Trouble in Paradise: The Crumbling California Model

California Governor Gavin Newsom speaks during a news conference at the California State Capitol in Sacramento, August 16, 2019. (Justin Sullivan/Getty Images)
California is broken, but it is not doomed.

NRPLUS MEMBER ARTICLE S ome horrified conservatives dismiss California as the progressive dystopia, bound for bankruptcy and, let’s hope, growing irrelevance. Progressives, for their part, hail the Golden State as the avatar of a better future, the role model for a new, more environmentally friendly and socially just economic order. They often dismiss critiques as conservative misinformation.

Yet California is not doomed, at least in the near term, nor is it anything like a model of social democracy. As long as its tech oligarchs produce enormous profits and generate wealth, California remains fiscally flush for the near term, and the evolving economy, long on digitization and constant entertainment, works to the state’s historic strengths. Key industries such as space and biomedical research also offer promise.

The big problem with the California model is that it does not work for most Californians, who suffer from the highest poverty rate (cost of living adjusted) in the country. Despite being home to three of the nation’s four most expensive housing markets, California has among the lowest cost-adjusted median income of any state, as demographer Wendell Cox notes. Although not particularly hard hit by pandemic fatalities, California continues to recover more slowly than the rest of the states and now suffers the highest unemployment rate in the country — including nine of the 16 metros with the greatest joblessness. Even as the tech oligarchy has reaped record profits and expanded its wealth to unprecedented levels, California ranks as the second-worst place to find a job of all the states. Thank God for Hawaii!

A New Economic Model?

Flush from his recall triumph, Governor Gavin Newsom, along with the legislature, seems determined to double down on his attempt to shape California as the model for the progressive future. He claims that our state is “the envy of the world” and the model of social justice. “Unlike the Washington plutocracy,” he boasts, “California isn’t satisfied serving a powerful few on one side of the velvet rope.”

We can see, in aggregate numbers, some justification for crowing. A writer at Bloomberg claims that the state has “the best economy” in the world, pointing to the bloated stock prices of the major tech firms, soaring home values, and the enormous wealth creation accruing to a relative handful. Other writers insist that California will continue to dominate most of its key industries, owing to its innovation and capital resources.

Yet it’s time now to see what California’s “success” is all about. It reflects a new kind of economy — dominated by a few large companies, with an elite workforce, a large service class, and a population increasingly dependent on wealth redistribution. This emerging oligarchic regime, however progressive it likes to label itself, is more feudal than egalitarian, more hierarchical than competitive, financed largely by the same tech giants who help fund Newsom’s successful defeat of the recall.

For most, the reality on the ground is increasingly challenging. The state is now the second-most unaffordable state for home-buyers, a particular challenge for Millennials, and it suffers the highest rate of “doubling up” — only our friend Hawaii does worse. California has the largest gap between middle and upper wage quartiles in the nation, and it has a level of inequality greater than that of Mexico and closer to that of Central American countries such as Guatemala and Honduras than to such “progressive” developed counties as Canada and Norway. According to the state Legislative Analyst’s Office, 20 percent of state wealth is held within 30 zip codes that account for just 2 percent of the population. Less than 33 percent of state wealth is held within 1,350 zip codes that house 75 percent of Californians.

A Changed Economy

California’s inegalitarian reality reflects the decline of what was once a remarkably diverse, job-rich economy. Key sectors included aerospace, oil, trade, manufacturing, business services, agriculture, as well as software and media. But according to new research from Chapman University’s Marshall Toplansky and Ken Murphy of UC-Irvine, California ‘s rate of job creation over the past three decades has been far below that of key competitors such as Texas, Arizona, Florida, Washington, Nevada, and Colorado.

As one observer put it, California has allowed a largely unregulated sector — the tech industry — to thrive while putting ever more damaging restrictions on the rest of the economy, especially blue-collar sectors. Since the early 1990s, California has lost more than 700,000 out of a total of nearly 2 million manufacturing jobs, while states such as Arizona, Nevada, and Utah have gained, and states in the Intermountain West and parts of the South have emerged as industrial powerhouses.

Tech firms have been able to run largely unrestrained, but California industrial polluters must buy “credits” to operate, face high energy prices and draconian tax and labor laws that make it exceeding difficult to operate competitively — if your firm is not a quasi-monopoly — with other countries and states. Ever since California decided to lead the “war” against climate change in the past decade, the Golden State has fallen into the bottom half of states in manufacturing-sector employment growth, ranking 44th last year; its industrial new-job creation has, as mentioned above, lagged.

