California, the Cautionary Tale

Here’s Peggy Noonan in her new column in today’s Wall Street Journal:

When Americans go to Europe they see everything but the taxes. The taxes are terrible. But that’s Europe’s business and they’ll have to figure it out. Yes what happens there has implications for us but still, they’re there and we’re here.

What Americans are worried about, take as a warning sign, and are heavily invested in is California—that mythic place where Sutter struck gold, where the movies were invented, where the geniuses of the Internet age planted their flag, built their campuses, changed our world.

We care about California. We read every day of the bankruptcies, the reduced city services, the businesses fleeing. California is going down. How amazing is it that this is happening in the middle of a presidential campaign and our candidates aren’t even talking about it?

She is — and you have no idea how much it pains me to say this — agonizingly correct. And, by sheer coincidence, my new column this week is a detailed portrayal of what this decline has wrought:

Every year, CEO magazine – a publication targeted at the nation’s captains of industry – ranks the 50 states based on how friendly their respective economic climates are for business. In 2012 – for the eighth straight year – California finished dead last.

As JP Donlon put it in the piece accompanying the magazine’s rankings, “Once the most attractive business environment, the Golden State appears to slip deeper into the ninth circle of business hell. The economy, which used to outperform the rest of the country, now substantially underperforms. And its status as the most ruinously contentious place to operate remains undisturbed.” 

Harsh words, but hardly a new diagnosis from America’s business community. In 2010, the magazine called the Golden State “the Venezuela of North America” for its overt hostility to any commerce that doesn’t originate via legislative fiat. If this were the diagnosis of a single, industry-specific publication, perhaps CEO’s condemnations could be taken with a grain of salt. But the numbers bear out the magazine’s claim at every turn.

Pick a metric for public sector performance across the 50 states and it’s likely you’ll find California at or near the bottom. The Tax Foundation ranks the state 48th in the nation for its overall business tax climate, and 50th for individual income taxes. The state has the highest number of public employees (nearly 2.5 million according to a 2011 report by MarketWatch) in the country.

The Mercatus Center at George Mason University puts it 48th in the nation for economic freedom. In its 2011-2012 rankings of “Judicial Hellholes,” the American Tort Reform Foundation ranked the Golden State second, noting, “perhaps no other state more clearly illustrates the direct impact of excessive litigation on job creation and the ability of businesses to survive and thrive.” As a result of these and other factors, the state’s unemployment rate for June was 10.7 percent, third-highest in the nation.

California: what Lindsay Lohan would be like as a state. Read it in full here.

  1. ConservativeWanderer

    I left California many years ago and have never looked back.

  2. Joseph Stanko
    We read every day of the bankruptcies

    I live in CA, and in an effort to lower my tax bill I invest a portion of my savings in tax-exempt state and local bonds.  All this talk of bankruptcy lately got me worrying whether my investments were safe, so I’ve been keeping a close eye on them. 

    Here’s the thing: the CA bond fund I invest in, VCITX, is up 4.81% YTD.  The individual bonds I hold are up as well.  Interest rates are at historic lows, and when rates go down, bond prices go up.

    So what’s the deal?  If bankruptcy looms, why hasn’t the market noticed?  Could it be that, in a state this large, a few broke cities are an outlier rather than the tip of the iceberg?

  3. Look Away

    Joseph, you have hit on the answer yourself. In the principle of  risk and reward, if the reward seems higher than it should be given the risk, look out. As Madoff investors learned, there is no such thing as a free lunch.

  4. Edward Smith

    Lindsay Lohan is only 23 years old.  If she were to get into a 12 Step Program, stay on the wagon, otherwise get her act together, and go on a healthy diet …

    she could actually recover physically, emotionally and financially

    California is lucky if it doesn’t spend the next generation or so wearing a barrel.

  5. Nathaniel Wright

    I love how the term limits are working out for California.  If you want to see  case in point how to increase the influence and power of special interests, repeat the experiment elsewhere.  Unions dictate not only who comes into office in California — you’ll notice a lot of “educators” in the Legislature — but are also the only ones with policy making experience.  The permanent bureaucracy and the unions run the show.

    Yay us!  Dr. Marini was correct in the 90s when he wrote of how powerful the bureaucracy would be in a regime of term limits.

    To be fair, they aren’t CA’s only problem, but you might want to ask how the problems that Unions bring to Washington are magnified by people whose entire career belongs to the Unions.  Oh…and you might notice that some of the most troublesome and non-deliberative House Members come from our state as well.  Judy Chu’s machine backed career has resulted in an ideologue of epic proportions.  When her husband — Mike Eng — eventually migrates up, there will be one more pure partisan.

  6. BrentB67
    Joseph Stanko

    We read every day of the bankruptcies

    I live in CA, and in an effort to lower my tax bill I invest a portion of my savings in tax-exempt state and local bonds.  All this talk of bankruptcy lately got me worrying whether my investments were safe, so I’ve been keeping a close eye on them. 

    Here’s the thing: the CA bond fund I invest in, VCITX, is up 4.81% YTD.  The individual bonds I hold are up as well.  Interest rates are at historic lows, and when rates go down, bond prices go up.

