 00:02:25,600 According to the Financial Times, over 200 companies have 40 00:02:25,600 --> 00:02:30,760 left California since 2019, with very few companies moving there 41 00:02:30,760 --> 00:02:34,000 to replace them. This contrasts with states like 42 00:02:34,000 --> 00:02:37,480 Texas and Florida where the exact opposite is happening. 43 00:02:38,120 --> 00:02:41,680 This isn't all that new either. Research from the Hoover 44 00:02:41,680 --> 00:02:45,520 Institution shows that this trend began well before the 45 00:02:45,520 --> 00:02:48,640 pandemic and has been slowly picking up pace. 46 00:02:48,880 --> 00:02:52,760 They point out that corporate relocation planning takes years, 47 00:02:52,960 --> 00:02:58,240 giving the example of the NHRA who left California in 20/21 48 00:02:58,400 --> 00:03:02,720 after a 12 year study. According to Joseph Politano at 49 00:03:02,720 --> 00:03:06,720 the Bureau of Labor Statistics, the biggest beneficiaries of the 50 00:03:06,720 --> 00:03:10,520 post pandemic move have been states like Texas and Florida, 51 00:03:10,680 --> 00:03:13,960 whose economic growth has outstripped most emerging 52 00:03:13,960 --> 00:03:18,000 markets in recent years with huge jobs growth too. 53 00:03:18,600 --> 00:03:22,040 Now, it's worth noting that despite all of this negativity, 54 00:03:22,120 --> 00:03:25,760 California has been growing faster than the United States 55 00:03:25,760 --> 00:03:28,120 overall. And the United States has 56 00:03:28,120 --> 00:03:31,360 experienced great economic growth in recent years. 57 00:03:31,600 --> 00:03:34,960 But as Texas and Florida have grown, so have jobs. 58 00:03:35,120 --> 00:03:39,240 But in California, there's been economic growth paired with very 59 00:03:39,240 --> 00:03:43,520 weak jobs growth, which is a problem. the US unemployment 60 00:03:43,520 --> 00:03:47,160 rate sits at 4.1%, which is not far off. 61 00:03:47,160 --> 00:03:50,120 It's low, but in California, California, the unemployment 62 00:03:50,120 --> 00:03:55,000 rate has risen to 5.3%, the highest of any US state. 63 00:03:55,360 --> 00:03:59,560 The recent tech and AI boom has been good for California, but 64 00:03:59,560 --> 00:04:03,080 not for Californians. According to the LA Times, 65 00:04:03,080 --> 00:04:06,440 California's homelessness problem, which has always been 66 00:04:06,440 --> 00:04:10,720 an issue, has grown by 40% over the last five years. 67 00:04:10,880 --> 00:04:14,720 And half of all homeless people in the United States live in 68 00:04:14,720 --> 00:04:18,200 California. So how is California different 69 00:04:18,200 --> 00:04:19,959 from the rest of the United States? 70 00:04:20,160 --> 00:04:24,160 How did they go from $100 billion budget surplus two years 71 00:04:24,160 --> 00:04:29,240 ago to a budget crisis with a $73 billion deficit today? 72 00:04:29,520 --> 00:04:33,280 And what explains the Californian exodus and lack of 73 00:04:33,280 --> 00:04:36,640 new arrival? Early settlers mistakenly 74 00:04:36,640 --> 00:04:40,600 believed that California was an island, entirely separated from 75 00:04:40,600 --> 00:04:43,280 the United States by the Gulf of California. 76 00:04:43,600 --> 00:04:47,600 In many ways it developed like an island too, with its major 77 00:04:47,600 --> 00:04:51,520 population centres all on the coast as it was cut off from the 78 00:04:51,520 --> 00:04:55,440 rest of the United States by huge mountain ranges and hard to 79 00:04:55,440 --> 00:04:58,720 cross deserts. Before rail and good roads were 80 00:04:58,720 --> 00:05:03,080 laid, the easiest route from the East Coast to California was by 81 00:05:03,080 --> 00:05:06,040 sea. The states modern economic 82 00:05:06,040 --> 00:05:10,600 history began with the Gold Rush in 1848 which attracted over 83 00:05:10,600 --> 00:05:15,560 300,000 settlers, boosting the population and infrastructure 84 00:05:15,680 --> 00:05:19,520 which led to statehood 2 years later in 1850. 85 00:05:20,000 --> 00:05:23,360 The oil industry played a significant role in the state's 86 00:05:23,360 --> 00:05:27,920 early economic development too. After oil was discovered in Los 87 00:05:27,920 --> 00:05:33,040 Angeles in 1895, California quickly became the biggest oil 88 00:05:33,040 --> 00:05:38,360 producing state up until 1936, after which reserves became 89 00:05:38,360 --> 00:05:41,600 depleted. Today, oil and natural gas are 90 00:05:41,600 --> 00:05:45,840 mostly imported into California from abroad, which partially 91 00:05:45,840 --> 00:05:48,600 explains the state's high energy costs. 