This is California, the Golden state and one
of the largest economies in the world in it’s own right.
If California was counted as a sovereign nation it would be the fifth largest in the world by GDP,
with a 3.2 trillion dollar gross
state product putting it just behind Germany and just ahead of India.
The state has a lot going for it, from the largest movie and technology
centers in the world all the way to a surprisingly strong agricultural sector.
All of this has meant that the residents of California are on average
doing very well for themselves, and one look around the wealthy
enclaves of las Angeles and san Francisco would back this up.
Despite all of this however, the state is going through a period of economic turbulence.
The economic fallout of the coronavirus has hit the state’s economy particularly hard.
Major industries like tourism, and media creation
have ground to a complete halt having widespread knock-on implications throughout the economy
hitting smaller vendors who were once reliant on these industries.
This bump in the road however was by no means the total undoing of the state.
California’s metrics before 2020 looked very strong, with low unemployment,
solid growth and booming industries, but there were still cracks forming.
The state is home to the largest population in the US but the industries that were truly
driving wealth creation are famously bad at actually employing people.
This had led to a sharp increase in social issues like homelessness and crime.
All of these problems that were bubbling away under the surface
have now been massively accelerated, so much so that many economists have
predicted that the sun might be setting on the setting on the sunshine state.
It may sound like absurdist alarmism but it is a reality that shouldn’t be dismissed.
Remember in previous decades there was another economic region in the US
riding high on the new growth industry of the age. but these days
Detroit is not exactly seen as the bastion of prosperity it once was.
So could the same grim reality be in store for California?
Well to answer this we need to look at a few key areas.
What made the state so prosperous before the 2020 downturn?
What were the underlying issues impacting the economy?
How will these issues be impacted by this decline?
And finally while we are here we may aswell give it an EE national Economy score and put it on our
leaderboard. I know it’s state but with a GDP in the trillions of dollars, it deserves an entry.
INTRO ADD
Now this year has certainly been one for doom and gloom,
and it is still important to address what is working well.
Any economy that can grow to the level that California has and provide so much wealth and
prosperity to it’s citizens is probably doing something right. So what was the driver of the
California Dream
California is both really lucky and really unlucky in terms of its geography.
The state had a big headstart over other states in the union when it
was getting established because it had access to decent farmland,
a good year-round climate, oh and an ocean for fishing and trade.
On the flip side of that same coin, it was literally about as far
away from the economic centers of the US as one could reasonably be while still in the US.
None the less the state grew well as a distant outpost that attracted farmers,
gold diggers, and or people that would rather be a
little bit removed from all of that pesky law and order in the east.
The first big boon for the state in the modern era was its film industry,
which was curiously also at least partially thanks to its geography and position in the world.
You see early film technology relied heavily on lots of light and good weather.
That’s one thing that California has in abundance, I mean its right there in the name.
What’s more is that a lot of this new cinema was filmed using technologies that
had patents on them. Primarily patents owned
by thomas edison and his businesses that were headquartered in new york.
By conducting business in Las angeles,
up and coming film companies felt more comfortable not been found out for using
much cheaper film equipment that was not paying royalties back to eddison for his patents.
Now this all meant two things, for starters it hopefully makes you
feel less guilty about watching a cheeky movie for free online.
But more importantly, it established LA as the center of the movie business.
We actually plan to do an entire video on the economics of hollywood,
but for now just know that eventually of course camera technology got to a point where
film locations were not as important, and modern studios do pay what they owe to their suppliers.
But once these studios were established they got comfortable.
Support Industries sprung up, film-related unions were founded and it almost got to
a point where it was really hard to film anywhere but LA.
So through nothing but being in the right place and looking the right way sume 100 years ago
california is now the epicentre of one of the largest industries in the world.
This would go on to be a common theme.
The tech revolution that started silicone valley was mostly formed around stanford university,
which was one of the first universities in the nation to offer computer science as a course.
Once a few tech companies got going other tech companies were attracted to the same area,
and along with them came the people with the expertise to create new technology.
