California: Easy to Love, Impossible to Do Business In
California is beautiful. Many parts have great weather. There are a lot of smart people there and some good schools. Both my kids live there right now, though it is really expensive given the state and local governments' propensity to take many steps to limit the supply of housing.
But it is simply impossible to do business in. Every single legislative session brings a series of new time-consuming and expensive regulatory requirements. Despite California having some of the best recreation spots in the world, we have systematically reduced our business in California by 50%, and I have a moratorium in place on accepting new business (I won't even look at RFP's and proposals to avoid being tempted.) I wrote about this process a number of times, including here.
This week, Hans Bader covers this ground and more in his article about businesses fleeing California to places like Texas.
It does not surprise me that service industries, particularly those that provide high-margin services to the wealthy, stay in California -- service businesses have to be close to their customers. But it always blows me away when I see anyone manufacturing in California. Why? Move over the border into Nevada or Arizona or Mexico and costs go down a lot without any real increase in logistics costs. California does not even want you there -- I am convinced they achieve most of their environmental goals merely by chasing folks over the border, exporting these issues rather than solving them.
marque2:
There is a cost to moving. On a personal level , moving to Texas would cost 40k. Even with lower costs, it would take many years to make that up, so by inertia, I am sticking with CA.
February 3, 2017, 11:52 amEau de Javelina:
If you own a home in CA you can likely sell it for far more than a replacement home will cost you in TX. There's your $40K+ in savings right there! Leave now, before they build a Brandenburg wall around CA. I assume they're working on a CA Business Exit Tax right now.
February 3, 2017, 12:00 pmMercury:
I don't really have a problem with California being California as long as the rest of us don't have to support it somehow. Each state should have wide latitude to do their own thing and let people and "the market" determine outcomes on their own.
According to this chart: https://www.theatlantic.com/business/archive/2014/05/which-states-are-givers-and-which-are-takers/361668/
CA pays more than it receives from the Feds but this might not include corporate taxes and other considerations but nonetheless the state may be more net-productive than their obvious idiocies imply
February 3, 2017, 12:13 pmcraftman:
I work with printed circuit board (PCB) manufacturers and probably 30% of them (my customers) are in California. For this specific industry, I think there's just a lot of legacy talent leftover from the original Silicon Valley days. These shops are always way more cutting edge and capable of difficult work than in places like Syracuse, Rochester, etc. who do legacy work for mostly old government programs.
I'd guess they have a good 10 years left until some of these old guys start retiring and it becomes cost-prohibitive to move in new, talented engineers for manufacturing. They can't compete with salaries of software engineers. They'll probably relocate to places like Denver, Minneapolis, Chicago (west Chicago), Arizona...
February 3, 2017, 12:24 pmPeabody:
I've been puzzled by this as well. As soon as our business was successful, we moved to a no tax, low regulation state.
February 3, 2017, 1:44 pmIke Evans:
Growing up in Idaho, and now residing in Minnesota, I have noticed there are two (maybe three) states people are *really* proud to be from. California, Texas and maybe New York.
California, however, is peculiar. I can't tell you how often I've ran into someone who loves to brag about how they are from California in one breath, and in another breath bemoan about how much they absolutely hate, hate, HATE it.
February 3, 2017, 1:59 pmIke Evans:
The single most significant resource that California has that gives it a competitive advantage is the high concentrations of people. Let's say you want to open a new factory. Doing so would require dozens of highly skilled engineers and administrators, as well as hundreds of other skilled blue collar staff. Finding that kind of talent pool is going to be difficult in some place like Alabama, for example. It's not that Alabama doesn't have the talent, it's that they don't have the concentration of talent.
Interestingly enough, this is one of the reasons China is so competitive. It's not necessarily their cheap labor (although this helps), it is their high concentration of industrial engineers required to open new factories.
February 3, 2017, 2:06 pmmarque2:
Yeah, that is a point, however I would lose 30 plus K on the Realtor commission's alone. I was probably short, I do consulting g and it costs me 5 grand just to drive and get an apartment in another state. I would actually guess more like 60k. 35k to sell home $15 k to move and get temp residence and another 5k to buy a new house.
February 3, 2017, 4:02 pmDavid in Michigan:
I laughed at your comment because it fits me so well...... from Calif but now absolutely hate it. That's because it's now so different than when I lived there loooong ago (left in 1978). By the way, I moved to Texas. Go figure.
February 4, 2017, 12:34 amkidmugsy:
I first visited California by Greyhound bus. We came down out of the mountains towards LA and I saw a great, grey ocean. "Where the devil has California gone?" I wondered. Then I learnt that the greyness was the atmosphere. If the air has improved you can set that against all the many things that have deteriorated. It was a pretty wonderful place back then: it doesn't take many generations to ruin a paradise, does it?
