Politics & Policy

Land of Inequality

(Getty Images/Mark Miller)
From the March 10, 2014, issue of NR

From the end of World War II until the 1990s, California possessed a magnetism unique among the 50 states. It was — according to a mythology that was probably overwrought even in those halcyon days — an American Eden, a place where ambition and unfettered imagination combined to make even the most exotic dreams seem feasible.

One of the reasons that image was so enduring was that the state consistently delivered on the outsized expectations. It came to be the center of American entertainment, with “Hollywood” becoming a metonym for the entire industry. It fostered the digital revolution that would eventually flower in Silicon Valley. It constructed one of the nation’s most extensive freeway systems, built a sophisticated infrastructure for delivering water, and developed one of the most impressive networks of universities in the country.

That California was synonymous with opportunity. It was a beacon to the middle class, a place where it was believed that you could author the future on your own terms.

The California that once beckoned residents from every corner of the nation has been demagnetized over the past quarter century. As an important 2012 Manhattan Institute study by Tom Gray and Robert Scardamalia noted, California led the nation in domestic out-migration in the 20-year period from 1990 to 2010, seeing an exodus of nearly 3.4 million residents that eliminated approximately 80 percent of the gains the state had made in domestic migration in the three decades prior. When those numbers are considered as a percentage of overall population, the Golden State stands alongside the nation’s biggest exporters of citizens: public-sector basket cases like New York, Michigan, Illinois, and New Jersey. In 2010, for the first time in the state’s history, California failed to gain any new seats in congressional redistricting.

Around the time this trend became widely acknowledged, a notion began to take hold that California’s regime of high taxes, oppressive regulation, and rampant litigation was scaring away the business class that brought firms and jobs to the state. There is plenty of truth to this criticism. For nearly a decade straight, CEO magazine has ranked California as the worst state in the nation in which to do business. From 1994 to 2008, California lost 124,000 more jobs to other places than it gained. And a Bloomberg analysis of Bureau of Labor Statistics data found that the Golden State saw its number of businesses drop by 5.2 percent in 2012 (a figure that includes both closures and relocations), easily outpacing every other state in the nation.

While the plight of the business sector is all too real, it tends to obscure the story of the migration numbers. An analysis conducted last year by the Hoover Institution’s Carson Bruno revealed that the group making up the largest share of the California diaspora is the middle class. These are not titans of industry looking to maximize profits in Texas or Florida; these are everyday citizens who’ve found themselves priced out of what was once called the California dream.

What accounts for the disproportionate impact on the middle class? In political terms, the explanation is rather simple: California is a state that owes its regnant liberalism to a political alliance between the super-rich and the super-poor.

While it’s fashionable to decry the state’s yawning wealth gap — the liberal Center on Budget and Policy Priorities ranked the Golden State as having had the third-worst income inequality in the nation from 2008 to 2010 — a What’s the Matter with Kansas?–style analysis, blaming the lower class for not voting in their own economic interests, can’t pass the laugh test in California.

In Los Angeles County — the state’s most populous — Democrats command majorities in tony precincts like Beverly Hills and Malibu as readily as in downtrodden areas like Inglewood and Compton. Barely one-fifth of L.A. County voters are registered Republicans. The situation is much the same in northern California. In Silicon Valley’s affluent Santa Clara County — the region’s largest — registered Democrats outnumber registered Republicans more than two to one. Yet Democrats also dominate in poor farming communities like Salinas and hotbeds of urban crime like Oakland.

It’s not that Republicans are entirely dead in California. Many of the state’s inland counties have the political disposition of red states, and Orange County stands defiantly as perhaps the last redoubt of conservatism on the Pacific. Their numbers, however, pale in comparison with those of the dominant coastal majority. While California may be famed for the cultural antagonisms between north and south, the political battle is largely east vs. west — those who bronze on the beaches against those who toil under the hot inland sun.

This trend doesn’t explain the hollowing out of the state’s middle class so much as establish the precondition for it. While the rich and the poor may come together at the ballot box, it is indisputably (and unsurprisingly) the former who end up manning the state’s levers of power. This has given rise to a class of what my Orange County Register colleague (and self-identified “Truman Democrat”) Joel Kotkin refers to as “gentry liberals,” a left-wing governing caste whose public-policy predilections owe more to considerations of taste than of economic necessity.