Once this moden gold rush hit a critical mass silicone valley just became the logical place
to conduct tech business because it naturally ticked all the boxes.
Access to suppliers, access to investors and access to skilled people.
Given that technical development by its nature can be virtually rolled out anywhere..
being in an amongst a huge pool of competitors is not as much of an issue as it would be in
customer-facing industries like retail, hospitality or even manufacturing.
In fact having this ecosystem actually makes everything much easier. You need a part that only
one niche tech manufacturer in the world makes? Good chance that will be in silicone valley.
You need to consult with the world leader is some type of technical infrastructure
chances are silicone valley is the best place to find them.
This whole process is called agglomeration, which is a fancy word the inherent benefit
industry receives by being geographically close to its industry partners and peers.
Being lucky enough to just happen to have the nucleia around which
the largest industry in the world formed became par for the course for california.
Of course, a lot of it was good planning and the state did a lot of things right
to nurture the growth of these industries but luck did play an undoubtedly huge part.
All the same even if north dakota happened to be an early centre for technical innovation
it is hard to see it having the same appeal to tech companies and their staff
as the blue skies and sandy beaches of California.
Now so far this all sounds great, California has a diverse portfolio
of wealth-creating industries that are not dependant on limited resources to sustain.
But suffering from success does start to become an issue in it’s own right,
especially when California is home to a lot of people that don’t call it home.
For lack of a better way of putting it, welcome to the
Hotel California
Gold rushes throughout history were not good for local economies long term.
They see a massive spike in new workers all desperately seeking their riches and
this does create some big short term wins, businesses catering to this foot traffic can
be built and maybe even some taxes can be levied on the wealth that is extracted, but
once the gold is dug everything goes right back to where it was.
Now the californian gold rush is but a distant memory these days,
however, the state is not immune to a lot of the same effects.
Moving to LA to try and make it in the film industry or San Fransisco
to earn fat stacks as a developer are pretty common endevours.
The issue is that these types of employment don’t actually give too much back to the economy.
An influx of computer programmers getting paid 6 figures for graduate positions means that things
like real estate become unaffordable to long term residents that moved into other industries.
Real estate also drives up rents for commercial
buildings which gets passed along to consumers as higher costs of living.
It would be next to impossible for a worker earning the national average
wage to move to the bay area and expect to live a comfortable lifestyle even as a single adult
not to mention a with a family.
So people either make sacrifices, like living with roommates or parents, or they move away.
Now if you are particularly cold-hearted you might argue that trading in some
average income earning local residents for some exceptionally skilled
and well-compensated computer nerds is probably a good trade to make. But it isn’t.
For starters, you can’t run a city on computer code…. Yet…
Someone needs to be there to stock the whole foods and unless produce
packer is a job role that starts to attract a six-figure salary these people need to be
accommodated in some way or else demand-pull inflation can get to dangerous levels fast.
But the real issue is that these people don’t stay for long.
San fransicso has the highest level of internal migration withing the USA.
That means lots of people are moving in and lots of people are moving out.
that ‘s because people working in silicone valley don’t tend to do it for very long.
A few years in the industry gets people great experience and a nice
big pile of cash to take back to their hometowns.
During this time most of thse workers will live below there means and focus pretty heavily on
work. They won’t be living family lives that give back to local industries because well
it’s too expensive, even these well-compensated employees
would struggle to raise a family in southern California given the general cost of living.
Its a pretty common industry gameplan. Graduate university, get a job at a FAANG company,
stick it out for 5 years, save up some cash, live in a tiny apartment
and then move back to your home city and live like a kind doing consultation work.
People paying alot of money for a short stay in modest comfort?
I guess the Hotel California is open for business, but you can actually leave.
To try and make the best of a bad situation the Californian
government levies the highest state income taxes in the nation.
The general idea is that sure these outside workers can come and make their millions
but at least it will generate lots of revenue for the government that
they can then use to address some of the issues caused by said workers.