February 4, 2017, 4:29 amZachriel:
California GDP grew 3.8% in 2015. Growth continued in 2016 with the third quarter at an annual rate of 3.3%. California's GDP is about $2.28 trillion.
February 4, 2017, 8:31 amStillAnOptimist:
..."I am convinced they achieve most of their environmental goals merely by chasing folks over the border, exporting these issues rather than solving them" - Yup - like how they imagine they are being nice to the environment by driving electric cars when such cars are really powered by coal - electricity generated elsewhere ("Hey, we do not use coal for electricity - and just because we buy it does not mean we are at fault")
February 4, 2017, 9:07 amCapitalistRoader:
Ranking the States by Fiscal Condition 2016 Edition
https://www.mercatus.org/sites/default/files/FR16-OVERALL-Map-v8_0.jpg
February 4, 2017, 11:10 amCapitalistRoader:
Compare California's 14.25% five-year GDP growth rate to Texas's 22.41%.
February 4, 2017, 11:27 amZachriel:
The topic was California. Apparently, a lot of people do business in a state which is "impossible to do business in".
February 4, 2017, 12:52 pmJohn O.:
A good portion of this GDP growth is bullshit spending by California's state and local governments. California's crash is coming and its not going to be fun for anybody still living there when it happens.
February 4, 2017, 2:53 pmAllen Ingling:
"Both my kids live there right now, though it is really expensive given the state and local governments' propensity to take many steps to limit the supply of housing."
Tell them to stay in campgrounds to save money. ;-)
February 4, 2017, 4:36 pmThomas Reid:
A lot of talent is coming in from overseas to Silicon Valley.
People keep predicting California's demise but we have such huge advantages in climate and proximity to Asian talent and markets that we can afford to be 30-50% crazier than the rest of the country. If you ask me, we may have crossed over even our high crazy threshold but people have to realize that we don't have to make it back to normal to thrive; we just need to fall back from insane to crazy.
February 4, 2017, 5:03 pmmlhouse:
Just about any "Blue" state is difficult, particularly the Blue state metro areas. In Minneapolis, MN the communist city council is looking at 3 measures.
1. Raise the minumum wage to $15/hour.
2. Require 1 hour of paid sick time for every 30 hours worked.
3. Require 28 days advance scheduling notice, or be forced to pay time and half.
So, because they raised minimum wage you are running at rock bottom minimum staffing. Your $15 hour worker, who is worth $7, calls in sick because they can and will be paid. You have to find a replacement, and you haven't given that employee 28 days notice, so you are paying that worker $22.50.
So, for the labor that should cost you $7/hour, and you would probably hire 2 workers for that hour, you now have to pay $37.50.
The Liberals are the best at figuring out how to get people paid for NOT WORKING.
February 4, 2017, 5:21 pmTruthisaPeskyThing:
Zachriel, I agree that CA has had a relatively robust economy recently, and that economic growth seems as odds with all the anecdotal information about businesses being pessimistic about the state. I have asked a few people about that issue. Some tell me that the growth is being propped up by government spending, and that cannot last. I do not know if that is true, but it is commonly mentioned. Of course, another explanation offered is that left-wing ideology works an CA shows. I think that there are other possible explanations. As people migrate to a state, the state's GDP goes up just because of increased population -- and easy migration from Mexico supplies that increased population. And the increased population provides affordable workers. Also, the federal government has been generous to CA. A huge, huge portion of welfare spending from Uncle Sam goes to CA. Also military spending and other federal spending in CA is huge. (I do also know that the wealthy in CA pay a lot of taxes to Uncle Sam so it there is not a huge transfer from other states to CA.)
February 4, 2017, 6:12 pmNo clear answers. Objective studies do show that CA does lose citizens and businesses due to taxes and businesses, but if there is a day of reckoning coming, it is not yet in sight. Likely, the cause of CA relatively robust economy would make a great Master's thesis.
CapitalistRoader:
The topic was Texas, too:
Certainly, California is hemorrhaging AGI to Texas and other low tax states.
February 4, 2017, 6:32 pmDaniel McGillicuddy Griswold:
A new business works hard on establishing itself. Once it is a going concern, management discovers that innumerable rules, taxes and regulations keep the business from prospering. The company I work for moved from Sacramento CA to Reno NV when the manufacturing plant needed to expand.
February 4, 2017, 7:31 pmDaniel McGillicuddy Griswold:
The Reno real estate market is warped by retired California emigres. Sell a bay area house then purchase two in Reno. One to live in and one to rent.
