Should We Let California Go Bankrupt?

Friday, February 27th, 2009

Should we let California go bankrupt? They are doing it to themselves, Steve Malanga points out:

As Milton Friedman observed in the mid-1990s, you can’t have porous borders and a welfare state. The incentives are all wrong. California has become a case-study in that notion. A report by economists working for the National Academy of Sciences in the mid-1990s concluded that the average native-born California household paid about $1,100 in additional taxes because of government services used by immigrants whose own taxes don’t come close to covering their cost to society. It would be very interesting to see what the numbers are today.

But California doesn’t just have a spending problem. Increasingly it also has economic and revenue problems. Even as I write this other neighboring states are running ads in local newspapers inviting California businesses to move their headquarters out of the state. That’s advertising money well spent. A poll of business executives conducted last year by Development Counsellors International, which advises companies on where to locate their facilities, tabbed California as the worst state to do business in.

There are a host of reasons why California has become toxic to business, ranging from the highest personal income tax rate in the country (small business owners are especially hard hit by PITs), to an environmental regulatory regime that has made electricity so expensive businesses simply can’t compete in California. That is one reason why even California-based businesses are expanding elsewhere, from Google, which built a server farm in Oregon, to Intel, which opened a $3 billion factory for producing microprocessors outside of Phoenix.

In the race for the exits, residents are accompanying businesses. In just one decade California made a remarkable turnabout, going from a state with one of the highest levels of net in-migration to the state with the second highest level of domestic net out-migration. Typically people either head for the exits because they are seeking more economic opportunity or because they are being driven out by high housing costs. You get a little bit of both in California because the state’s zoning regulatory schemes keep housing production artificially low and housing prices high even in a mediocre economy.

As the economist Randall O’Toole points out in his study of housing restrictions, The Planning Penalty, “Thanks to a variety of land-use restrictions, California suffers from the least affordable housing in the nation.” The planning penalty, O’Toole estimates, adds from $70,000 to $230,000 to the cost of a home in the Central Valley, $300,000 to $400,000 in Southern California, and $400,000 to $850,000 in the San Francisco Bay area because in California, 95 percent of the population lives on just 5 percent of the land. “The problem is supply, not demand,” O’Toole observes. “Austin, Atlanta and Raleigh are growing faster than California cities, yet have maintained affordable housing.”

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