Hey honey, should we take that job in California? Stephen Levy's Economy Blog, posted by stephen levy, a resident of the University South neighborhood, on Dec 29, 2009 at 11:43 am stephen levy is a member (registered user) of Palo Alto Online
California gets criticized regularly for having a bad business climate. The storyline goes roughly like this.
States compete fiercely for new businesses. California has high income tax rates and excessive regulations. We are not friendly to business and companies are fleeing California for these reasons.
I have a different perspective based on studying the California economy for the past 40 years.
The bottom line goes like this: 1) companies compete for workers and their families as well as for entrepreneurs and 2) companies care about much more than tax rates and regulatory policies when deciding where to locate. As a side note, the Public Policy Institute of California (www.ppic.org) has shown in several studies that neither companies nor high-income individuals are “fleeing California” in any large numbers.
I developed a short “hey honey” story to illustrate that competition includes being a state that is attractive to families.
“Hey honey, the recruiter from Apple called and you got the job--$200,000 to start.” (You can fill in any famous company and amount).
“Wow, honey that’s great news.
But what about Sarah and Chris? Where will they go to school? Do we have to buy a $1 million + house in Palo Alto or Cupertino to find a good public school?
And I hear that California universities are turning away students and raising fees.
Hey honey, do you know if California ever solved their water problem? And what about transportation and energy?
Isn’t California where they fight over everything and can’t pass a balanced budget?
Honey, I have a great idea. Let’s call the recruiter and see if Apple wants to start a branch here in Omaha.”
The California has a bad business climate narrative assumes that workers and families will come if only we can get companies to locate here. I think families today have many choices of where to live and have a good job. So California must compete with good schools, great infrastructure and communities that are attractive and affordable to the workers and families we are trying to attract.
But the argument that California competes by being a great place to live and work applies to businesses as well. Look at where California’s good jobs of the future will come from. We are leaders in technology, in the expanding use of the Internet, in being creative designers of cars, energy-efficient buildings, clothes and entertainment products that captivate the world. And we hope to lead the world in developing goods and services that address energy-efficiency and climate change—the green revolution.
These businesses also want to locate in communities (and states) that are great places to live and work. The good schools, world-class infrastructure and attractive communities agenda is important to businesses as well or often more important than tax rates and regulations.
Californians need to engage in conversations about which vision of competing for business is the best guide to public policy or how the two visions can be melded.
If we decide that competing by having great places to live and work is the best strategy then we need conversations about how to fund the long-term investments in people, places and infrastructure that will make this happen.
This will all happen in a context of projected state budget shortfalls so it will be even more difficult to develop a consensus. Yet, what is true for companies is also true for states. If you stop investing for the future, you have stopped competing.
I end with two ideas to consider in these larger conversations about our economic future. I will write more about these ideas in the coming weeks.
The first idea is to make changes in the way we fund infrastructure investments. I think state General Obligation bonds should be funded with a tax just like we do when we pass local school or library bonds. This will improve decision making the costs real to voters and lower the cost to the General Fund of paying for bonds. The second change is to make it easier for local residents to pass infrastructure bonds by going to a 50% or 55% voting approval like we do now for school bonds.
The second idea is to engage residents in talking about how the future of California’s generations (old and young) is connected. The idea of generational connection about our shared future is suggested in many recent articles by Dowell Myers of U.S.C. (http://www-rcf.usc.edu/~dowell/udem.htm).
In November 2008 at the darkest moment in recent economic times older voters in Los Angeles approved by more than a 2/3 vote $10 billion in school bonds financed by taxes. That money would go overwhelmingly to fund the children and grandchildren of immigrants who lived in a different part of the city from most of the voters.
How could they see that their futures were tied together and it is so hard to see this at the state policy level?
Happy New Year and may 2010 be a time of expanding peace and prosperity.
Posted by Peter, a resident of the College Terrace neighborhood, on Dec 29, 2009 at 1:18 pm
"The California has a bad business climate narrative assumes that workers and families will come if only we can get companies to locate here."
Since many recent college graduates are forced to move out of California, because they cannot find a job, your thesis seems to lack logic. Almost every job offer in the Bay Area has many applicants. Companies avoid California, not due to a paucity of qualified workers, but because it is too expensive to do business here. This goes to the regulatory burden, high taxes and bad business climate.
Mr. Levy, your arguments are a stealth attempt to raise taxes. California is already drowning in taxes. Just as an intellectual exercise, why don't you ponder the possbility that there will be no tax increases? How would you then tackle the problems of California?
