For years, California could rely on its temperate climate and a talented workforce to attract and keep businesses even as taxes and regulations increased. No more. In surveys, executives regularly express the view that California has one of the country's most toxic business environments, and they say it is one of the least likely places they would open or expand a company. Many firms headquartered here say they have forsaken expansion in the state. Meanwhile, California suffers from an unemployment rate some 2 percentage points higher than that of the nation as a whole.
The deep discontent of the business community is just one sign of larger problems in the California economy that predate the 2008 national financial crisis. A study by City Journal using the National Establishment Time Series Database, which has tracked national job creation and migration from 1992 through 2008 (the latest data available), suggests that California's economy started showing signs of sclerosis a decade ago. So even after a national recovery takes place, the Golden State may keep struggling — unless Sacramento moves to improve the business climate.
Economists usually see business start-ups as the most important long-term source of job growth, and California has long had a reputation for nurturing new companies. Indeed, from 1992 to 2000, California added 777,000 more jobs from start-ups than it lost to closures. But this dynamism vanished in the 2000s. Between 2000 and 2008, California lost 262,000 more jobs from closures than it gained from start-ups.
Between 2000 and 2008, some 80,000 more jobs left California for other states than came here from other states. The leading destination of the job migration was Texas, with Oregon and North Carolina running second and third. California managed to add jobs only through the expansion of existing businesses, and even that was at a considerably lower rate than a decade earlier.
Another dark sign has been that economic growth in California's major cities stalled after 2000. Los Angeles and the San Francisco Bay Area had been the engines of California's economic growth for at least a century. But between 2000 and 2008, California's two big metropolitan areas produced fewer than 70,000 new jobs — a nearly 95% drop from the 1990s and a mere 6% of job creation in the state. This was a collapse of historic proportions.
Equally troubling was that California's growth in the 2000s, such as it was, took place disproportionately in sectors that rode the housing bubble. In fact, 35% of the net new jobs in the state were created in construction and real estate. All those jobs have vaporized since 2008, according to Bureau of Labor Statistics data.
While there are many reasons for these troubling trends, the state cannot ignore the role its policies have played in the economic decline. For seven consecutive years, executives polled by Chief Executive magazine have ranked California as having the worst business environment in the country. In a 2011 survey of its members by CalRecovery, a California coalition of businesses and industries based in the state, 84% of about 400 executives and owners who responded said that if they weren't already here, they wouldn't consider starting up in the state, while 64% said that the main reason they stayed in California was that it was tough to relocate their particular kind of business. In a recent op-ed, Andrew Puzder, chief executive of Carpinteria-based CKE Restaurants, which manages 3,000 eateries around the country, called California "the most business-unfriendly state we operate in."
Another troubling sign: California is even losing the battle for green manufacturing jobs. Earlier this year, Bing Energy, a fuel-cell maker, announced that it would relocate from Chino in San Bernardino County to Tallahassee, Fla., where it expected to hire nearly 250 workers. "I just can't imagine any corporation in their right mind would decide to set up in California today," Dean Minardi, Bing's chief financial officer, said.
California's suffocating regulations have a lot to do with this discontent. A 2009 study by two California State University finance professors, Sanjay Varshney and Dennis Tootelian, estimated that regulation cost the state's businesses $493 billion annually, or nearly $135,000 per company. Additionally, dense and complex land-use regulations have driven up housing construction costs in the state, giving residents a double whammy: a stagnant economy and unaffordable home prices, even since the real estate bubble burst.
Taxes are another burden. According to the Tax Foundation, California imposes the nation's second-heaviest tax burden on businesses, and finance officers of major companies recently rated the state's overall tax environment the worst in the country, according to a poll in CFO magazine.
On top of taxes and regulation, the state can also claim what may be America's most expensive litigation environment for firms. The American Tort Reform Foundation recently named California one of the country's five worst "judicial hellholes," in part because state law allows trial lawyers to sue firms for minor violations of California's complex labor and environmental regulations.
Gov. Jerry Brown has declared that "California always comes back." But history shows that great states can decline. Some, like New York, which was the nation's economic engine before California, never regain their luster. The state's leaders need to acknowledge the message they are hearing from the local business community and consider ways to help the state regain its economic edge.
Wendell Cox is the principal of Demographia, a public policy consulting firm. Steven Malanga is senior editor of City Journal, from whose fall issue this article is adapted.
"Victor Davis Hanson brings a lifetime of experience in California's Central Valley to this indictment of multiculturalism and mass immigration." -- Mark Krikorian, Center for Immigration Studies
February 2, 2009
From Sacramento — Based on my e-mail, a lot of folks think the solution to California's state budget deficit is to round up all the illegal immigrants and truck them down to Mexico.
