California, the Golden state of the United States, with a massive economy of $3.4 trillion (2021), is known for its Silicon Valley, sublime weather, sandy beaches, tourism, and Hollywood studios.
California experienced a gold rush in 1848, leading many people to settle in the state. The large-scale migration and population boom qualified California for statehood in 1850. And later, it became home to high-tech Silicon Valley companies like Apple, Microsoft, Google, Tesla, etc.
However, in recent years, it has faced severe economic losses, which have affected the economy of the state and its population in general.
California Economy in Present
California is leading the US in terms of software, automobile, digital technology, modern mobility, environment, and space industry. Moreover, being located on the west coast of the US, it is considered the front door between the United States, the Pacific Rim, and the emerging Asian market.
However, after the advent of the pandemic, California’s economy started to face setbacks.
Let’s analyze the reasons and ramifications in detail.
California was the first state in the United States to impose the lockdown, leading the fight against coronavirus. But the government’s wrong policies and method of handling the pandemic greatly impacted people’s lives and the economy.
Being the largest and most diverse state in the US, the population of 39 million was severely affected by the pandemic.
The state reported 3.9 million cases in 2021, which is 11.0% of the total cases in the country and approximately 10.5% of total deaths (63,891 deaths), according to the California Department of Public Health.
Moreover, the lockdown imposed by the California authorities hiked the unemployment rate by 16%. Resultantly, the state economy lost more than 2.5 million jobs, which heavily impacted the manufacturing industry of California.
California’s tourism, hotel, media creation, and lifestyle industries also faced a significant setback due to the hefty lockdowns.
Apart from that, as California heavily relies on Agricultural labor more than any other state, the agriculture sector faced massive losses, especially in the beef, dairy, and meat industry. In usual years, farm employment peaks in the month of June in California, but during the pandemic in 2020-21, the numbers substantially decreased due to the government’s stay-at-home orders.
Mass Exodus of Big Corporations
Major high-tech companies like HP, Oracle, Apple, Palantir, and SpaceX are building their megafactory in Austin, Texas. More than 1800 companies shifted their headquarters away from California only in 2016. The other major companies– Toyota, Nestlé, Charles Schwab, and Jamba juice already moved their headquarters to Texas in 2018.
What’s the reason for the mass exodus of these high-profile MNCs from California?
The taxes, housing costs, and cost of living in California are 50 percent higher than in other meidan states. Whereas public services, including healthcare and schools, are not at par with other states.
Earlier, there was no alternative for the high-tech companies to relocate. But now they can move to Houston and Texas, offering these companies better opportunities and low taxes.
Moreover, the High-tech companies faced strict regulations by the Californian Authorities during the pandemic, including stay-at-home orders for employees and compulsory lockdowns, leading to a major monetary loss. Meanwhile, other states allowed some relaxation in-laws for these industries.
As Democrats hold a supermajority in both houses of California State, people are divided over their business policies, where few call them progressive policies and others are skeptical and call the state unfriendly for business. The Democrats are tough on fuel use, automobile emission, and water caps and impose strict laws over polluting industries, therefore making California costly to do business with.
Taxes: Maneuvering California’s Industrial fabric
California is heavily dependent on tax payments by rich individuals and heavy charges taxes on all metrics compared to other states across the US. For instance, California has high business taxes and complex red tape relaxation criteria over income tax credit processes.
Whereas nine other US states charge no taxes on individual wages, unlike California.
This is increasing the living cost of employees tremendously. Consequently, 2 out of 3 employees across all industries in California are looking to live outside of the state if they get work-from-home opportunities.
The Departure of Companies: Impact on California Economy
California receives handsome revenue from the top earners and is heavily dependent on these taxes. According to California’s Franchise Tax Board, the top 0.5 percent of super-earners, many of them in the tech sector, pay 40% of the state’s tax revenue.
However, the recent withdrawal trend of major companies is going to impact California’s state economy adversely.
Just as an analogy, New Jersey State had to amend its budget because a single Billionaire left. Imagine the impact on California’s economy when billionaires like Elon Musk shift their companies to Texas.
Therefore, if California doesn’t amend the tax relaxation laws for these high-tech companies, jobs, living conditions, and state revenue will dry out.
When the 2008 recession ended, it took California five years to reach the past downturn levels. California received $50 billion less income tax revenue in those five years, and the government was forced to compensate by cutting California’s $45 billion in social welfare programs.