The unhappy reality of life under the gentry is that the sorts of measures needed to foster economic growth — not to mention affordable middle-class lifestyles — are regarded as gauche in Sacramento. The California of the governing class’s dreams is a place where white-collar workers take public transit through densely packed urban centers, leaving nary a carbon footprint to be found in their wake. That is, a California where rank-and-file citizens have adopted the tastes of the state’s elites — despite the fact that they don’t have the resources to afford them. What it most certainly is not is a California like the one that once beguiled the nation — one with abundant, affordable suburban housing, open roads, middle-class jobs aplenty, and good schools.

It’s harmless enough, of course, for the California cognoscenti to evangelize in behalf of their artisanal lifestyles. It’s another matter entirely to insist that such tastes drive lawmaking. That, however, is precisely what’s happened in the Golden State — and that’s the trend that’s increasingly driving California’s middle class across state lines.

Consider the state’s employment situation. In the aftermath of the Great Recession, California has consistently been one of the nation’s leaders in joblessness. Indeed, it’s a testament to how low expectations have fallen that the 8.3 percent unemployment rate the state posted in December — fifth-worst in the nation — was considered something of a triumph. Unemployment had stayed at or above 12 percent from September 2009 to February 2011.

Of course, plenty of states were hit hard by the downturn, and California was one of those most deeply affected by the housing bubble. Those factors can’t be ignored, but neither can the fact that the Golden State seems stubbornly resistant to a vigorous recovery.

This brings us back to the fiscal, legal, and regulatory environment for businesses. The ranks of the wealthy departing California may be considerably smaller than those of the middle class, but the impact is outsized given the jobs that they’re taking with them. Major firms in particular — which are the most likely to have the resources to pick up and move once government harassment becomes intolerable — are increasingly viewing California in the rearview mirror. As demographer Wendell Cox has reported, the state suffered a net loss of nearly 450,000 jobs from firms with 500 employees or more from 2000 to 2008 — before the financial crisis even began.

Things aren’t much better for the companies that stay behind. While there’s a lack of reliable data on the cost of regulation to California business, a number of prominent executives in the state have gone public with their exasperation. One of the most vocal is Andy Puzder, CEO of Carl’s Jr., the iconic fast-food chain that started in Orange County. In a Wall Street Journal interview last year, Puzder noted that he could get a building permit for a new restaurant within 125 days of signing a lease in Novosibirsk, Russia, but that it would take 285 days in Los Angeles. “I can open up a restaurant faster on Karl Marx Prospect in Siberia than on Carl Karcher Boulevard in California,” he noted archly (Karcher being the eponymous Carl).

Puzder’s insight underscores an important facet of California’s economic entropy: The problem is just as much jobs that are never created in the first place as those that are eliminated. Carl’s Jr., for instance, is aggressively expanding in Texas, but won’t be building new restaurants in California because of the regulatory costs. Energy production — one of the historical drivers of California’s growth and a reliable boon for blue-collar workers — is another casualty of the gentry class. The Monterey shale formation, located in the state’s San Joaquin Valley, is estimated to hold over 15 billion barrels’ worth of oil, which would represent nearly two-thirds of shale reserves in the nation. A recent study by the University of Southern California estimated that harnessing the Monterey’s resources could create 2.8 million jobs in the state by 2020. Don’t hold your breath, however. The environmental lobby — which regards opposition to fracking as a moral imperative — blanches at the notion of California’s becoming the nation’s leading oil producer (as it was at the beginning of the 20th century). And it has sufficient political power to make extraction of the state’s shale resources prohibitively expensive, if not impossible.

Members of the middle class who are fortunate enough to find gainful employment in California are immediately faced with another challenge: finding affordable housing. In San Francisco, for example — a city that has actually seen fairly robust job growth of late — only 4,000 housing units have been added over the past three years, a period during which the city has added roughly 10,000 new households. According to Jed Kolko, chief economist for the real-estate firm Trulia, only 14 percent of homes in the San Francisco metro area are within reach of someone making the median income for the area. As one might suspect, the quality of homes that fall into that category is often sufficiently low to repel many buyers.

