Op-Ed: California’s budget surplus is gone and its economy is in jeopardy. It can go in two ways

The much-celebrated California boom faces a harsh reality.

All was looking good based on the huge growth in capital gains in tech stocks and real estate, and some in Sacramento assumed the premium would last — until it didn’t. The latest bad news is the evaporation of the government budget surplus, which is now rapidly turning into a deficit that could run to $22 billion to $40 billion, especially if a recession hits.

But while dangers lie ahead, there is no need to panic. This painful reality can be turned to our advantage and help us realign our economy toward greater economic diversity and opportunity for most Californians, especially ethnic minorities.

The fact is, we cannot continue to rely on the tax revenues generated by technology, media, and ever-increasing real estate prices to fund our budget and economy. Today, real estate values ​​in California’s three largest metropolitan areas, including Southland, are declining faster than the rest of the country, and even San Francisco’s once-thriving business district faces persistent vacancy rates.

Meanwhile, new IPOs, a major source of tax revenue, are suffering their biggest decline in two decades, and Hollywood is suffering layoffs at Disney, Warner Bros., Paramount and CBS. In 2022, media company stocks lost $500 billion in value and technology company stocks suffered a staggering $4 trillion reversal. Tech firms laid off at least 120,000 employees last year.

The unemployment rate continues to fall and is close to the pre-pandemic level. But it’s falling at a slower rate in California than in the rest of the country.

Senior jobs are also increasingly leaving the state. California’s growth in high-paying “advanced” industries (a 50-sector group of industries defined by the Brookings Institution) lags behind that of cities like Nashville, Raleigh, NC, and Austin, Texas. In the second quarter of 2022, California’s economic output shrank by half a percent, while that of archrival Texas grew by 1.8%.

Venture capitalist Marc Andreessen recently compared California to Rome in 250, a time when the empire began its final death spiral.

California has the nation’s highest cost-adjusted poverty rate, limited opportunities for working-class families, and notably the highest rate of functional illiteracy. No California metro area ranks among the top 10 in the US for high-paying blue-collar jobs.

The ports, particularly Los Angeles-Long Beach, which have long been hubs of the working-class economy, have lost ground to competitors in Texas, New Jersey and the Southeast.

In times of crisis, Governor Gavin Newsom could hand out thousands of dollars in goodies to households and create massive direct subsidy programs for housing and health care. A continuation of this generosity seems unlikely.

A better option is to enact policies that reintegrate working-class and middle-class Californians into the economy. This is critical as we can no longer rely on the 1% – who pay about half of the state’s top income taxes – to bail out the bulk of Californians.

There are great opportunities for restoring economic diversity. California is, of course, well-positioned to benefit from the increasing offshoring of industries offshore, a trend largely driven by tensions with China and supply chain issues. The good news is that the industries best prepared for restructuring — aerospace, medical equipment, defense, and electronics — are also big for California. But for now, California’s regulatory and tax systems discourage new investment compared to states like Ohio, Florida and Texas, according to a recent study by the Hoover Institution.

President Biden’s high-tech and “green” energy initiatives could boost growth in California, particularly in areas like semiconductors and sustainable energy, water and agriculture policies. But although much of the semiconductor industry is headquartered here, the new surge in chip production is taking place almost entirely in places like Ohio, New Mexico, Arizona and Texas. Similarly, most new electric vehicle and battery plants are located in the nation’s heartland, south, or other locations east of the Sierra Nevada.

California should also shift its tech focus away from social media and advertising, which are dominated by increasingly stagnant quasi-monopolies. Instead, the state should focus on promoting more dynamic sectors such as aerospace, medical and environmental technology. However, as with reshoring, this requires control of taxes and regulations and the provision of specialist training for line workers.

California can also expand its innovative grassroots economy in areas other than technology, such as B. Food, clothing and furniture design. As well as being home to the denim and casual wear industries, the state has fueled the growth of farmers’ markets and the organic food industry – the state produces 40% of the country’s organic food. Many cuisines that are popular across the country today, from Mexican food to Korean BBQ and sushi, got their early start here.

We’re already seeing a new wave of restaurants, artisan food and design businesses reflecting the state’s diverse population. About 60% of all California restaurants are owned by blacks, over a third are Asian and a quarter are Latino.

Shaheen Sadeghi, founder of California-based Lab Holdings, which creates retail and manufacturing businesses for independent businesses, reckons the COVID-19 pandemic has had some positive impacts on business. “The mediocrities are gone, but the people who survived are better off than ever. They have created new ways of doing business that fit the new realities.”

But in order to thrive and develop, these firms need a more positive business environment, Sadeghi says. Attempts to introduce a wealth tax would not suit the plans of budding entrepreneurs, some of whom have already left the state.

Lawmakers are also considering a proposal to reduce the workweek to four days, or 32 hours, and have already passed a slew of bills designed to regulate small businesses like fast-food joints. This will not help encourage entrepreneurs to set up businesses here.

Essentially, California can go one of two paths. It can continue on its current path, which is toxic to its middle and working classes, driving out even long-established companies, and hoping another tech bubble will emerge to pay the price for impoverishment. Or, as before, it can focus on improving basic infrastructure, such as roads and water, and creating opportunities for entrepreneurial ventures that benefit the state’s citizens and communities.

The promise of our state is not irrevocably lost. But it can only be restored by a profound change of direction.

Joel Kotkin is Presidential Fellow for Urban Futures at Chapman University. Marshall Toplansky is Clinical Assistant Professor of Management Science at Chapman University’s Argyros School of Business and Economics.