February 4, 2017, 7:40 pmmarque2:
It is a love hate thing. I live 2.5 hours from Skiing, 1/2 from the Beach and am in a little foothill suburb of San Diego. The weather is nice, there are lots of things to do. But then bad side, it is a total nanny state. Helmet for kids by law, so kids no longer ride bikes, they just banned touching your cell phone at all, taxes are really high, property is outrageously so, and gas and food prices are as well. Plus all the political nuttiness, the poor infrastructure because everything costs twice as much to build as the next most expensive state. Also many people have a stick up their butt. Race relations are worse than other states, etc.
I want to move out, because I can get the same wages in Texas and our costs go way down (it would take several years to break even as I noted in another post) but on the other hand, the family is established, we found the only conservative town left in the whole state, so the people aren't quite nuts. So what happens is they make me move to get the good jobs. Now in St Louis, while the family hangs in San Diego.
February 4, 2017, 7:52 pmmarque2:
Yeah, California has been doing very poorly compared to other states since 2008, but it popped in the last year. Mostly in Silicon Valley. Still losing business and jobs in some parts of Southern CA.
February 4, 2017, 7:55 pmmarque2:
Yes bring in the Asians on an H1B for half price
But your assertion is false. We found out last week that most of Silicon Valley overseas engineers come from Libya, Sudan, Syria, Iraq, Iran, and Yemen. At least that is what it seems the way they go on about the temporary restrictions.
February 4, 2017, 8:02 pmmarque2:
I live in San Diego. Yeah, and then when they move to Reno, they do it for the low housing prices and taxes, and then get wigged out that Reno isn't exactly like California, and vote in all sorts of garbage. Nevada used to be the most conservative state, no it is a state of left wing cowboys. It is rather sad.
February 4, 2017, 8:08 pmThomas Reid:
I take it you don't do a lot of high tech recruiting. Good luck trying to meet demand in high tech by hiring only native born software engineers.
And, a federal judge has blocked Trump's ban on legal grounds. And, believe it or not, visa holders from those countries you mentioned do work in the United States legally. Banning their return is kind of a big thing.
February 4, 2017, 8:15 pmIke Evans:
I live in the Twin Cities as a recent transplant from Idaho. It is surprising to me how Shakopee (my current home town) can be so RED, and yet I can drive ten miles north and I'm in deep BLUE country.
February 4, 2017, 9:41 pmDaniel McGillicuddy Griswold:
It is also getting more and more hispanic.
February 5, 2017, 1:55 amrst1317:
Physically most of MN is red.
February 5, 2017, 7:01 amrst1317:
Out of curiosity I hope they pass them. I'm curious to see some restaurants and other service businesses popping up right on the border with MPLS. 50th and France would be a classic sort of place for that.
February 5, 2017, 7:03 amrst1317:
How is California's GDP doing sans government spending? That's one f the pillars of GDP.
February 5, 2017, 7:05 amrst1317:
Speaking of Alabama, note that despite Cali's wealth of talent Airbus chose to open a new manufacturing plant in Mobile, Alabama.
February 5, 2017, 7:07 amZachriel:
Only deficit spending would be relevant. California's deficit is about 0.1% of GDP, which represents an insignificant portion of growth.
February 5, 2017, 7:24 amZachriel:
As noted by CapitalistRoader, California has been doing significantly better over the last five years than the national average.
February 5, 2017, 7:27 amZachriel:
TruthisaPeskyThing: I have asked a few people about that issue. Some tell me that the
growth is being propped up by government spending, and that cannot last.
They've been a big government state for quite some time, but still manage overall growth.
TruthisaPeskyThing: As people migrate to a state, the state's GDP goes up just because of
increased population -- and easy migration from Mexico supplies that
increased population.
Median household income is 9th largest among the states.
TruthisaPeskyThing: Also, the federal government has been generous to CA.
California is a net payer to the federal government, about $1.18 paid for each dollar received, while still maintaining growth.
February 5, 2017, 7:33 amZachriel:
Yet California's real median household income is still growing. So they can export wealth while generating even more. You might think of Texas and Arizona as California's suburbs.
February 5, 2017, 7:41 ammlhouse:
Not me. I am in the process of finding an office location outside of the city. Hopefully the state will put an end to this, and legislation has already passed the House, but most likely Mark Dayton will veto.
