In the New York Times last Thursday, Thomas Edsall had a piece titled “Is California a Good Role Model?” The piece summarized different views from pundits on the right and left as to the future prospects for California as it continues and adds to a growing menu of the latest progressive policy prescriptions — highest in the nation state income tax rates, highest in the nation sales tax rates, aggressive energy policies to address “climate change,” and so forth. A fair summary is that the right-side pundits chided California for having highest-in-the-nation inequality and poverty rates, while the left-side pundits responded that it also had strong economic growth.
I actually wrote a post on exactly this subject way back in February 2013, titled “Let’s Start A Pool On How California Will Do Over The Next Five Years.” That post began by describing three of the then-recently-enacted progressive policy favorites (highest-in-the-nation tax rates going up to 13.3% on incomes over $1 million, intentional increasing of electricity prices via a cap-and-trade system, and the high speed rail project). Would those things knock California off its high growth pedestal? You may be surprised with my take at the time:
I'm certainly not predicting an imminent collapse for California. The consequence of making yourself way out of line in taxes and costs is not rapid collapse, but slow relative decline.
Before getting more specifically to the case of California, let me illustrate what I mean by “slow relative decline” by describing the case of New York. Also, understand that “relative decline” doesn’t necessarily mean absolute decline, in the sense that per capita income is actually going down. It just means decline relative to the competition, which in this case is the other states.
For the case of New York, if you are not a student of economic statistics, you may find it hard to believe how dominant New York was in the economic life of the U.S. at its peak in the 1920s. They didn’t publish the same kinds of economic data back then that they do today, but the newly-created IRS did put out some very useful information. At this link, page 2, you can find IRS population and income data by state for 1920. New York was far and away the largest and richest state, with 9.8% of the population (10.4 million out of 106 million) and 16.99% of the reported income, which you can see made its residents almost twice as rich as the average of the rest of the country on a per capita basis. Next richest then were Pennsylvania and Illinois; but Pennsylvania had 84% the population of New York (8.7 million), but only 54.8% of the income, and Illinois had 62% of the population (6.46 million), but only 45.6% of the income. By 1930 (this link at page 67), New York had even increased its dominance, going to 10.22% of the population and 19.19% of the reported income. That made it more than twice as rich as the average of the other states on a per capita basis. Pennsylvania, Illinois and the rest had only fallen farther behind.
The 1930s were the decade when an early version of progressivism began to take hold in New York, with things like expanded public welfare programs and the trendy new idea of public housing. I won’t try to give a full history of New York’s adoption of the high-spend high-tax state model, but as some examples, over the course of the 1940s through 70s New York gave constitutional protection to public sector pensions (1940), granted collective bargaining rights to public sector unions (1958), saw income tax rates soar to a 15% marginal state rate by the early 70s, added a New York City income tax with its own rate of about 4% in 1966, and so forth. New York City’s taxes today are famously highest in the nation by most measures, and public spending levels are comparably far above national norms, particularly for public schools and Medicaid.
And the results? It doesn’t seem so bad around here. But you need to look at the statistics to see the enormous relative decline. Today New York’s population of 19.8 million is only 6.4% of the nation’s population, and only fourth among the states. The states that have passed it recently, Texas and Florida, are no-income-tax states. In per capita income, New York ranks only 7th among the states, with per capita income only 14% above the national average. When you look at these statistics, you realize what a huge relative decline New York has experienced. Of course, this process has taken almost one hundred years, with some partial revivals along the way.
So back to California. From Edsall’s piece:
Let’s look at the plus side [for California] first. Take per capita personal income, which grew nationally from $4,218 in 1970 to $51,631 in 2017, according to the St. Louis Federal Reserve. In California, over that same period, income grew significantly more, from $4,966 to $58,272, in real dollars, unadjusted for inflation.
Gotta love those basic arithmetic skills over at Pravda. No, Tom, those numbers do not indicate that California per capita personal income grew faster than that of the U.S., but rather prove the opposite, that it grew more slowly, if not by a lot. Per your own numbers, in 1970 the ratio of per capita income in California to the rest of the country was 4966/4218, or 1.177; in 2017 the ratio was 58272/51631, or 1.128. Obviously, the rest of the country was growing relatively somewhat more quickly. On the other hand, the 1970 start date for the comparison may not be that relevant. Ronald Reagan was the Governor of California in the 70s. California only caught the progressive bug more recently.
Let’s take an example of something from a more relevant time period, 2010 - 2017. The thing that California has most been known for for a century has been rapid population growth, as people from all over the country and the world flock there for a combination of the great weather and the economic opportunity. But by 2010, the high tax, high spend policies were really kicking in. What’s the story on California’s population growth for these recent years? The answer is that in the period 2010 to 2017 California went from 37.33 million people to 39.54 million, an increase of 5.9%. For the US as a whole, the increase for the same period was from 309.33 million to 325.72 million, or 5.3%. California beat the rest of the country, but barely. (For purposes of comparison, from 1980 to 1987, the population of California went from 23.67 million to 27.78 million, a 17% increase.) Down in Texas, the increase from 2010 - 2017 was 25.25 million to 28.30 million, approximately 12%.
So in the most recent years, California’s population increase has slowed to be approximately equal to that of the rest of the country. As their high costs and high taxes continue to wear on their economy, expect their growth rates of population and per capita income to slow until they are below — and maybe substantially below — the rest of the country. They are likely to see the same slow relative decline that New York has experienced for the last century. Fifty years from now, it is likely that they will not be the largest state by population, and that they will be an also-ran in per capita income, as other states pass them by.
Another possibility is that California takes the course of Venezuela, attempting to achieve immediate perfect justice and fairness by high tax and redistributive policies. I don’t foresee that, but I can’t rule it out. If they go that route, they may even be able to achieve rapidly declining incomes and economic collapse.