Posted by Steve, a resident of another community, on Dec 30, 2009 at 10:46 am
Whether California's high taxes and regulatory environment is driving away business and jobs has been argued over for years and statistics are always posted to support both sides of the argument. Personally I moved out of California after 47 years because of the high taxes and cost of living. Blessed with the ability to work from anywhere I couldn't come up with anything California was providing me that any other State wouldn't that would justify the cost. I have several friends and business associates who are doing likewise.
When I graduated business school several years ago I interviewed with Applied Materials for a position in Santa Clara. Several interviewers mentioned that one of my strong points was a willingness to relocate to California (I attended Business School out of State) because it was difficult to find applicants willing to do so because of the cost of living. Everyone wanted to be located at their Austin facility.
I imagine the situation has changed very little in the ensuing years.
A second company I worked for had two manufacturing plants in California they were planning on shutting down and moving to Nevada and Arizona respectively. The statement I heard in the boardroom was that they would never again open a plant in California because of the high costs as compared to other markets. A third company I was involved with moved their sales operations from Norwalk, Ca to Sparks, Nevada because of costs.
You can continue to argue all you want that there is little effect on jobs and businesses caused by the high costs associated with being in California but the truth is that it does hurt and that it will only get worse.
Posted by Paul Losch, a resident of Palo Alto, on Dec 30, 2009 at 3:10 pm Paul Losch is a member (registered user) of Palo Alto Online
I am going to put this on Steve's blog instead of mine, but it has once again to do with the cost of insurance.
My landlord this month raised the general liability coverage required under the lease I have, and it doubles my premium.
Workmans compensation is so expensive for a small company in Calfornia, I am going to outsource more of the work, put some employees with an agency, and stop having a payroll. BTW this affects my ability to get a persoanl health care policy for me through my company--what a stupid tradeoff.
Health care coverage is confusing. I really hope we get some sort of health care and health insurance bill passed, so we all can at least know what is going on.
I am not one to have patience with detail, but it appears to me that various insurance providers on these various types have policies I describe have people who are detail oriented, and encouraged to say "No," not try to figure out how to make a policy work without costing the client an arm and a leg. They just don't care. They are accountable to a boss, not the customer.
So should you move to California? Unless you are getting involved with a company that has enough employees and money to cover all the onerous insurance expenses that a small business owner is "expected" to meet, my advice is no.
I don't know that my experience is unique to California, it may be a dilemma faced by small business owners nation wide. But as I said in my blog, it SUCKS! And I got another zinger today, December 30, to help me celebrate a happy new year.
I drive through areas of Fremont on the way to work each day where the parking lots are empty, and my landlord tells me their occupancy is very low. Are these insurance companies trying to make up for less demand by jacking up premiums on the rest of us? Something stinks here.
Again, it may not be unique to California, but we sure as hell are feeling it in this State.
Posted by Anna, a resident of the Downtown North neighborhood, on Dec 30, 2009 at 10:23 pm
Peter is right that Levy's post is an attempt to justify higher taxes (I would call it laughably transparent rather than "stealth" however.)
In fact, California's problem is that the taxes it has are spent in ways that don't deliver services and benefits worth their burden. There recently was an interesting column in the LA Times detailing the difference in the way that California spends its $11,000 per resident per year vs the way Texas spends it's $6500 per year. Web Link
Twenty years ago, what Levy says in his post may have had some truth: there were choices between high tax/high services states and low tax/low service states that people and businesses had to look at when deciding where to locate. Now the choice is increasingly between high tax/low service states like California and low tax/moderate service states like Texas - which is stealing jobs and taxpayers from California like crazy.
As one commenter notes: "Twenty years ago, you could go to Texas, where they had very low taxes, and you would see the difference between there and California. Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California’s government and the middle class is constantly being renegotiated to the disadvantage of the middle class..."
Until California addresses the source of this problem: public sector unions and other interest groups that have hijacked the budget to the detriment of the average Californian, more taxes won't help.
Posted by pat, a resident of the Midtown neighborhood, on Dec 31, 2009 at 11:11 am
Anna: The article about CA and TX is excellent. It also applies in spades to the city of Palo Alto, supposedly the greatest in the universe because of all it’s marvelous "services" that eat up our tax dollars.
Posted by maguro_01, a resident of Mountain View, on Dec 31, 2009 at 7:43 pm
California's problems go beyond hobby horses like unions. The various disconnected Propositions from over the years take much of the budget. California's agribusiness has bought private profit and socialized expenses and losses in Washington and Sacramento. California is stuck with very large expenses required by Washington but not reimbursed. California is not responsible for NAFTA's failure and the disaster of the Mexican economy. China's economic warfare is, along with the prior Washington government that took a dive. That's the biggest reason we have so many new neighbors and we would do the same.