92 00:05:49,320 --> 00:05:53,200 Agriculture has been a huge industry in the state too, with 93 00:05:53,200 --> 00:05:56,640 Californian farmers focusing on the production of the highest 94 00:05:56,640 --> 00:05:59,920 margin produce. The film industry is possibly 95 00:05:59,920 --> 00:06:03,320 what California has been most famous for around the world, and 96 00:06:03,440 --> 00:06:07,080 along with the tech sector, it contributes significantly to 97 00:06:07,080 --> 00:06:11,280 California's global cultural influence, which has been huge. 98 00:06:11,880 --> 00:06:15,280 The development of Silicon Valley in the late 1970s 99 00:06:15,480 --> 00:06:19,800 transformed California into the global leader in technology and 100 00:06:19,800 --> 00:06:22,760 innovation, which it remains to this day. 101 00:06:23,160 --> 00:06:26,880 Given the size of the state economy, it's no surprise that 102 00:06:26,880 --> 00:06:29,920 there's also a vibrant financial sector too. 103 00:06:30,640 --> 00:06:34,520 Californias public universities are ranked amongst the best in 104 00:06:34,520 --> 00:06:37,720 the world for academic excellence, research and 105 00:06:37,720 --> 00:06:40,760 innovation. They attract top tier faculty 106 00:06:40,960 --> 00:06:44,200 and focus on research and development, which has driven 107 00:06:44,200 --> 00:06:47,600 advancements in technology, medicine and the arts. 108 00:06:48,040 --> 00:06:52,040 The top Californian universities have policies in place that 109 00:06:52,040 --> 00:06:55,760 encourage students to take ownership of their research. 110 00:06:56,000 --> 00:06:59,200 Students are often given the opportunity to be named on 111 00:06:59,200 --> 00:07:02,440 patents that they developed and are supported by the 112 00:07:02,440 --> 00:07:05,200 universities in commercializing their work. 113 00:07:05,560 --> 00:07:10,560 The UC system has resources like technology transfer offices and 114 00:07:10,560 --> 00:07:14,200 entrepreneurship programs to help students navigate 115 00:07:14,200 --> 00:07:17,960 intellectual property rights and develop their research into 116 00:07:18,040 --> 00:07:22,520 marketable products or services. At other universities, the 117 00:07:22,520 --> 00:07:26,120 ownership of research and IP might be more strictly 118 00:07:26,120 --> 00:07:28,560 controlled by the institution itself. 119 00:07:28,800 --> 00:07:33,160 Many universities retain ownership of all IP created by 120 00:07:33,160 --> 00:07:38,240 students, faculty, and staff. The UC systems policies have 121 00:07:38,240 --> 00:07:42,040 fostered a sense of ownership, empowerment and entrepreneurship 122 00:07:42,040 --> 00:07:45,560 among students and can be given credit for a lot of the 123 00:07:45,560 --> 00:07:49,360 innovation and business success that come out of the state. 124 00:07:49,920 --> 00:07:54,840 California is famously America's most left-leaning state, earning 125 00:07:54,840 --> 00:07:58,280 it the nickname the People's Republic of California and 126 00:07:58,280 --> 00:08:01,320 making it the whipping boy of conservatives for whom 127 00:08:01,320 --> 00:08:04,880 California has long been shorthand for everything wrong 128 00:08:04,880 --> 00:08:07,760 in the country. The state is home to many of 129 00:08:07,760 --> 00:08:10,240 America's most progressive policies. 130 00:08:10,400 --> 00:08:12,840 It has the heaviest tax load in the country. 