    So what’s the deal?  If bankruptcy looms, why hasn’t the market noticed?  Could it be that, in a state this large, a few broke cities are an outlier rather than the tip of the iceberg? · 2 hours ago

    Most municipal issues are insured by 3rd parties, Berkshire did this for a while, but I don’t think that is the reason for what you are seeing.

    There is a perception of an implied full faith and credit guarantee by the federal government. The concept of state bankruptcy is uncharted waters and the feds won’t allow it.

  7. Roberto
    Troy Senik, Ed.:   In 2010, the magazine called the Golden State “the Venezuela of North America”

    All the fun of a Third World Kleptocracy and you don’t even need a passport to visit:

    Let’s not mince words about what the state Senate’s Democratic leader did Wednesday. It was self-serving censorship, the sort of thing that one expects from tinpot dictators, not from those who fancy themselves to be progressive civil libertarians.

    Someone acting for Senate President Pro Tem Darrell Steinberg suddenly cut off cable television access to a legislative hearing to air facts and arguments about pending ballot measures.

  8. John Walker

    I ran a (very) small business in California between 1976 and 1983.  Around 1981, the “California State Board of Equalization” (sales tax enforcers) decided I might have committed the unthinkable in actually shipping most of the products of my company out of state (thus contributing to its balance of payments), and selected me for an intrusive audit in which I had to produce every invoice for the preceding three years, with proof (from shipping documentation) that it was shipped out of state or internationally.  After months, they conceded I was actually innocent.

    That is the moment I decided the state, and the State in general, was my enemy, and decided to get out.

    I abandoned foul California and the United States in 1991, and have never regretted it for a moment.  After I did, the “California Franchise Tax Board” spent three years trying to claim, despite my having not only left the state (with no assets within it), but the country, that I was still a resident and owed them a tithe of my income.

    I’m sorry for those still there, but when the whole thing collapses, I will celebrate it as long overdue.

  9. Roberto
    Troy Senik, Ed.: Pick a metric for public sector performance across the 50 states and it’s likely you’ll find California at or near the bottom… The state has the highest number of public employees (nearly 2.5 million according to a 2011 report by MarketWatch) in the country.

    “Employees” is not the correct term these days, one might be more apt to refer to them as the Legislature’s one true constituency:

    …we saw some of that legislative skulduggery in the 2011 budget… But we’ve seen even more this year, as dozens of so-called trailer bills were drafted in secrecy, made technically legal only by including token $1,000 appropriations, and then quickly enacted with scant, if any, public notice.

     Several others were giveaways to public employee unions, which are the Democrats’ chief source of funds for their own campaigns and the tax measure.

    The process was so blatant that legislative leaders such as Senate President Pro Tem Darrell Steinberg admitted that secrecy was employed to thwart opponents of bills from marshaling legislative opposition.

    This is California, watch and learn the rest of you 49->

    mistakesdemotivator.jpg

  10. CoolHand
    Joseph Stanko

    Here’s the thing: the CA bond fund I invest in, VCITX, is up 4.81% YTD.  The individual bonds I hold are up as well.  Interest rates are at historic lows, and when rates go down, bond prices go up.

    So what’s the deal?  If bankruptcy looms, why hasn’t the market noticed?  Could it be that, in a state this large, a few broke cities are an outlier rather than the tip of the iceberg?

    No, it’s not that they’re outliers, it’s that investors are suffering from a severe form of Ostritchitis.

    Just remember, when you’ve got your head stuck in the sand, it leaves your hind quarters in a very compromised position.

    At this point, after seeing how the Dow and other Wall St markets do not react at all rationally to exterior stimuli (like they used to), I am fairly confident in saying that if the markets are not all rigged outright, then they are badly broken and/or being run by robots.

    The only “safe” investments from 2008 until the whole thing comes apart are going to be things that you can physically lay your hands on.

  11. Retail Lawyer

    I am still horrified that the voters chose Jerry Brown over Meg Whitman, Boxer over Carly Fiorina.  Can’t get over that.  Our last chance.  What are the odds of another two attractive candidates of gender who can self-finance a campaign giving it a try here?  If I lived anywhere else, I would say the voters deserve what they’re getting – but I do live here, so I’m more nuanced.  I don’t deserve it, my brother does not deserve getting bogus bills from the predatory State Board of Equalization . . . 

    I’m just waiting for Gloria Allred to “represent” some woman aggrieved by Mitt Romney.  

    I’ve lived here all my life.  I’m 5th generation native Californian.  I am seriously horrified.  This will not end well . . . 

  12. Thursday

    I’ve lived here for 6 years – and I’m actively working to get out. Here in Los Angeles at least – the roads are a mess, my taxes are astronomical, the cost of living insanely high – and I have the added bonus of listening to helicopters hover continually over my apartment building.

    Thankfully I am still young, don’t own a home here, and will be able to change career directions once I’m done with my MBA – which I intend to get at a school somewhere in Texas or the South next fall.

    As everyone here knows, I’m not the only one planning on leaving (or has left already) – I’ve had 10 good friends leave the state in the last few months, most of them married with young children. All of them either couldn’t find work here or received much better job offers elsewhere. I can’t wait to join them.

  13. Aaron Miller
    Troy Senik, Ed.:

    California: what Lindsay Lohan would be like as a state.

    Is it too much to hope that if Lohan goes red again California will, too?

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