Murphy and Toplansky also found that job creation in other blue-collar sectors, notably construction, has massively lagged that of Texas, Florida, Arizona, Nevada, Utah, and even highly regulated Washington State over the past 30 years. Even without adjusting for costs, notes the New York Times, no California metro ranks in the U.S. top ten in terms of well-paying blue-collar jobs. But four — Ventura, Los Angeles, San Jose, and San Diego — place among the bottom ten.

At the same time, policy-makers have targeted the heavily unionized local fossil-fuel industry for extinction, preferring to source its oil from countries such as Saudi Arabia. According to a study by the Los Angeles Economic Development Corporation, these dictates threaten over 366,000 high-paying, largely blue-collar jobs, about half held by people of color. Another 3.9 million jobs, 16.5 percent of total state employment, are at risk from these policies.

The Threat to the High-End Economy

The state’s troubles don’t stop there. California is creating fewer professional business-service jobs, the largest source of high-wage employment. According to Toplansky and Murphy’s analysis of BLS data, over the past three decades, California has lagged behind the national average and grown at half the rate of Texas, Washington State, Utah, Florida, and Colorado. The growing exodus of key business service firms — Bechtel, Jacobs, McKesson — has both epitomized and accelerated this decline.

But the biggest crisis could be a decline in the all-important “innovation” sector. Last year, Tesla, Hewlett Packard Enterprises, and Oracle moved their headquarters to Texas. Some 40 percent of Bay Area tech workers say that they would like to move to a less expensive region. Leading tech firms now expect a large proportion of their workforce — roughly 50 percent of whom could work remotely — to stay elsewhere after the pandemic, with workers seeking out cheaper and less congested climes, most notably in Texas or further out in the relatively cheaper California interior.

To be sure, the core Bay Area counties still contain virtually all the country’s billionaires under 40. But there are some signs that this may not be the case much longer. The state’s share of venture-capital investments has fallen, and the rate of start-ups is rising in competitive regions such as Arizona, Nevada, Texas, and North Carolina. Over the past 30 years, California’s innovation sector, note Toplansky and Murphy, has lagged that of several other states, notably Utah and Washington, and others too could catch up.

California may also discover that many of its increasingly entrenched giants, such as Google, could become sclerotic as they take on the bureaucratic sloth associated with size and a powerful market position. Once an intensely competitive sector, Big Tech has become enamored with the allure of “the sure thing” backed by massive capital, suggests long time analyst Mike Malone. If there is a potential competitor, he says, it gets bought. Twitter’s former CEO, Jack Dorsey, has suggested that the magic that led firms and people to come to California is in danger of wearing off.

Betraying the California Promise

Historically California’s booms — entertainment, trade, construction, aerospace, semiconductors — benefited large parts of the population. The current boom in information technology does not even boost prospects for most in Silicon Valley. The area, note two left-wing scholars, Manuel Pastor and Chris Brenner, once was among the most egalitarian in the nation — a place of opportunity for many immigrants, particularly from east Asia. Today, they suggest, as it has become home to an expanding number of the super-rich, Silicon Valley has become “fragmented and divided,” with “the high-tech community largely isolated from the broader region” and particularly its working class.

Simply put, the current tech economy, based on software, social media, and massive venture-capital investments, does not produce higher living standards for most, even as it generates huge fortunes for the relative few. According to a 2018 University of California Santa Cruz study, nine out of ten jobs in the Valley now pay less than they did 20 years ago, adjusted for inflation. Particularly disadvantaged are those who clean the offices of tech firms, make food for their employees, and take care of their children. 

This bifurcation is found throughout the state. One in three California households struggle to meet “basic needs,” notes the United Way, and that includes over half of Latino households and two in five African-American ones. Over two-thirds of noncitizen Latinos, including the undocumented, live at or below the poverty line. “In California, there is this idea of ‘Oh, we care about the poor,’” notes Mark Duggan, principal author of a Stanford/University of Texas research on the country’s contesting mega-states. “But on this metric, we are literally the worst.”

The Great Migration

California’s media and academic establishment tend to dismiss the idea of an “exodus,” blaming the narrative in large part on conservative propagandists. We can debate the significance of this outbound movement, but it’s not exactly chopped liver. Since 2000, more than 2.4 million net domestic migrants, a population larger than that of the Sacramento metropolitan area, have moved to other parts of the nation from California. This process is now accelerating, driven as much by people not moving in as those moving out. Between 2014 and 2020, net domestic out-migration from California grew from an annual rate of 46,000 to 242,000, according to U.S. Census Bureau estimates.