Wrong. Even if it were logistically possible and the deportees didn't just climb off the truck and hitch another ride back up north, their absence from the state wouldn't come close to saving enough tax dollars to balance a budget that has a $42-billion hole projected over the next 17 months.
Painful cuts in education, healthcare and social service programs still would be needed. Sharp tax increases would be required.
That said, let's be honest: Illegal immigration does cost California taxpayers a substantial wad, undeniably into the billions.
But it hasn't been PC for officeholders to talk about this for years, ever since Gov. Pete Wilson broke his pick waging an aggressive campaign for Proposition 187. That 1994 ballot initiative sought to bar illegal immigrants from most public services, including education. Voters approved the measure overwhelmingly, but it was tossed out by the courts.
Wilson was demonized by Democrats within the Latino community. And many think the Republican Party never has recovered among this rapidly growing slice of the electorate.
So it's not a topic that comes easily to the tongues of politicians, even Republicans.
Besides, most of the policy issues are out of California's hands. The federal government has jurisdiction over the border. Federal law decrees that every child is entitled to attend public school, regardless of immigration status. And every person -- here illegally or not -- must be cared for in hospital emergency rooms.
But the state does add a few benefits that aren't required.
And as Gov. Arnold Schwarzenegger and legislative leaders dig into the books trying to find billions in savings, at least a brief look at what's being spent on illegal immigrants seems in order.
First, nobody seems to know exactly. Numbers vary widely, depending which side they come from in the ongoing angry debate over whether people who entered the country illegally to work should be allowed to stay or loaded on the southbound truck.
But here are some no-agenda numbers:
* There were 2.8 million illegal immigrants living in California in 2006, the last year for which there are relatively good figures, according to the nonpartisan Public Policy Institute of California. That represented about 8% of the state's population and roughly a quarter of the nation's illegal immigrants. About 90% of California's illegal immigrants were from Latin America; 65% from Mexico.
* There are roughly 19,000 illegal immigrants in state prisons, representing 11% of all inmates. That's costing $970 million during the current fiscal year. The feds kick in a measly $111 million, leaving the state with an $859 million tab.
* Schools are the toughest to calculate. Administrators don't ask kids about citizenship status. Anyway, many children of illegal immigrants were born in this country and automatically became U.S. citizens.
If you figure that the children of illegal immigrants attending K-12 schools approximates the proportion of illegal immigrants in the population, the bill currently comes to roughly $4 billion. Most is state money; some local property taxes.
* Illegal immigrants aren't entitled to welfare, called CalWORKs. But their citizen children are. Roughly 190,000 kids are receiving welfare checks that pass through their parents. The cost: about $500 million, according to the nonpartisan Legislative Analyst's Office.
Schwarzenegger has proposed removing these children from the welfare rolls after five years. It's part of a broader proposal to also boot off, after five years, the children of U.S. citizens who aren't meeting federal work requirements. There'd be a combined savings of $522 million.
* The state is spending $775 million on Medi-Cal healthcare for illegal immigrants, according to the legislative analyst. Of that, $642 million goes into direct benefits. Practically all the rest is paid to counties to administer the program. The feds generally match the state dollar-for-dollar on mandatory programs.
So-called emergency services are the biggest state cost: $536 million. Prenatal care is $59 million. Not counted in the overall total is the cost of baby delivery -- $108 million -- because the newborns aren't illegal immigrants.
The state also pays $47 million for programs that Washington does not require: Non-emergency care (breast and cervical cancer treatment), $25 million; long-term nursing home care, $19 million; abortions, $3 million.
Schwarzenegger has proposed requiring illegal immigrants to requalify every month for Medi-Cal benefits, except pregnancy-related emergencies.
There also are other taxpayer costs -- especially through local governments -- but those are the biggies for the state. Add them all up and the state spends well over $5 billion a year on illegal immigrants and their families.
Of course, illegal immigrants do pay state taxes. But no way do they pay enough to replenish what they're drawing in services. Their main revenue contribution would be the sales tax, but they can't afford to be big consumers, and food and prescription drugs are exempt.
My view is this: These people are here illegally and shouldn't be, regardless of whether they're just looking for a better life. Do it the legal way. And enforce the law against hiring the undocumented.
On the other hand, they are here. We can't have uneducated kids and unhealthy people living with us. We have moral obligations and practical imperatives.
The Obama administration and Congress need to finally pass an immigration reform act that allows for an agriculture work program and a route to citizenship.
Meanwhile, California should be honest about the costs. Illegal immigrants are not the sole cause of the state's deficit. But they are a drain.