Part #1 Assessing the State of the Golden State

The California Prosperity Project is a major undertaking by the Pacific Research Institute to help
reform government policies with the goal of putting California’s economy back on track and moving
towards greater and lasting prosperity. According to the Institute, the Prosperity Project is a
multiyear project aimed at explaining to Californians the underlying problems plaguing their
economy and more important, the solutions to these problems. The Institute believes it is impossible
for fresh, new ideas to flourish while old, bad ideas remain intact. The Institute’s goal is to inform
Californians of the severity of the problem facing the state so it can begin to create a climate of
opinion open to change.

The Prosperity Project will include a series of studies that will be completed over the course of 2009
and 2010, culminating in the release of a road map to recovery just prior to the general election of 2010.

The Institute’s methodology for this report rests on two core approaches. The first is to establish the
problem. This first approach is entirely aimed at establishing the scope and depth of the economic
problems facing the state. The second approach is to provide workable solutions based on sound
empirical research.

The report, ‘Assessing the State of the Golden State’ is the first installment in the California Prosperity
Project. It measures the economic performance of California against the other 49 states on a range of
economic indicators—income, labor, migration, and entrepreneurship—to provide both a picture of the
state’s specific economic performance in individual areas and a more comprehensive view of the state’s
overall performance.

The report written by Robert Murphy, Ph.D. and Jason Clemons illustrates that although California with
all of its advantages, such as its position to the Pacific Rim and North American markets, its diverse
agriculture sector to advance research and development, premiere universities which serve ‘hubs of high
tech’ innovation, and a geographically gorgeous location, is unfortunately economically ill.  The economy
that has manifested itself in the ongoing budget crisis apparently goes well beyond the current economic
downturn that has impacted the other states according to the authors.

This report assesses the economic performance of all 50 states from several time frames over periods
from 2003- 2007 and 2004-2008, with particular attention paid to four main categories:
1. Income
2. Labor
3. Migration
4. Entrepreneurship  

INCOME
The income category is broken down into three components: (i) growth in gross state product, (ii) growth
in per capita personal disposable income, and (iii) the average poverty rate.

The analysis illustrated that California’s Gross State Product, GSP grew at 3.6 percent, which placed
California 10th highest in the nation.  However, the report rightly illustrates that California’s GSP began
to falter in the later part of the timeframe of 2003-2007.

The analysis used percentages rather than presenting the aggregate sum to reflect the components. 
So, in the case of measuring California’s GSP (which is identified as one of the top ten largest economies
in the world) against much smaller states, the percentage of the Golden State’s growth will always look
smaller compared to smaller states such as Nevada and Idaho similar to the national total of the U.S.. 
While the authors validate the use of percentages within their methodology it would have been of value
to also see the aggregate sum comparison given the state’s economic position in the world.  Given that
California’s GSP makes up nearly twelve percent of the nation’s GNP, the reader should look to the
states of New York, Texas, Florida and Illinois.  These states when added with California make up nearly
50 percent of the nation’s GNP.  So, how can one compare the Golden State against a smaller state
utilizing a percentage basis when smaller aggregate economic growth can create a larger percentage? 
A two to four percent GSP can illustrate a very robust economy as was the case for California.  So
should have the analysis compared California against the twenty largest economies in the world instead?
Jason Clemons one of the authors provided insight that there is at least a potential for some discussion
in future analysis for that examination.

In the second component presented, related to the growth in per capita personal disposable income, it
Illustrated the necessity to compare successful states with California to ascertain opportunities and
public policy development to enhance the state’s economy.  In the case of New York and Texas, they
rank much higher than the Golden State, but closer to Florida and nearly even with Nevada,  which has
a lower tax rate) and yet higher than Illinois. But there was no discussion why these states are and have
been more successful. Again, the need for further discussion.

The third component relates to poverty rates. The report quickly points out that although it would be
reasonable to evaluate a state based on its success in reducing its poverty rate, in practice this approach
leads to difficulties of weighting. For example, should a state be judged by the absolute reduction in terms
of percentage points, or in relative terms by the percentage fall in the poverty rate itself? To avoid such
difficult and often arbitrary decisions, the report relies on a simple arithmetic mean (average) of a state’s
annual poverty rates from 2003 to 2007.

California’s poverty rate was lower than New York and Texas but slightly higher than Illinois and Florida. 
Again, how would California rank against world economies?

LABOR
In the labor category there are four indicators: (i) growth in private employment, (ii) the relative size of
private versus government employment, (iii) the average unemployment rate, and finally (iv) the extent
of severe (long duration) unemployment.

