California’s Economy Grows More Dependent on AI

While California’s economy continues to produce some impressive headline numbers, its trajectory is becoming increasingly dependent on the tech sector. And now that tech has gone all in on artificial intelligence, the state’s finances are vulnerable to either a bursting of the “AI Bubble” or an exit of AI innovators to other states.

Gov. Gavin Newsom has focused the public’s attention on California’s Gross Domestic Product (GDP) relative to that of major countries. Most recently, California passed Japan to become the world’s fourth-largest economy in 2024.

The importance of this ranking should not be exaggerated. Because different states and countries have different costs and different populations, nominal GDP tells us little about relative living standards. If we adjust GDP to equalize purchasing power, California falls to number 11 in the world, but still near or above countries with many times our population.

While California’s GDP per person is exceptionally high, it is lower than that of Washington D.C., New York state, Massachusetts, and Washington state. Among nations, California’s per capita GDP is surpassed by Ireland, Luxembourg, and a couple of smaller countries. Finally, because California’s per capita GDP is influenced by the very high incomes of a few tech titans, it is not fully indicative of the standard of living enjoyed by the state’s middle class.

Although California economic policies under Newsom and his predecessor Jerry Brown have faced criticism, the state’s economic growth has exceeded that of the nation as a whole since 2010. But in recent years, competing states including Florida, Texas, and Arizona have experienced faster GDP growth than California on the back of large population influxes.

California’s future growth will be intimately tied to the fortunes of its technology industry. To get some idea of how tech-driven California’s economy has become during the Newsom years, I looked at the market capitalization of large publicly traded companies before he took office versus today. At the end of 2018, about 60 percent of California big public company market cap was from tech firms. Today, that proportion is around 80 percent. The increase in this ratio is driven by the sharp increase in value of a few companies: NVIDIA, Apple, Alphabet (Google), Broadcom, and Meta (Facebook). All these firms are now worth more than $1 trillion while back in 2018 none was worth more than $750 billion.

By contrast, California’s other signature industry, movie and television production, has shrunk. On-location shoot days in Los Angeles plummeted 53 percent from late 2019 to late 2024, while soundstage occupancy fell from around 90 percent to just 63 percent. Iconic studios slashed staff, prop houses shuttered, and vendors went bankrupt. Entertainment can no longer be considered a tentpole of the California economy.

Meanwhile, California’s publicly listed tech firms are betting heavily on the growth of artificial intelligence technology as are many private firms such as Open AI and Anthropic which were not included in the proportions I calculated.

California’s growth may well continue and even accelerate in the near to intermediate term due to AI. But state and local government could forfeit this potential if officials make the tax and regulatory regime more intolerable. In recent years, a handful of tech companies left California, including X, HP, and Oracle. More tech companies could leave if the billionaire wealth tax passes next November, or if the state legislature adds to the list of AI regulations it imposed in 2025.

Another risk would be the bursting of the AI bubble, if it is indeed a bubble. The collapse of the “Dotcom Bubble” at the beginning of the 21st Century crimped state revenues and helped contributed to Gray Davis’s recall. A similar downturn in 2026 or 2027 would have much more serious budgetary consequences.

Over the longer term, an improved business climate combined with California’s rich reserves of human capital could facilitate the growth of other industries which might once again diversify the state’s economy. But, for the time being, California policymakers should do what they can to retain our tech superstars and hope they do not fall.

Marc Joffe is a visiting fellow at California Policy Center.

This article originally appeared in The Epoch Times.

Marc Joffe

California’s Economy Grows More Dependent on AI

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