You see, we are talking about billions of dollars, which will dry out from California’s coffers with the mass exodus of these tech companies.
California’s Drought is Worsening its Economy.
California’s $3.4 billion economy started to feel the heat of drought and Climate Change in recent years.
The state has been experiencing severe droughts in the last few years, and it has continued over the years. There is not enough water for homeowners, the manufacturing industry, homeowners, fish industry, and agriculture.
As rural areas depend heavily on groundwater for agricultural input, the decreasing water level will get severe in the coming years.
Similarly, in Southern California, which heavily depends on the Colorado River for its water requirement, the water level has been falling for quite an extended period. They even restricted watering a lawn more than once a week.
The Public Policy Institute of California reported that California experienced 3.5 degrees Fahrenheit warmer temperature compared to the 20th century. It led to an 8% increase in crop water demand in 2021.
Moreover, the scarcity of rain has increased the frequency of forest fires in the last few years, causing more property and resource losses for the economy.
Real-Estate Crisis in California
California, by all estimates, is short of 3-4 million houses. Pinching salt in the wound, the ever-rising living cost has further worsened the situation for major high-tech companies’ employees. It is worse for both as private businesses are profit-seeking, and if the companies employ people in the state, they will have to pay higher salaries, thus ultimately reducing their profits.
Comparatively, the other states across the US are much cheaper for housing and living compared to California.
To understand how fatal California’s Real-Estate problem is, let’s check out the data from the White House, which says California accounts for half (47%) of the unsheltered US population. The poor people in California, who cannot afford the accommodation, are compelled to live on the streets and vans. Resultantly, people from middle and lower-income categories also look for an alternative to California.
Is California’s Economy Heading Towards Recession?
For quite a few times, Republicans have insisted that their economy is heading towards a recession. The GDP of California has contracted straight for the last two-quarter of the year 2022, as per economic data published by the Federal government of California in August.
Jobs: California’s unemployment rate was 4.2%, above the national average of 3.6%, and is the 10th highest in the United States.
Consumer behavior: As the risk of imminent recession increases, Consumers naturally refrain from purchasing goods and start to prepare for it by increasing their savings.
The report published by the New York-based Conference Board survey in August shows that consumer confidence has been dropping for the past three months, which would have a ripple effect in the long run.
Inflation and interest rate: Consumer prices were seen at 9.1 percent in this financial year. This annual leap is the biggest since 1981. During these circumstances, the consumer abstains from paying higher prices and interest rates, which eventually retards economic growth.
Long-term Planning: The US has the highest debt to Gross Domestic Product ratio. It seems to increase sharply in the upcoming few months, creating a bigger federal deficit and leading to a bigger debt servicing ratio as well.
Therefore from the above analysis, it is evident that California’s economy, if not dwelling into recession, is not performing well and can potentially suffer long-term ramifications.
How is California’s Economy Performing Now?
In the last few recent years, we experienced the wave of coronavirus, and economic upheaval led many people to seek other better places to migrate. So how is California performing now, and will it continue?
An Economic Overview of Present California’s Economy:
California experienced a plunge in its hotel industry since the beginning of the novel Coronavirus pandemic. However, it started to witness tourists in March 2022, when its tourism peaked. The arrival of tourists tends to continue in the future if no further wave of coronavirus and event cancellation occurs, which could be positive news for California’s tourism industry.
Outdoor and recreation industry
California, famous for its beaches and warm weather, is ideal for outdoor activities. The data published by Gravy Analytics shows California’s outdoor recreation industry isn’t performing as well as it should be because of strict regulations imposed by the state due to the pandemic.
California attracts tourists worldwide through its Golden Gate Bridge, Disneyland, and Hollywood. Its Entertainment industry has performed average since it opened its space for outsiders. It may be expected to peak in the future, and California can earn more revenue from Entertainment tourism.
Restaurant and Food industry
The government imposed a lockdown during the Covid-19 pandemic, discouraging consumers from eating more at home and in-person grocery shopping trips. Since then, California has experienced an improvement in its restaurant and food industry as more tourists are starting to roll down for vacation and recreation.
California has to allow a more business-friendly environment for its companies. The top 1 percent of super-earners pay 46 percent of its total budget revenue. That’s why it’s vital to keep businesses going in California.
Tourism, restaurant chains, the entertainment industry, etc., have started to gear up, and it is good news for California’s economy.
However, it is difficult to say anything in this environment of uncertain economic conditions throughout the world when the US, along with many nations, is at the door of recession.