This decline does not reflect the movement of disgruntled oldsters and the unemployable, but from a rapid decline in people who traditionally came here to make their fortunes. California now has the worst attraction rate in the country, which is driving the demographic decline. Some 85 percent of those leaving, according to an analysis of IRS data from 2012 to 2019, are in their prime earning years of 25 to 64. In 2019, the largest number of net domestic migrants was in the 35–44 age category, at 27 percent, while 21 percent were age 55–64.

Particularly ironic, given the state’s racialized politics, has been the declining growth of California’s minority populations, who now represent nearly two-thirds of the residents. Some may see California as a multicultural exemplar, but a recent University of California, Berkeley, poll showed that 58 percent of African Americans express interest in leaving the state, more than any other ethnic group. So too do 45 percent of Asians and Latinos.

Minorities are increasingly headed elsewhere. The Latino population in the state rose at only one-half the national rate from 2010 to 2019, while the state’s black population was under 1 percent , well below the 7.2 percent national rate and even further below its share in Florida and Texas.

Over the past two decades, the African-American household population, notes demographer Cox, has declined in San Francisco, Oxnard, and Los Angeles.

Foreigners also appear to be staying away. Net international migration to the state peaked in 2015, at 154,000 and fell to 29,000 by 2020. Los Angeles and San Francisco were once beacons for people from abroad, but they increasingly choose Dallas–Fort Worth, Nashville, Houston, and even some Midwestern metros. According to a recent study from Heartland Forward, over the past decade Los Angeles lost foreign-born residents, while areas such as Dallas, Columbus, Phoenix, Austin, Houston, and Denver saw growth of up to 30 percent.

California, once the symbolic capital of youth culture, is also losing its appeal to the young generation. Between 2013 and 2017, Los Angeles ranked only behind New York for the largest net losses of Millennials, notes Brookings, as young people grew to prefer the more affordable Dallas, Austin, Houston, and Denver metros. Childbearing is increasingly either too expensive or out of fashion. Los Angeles and San Francisco rank last and second-to-last in birthrates among the country’s 53 major metropolitan areas. 

Over the past decade the state suffered among the most precipitous fertility declines of any state. Three-fifths of counties, particularly those on the coast, have seen a decline in their under-25 population, with Los Angeles alone since 2000 experiencing a hegira in this demographic decline of three-quarters of a million people. California’s total fertility rate, long above the national average, is now the nation’s tenth-lowest.

The Rise of Oligarchal Progressivism

The odd confluence of enormous wealth creation, mass poverty, and a weakened middle class has come in a state that the Biden administration seeks to use a model for the rest of the country. Shortly after Biden took office, the LA Times gleefully wrote that the new administration was striving to make “America California again.”

What few, particularly in the dominant media and political culture, recognize is that this is no longer the old California of opportunity but an increasingly hierarchical and inegalitarian version. Rather than bolster opportunities along a broad spectrum, the state increasingly deals with inequality by providing what Marx described as “the proletarian alms bag ” — rent control, housing subsidies, free health care, and other largesse to the increasingly economically irrelevant masses. “The culture for much of California, driven by state politics, is one of benefits (and now guaranteed income), not a jobs strategy or expectation,” says Michael Bernick, a former director of the state’s Employment Development Department.

This can be seen in the disbursement of the state surplus, which the state has chosen to dole out in an unprecedented series of payments to the poor and families making less than $75,000 a year. Oddly, this approach has many supporters in the tech oligarchy. Mark Zuckerberg, Pierre Omidyar, Elon Musk, and Sam Altman, founder of the Y Combinator, all support universal basic income and generally back subsidies for basics such as rent and electricity. Some claim they will be able to foot the bill with profits made from artificial intelligence.

It also reflects the worldview of many tech leaders, who appear to regard the masses as incapable of improving their lives in a digitized world. Gregory Ferenstein, after interviewing 147 digital-company founders, reported that most believed that an “increasingly greater share of economic wealth will be generated by a smaller slice of very talented or original people. “Everyone else would subsist on subsidies and perhaps a bit of ‘gig’ work.”

Is There Room for a Counterrevolution?

This is not the American dream, and especially not the old California version, epitomized by Pat Brown, California’s governor from 1958 to 1966, who built the state’s expansive road network, public university, and college system, and promoted the development of well-paying jobs in fields such as aerospace. The state, when I moved here in the early 1970s, was all about the opportunity to rise. But one recent survey, this one from the Public Policy Institute of California, found that roughly two in three state residents believe that inequality has worsened in their area and that it will continue to do so in coming years. Nearly two-thirds of Californians think the state’s best days are behind us.

