California's Budget Surplus Has Vanished; Its Economy Faces a Harsh Reality

The much-celebrated California boom is facing a harsh reality.

Everything was looking good, based on enormous growth in capital gains in tech stocks and property, and some in Sacramento assumed the bounty would last — until it didn’t. The latest bad news is the evaporation of the state budget surplus that is now rapidly turning into a deficit that could run as high as $22 billion to $40 billion, particularly if there’s a recession.

But although there are dangers ahead, there’s no need to panic. This painful reality can be turned to our advantage and help us pivot our economy toward greater economic diversity and opportunity for most Californians, particularly ethnic minorities.

The fact is, we cannot continue to rely on the tax revenue generated by tech, media and ever-rising property prices to fund our budget and economy. Today, property values are dropping faster in California’s three largest metropolitan areas, including the Southland, than in the rest of country, and even San Francisco’s once-thriving business district faces persistent vacancies.

Meanwhile, new initial public offerings, a critical source of tax revenue, are suffering their biggest decline in two decades, and Hollywood is enduring layoffs at Disney, Warner Bros., Paramount and CBS. In 2022, stocks in media companies lost $500 billion in value, and stocks in tech firms suffered a reversal of an astounding $4 trillion. Tech firms laid off at least 120,000 employees last year.

True, the unemployment rate continues to drop and is close to pre-pandemic levels. But it is falling more slowly in California than in the rest of the country.

Even high-end employment is increasingly leaving the state. California’s growth in the high-paying “advanced” industries (a 50-sector group of industries defined by the Brookings Institution) has lagged behind that of cities like Nashville, Raleigh, N.C., and Austin, Texas. During the second quarter of 2022, California’s economic output shrank by a half-percent while that of archrival Texas grew by 1.8%.

Venture capitalist Marc Andreessen recently compared California to Rome in the year 250, a period when the empire began its final death spiral.

California has the nation’s highest cost-adjusted poverty rate, limited opportunities for working-class families and, remarkably, the highest rate of functional illiteracy. No California metro area ranks in the U.S. top 10 in terms of well-paying blue-collar jobs.

The ports, notably Los Angeles-Long Beach, that have long been linchpins of the blue-collar economy, have been losing ground to rivals in Texas, New Jersey and the Southeast.

In flush times, Gov. Gavin Newsom could hand out thousands of dollars of goodies to struggling households and create massive direct subsidy programs for housing and healthcare. Continuing such largesse seems improbable.

A better option is to adopt policies that reintegrate blue-collar and middle-class Californians into the economy. This is critical as we can no longer count on the 1% — who pay roughly half of the state’s highest-in-the-nation income taxes — to bail out the mass of Californians.

Read the rest of this piece at Los Angeles Times.

Joel Kotkin is the author of The Coming of Neo-Feudalism: A Warning to the Global Middle Class. He is the Roger Hobbs Presidential Fellow in Urban Futures at Chapman University and Executive Director for Urban Reform Institute. Learn more at joelkotkin.com and follow him on Twitter @joelkotkin.

Marshall Toplansky is a widely published and award-winning marketing professional and successful entrepreneur. He co-founded KPMG’s data & analytics center of excellence and now teaches and consults corporations on their analytics strategies.

Homepage Photo: Barrett Ward, CC 0.0 License