California's large tech companies have effectively bought a subsidy to move tech off shore and are doing so. Many of the best US students steer away from tech since if they get a job they aren't likely to get a career. Who wants to be 40-something with a mortgage and family but in the market with a heavy tech degree that is a disadvantage? The way the work visa programs are implemented - it was bought by companies - a US citizen or PR can't compete even on price. There is no competing with effective indenture. A brain-drain the world program is a great idea, but the numbers are so large that most of the people are average and more and more return. California is actually undeveloping and the supply of logs and rocks to export is diminishing.
The pay-to-play politics and corruption of Washington may finally necessitate IMF control for a few years as it did in Indonesia and Russia and elsewhere for similar reasons. These are not the times to have an insolvent California that needs a new Constitution and has irreconcilable politics. Even after cleaning up Sacramento and resetting the Constitution and Propositions, California may need to be divided to function as may the United States, perish the thought.
The present majority population probably won't contribute much to the Palo Alto population nor economy a generation hence. Which is all the more reason to have solid schools with sound values today. And to not drain the future with cranky excesses otherwise leaving little but payback. The behavior of the LA voters described in another post means real hope for the future I would have been too cynical to forecast - a good lesson.
Posted by shh..it is a secret, a resident of the Meadow Park neighborhood, on Jan 1, 2010 at 6:49 am
Anna...shhhh....Texans do NOT want a bunch of us thinking that our lives might be better there, then moving to their State and trying to change it into California...destroying it with our "kindness" like we have done to California.
No "red" state wants to advertise that they aren't broke, they have jobs,they do a better job of educating their kids and people have a higher standard of living than the "blue" states. They prefer we keep thinking they are just a bunch of fools so we stay away from them.
Posted by shh..it is a secret, a resident of the Meadow Park neighborhood, on Jan 1, 2010 at 7:00 am
BTW, I recommend anything by Thomas Sowell to understand real economics better ...his latest book "Intellectuals and Society" just came out, and I haven't read it yet. But if it is like all the rest, it will use actual data and historical evidence to show why seeming "good" ideas almost always produce the exact opposite of the intended results.
He also just published one about the housing boom and bust which is right on ( from personal experience in the business), and he has written a few excellent primers that are easy reads on economics ( like Economics 101, Applied Economics etc) Probably Applied Economics would be the best one to read if you are only going to read ONE of his books.
Anyway, for anyone who wants to actually understand and think for themselves, I recommend any of his books to help you analyze policies and vote in a way that will actually cause good things to happen.
Posted by ten gallon, a resident of the Leland Manor/Garland Drive neighborhood, on Jan 1, 2010 at 3:18 pm
"No "red" state wants to advertise that they aren't broke, they have jobs,they do a better job of educating their kids and people have a higher standard of living than the "blue" states. They prefer we keep thinking they are just a bunch of fools so we stay away from them."
I just stopped laughing. Texas? Really? Hotter than hell, and it's going to get worse as the globe heats up; capital punishment capital of America; oil economy (except for Austin); extreme right wing Bible thumpers all over the place;basically, Braggadocio for no reason at all. Who in their right mind - having a choice - would want to live there?
Posted by maguro_01, a resident of Mountain View, on Jan 1, 2010 at 4:37 pm
"..destroying it with our "kindness" like we have done to California."
We know a lot of that "kindness" is bogus - propositions pushed and bankrolled by commercial interests and each with no relationship to the others. Agribusiness plans for private profit but socialized expenses and losses drain money. It's also worth noting that it retards progress in agriculture. Here in Mountain View and Palo Alto a lot of piety comes from people running their house as a real-estate business and tapping public funds for as many neighborhood improvements as possible while running out lower income people.
Our biggest problem in governance is an inherently corrupt political system in Sacramento that, according to the Supreme Court, has to be fixed at the Constitutional level. How much could be fixed by resetting the state Constitution is not clear, but everyone is afraid to do that. We might end up with 800 pages of junk including everything from vegetarianism to abortion to PETA to guns everywhere. Then again we might not.
"No "red" state wants to advertise that they aren't broke, they have jobs, they do a better job of educating their kids and people have a higher standard of living than the "blue" states. They prefer we keep thinking they are just a bunch of fools so we stay away from them."
Few red states want to advertise where their real budget comes from because so much comes from you and me. The Senate in Washington gives a Nebraska voter over 60 times the weight of a California voter if memory serves. If it wasn't for federal water projects, depletion allowances, price supports, porkbarreling, military bases and contracts, etc, etc, many of our sturdy individualists would be living in tepees in the desert. Maybe it's time they did. As dedicated Libertarians they should understand.