131 00:08:13,080 --> 00:08:17,960 Criminal justice policies like decarceration, deprosecution and 132 00:08:18,160 --> 00:08:22,440 policing, these are all new words to me, have led to a crime 133 00:08:22,440 --> 00:08:25,800 problem that has damaged the state's image along with 134 00:08:25,800 --> 00:08:30,160 residents feeling of safety. Energy prices, which are high to 135 00:08:30,160 --> 00:08:34,080 begin with in California, are likely to only rise higher as 136 00:08:34,080 --> 00:08:38,400 the state mandated transition to A0 carbon grid takes 137 00:08:38,400 --> 00:08:42,320 conventional power offline and replaces it with more expensive 138 00:08:42,320 --> 00:08:45,320 green sources. According to research from 139 00:08:45,320 --> 00:08:49,400 George Mason University, California is the most regulated 140 00:08:49,400 --> 00:08:54,840 state in the United States with more than 419,000 restrictions 141 00:08:54,840 --> 00:08:58,880 in place, the majority of which cover industry, commerce and 142 00:08:58,880 --> 00:09:02,000 development. This overall combination of high 143 00:09:02,000 --> 00:09:05,360 taxes, high regulation, high crime, and an extreme 144 00:09:05,360 --> 00:09:09,240 homelessness problem makes California an easy target for 145 00:09:09,240 --> 00:09:13,000 right wing politicians. And as the situation gets worse, 146 00:09:13,280 --> 00:09:17,080 outsiders rush to declare it a failed state or announced that 147 00:09:17,080 --> 00:09:19,920 the California dream is turning into a nightmare. 148 00:09:20,400 --> 00:09:23,240 I should probably use one of those as a video title or 149 00:09:23,240 --> 00:09:27,000 something about checking out of the Hotel California. 150 00:09:27,440 --> 00:09:30,080 You guys will click on that hopefully. 151 00:09:30,880 --> 00:09:34,760 The cost of housing and energy are so high in California when 152 00:09:34,760 --> 00:09:38,080 compared to the rest of the United States that even high 153 00:09:38,080 --> 00:09:41,400 incomes look a lot less impressive once adjusted for 154 00:09:41,400 --> 00:09:44,240 taxes and the overall higher cost of living. 155 00:09:44,760 --> 00:09:49,600 The price to income ratio for buying homes is 25 times median 156 00:09:49,600 --> 00:09:54,240 income in Newport Beach, 19 times median income in Palo 157 00:09:54,280 --> 00:09:59,320 Alto, 12 times in San Jose, and 11 times in San Francisco. 158 00:09:59,640 --> 00:10:03,920 This compares to a national average of 5.6 times for the 159 00:10:03,920 --> 00:10:07,640 overall United States, according to researchers from Harvard. 160 00:10:08,240 --> 00:10:11,160 According to the Hoover Institution headquarters, 161 00:10:11,160 --> 00:10:15,480 migrations out of Santa Clara, Alameda and San Mateo counties 162 00:10:15,680 --> 00:10:19,600 reflect high tech companies in the digital and social media 163 00:10:19,600 --> 00:10:24,200 world opting for less expensive locations not only to control 164 00:10:24,200 --> 00:10:27,920 business costs, but so that they can recruit workers who will 165 00:10:27,920 --> 00:10:31,160 benefit from lower housing costs in other states. 166 00:10:31,680 --> 00:10:35,320 California's 3 greatest challenges today are rising 167 00:10:35,320 --> 00:10:38,680 unemployment, growing fiscal strains, and population 168 00:10:38,680 --> 00:10:42,640 outflows, all of which relate to each other and don't have easy 169 00:10:42,640 --> 00:10:46,280 solutions. In the United States, overall, 170 00:10:46,280 --> 00:10:50,120 the unemployment situation is quite good, with an unemployment 171 00:10:50,120 --> 00:10:54,760 rate near its long term lows and with 1.6 job openings per 172 00:10:54,760 --> 00:10:58,240 unemployed person. In California, the situation is 173 00:10:58,240 --> 00:11:01,320 a lot worse. Unemployment rose more than in 174 00:11:01,320 --> 00:11:05,200 any other state since interest rates were hiked in 2022, and 175 00:11:05,200 --> 00:11:10,240 there are just 0.8 job openings per unemployed person, the worst 176 00:11:10,240 --> 00:11:13,920 ratio in the country. Big Tech, which had hired 177 00:11:13,920 --> 00:11:17,560 aggressively during the 0 interest rate environment, began 178 00:11:17,560 --> 00:11:21,200 laying off staff a few years ago as soon as they experienced a 179 00:11:21,200 --> 00:11:23,840 slowdown. These layoffs affected the 180 00:11:23,840 --> 00:11:28,640 overall Californian economy, not just tech, as when laid off tech 181 00:11:28,640 --> 00:11:32,320 workers stopped spending, it affected retailers, restaurants, 182 00:11:32,560 --> 00:11:35,200 transport and service workers too. 183 00:11:35,560 --> 00:11:39,840 With the slowdown, California's income tax collection fell by 184 00:11:39,840 --> 00:11:44,040 25% last year. A drop equivalent to decline 185 00:11:44,200 --> 00:11:47,080 that happened during the bursting ofthe.com bubble in 186 00:11:47,080 --> 00:11:51,320 2000 and the global financial crisis in 2008. 