February 5, 2017, 9:00 amCapitalistRoader:
As is Texas's median household inocome, at about the same clip. The thing is, you get so much more house for your money in Texas vs. California. Think of Texas as where working, middle-class Californians are moving, and California as an economically bifurcated distopia, with a few very rich people and many poor people.
http://static1.businessinsider.com/image/53bd9837ecad04cb13b89f2c-1200-924/zillow%20housing%20affordability%20q1%202014%20map.png
http://4.bp.blogspot.com/-fsjncCk7vVU/U-rIKdRmcKI/AAAAAAAACrA/Hu24jzvWKGM/s1600/poverty.png
February 5, 2017, 9:57 amJust Thinking:
Zachriel, there is a lot more to a region's growth than government's tax and regulatory policies. California has a lot going for it: ample source of workers, favorable climate, attractive natural beauty, access to Pacific trading nations, and a place where wealthy like to live. I do not know from experience, but I imagine that for many wealthy people who have already achieved wealth, a tax rate of 11% vs. 9% on the state level is not going make that much difference on location decisions. CA has a lot wealthy people; I do not know if they have a lot of ways to avoid state tax like the wealthy avoided federal income tax before the Kennedy and Reagan tax cuts, but it is obvious that many wealthy stay.
Because of the wealthy who stay in CA, California is able to have a high median household income -- and the high percentage of federal workers in CA also helps that median income. Also, the ability to retain the wealthy enables CA to send more to Washington than they get back. By the way, I do not know the details of how they calculate that net flow to Washington . . . I would want to know the details before I get too excited about it.
February 5, 2017, 9:33 pmInteresting, even though it seems that CA retain most of their wealthy citizens, they also lose many of them also. A friend of mine moved from CA to TN because of taxes, and his wife just cried -- she so much did not want to leave CA, but the tax burden was too much for the family. Beyond anecdotal stories, there have been studies on the migration effect. Some studies are bogus because they make erroneous assumptions on how long it takes for people to decide and implement moves. The most reliable studies do show a significant impact of CA taxes on decisions of individuals to move.
The bottom line? CA will survive, no doubt. Its tax and regulatory policies will be a drag, but it is not clear that such a drag will overcome other advantages that CA has.
Zachriel:
Just Thinking: there is a lot more to a region's growth than government's tax and regulatory policies.
Sure.
Just Thinking: Because of the wealthy who stay in CA, California is able to have a high
median household income --
The wealthy only represent a small percentage of the population, so do not account for the high
February 6, 2017, 7:07 ammedian household income.
Zachriel:
CapitalistRoader: with a few very rich people and many poor people.
A "few" can't account for the median.
February 6, 2017, 7:11 amTruthisaPeskyThing:
On the impact of a few wealthy people and median income . . . agreed if we are talking about a few very wealthy.
February 6, 2017, 10:46 amOne think not to forget . . . the cost of living is very high in CA. So a median income that is #8 does not mean a whole lot. Housing costs in California are much higher than TWICE the national average.
For example, median income is $98000 in San Jose vs. 60000 in Houston, a 63% advantage to California. BUT adjusted for cost of living, Houston's median income buys 11% more than San Jose's median income. A decisive advantage to Texas.
Zachriel:
TruthisaPeskyThing: Housing costs in California are much higher than TWICE the national average.
Sure. That's because people want to live and work in California.
To return to the original post, it's not impossible to do business in California as the growing economy there attests.
February 6, 2017, 11:24 amJust Thinking:
Zachriel, I decided to spend a few moments that I did not have to look at studies that reach conclusions such as "California is a net payer to the federal government, about $1.18 paid for each dollar received." I looked at Pew's study and was surprised by the following disclaimer: Social security and welfare payments are not included since these payments are not in exchange for goods and services. I can understand the economic theory behind this approach; however, I think the study's conclusions are not saying what casual readers think they are saying. I looked at McMaken's work which does include welfare payments; his conclusion is that California get $1.18 back for every dollar that goes from every dollar paid in federal taxes. That is the opposite conclusion of what you report. No doubt, this issue deserves more study before one can sure of what is being said and concluded.
February 7, 2017, 6:39 pmMan in the Middle:
Actually, it can, if the top 1% have 42% of the total wealth, as was true in the US in 2011, according to a new WILEY Blackwell textbook I'm reviewing for Amazon Vine. It also says the top 40% have 95.7% of the total wealth, and the bottom 40% only 0.37% of it.
February 14, 2017, 11:32 amDirtyDave:
Come Texas. Far less regulation and no income tax. Warmer, too, thought summers do take some getting used to, but that's why God created air conditioning.
February 14, 2017, 12:07 pmZachriel:
The only thing that matters concerning the median income is the wealth of the top 50%.
If Bill Gates (worth $80 billion) walks into a crowded bar, it will have a large effect on the mean wealth, but it will probably have only a small effect on the median wealth.
Fred, $10k
George, $20k
Susan, $30k
Sam, $40k
Cathy, $50k
Elly, $60k
Pete, $100k
Mean = $44k
Median = $40k
---
Bill walks into the bar...
Mean = $10 billion
Median = 45k
Bill's share of the wealth, 99.9996%
February 14, 2017, 3:57 pmirandom419:
"Social security and welfare payments are not included since these payments are not in exchange for goods and services."
April 13, 2017, 1:06 amVotes don't count as services?