All Americans will come to understand that we have to lose at least a generation of 'standard of living' and roll up our sleeves if they don't already. "Beggar thy neighbor" won't work in California and it won't work much longer in Texas either. Given Texas' demographics they don't have that much time. California is filling up, Texas will too.
California has other reasons that might steer people away. As things get tighter, behavior degenerates. Many businesses are more and more a minefield of generational and ethnic warfare. That's especially true when they thin out low level management and worker's social overhead goes up. Another California piety is that a person can't wire themselves unilaterally as is possible in many other states. We are exposed to outrageous fraud, lying, abuse, and even assault with no possible recourse. None. That wasn't a service to people, however righteous the politically correct may be over it. Things are often not what they seem.
California needs more economics and entrepreneurial education but with as little politics as possible. We must not discourage startups with really high fees and Ottoman Empire level complexity. The Univ of Calif left behind important values like truth and student excellence decades ago. UC has become an important part of moving tech and jobs out of the US with a California taxpayer subsidy. There is a lot of work to do. Again, this is a dangerous time to be insolvent and hopelessly divided.
Posted by shh..it is a secret, a resident of the Meadow Park neighborhood, on Jan 1, 2010 at 5:12 pm
Disagree with most of what you say, but have to agree on one implication you made...stop the centralizing of power in DC whereby someone in DC takes someone's money in one state and gives it to someone else in another ..stop the "spread the wealth" mentality, and everyone will win, our economy will explode, and everyone is happier.
I believe that, regardless of where you sit on the political spectrum, most of us can agree that it is wrong to tax people in one state and give it to another.
Posted by shh..it is a secret, a resident of the Meadow Park neighborhood, on Jan 1, 2010 at 5:23 pm
To clarify, having just have a friend read this and not understand...a person in one state should not be paying taxes to another State to do STATE jobs, like roads, schools etc.
The one area I believe we can agree on, though we may disagree with how much is necessary, is that national security is EVERY citizen's duty to support. When talking about "wealth transfer" from one state to another, it would be important to note that MILITARY BASES and/or military support that happens to be housed in one State ( California and Texas both have a lot of bases, for example) are not "wealth transfers" from other states without bases, but "national security". Border control in our border states is not "wealth transfer" but national security.
We are drifting from the original intent of the post, but the idea remains. To tax a State's citizens or not is a big question, and certainly not helped if, additionally, there are huge fed taxes to impose wealth transfer obligations from one state to another.
Posted by stephen levy, a resident of the University South neighborhood, on Jan 2, 2010 at 9:48 am
The point of my post was to argue that California competes for families as well as entrepreneurs and that part of competing for both is great schools, great communities and great infrastructure.
I am interested in how people react to those arguments.
Certainly in PA we compete that way and have high housing demand as a result.
I am interested in how people react to the Los Angeles example at the end of my post--older voters stepping up to fund education fo rotehr folks' children. We do thatg in PA as well.
I am interested (without any judgmengt attached) as to why the people who love red states and tell Paul to move to Nevada still live here.
I think our biggest "high cost" is land and housing and high prices usually indicate demand from people who want to live here. I wonder if these folks are arguing that PA and other cities should abolish zoning so we can have more housing and lower prices.
Since houisng and land orices are high (despite the persistent blog posts aboug how awful CA is) I think we compete by compensating with great places to live and work.
Mainly I hope we can get unstuck from this awful paralysis of fighting the same arguments (and election results) over and over again.
There are people on TS who see the world very differently ffrom my perspective, which is fine.
Are there new voices who want to join in the discussion/
Posted by Peter, a resident of the College Terrace neighborhood, on Jan 2, 2010 at 10:38 am
My belief is that people want to live in the Bay Area because the weather is great, and there are some top universities in this area. However, California, including the Bay Area, is becoming a much less desriable place for the middle class. It is the rich and the poor who are still coming to CA. The poor are the servants of the rich. The middle class cannot find jobs that support a middle class lifestyle.
If I was a small business owner, I would definitely look to Nevada for a better place to do business.
Mr. Levy, if taxes are not to be raised, how would you go about solving the problems that California faces?
Posted by Kyle Samuels, a resident of Los Altos Hills, on Feb 20, 2010 at 12:28 pm
California prior to Prop. 13, had a total State and Local tax burden between 12 and 13 percent of GDP. After 13 it dropped to about 9 percent. That percent has risen through the last few decades till it reached about 11 percent in 2007-08. I found this information on the California State Website. Not sure exactly where. The site further noted that the percent burden was variable based on capital gains tax. In 07-08 or so it was significant. Since then Capital gains tax has dropped dramatically, and the overall burden of tax is closer to 9% again.