In this analysis, the report restricts the measure to private-sector employment so as not to “reward” a
state that expands employment through hiring more government workers, who ultimately have to be
financed by taxing private sector
workers.

Thus, in the first component, growth in private employment 2004-08 illustrates that California was in
the bottom twenty of the list of 50.  However, further review shows that California is really in alignment
with the lower 50 percent of the nation in job creation. And, while no further detail is given, there is no
explanation on the type of jobs created during this same period. So, there is a potential for further
discussion and examination. For California, the state possessed the headquarters of the third most
Fortune 500 firms in the nation during this period and companies were created in the state that could
become fortune 500 firms.  California ranked only behind New York and Texas for Fortune 500 firms,
illustrating quality jobs and career ladder opportunities.

The second component, the relative size of private versus government employment, is one of the most
obvious and significant examples of an issue facing the state.  The size of government, specifically local
government is enormous compared to the private sector.  California has one of the worst ratios.  In recent
state Employment Development Department data, it illustrates that state government employment makes
up only 11 percent of the total public sector jobs in the state of nearly 2.5 million public sector workers.
So it is the enormous growth of California’s local government’s that have seen significant growth, specifically
since 2000.  Thus it appears that the issue with the poor government to private sector employment ratio is
caused by local government. This certainly requires further discussion.

The third component, the average unemployment rate illustrates that California had one of the lowest
unemployment rates in the nation and lower than New York, Texas, Florida and Illinois. However, the
extent of severe unemployment captured by this study illustrates California as having a higher proportion
of severe unemployment, but there is no detail that illustrates the reason for this severity.  Speculation
for this could be caused by the seasonality from the state’s agricultural community, specifically in the
Central Valley, Sacramento Valley and Salinas Valley, specifically as it pertains to not only the need
of farm workers but also non durable products such as food processing.

MIGRATION
The report illustrates the in and out migration of people to the states.  While California migration illustrates
a high proportion of people leaving the state, it does not disaggregate the age of the population that out
migrated.  Additionally this section should also illustrate the internal growth of each state’s population. 
California has added hundreds of thousands just through increased births, and over a period of four to six
years can add a population the size of at least 15 individual states in that time period.

ENTREPRENEURSHIP
The authors conclude that the purpose of this study is to convince Californians and policy makers in the
state that there is a problem. Yet they believe that state legislators and citizens should not simply throw
up their hands in helplessness. The authors urge citizens and legislators alike to realize that state
government policies wield a definite impact on economic performance measures such as migration.

However, in the context to reviewing the state, they might have chosen other measurements. For example,
if they were to measure economic growth, they possibly could have gone beyond the examination of
population but also included the infusion of capital or intermediation of capital, harvesting of natural
resources and changes in technology during the period reviewed.  And if they had looked at California
from an economic development perspective they could have done further analysis beyond income growth
such as incorporating wealth generation, job growth and investment opportunities. 

However, we are going to reserve judgment on this study as the Pacific Research Institute identified that
they will in their next installment of the California Prosperity Project analyze specific policies that California
can enact to improve its economic performance.

SUMMARY
In the meantime, the authors suggest that Californians and its policy makers should study the relatively
successful states to understand the reasons for their superior performance.  For example, this report
ranks Nevada as the top performer.  Recently, economists from the University of Nevada, Las Vegas
illustrated in a forum covered in an article in the Las Vegas Sun newspaper that Las Vegas and the
state are over capacity for everything from housing, hotel rooms and casinos.  They identified that
Californians have stopped coming to the ‘Sin City’.  And to add insult to injury, Nevada just announced
a mass marketing campaign in California to recruit business away from the Golden State.  Strange,
that if Nevada was all that entrepreneurial in nature, they need to recruit businesses to their state. 
And of interest, Nevada has a higher unemployment rate than California, even though it has much
lower taxes, which should be discussed as a key component as a function to growing an economy
in the Institute’s  future analysis.

However, the authors do leave the readers with sage advice:

“If California is to have any hope of climbing out of its present
economic and budgetary nightmare—let alone lay the foundation
of a solid recovery so that such crises do not return—then
state policy makers must seriously confront its underperformance
not only against other states during the past few years, but also
against California’s own standing in previous times when the state
enjoyed much greater prosperity.”

For further information see-http://liberty.pacificresearch.org/publications/assessing-the-state-of-the-golden-state

Next, Part 2, An Overview of the Report- Manufacturing 2.0, A More Prosperous California by the Milken Institute.