Now in theory this is fine and it actually worked well for some time. But it was a
precarious balancing act, the slightest breeze could throw if off course. Which is exactly where
the hurricane that was 2020 came in. The state first the first time ever is starting to see
Mass vacancies.
The economic fallout of the coronavirus has been a major hit to Everybody, but the consequences
have been especially severe in the united states, and especially severe in california.
For starters, nobody is making a movie, going on a beach holiday
or attending Disneyland at the moment so that has been a major direct blow.
But what might end up being more severe is a consequence that is a little bit harder to notice.
People are starting to leave.
The push to work from home means that the aforementioned tech workers
no longer need to live in a cramped 1 bedroom apartment in the bay area,
they can instead just do exactly the same thing in a nice family home anywhere in the nation
while enjoying a much better quality of life and paying much less in tax.
The same income tax designed to make the most of high-income earners while
they were working in the state is now pushing people away in droves.
The issue of capital flight is an argument that is
often brought up to dissuade governments for passing taxes on high-income earners.
To speak candidly most of the time these arguments are weak at best. Most people will
not move their families to a new nation to save a few thousand dollars on taxes, but a single
worker moving to a new city in the same country, well that is a far more compelling prospect.
Infact while I was in the process of writing this script Graeham Stephan, a personal finance
YouTuber posted a breakdown of why he was leaving California and moving to Las Vegas to live.
Now Graham does not work in the tech industry but he is still indicative of those types of workers.
Young, very well off, with a business that he can do from anywhere.
Of course, one mans experience does not a trend make.
but his reasons for leaving were very in line with the research that we conducted,
so go and check that video out he is a good e gg that graham.
Ranking.
Ok I know California is not a country and this say’s national leaderboard but it is
still interesting nonetheless, and I mean Hong Kong gets a spot so why not right?
Size is simply phenomenal. California would make for a huge national economy in its own right but
the fact that it is just one part of the US gives you and idea of just how influential the economies
of the worlds super powers are. It gets a 9/10, of course falling short of the
14 figure GDP club but still one of the largest most influential economies in the world.
GDP per capita is very high, as temperamental as they may be the nation is still home to alot of
very skilled very industrious workers, and with a GSP per capita of 72,000 in 2019 it gets a 9/10.
Curiously enough the state or territory in the US with the highest GDP per capita is the Disctrict
of Columbia with a whopping $162,000 as of 2018, which puts it in line with places like Monaco.
Stability and confidence. This is really subjective and had
it been asked 12 months ago it would have been a clear 10/10.
But flying so high means it has a long way to fall and it has historically felt the impacts
of downturns more heavily than the national average, so it gets an 8/10 which is of course
still very well deserved for a state with such a diverse portfolio of world-leading industries.
Growth is pretty stable. The economy is large and
reflects a developed nation in its own right and the growth figures reflect
this. Outside of 2020 it has averaged 2-3% annual growth so it gets a 6/10.
Finally industry, well cmon what else could it be. If anything could get an 11/10 it would be
California. But in the meantime, it will need to make do with a nice round 10/10.
Altogether this gives the sunshine state and average score of 8.4 out of 10,
just falling short of the top spot. Of course with
the same big asterisk as hong kong that this is not actually a nation.
Final thoughts
California would be a remarkable economy if it was it’s own nation but in a way it is
even more so as just a very productive piece of the grander american puzzle.
But that does not mean it is without concern. Yes has been fortunate enough to attract alot
of very profitable industries and the very skilled people that come with them.
Yes its loverly beaches and attractions will continue to attract more tourists
and businesses alike, but it can’t rest on it’s laurels.
Many economies have thought they were the epicenter of industries that would last forever,
became overly reliant on them and then suffered as those same industries faded into obscurity
There is no such thing as an unsinkable ship, and when all of the smart people
start heading for the life rafts, it might be time to look out for icebergs ahead.
Who would have thought that the golden child of American industry would have been hit so hard,
in so many unusual ways, in such a short amount of time, it’s one of those events you don’t see
happening until it’s too late. Unless you have some fantastic insights, like the ones
you can get… On trends