187 00:11:51,720 --> 00:11:56,560 California's state constitution requires a balanced budget in 188 00:11:56,560 --> 00:12:00,600 that if proposed spending exceeds estimated revenues, the 189 00:12:00,600 --> 00:12:04,240 governor has to recommend the sources to make up the budget 190 00:12:04,240 --> 00:12:06,960 shortfall. Governor Newsom projected a 191 00:12:06,960 --> 00:12:12,120 deficit of $38 billion for this fiscal year, but the Legislative 192 00:12:12,240 --> 00:12:16,560 Analyst's Office, a nonpartisan fiscal advisor for California's 193 00:12:16,560 --> 00:12:21,560 legislature, has estimated that the state is on track to spend 194 00:12:21,560 --> 00:12:25,200 $73 billion more than it brings in in taxes. 195 00:12:25,640 --> 00:12:30,080 This is quite an about turn, as just two years ago the state had 196 00:12:30,080 --> 00:12:35,040 a $100 billion budget surplus. The reason California's budget 197 00:12:35,040 --> 00:12:38,640 fluctuates so wildly is that California has a very 198 00:12:38,640 --> 00:12:43,000 progressive tax structure for higher earners pay a much larger 199 00:12:43,000 --> 00:12:46,240 share of taxes. When the state's highest earners 200 00:12:46,240 --> 00:12:50,320 do well, the state budget does well, like in 2022. 201 00:12:50,640 --> 00:12:54,760 But during business slowdowns, tax revenues dry right up. 202 00:12:55,120 --> 00:12:59,000 This volatility in tax collections explains why every 203 00:12:59,000 --> 00:13:02,600 few years California has a major fiscal crisis. 204 00:13:03,200 --> 00:13:07,160 Governor Newsom defends this set up, saying that it creates a 205 00:13:07,160 --> 00:13:10,680 lower tax burden on low and middle income workers. 206 00:13:10,920 --> 00:13:14,400 But the problem is that the policies are pro cyclical, 207 00:13:14,560 --> 00:13:17,760 meaning that when the state needs to spend money during a 208 00:13:17,760 --> 00:13:21,880 slowdown, it has no money to spend and instead needs to cut 209 00:13:21,880 --> 00:13:24,600 back. It's not obvious that cutbacks 210 00:13:24,600 --> 00:13:28,440 on government programs that are most relied on by low income 211 00:13:28,440 --> 00:13:31,080 workers during downturns benefits them. 212 00:13:31,640 --> 00:13:34,520 Solutions that have been put forth for dealing with the 213 00:13:34,520 --> 00:13:38,480 current budget deficit include deferring promised funding for 214 00:13:38,480 --> 00:13:41,520 universities, the homeless and the disabled. 215 00:13:41,760 --> 00:13:45,440 In prior budget crises, Californian politicians have 216 00:13:45,440 --> 00:13:49,000 played games like pushing payments out an extra day so 217 00:13:49,000 --> 00:13:52,640 that they come out of next year's budget are paying IO us 218 00:13:52,640 --> 00:13:56,360 to businesses, students and taxpayers to whom it owed money. 219 00:13:56,640 --> 00:13:59,240 None of this fixes the core problem. 220 00:13:59,960 --> 00:14:03,200 The LA Times writes that despite what people believe, 221 00:14:03,440 --> 00:14:07,400 overspending is only a small part of California's problem. 222 00:14:07,680 --> 00:14:11,560 They say that the state's fiscal headache is largely the result 223 00:14:11,560 --> 00:14:16,200 of an unstable tax system that relies too heavily on the rich. 224 00:14:16,520 --> 00:14:19,840 For decades, California's revenues have been heavily 225 00:14:19,840 --> 00:14:23,640 dependent on capital gains taxes on the richest residents. 226 00:14:24,120 --> 00:14:28,000 Thus, revenues spike in years when the stock market booms as a 227 00:14:28,000 --> 00:14:32,480 lot of IPOs occur and investors sell stocks and other assets. 228 00:14:32,680 --> 00:14:37,760 For example, Facebook's IPO in 2012 brought in an extra $1.3 229 00:14:37,760 --> 00:14:42,120 billion in state taxes. The problem is that in years 230 00:14:42,120 --> 00:14:45,920 with an IPO drought, insufficient taxes are collected 231 00:14:45,920 --> 00:14:47,960 to keep government programs running. 