Renting isn’t a particularly enticing option either. As of last summer, the average rent for an apartment in Orange County was $1,671 a month. If one applies the (conservative) rule that housing costs should amount to no more than 25 percent of your annual income, that means that an income of over $80,000 a year is required to comfortably rent in Orange County.

Not all of the blame for this can be laid on public policy, of course. Housing costs are always going to be higher in desirable areas, of which California has no shortage. The no-growth predilections of the governing class, however, greatly exacerbate the problem.

California is a national leader in so-called smart growth, imposing draconian regulations on property development. The 2010 Demographia Residential Land & Regulation Cost Index — a study intended to unearth the effect of land-use policies on housing costs — sampled eleven metro areas throughout the country to find how regulation had added to their real-estate prices. Areas like Atlanta and Dallas, which had seen costs from regulation adhere to their historical norm, received a value of 1. Minneapolis received a 2.4, indicating that the added cost from land-use restrictions was 2.4 times the historical norm. San Diego, the sole California area included in the study, received a 13.2. Land-use restrictions were estimated to have added an average of $220,000 to the cost of a San Diego home.

As a result of the inflated costs, members of the middle class who decide to stick it out in California often find themselves living in less fashionable communities, far away from work. That’s the story of the Inland Empire, the enormous yet nationally anonymous region on the far-eastern periphery of the greater Los Angeles area, where nearly 40 percent of the population commutes to work in Los Angeles, Orange, or San Diego County. The Inland Empire is not the iconic California of which the rest of the nation dreams. It’s hot, dry, dusty, and plagued by smog that the prevailing winds carry in from the coast. It’s also a sort of cultural piñata for coastal elites. Mention of the Inland Empire in Los Angeles or Orange County will inevitably inspire condescending references to “the dirt people” or “909ers” (after one of the region’s area codes).

What it is, however, is cheap — at least as a relative matter. Housing prices in the Inland Empire are at least 40 percent lower than those in Los Angeles or Orange County. The surge of homebuyers to the region was one of the reasons it was hit so spectacularly hard by the popping of the housing bubble. The home of a higher percentage of subprime loans than anywhere else in the nation, the Inland Empire saw its housing prices decline by 53 percent from the market’s high point in 2006 to its trough in 2009.

Cheaper rents, however, come at a cost. The deplorable quality of traffic in California means that commuters often end up paying out in time what they save in money. There’s a reason that Californians refer to distance in terms of time on the road rather than mileage. For years, I commuted from my home in the South Bay area of Los Angeles County to an office in downtown Los Angeles. At 35 miles each way, it was not an especially daunting prospect on paper. With normal workday traffic flows, however, the trip rarely clocked in at under 90 minutes each way. Any similarly situated Californian (and they are legion) is spending the equivalent of more than 30 days a year in traffic. Forget trying to make your kid’s soccer game, establishing a side business out of your home, or working on a degree in the evening. And that’s before factoring in the price of gas (in part because of special regulations, California consistently has some of the highest fuel prices in the nation).

Why is the middle class leaving California? Because California has left the middle class. As the economy faltered, the state raised taxes and continued to let regulation and litigation run riot. As the freeways clogged and housing prices climbed to astronomical levels, environmental activists called for high-speed rail and “sustainable communities.” As the state’s schools saw their performance plummet to national lows, the California Teachers Association — the state’s dominant teachers’ union and foremost opponent of education reform — remained the single biggest financial player in state politics.

Though their interests may be diverse, the impulses of every powerful constituency in California politics converge on the same point: more government. As a result, California has become a place of government of the elites, by the elites, and for the elites. It should be no surprise then that the elites are increasingly the only ones left who can afford it.

— Troy Senik, a former speechwriter for George W. Bush, is the senior editor of Ricochet, a columnist for and member of the editorial board of the Orange County Register, a senior fellow at the Center for Individual Freedom, and the host of a series of podcasts for the Hoover Institution at Stanford University.


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