For now, Sacramento chooses to focus on such critical issues as mandating gender-neutral toys or launching a vigilante assault on gun companies. But a coalition to reverse course, at least, can be gleaned from such things as the 2020 vote on Proposition 15, a measure financed by Meta’s Mark Zuckerberg and the teachers’ unions, which would have raised property taxes in the middle of a devastating recession. In a letter to Mark Zuckerberg, the biggest backer of the measure raising property taxes, various groups, including the state’s Black, Hispanic, and Asian chambers of commerce noted: “Unlike Facebook, restaurants, dry cleaners, nail salons and other small businesses can’t operate right now and many may never open again. The last thing they need is a billionaire pushing higher taxes on them under the false flag of social justice.”

Amid the state’s well-publicized crime wave, there’s a mounting campaign against progressive district attorneys, notably and amazingly in San Francisco. There is also growing discomfort among some minorities who are beginning to dissent over green policies. A lawsuit by 200 prominent civil-rights leaders claims that California climate policy has disproportionately hurt poor and minority populations by boosting housing and energy prices and undermining blue-collar employment. In response to the state’s drive to prevent new natural-gas hookups, 113 cities and the three most prominent ethnic chambers of commerce — African-American, Latino, and Asian-Pacific — have joined the State Chamber in opposition. Bay Area restaurateurs, who prefer to cook with gas and are already struggling with existing regulatory mandates and pressures, have sued the state.

A Coming Political Crunch

Public employees are now casting their gaze at the tech moguls’ vast fortunes as a way to finance the state’s long-term indebtedness, which is tied heavily both to welfare spending and pensions and lifetime health care for state workers, among the worst, and least sustainable, in the nation. The 1 percent — who pay roughly half of the state’s income taxes — won’t always have such great years, and with the middle and working class in decline, it’s hard to see where the money will come from to support the burgeoning welfare state.

This is what a Marxist friend might describe as “heightening the contradictions.” As California depends on the rich for revenues, it’s natural that the public sector may be tempted to keep sticking it to them. In 2020 alone, San Francisco passed three substantial tax increases on the tech and business community. These included a “CEO tax” and a gross-receipts tax that increases the rate on the tech industry to double that of comparable cities such as Seattle. In Sacramento, too, there are widespread calls for wealth taxes, with plans to force people to pay even if they leave the state, and to raise the state’s income tax, already the nation’s highest. A new proposal circulating in the legislature would add three new surcharges on seven-figure earners. This would mean a marginal tax rate of 54 percent for high earners.

The potential impact of the plans on high earners can be seen in the departure of high-profile billionaires such as Elon Musk and Larry Ellison, reacting in part to the threat of higher taxes. The state estimates that people and companies moving out of state are already costing $1 billion in taxes annually. But the California rich, long cozy with the progressive agenda, may not be so content to live with the imposition of what some call “fully automated luxury communism” that would put everyone on easy street, paid for by draconian taxes on the richest.

California and the American Future

Many conservatives may like to write off California, claiming that “nobody is going to save” the beleaguered state. But the state is too large, too important, and too critical to be ignored. California shapes our technological future — even as companies such as Apple sell out their legacy to China — and its cultural influence is unsurpassed. It’s doubtful that Texas or Arizona, much less the South, will ever enjoy the creative synergy that has driven California. China, not Texas, may prove the real winner of the technological future.

It’s conceivable that, as progressives up their pressure, an emerging centrist majority could arise. The key will be building a new alliance between the remaining conservative and centrist voters with increasingly alienated minorities and Millennials, both of whom may be less reliably leftist than commonly supposed. These voters, like Americans elsewhere, want to own homes, raise families, start businesses, and support themselves. Many are probably more concerned with the loss of middle-management, factory, energy, and food-related jobs than with policing the gender neutrality of toys. The constituencies for change do exist.

As for the rest of you, please do not abandon California. It has a way of imposing its crazy visions, as well as its most brilliant innovations, on everyone else. Our state may be troubled, but the forces undermining our society are present elsewhere as well, if less starkly. You cannot allow our leading state, and the creator of our cutting edge, to go into permanent decline. After all, as we go, so too might you.

Joel KotkinMr. Kotkin is the presidential fellow in Urban Futures at Chapman University in Orange, Calif., Washington Fellow at the Claremont Institute’s Center for the American Way of Life, and the executive director of the Urban Reform Institute. His new book is The Coming of Neo-Feudalism.

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