232 00:14:48,680 --> 00:14:55,000 As an example, in 2021, the top 110th of 1% of Californians paid 233 00:14:55,000 --> 00:14:58,360 almost 30% of Allstate income tax. 234 00:14:58,640 --> 00:15:02,240 The problem with relying on such a small number of people for 235 00:15:02,240 --> 00:15:06,560 such a large percentage of state taxes is that if they choose to 236 00:15:06,560 --> 00:15:09,960 leave the state, the tax revenue drives right up. 237 00:15:10,560 --> 00:15:14,520 A famous example of over reliance on top earners was in 238 00:15:14,520 --> 00:15:19,480 2016 when New Jerseys wealthiest resident moved to Florida, 239 00:15:19,760 --> 00:15:23,960 throwing the New Jersey State budget into chaos as hundreds of 240 00:15:23,960 --> 00:15:26,840 millions of expected revenues evaporated. 241 00:15:27,360 --> 00:15:30,040 This is already a problem in California. 242 00:15:30,320 --> 00:15:33,600 The state has been losing a growing number of high earning 243 00:15:33,600 --> 00:15:36,640 residents, with the trend picking up pace during the 244 00:15:36,640 --> 00:15:39,840 pandemic. In 2021, according to The 245 00:15:39,840 --> 00:15:44,800 Economist, the state lost almost $30 billion in net taxpayer 246 00:15:44,800 --> 00:15:49,360 income to other states as wealthy taxpayers relocated. 247 00:15:49,680 --> 00:15:52,680 California was not always set up like this. 248 00:15:52,880 --> 00:15:57,280 In the 1950s, income tax made-up only 10% of California. 249 00:15:57,360 --> 00:16:01,080 California general fund and sales tax, which is much more 250 00:16:01,080 --> 00:16:03,680 stable, was the main revenue source. 251 00:16:03,880 --> 00:16:07,640 Since then, California has become much more of a services 252 00:16:07,640 --> 00:16:11,320 based economy and is one of the few states that doesn't tax 253 00:16:11,320 --> 00:16:14,440 services. Tim Hartford wrote an article 254 00:16:14,440 --> 00:16:18,160 this week on some of the strange taxes that have been introduced 255 00:16:18,360 --> 00:16:21,400 throughout history. Like Peter the Great's beard 256 00:16:21,400 --> 00:16:25,200 tax, whose aim was to encourage Russian nobles to shave. 257 00:16:25,400 --> 00:16:29,120 Or Argentina's bachelor tax, which brought about a new 258 00:16:29,120 --> 00:16:33,520 profession, the Lady Rejecter, where women would charge men a 259 00:16:33,520 --> 00:16:37,440 fee to write a letter stating that the man had proposed 260 00:16:37,440 --> 00:16:40,200 marriage to her and that she had declined the offer. 261 00:16:40,480 --> 00:16:44,440 The fact that the man had tried but failed made him exempt from 262 00:16:44,440 --> 00:16:47,360 the tax. Hartford, who was writing about 263 00:16:47,360 --> 00:16:51,120 the UK and not California, argued that it often works 264 00:16:51,120 --> 00:16:55,240 better when a government needs to raise revenue to broaden the 265 00:16:55,240 --> 00:16:59,840 tax base while lowering the tax rate at the same time, rather 266 00:16:59,840 --> 00:17:02,320 than to single out small groups to tax. 267 00:17:02,560 --> 00:17:06,319 This is possibly more the case for a state than a country, as 268 00:17:06,319 --> 00:17:09,359 it's easier to move to a neighbouring state in the United 269 00:17:09,359 --> 00:17:12,079 States than it is to move to another country. 270 00:17:12,640 --> 00:17:16,119 The Economist points out that there's nothing new about more 271 00:17:16,119 --> 00:17:18,640 Americans leaving California than move there. 272 00:17:18,920 --> 00:17:22,800 They say that this has been going on for over 30 years, but 273 00:17:22,800 --> 00:17:25,520 they point out that something else has changed. 274 00:17:25,800 --> 00:17:30,320 California's population still grew over that period because of 275 00:17:30,320 --> 00:17:32,600 foreign immigrants arriving there to work. 276 00:17:32,920 --> 00:17:36,920 A slowdown in immigration to California from abroad that 277 00:17:36,920 --> 00:17:40,720 started during the pandemic has sustained, and California has 278 00:17:40,720 --> 00:17:44,480 now seen an outright decline in its population for three 279 00:17:44,480 --> 00:17:48,120 straight years, the first sustained drop since becoming a 280 00:17:48,120 --> 00:17:52,400 state in 1850. California's reliance on capital 281 00:17:52,400 --> 00:17:56,720 gains taxes limits the state's flexibility to fix its budget 282 00:17:56,720 --> 00:18:01,000 crisis, as hiking taxes further could just drive more rich 283 00:18:01,000 --> 00:18:04,360 Californians to leave, exacerbating the problem. 