California’s Economic Picture is Not as Rosy as Commonly Believed

The prevailing wisdom in Sacramento on the Democrat side of the aisle is that the ruling Democrat Legislature can do no wrong with the economy because the California economy is exceptional and can handle extraordinary tax rates and regulation that far exceed national and international standards.

But my new analysis of economic data from the U.S. Department of Commerce suggests that the California Democrat approach to the California economy may be finally taking a significant toll on the California economy in terms of reduced growth and business activity.

Moreover, the data shows that California’s long-term economic growth is roughly equal to the average of United States metro areas.  And when the Bay Area’s economy is excluded, California’s economic growth, as measured by real gross domestic product (GDP), actually averages only 0.3% for the 2008-14 period—equal to only 1/3 of the 0.9% growth for all metro areas in the United States over the 2008-14 period.  (Note: real means inflation adjusted dollars, 2009 base year)

According to the U.S. Dept. of Commerce Data, it is clear that in terms of economic growth the Bay Area is the exception, not California.  The two Bay Area metro areas represent just over ¼ of the state’s economy in dollar terms, but more than half of the state’s economic growth, even more depending on the time period.  The two Bay Area regions used for the analysis are “San Francisco—Oakland—Hayward” and “San Jose—Sunnyvale—Santa Clara.”

Alternatively, the two Bay Area metro areas recorded significantly higher real GDP growth rates than both the state and the nation.  The San Francisco–Oakland–Hayward economic region recorded an average 1.9% annual growth rate for 2002-14, and 1.6% for 2008-14.  The San Jose–Sunnyvale–Santa Clara economic region recorded an average 4% annual growth rate for 2002-14, and 4.1% for 2008-14.

For all California metro areas combined, economic growth was very similar to the nation for both 2002-14 and 2008-14.  All California metro areas combined recorded a 2% average annual economic growth rate for 2002-14, and only 0.9% for 2008-14.

But if you exclude the two Bay Area metro areas from the analysis the combined economic growth for all State of California metro areas declines significantly for the 2008-14 period in particular–to only 0.3% for 2008-14 for all California metro areas, excluding the two Bay Area metro areas.

Economic growth for the state and nation has improved in 2015, with California recording real economic growth of 4.1% in 2015, compared to 2.4% for the total United States.  This is the statistic that has generated a lot of attention, with many left-leaning commentators concluding that everything is rosy because California recorded 4.1% real GDP growth in 2015.

But economists agree that economic statistics need to be examined over the long-term for structural changes and trends that stand the test of time.

Even if this 4.1% figure is incorporated into my real GDP model, California still only slightly outperforms the nation over the 2008-15 period, with an average of 1.3% growth for California, compared to 1.1% for the nation.  And then if the two Bay Area metro areas are excluded, the remaining 75% of the California economy still underperforms the national economy for 2008-15 by an estimated 20-40%.

California routinely had growth rates of 3% or higher in the late 1990s but most economists agree that we are not likely to see a return of these growth rates any time soon.  The UCLA Anderson Forecast estimates California’s growth rate at 2% for 2016, and 1.6% for 2017, according to the Los Angeles Times.

According to the data for 2008-09, California’s economy tends to be slower to respond to economic recession, but when the recession comes the recession is far deeper in California, compared to the nation, as businesses decide to pull back in areas that are the most costly and detrimental to their interests.

Perhaps what is most troubling by my analysis of the federal data, is how poorly many of California’s metro area economies have performed since 2008.

Only seven of the 26 California metro areas examined, recorded average real GDP growth rates that equal or exceed the national average for the 2008-14 period.  The remaining 19 California metro areas recorded economic growth, or in many cases, negative growth or economic contraction, for the 2008-14 period.

For example, the Los Angeles—Long Beach—Anaheim area has only grown an average of 0.3% per year since 2008, compared to the national economy which has growth at 0.9%.  This is less than a percent real GDP growth, very anemic growth by anyone’s standards.

The California Center for Jobs reports that of the 10 metro areas with the worst unemployment rates nationally, eight are in California.

So the real question is not whether California’s economic policies, or rather lack of them, are having a negative impact on the state and regional economies?  It is really a question of how big is the negative impact on the economy and what can state policymakers do to improve the economic conditions of the 19 of the state’s 26 metro areas that continue to underperform that national economy.

The first step is to get honest about the data, which clearly shows that roughly 75% of California has underperformed the national economy since 2008.  Second, real long-term, structural solutions must be examined to try to turn the tide back in favor of creating jobs in the Golden State, as opposed to sending them elsewhere.

But with less than three months to the November 2016 election, it is not a convenient time for the Democrat majority party to admit that there is a major structural problem with the California economy.

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David Kersten is president of the Kersten Institute (www.kersteninstitute.org).  He has a master’s degree in public policy from Georgetown University and teaches a master’s course on public budgeting at the University of San Francisco.