Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“Inflation is taxation without legislation.”     Milton Friedman

January 5, 2010

The Reports Of CA’s Jobs Death Are Greatly Exaggerated

by Brad Warbiany

Ezra Klein links an interesting story by econoblogger Ryan Avent about declining cities. His post is a fairly interesting read about how (or whether to) try to save dying manufacturing cities.

But one of his passages discusses a greatly different topic. As a California resident, I’m stuck with a very high-tax, heavy-regulating, dysfunctional state government that tries to milk its residents of their lifeblood to pay for bloated, inefficient, and overpriced social services. Like most governments, even when facing a brutal economic clime like the one we’re currently in, they don’t want to face the music and truly cut spending to the bone, they’re going to try to clamor for federal help. Even with crippling taxation on the nation’s largest economy, they can’t make ends meet.

So what do they constantly do? They make it worse (I’ll have a post on 2010′s new CA laws making it worse soon). Each time they do so, the pronouncement from all those with right-of-center economics is that they’re going to destroy jobs and kill our state economy.

This is true — to an extent. Their policies do harm the economy. But its effect is greatly overstated for a reason that Avent points out:

The value in economically dynamic cities is the people that populate them. Where once, firms would pay high land prices to be near coal deposits or harbors, based on the economic advantages those amenities conferred, they now pay high land prices to be near talent. This yen to concentrate in particular areas has a number of dynamics. Firms want to be near customers and clients. Workers want to be near firms. Firms want to be near workers. Where there are lots of firms and workers, there will also be businesses serving those workers — in business and in the provision of consumption opportunities — and those services attract additional firms and workers. Everyone wants to be where everyone is, and it’s tough for anyone to go somewhere else because somewhere else is where people aren’t.

As every reader here knows, I’m a pretty hardcore libertarian. I hate California’s 9.3% state income tax, sales taxes hovering around the 8% mark, property taxes which aren’t high on a percentage basis (if you can avoid mello-roos) but are very high due to the cost of housing, nanny-state restrictions, and generally the higher price for almost all goods and services brought on by the taxes and regulations imposed on businesses. As a frequent traveler, I’m sometimes shocked at how much cheaper FOOD is elsewhere in the country. You’d think that the biggest thing I’d want to do in life would be to leave.

But I’m still here. Why? Because there’s a lot here worth living for. The job market is plentiful. If I were to leave my current employer there’s plenty of other engineering opportunities within very close proximity. The weather is absolutely perfect (something many readers may hate me for saying on January 5). I’m in close proximity to beaches and mountains, to great entertainment and dining options, and generally live in a very culturally rich and diverse place.

So what happens? Educated professionals want to be here. Companies want to be here to make use of the talents of those educated people. Support and service industries want to locate here to cater to those people. Those industries need labor, so labor all across the education spectrum is in demand. And this creates a cycle, attracting more professionals starting more companies requiring more services requiring more labor. The region grows.

And this attracts government. Make no mistake — economic activity is a tasty morsel, and government is a parasite that grows fatter and fatter on that morsel. Parasites steal from their hosts, they act as a drag and harm their hosts, but the good ones ensure that they never grow large enough to kill their host. Economic activity comes first, and government feeds on it second.

Why do the booming economic areas of the country correlate with some of the highest-taxed and highest-regulated locales of the world (think Massachusetts, New York, SoCal and NorCal, Chicago, etc)? Because the economic activity and the people came first, and once enough people wanted to live in the location the government knew it could feed and grow fat. While CA and MA have both been struggling with a domestic outflow of migration (Americans moving from those states to other US states), they are both growing in population due to international inflow. Despite the growth of government, these states are still alive. Where are the hottest “new” areas of growth? Places with critical mass of talent, such as Atlanta, Austin, or Minneapolis, but without a highly-developed parasite. The parasite is getting ready to feed, though.

To bring this back to Ryan Avent’s point, places like California and the northeast corridor, or Chicago, are not dying because their economies haven’t changed. The talent in the locale is still generating economic activity. The areas getting killed are the manufacturing-heavy rust belt areas, where as labor-intensive manufacturing is offshored and only capital-intensive manufacturing is retained, there is much less need for people. The talent in those locales has been made obsolete, and the “critical mass” of the newer type of talent was already established elsewhere.

There are a lot of things I like about California, and a lot of things I don’t like. But despite the proclamations of my right-leaning colleagues, the rest of the country need not write their eulogies for California yet.

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7 Comments

  1. Yah, I suffered some mild sticker shock at the prices there on the left coast way back in the 80′s… I can’t imagine how bad it is now.

    Comment by tfr — January 6, 2010 @ 7:06 am
  2. My wife and I would love to live in some beach paradise. But so do so many others. Along with the influx comes taxation and regulation of behavior. In such “paradise” (e.g. your CA), we find the people meaner – more detached – lacking joie-de-vivre. I generalize of course, but the pattern is there.

    We have visited some places which by any popular measure are bleak and uninviting. Yet the residents are happy. Their parasites are much less developed. Smaller population seems to translate often into more individual liberty.

    So we are attempting to adjust our taste of what is desirable. We are trying to learn to like landscape and weather that the masses do not.

    Time will tell if we are successful.

    Comment by Hank — January 6, 2010 @ 9:25 am
  3. All true. But…

    If there were a place that had a lower economic burden and many of the same intrinsic advantages that started to have the concentration of talent, then there would be a competition.

    That is (at least part of) why Atlanta grew like a weed for a while, and why the Raleigh-Durham area and Austin are doing so well.

    Not that the weather in Austin is as nice as Los Angeles (though I like Santa Barbara better), but the winters are mild and there is always air conditioning in the summer.

    Of course, the pure inertia of having a bjillion dollars invested in corporate infrastructure means that this sort of competition happens in slow motion.

    Comment by EscapedWestOfTheBigMuddy — January 6, 2010 @ 2:24 pm
  4. > we find the people meaner – more detached – lacking joie-de-vivre. I generalize of course, but the pattern is there.

    Yup. As a refugee from Massachusetts, I can say it’s the same there.

    Comment by tfr — January 7, 2010 @ 7:08 am
  5. Brad,

    Thank you for sending the Northrup Grumman jobs our way!

    Signed by,

    A reader in Virginia — a low tax, pro-jobs state.

    Comment by Let's Be Free — January 7, 2010 @ 7:45 am
  6. Let’s Be Free,

    Northrop didn’t move due to taxes. They moved to be close to the feeding trough of Washington DC. They’re still keeping roughly 30K employees here in Southern California and moving only about 300.

    I checked the news on that move as soon as it dropped, as I have two close friends who work for Northrop here locally, and wanted to make sure they wouldn’t be adversely affected.

    Comment by Brad Warbiany — January 7, 2010 @ 10:12 am
  7. Mr. Warbiany,

    Sure, the altruistic officers of the company don’t care at all about getting a 10 to 15 percent pay raise overnight by dint of relocation. And sending their kids to schools that actually work. And having available to their families a strong and viable university system versus one that’s imploding. Right. Let’s just go by what is in the press release.

    By the way, the folks tending feeding trough just across the Potomac and down at the Pentagon love doing business out West — it makes for pleasant junkets. You don’t score any brownie points in these parts for locating in a midrise along the Dulles toll road.

    Only 300 employees? I suppose that the consultants, outside counsel, contract support personnel and subcontractors will all remain out West as well. And in the future the business will emphasize growth 3,000 miles away from the decision makers instead of 30 miles. Of course, that’s human nature. WAKE UP!

    Cheers

    Comment by Let's Be Free — January 8, 2010 @ 6:54 am

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