284 00:18:04,640 --> 00:18:08,120 According to the Hoover Institute, California has hit a 285 00:18:08,120 --> 00:18:12,560 wall where the state can't bring in any more tax revenue without 286 00:18:12,640 --> 00:18:14,840 significantly damaging the economy. 287 00:18:15,360 --> 00:18:19,520 California's state income tax rate is amongst the steepest for 288 00:18:19,520 --> 00:18:24,840 wealthy people in the United States, topping out at 13.3% for 289 00:18:24,840 --> 00:18:29,200 millionaires, and it's gasoline tax of almost $0.60 per gallon 290 00:18:29,360 --> 00:18:32,880 is the nation's highest. Well, California's taxes are 291 00:18:32,880 --> 00:18:35,920 very progressive, hitting the wealthiest the hardest. 292 00:18:36,160 --> 00:18:40,960 The Public Policy Institute of California reports that 70% of 293 00:18:40,960 --> 00:18:44,920 Californians still feel that they are paying more than they 294 00:18:44,920 --> 00:18:50,120 should in state and local taxes. Most taxpayers weigh up what 295 00:18:50,120 --> 00:18:53,400 they get in terms of public services for their tax money. 296 00:18:53,680 --> 00:18:57,280 And with high crime and extreme levels of homelessness, many 297 00:18:57,280 --> 00:19:00,800 Californians don't feel that they get additional public 298 00:19:00,800 --> 00:19:04,120 services that are not available in low tax states. 299 00:19:04,360 --> 00:19:07,200 They simply feel that they're not getting value for their 300 00:19:07,200 --> 00:19:09,920 money. The one area where the state's 301 00:19:09,920 --> 00:19:13,840 tax collections are lower than in other states is property tax. 302 00:19:14,160 --> 00:19:18,080 Proposition 13, which was adopted by California voters in 303 00:19:18,080 --> 00:19:23,000 1978, requires that properties be assessed at market value at 304 00:19:23,000 --> 00:19:26,720 the time of their sale, and after that, assessments can't 305 00:19:26,720 --> 00:19:31,040 rise by more than 2% per year until the house is sold again. 306 00:19:31,360 --> 00:19:35,120 This means that in a situation where property values increase 307 00:19:35,120 --> 00:19:38,160 by more than 2% per year, which they have in California, 308 00:19:38,240 --> 00:19:42,040 California home owners are incentivized to stay in their 309 00:19:42,040 --> 00:19:46,520 original home rather than move, as their taxes are lower than 310 00:19:46,520 --> 00:19:49,760 they would be in a different House of the exact same value. 311 00:19:50,280 --> 00:19:54,360 This distorts the Californian real estate market, and the data 312 00:19:54,360 --> 00:19:58,200 shows that Californians tend to move house a lot less than 313 00:19:58,200 --> 00:20:02,120 Americans in other states. This rule benefits wealthier 314 00:20:02,120 --> 00:20:05,560 older residents at the expense of new home buyers. 315 00:20:06,200 --> 00:20:09,640 The people who have left California cite high taxes, 316 00:20:09,640 --> 00:20:13,240 expensive real estate, crime, homelessness, and over 317 00:20:13,240 --> 00:20:17,440 regulation as the reasons they decided to move to other states. 318 00:20:17,720 --> 00:20:21,320 So how bad is the regulatory environment in California? 319 00:20:21,600 --> 00:20:25,160 We saw earlier that California has the most regulation of any 320 00:20:25,160 --> 00:20:27,920 state in the US by a significant margin. 321 00:20:28,120 --> 00:20:31,680 But the same report showed that Texas, a state that people are 322 00:20:31,680 --> 00:20:35,880 leaving California for, is number 5 on that list, which 323 00:20:35,880 --> 00:20:39,320 doesn't seem a whole lot better. According to the Pacific 324 00:20:39,320 --> 00:20:42,720 Research Institute, California doesn't just have more 325 00:20:42,720 --> 00:20:46,600 regulations than other states, but the regulations themselves 326 00:20:46,760 --> 00:20:49,760 are more restrictive than in other states, too. 327 00:20:50,160 --> 00:20:53,000 The report argues that California's regulatory 328 00:20:53,000 --> 00:20:56,840 environment is particularly difficult for small businesses 329 00:20:57,040 --> 00:20:59,640 that lack the scale to efficiently manage the 330 00:20:59,640 --> 00:21:03,520 administrative burdens and finance the higher costs created 331 00:21:03,720 --> 00:21:07,880 by onerous regulations, according to the Bureau of Labor 332 00:21:07,880 --> 00:21:11,120 Statistics. A big reason for the migrations 333 00:21:11,120 --> 00:21:15,040 we've seen from states like New York and California to states 334 00:21:15,040 --> 00:21:18,640 like Florida and Texas is that the pandemic weakened the 335 00:21:18,640 --> 00:21:22,760 economic clusters that dominated pre pandemic America. 