In the year that it was 11%, many framed the tax burden of california as being very high. In fact we were about 10 from the top. Looking at the tax burden page, at 9% we dropped below the mean. When you account for the cost of living in California, the tax rates relative to cost of running government puts us in the last quartile. So the argument over whether California is a high tax state or not, tends to fall in the not category.
From an State and local expenditure point of view, California is decreasing rapidly. The two main areas of growth in the California State budget are jails, and social services. The jail increase is almost exclusively due to three strike, and social services is due to medical/medicare which is federal mandate. When taxes where high, and we spent less on the previous two item, business and people where flooding the State. This brought in poor as well as rich. Especially where I grew up. The result was sky rocketing housing prices, which my family made a fortune off of, and hence property taxes, and the State was rolling in the dough....prop 13. We have lived off that value of previous infrastructure investment, and underlying tax base for a while. Now property values are falling, and so are tax revenues. The conditions of our roads suck, our schools except in the riches neighborhoods are poorly maintained and staffed, and middle class people are leaving.
The spending per capita on infrastructure, schools, colleges, etc. has decrease dramatically, and puts us in the bottom 1/5 of all States. Thus Mr. Levy is right.
It is not taxes or regulation that is "driving" people from california, it is quality of life that is strongly associated with public infrastructure and education.
Further, the real problem is the 2/3rds rule. As a Democrat, I would be willing to say, that we change the 2/3rds rule to 55% minute the republicans take 56% or more of the seats in the State legislature. Why, because as you get closer to a simple majority control a party that is extreme looses control, while the main stream win. This would result in Republican party to push, and win with more moderate candidates. I would be fine with moderate republicans. Further, I don't want the extreme faction running the Democrats.
Let the legislature do its job. Could you imagine trying to run apple development if all the consumers got to "vote" on which project they wanted to develop next, and you needed a 2/3rds majority to do it. The company would be out of business tomorrow.
Posted by Nicely written, but disagree based on results, a resident of the Greendell/Walnut Grove neighborhood, on Feb 20, 2010 at 8:07 pm
Ok, Mr. Samuels, that is well written, but I believe the voting feet of the taxpayers more than any words.. You can believe anything you want, but you better put in your earplugs to drown out the sound of businesses and taxpayers stampeding to States that have a lower tax/regulation burden.
BTW, the spending per TAX PAYING capita is different from the spending per capita. We are near top in spending per taxpayer in education and infrastructure...If you can't find the data source, I will try to dig it up.
Not surprisingly, there is a migration pattern of net taxpayer losses in the higher taxed and regulated STates, and net gain of taxpayers in the lower taxed/regulate States.
That kind of migration says all I need to know, really..all the statistic manipulation in the world (never forget the guy who drowned in a river with an average depth of 2") can't change our migration patterns and begs the question..why are taxpayers and businesses leaving this State?
Posted by Nicely written, but disagree based on results, a resident of the Greendell/Walnut Grove neighborhood, on Feb 20, 2010 at 8:13 pm
Oh, sorry...meant to comment on the business allegory..as a matter of fact, businesses usually have Boards of Directors who represent the Shareholders..and DO vote on what the company needs to do..and in fact they are rarely set up to be a "simple majority" vote. Much the same as our legislature. Another example is even our School Boards or County Boards, which rarely vote with just a simple majority. They tend to wait until a solution is present and agreed on, with only a little dissent, before moving forward. Simple majorities tend to create strife and dissent in the representated population, and aren't good for decision making as a result ( think of how much dissent there is even over millions of votes in our Federal elections, when a president wins by just 52%, or when our Supreme Court makes a 5-4 decision..not good).
So, I vehemently disagree with a simple majority vote on almost anything. Which is why I really like the electoral college, as an aside.
Posted by Whole Picture, a resident of Menlo Park, on Mar 2, 2010 at 11:37 am
People who compare Texas with California always seem to look at only half the equation. In common with the majority of "red" states, Texas takes more out of the Federal pot than it pays. The most recent data, 2005, here:
show that, per inhabitant, Texas paid $6437 in federal taxes/etc., and took in $6,514. California, meanwhile, paid $8,028 per inhabitant, and only took in $6,514. What results could we show with an extra $300 million?
Having said that, I see nowhere in the Texas article that the LA Times actually demonstrates that the money is better spent in Texas -- they just quote people saying that it is.