336 00:21:23,120 --> 00:21:28,440 Pre pandemic, 19% of all tech jobs were based in California. 337 00:21:28,680 --> 00:21:33,840 Today, only 16 1/2 percent are. It's not just tech jobs that are 338 00:21:33,840 --> 00:21:37,760 moving out of state either. According to the LA Times, film 339 00:21:37,760 --> 00:21:42,600 and TV workers are leaving, too. During the pandemic, when work 340 00:21:42,600 --> 00:21:46,080 could be done remotely, people moved to more affordable 341 00:21:46,080 --> 00:21:49,160 locations. This happened right as the tech 342 00:21:49,160 --> 00:21:52,600 industry was booming, which just meant that California had a 343 00:21:52,600 --> 00:21:57,360 smaller slice of a growing pie. Everything seemed fine once the 344 00:21:57,360 --> 00:22:00,360 tech recession occurred. As interest rates rose, 345 00:22:00,560 --> 00:22:05,280 California was just losing outright with a smaller slice of 346 00:22:05,360 --> 00:22:08,840 a smaller pie. High technology stocks today 347 00:22:08,960 --> 00:22:13,840 make up just under 1/3 of the value of the S&P 500 index. 348 00:22:14,120 --> 00:22:17,960 If you add in communication services stocks, many of which 349 00:22:17,960 --> 00:22:21,720 connect with the technology arena, the group represents more 350 00:22:21,720 --> 00:22:24,680 than 40% of the overall stock market. 351 00:22:24,960 --> 00:22:28,400 On top of this, there are lots of huge privately owned tech 352 00:22:28,400 --> 00:22:31,320 firms too. The growth of the tech sector 353 00:22:31,320 --> 00:22:35,360 has been a huge contributor to Californian growth over the last 354 00:22:35,360 --> 00:22:39,000 60 years, but people are starting to question if these 355 00:22:39,000 --> 00:22:43,480 companies can continue to grow from their already massive size 356 00:22:43,480 --> 00:22:47,040 going forward. The tech sector is well suited 357 00:22:47,040 --> 00:22:51,160 to California as it relies on small numbers of highly paid 358 00:22:51,160 --> 00:22:54,880 workers to design products or software that are really 359 00:22:54,880 --> 00:22:58,000 scalable. Unfortunately for the state, you 360 00:22:58,000 --> 00:23:01,600 wouldn't really manufacture physical products there due to 361 00:23:01,600 --> 00:23:05,360 the expense of real estate, high regulation, and high taxes. 362 00:23:05,760 --> 00:23:08,920 There's a reason that every Apple product says designed in 363 00:23:08,920 --> 00:23:12,800 California, made in China, and taxed in Ireland on the back of 364 00:23:12,800 --> 00:23:15,320 it. If the tech industry stops 365 00:23:15,320 --> 00:23:17,560 growing, the state might struggle. 366 00:23:18,160 --> 00:23:21,440 Tech layoffs have been hitting California quite hard over the 367 00:23:21,440 --> 00:23:24,400 last two years. I made a whole video about this 368 00:23:24,400 --> 00:23:27,680 a few months ago, and while Californian tech workers 369 00:23:27,680 --> 00:23:31,920 received the highest average tech pay of any US state, they 370 00:23:31,920 --> 00:23:35,440 have not only been hit the hardest with layoffs, but also 371 00:23:35,440 --> 00:23:39,960 withstood the largest year over year pay drop when they find new 372 00:23:39,960 --> 00:23:44,720 jobs as demand for their skills has dried up since the gold 373 00:23:44,720 --> 00:23:48,520 rush, California's economy has been built on ready access to 374 00:23:48,520 --> 00:23:51,800 freshwater. The state's agriculture sector 375 00:23:51,840 --> 00:23:55,280 faces significant water challenges today due to 376 00:23:55,280 --> 00:23:58,800 prolonged droughts and over reliance on groundwater. 377 00:23:59,120 --> 00:24:03,200 California's water reservoirs are often well below average 378 00:24:03,200 --> 00:24:06,520 capacity today, leading to stringent water use 379 00:24:06,520 --> 00:24:09,480 restrictions. This puts a lot of strain on the 380 00:24:09,480 --> 00:24:13,720 agricultural sector, which is vital to California's economy. 381 00:24:13,920 --> 00:24:16,840 And once again, there's no obvious solution to this 382 00:24:16,840 --> 00:24:20,240 problem. California clearly faces a 383 00:24:20,240 --> 00:24:23,960 number of challenges and it's economy today is suffering in 384 00:24:23,960 --> 00:24:26,960 ways that the overall U.S. economy is not. 385 00:24:27,240 --> 00:24:31,040 But California has had rough patches in the past, like in the 386 00:24:31,040 --> 00:24:33,920 early 2000s and in the wake of the credit crunch. 387 00:24:34,160 --> 00:24:37,800 But it's innovation LED growth model has managed to stand the 388 00:24:37,800 --> 00:24:41,560 test of time. The state made-up 14% of 389 00:24:41,560 --> 00:24:46,200 America's total output last year, up from 12 1/2% in the 390 00:24:46,200 --> 00:24:49,480 late 1990s. There's no need to count the 391 00:24:49,480 --> 00:24:53,360 state out yet. The biggest problems appear to 392 00:24:53,360 --> 00:24:57,760 be unaffordable housing, excess regulation, and a pro cyclical 393 00:24:57,760 --> 00:25:01,960 tax system that finds itself in crisis every few years. 394 00:25:02,480 --> 00:25:06,440 The unaffordable housing problem is driven by a combination of 395 00:25:06,440 --> 00:25:10,360 excessive regulation and Nimbyism, which combined make 396 00:25:10,360 --> 00:25:13,840 California the most difficult part of the United States to 397 00:25:13,840 --> 00:25:17,520 build new housing in. Fixing this problem would likely 398 00:25:17,520 --> 00:25:20,320 fix a lot of California's other problems. 399 00:25:20,520 --> 00:25:23,200 It's worth noting that the states that people have been 400 00:25:23,200 --> 00:25:27,960 moving to, the ones experiencing the fastest growth, are also the 401 00:25:27,960 --> 00:25:31,280 states with affordable housing, where it's easy to build. 402 00:25:31,640 --> 00:25:35,480 Workers simply like living in places where they can afford a 403 00:25:35,480 --> 00:25:39,720 comfortable home, and employers like hiring in these places as 404 00:25:39,720 --> 00:25:43,440 workers with affordable homes are willing to accept lower pay. 405 00:25:43,760 --> 00:25:47,080 You don't really benefit from high pay if it all goes out the 406 00:25:47,080 --> 00:25:50,680 door, and housing costs. So can all of California's 407 00:25:50,680 --> 00:25:53,200 problems just be blamed on progressivism? 408 00:25:53,480 --> 00:25:57,520 After all, Californian refugees have been moving to states where 409 00:25:57,520 --> 00:26:01,600 there are no state income taxes, to states with lower regulation 410 00:26:01,600 --> 00:26:05,200 where it's easier to build, or to places where crime rates are 411 00:26:05,200 --> 00:26:09,920 lower than in the Golden State. Janan Ganesh made an interesting 412 00:26:09,920 --> 00:26:13,920 point in a recent FT article on the balance between the right 413 00:26:13,920 --> 00:26:17,600 and left, arguing that the governing climate in which urban 414 00:26:17,600 --> 00:26:21,120 life flourishes is a blend of progressive ideas such as 415 00:26:21,120 --> 00:26:24,760 liberal immigration rules and infrastructure spending, with 416 00:26:24,760 --> 00:26:28,800 conservative ideas like market incentives and toughness on 417 00:26:28,800 --> 00:26:31,320 crime. He argues that while cities 418 00:26:31,320 --> 00:26:36,120 might benefit from low taxes, less burdensome regulation, and 419 00:26:36,120 --> 00:26:40,040 a business friendly atmosphere, they often vote for policies 420 00:26:40,040 --> 00:26:43,400 that would harm them. California has been a hugely 421 00:26:43,400 --> 00:26:47,720 successful economy because of its ability to attract the best 422 00:26:47,720 --> 00:26:51,040 and brightest, and if these people are starting to move away 423 00:26:51,040 --> 00:26:55,080 for greener pastures, it might be worthwhile mimicking some of 424 00:26:55,080 --> 00:26:58,360 the qualities of the states that are attracting them away. 425 00:26:59,000 --> 00:27:01,760 Thanks for tuning into this week's podcast, with a special 426 00:27:01,760 --> 00:27:05,080 thanks to my supporters on Patreon who make it all happen. 427 00:27:05,280 --> 00:27:07,920 If you'd like to support the podcast, there's a link in the 428 00:27:07,920 --> 00:27:10,360 show notes. Talk to you again soon. 429 00:27:10,480 --> 00:27:10,840 Bye.