The Hidden Gloom Underlying California's 'Boom'

Good news, in 2013, California's economy grew faster than the nation's - 2 percent vs. 1.8 percent. Many have used this as vindication that California's progressive policies, ranging from the 2012 Proposition 30 tax increases to implementation of AB 32's cap-and-trade scheme, are not hindering growth (some even suggest such policies are aiding the growth).

However, focusing on the statewide number masks the bad news; California's growth is vastly inconsistent across its regions. And if we explore those differences - using Bureau of Economic Analysis 2001-to-2012 metropolitan-area statistics adjusted for inflation using the CPI-U-RS - the Golden State looks like an awkward composition of extraordinary growth, stagnation, and decline.

Coast vs. Inland: Not only are these two regions geographically and politically different, their economies stand in stark contrast: coastal being home to techies and movie stars, while some of the most fertile farms and productive oil fields lay inland. However, between 2002 and 2012, inland California's real average annual growth was better than coastal California's: 1.9 percent compared to 1.2 percent. The slight inland advantage is the result of substantial growth in the early 2000's while the coastal region limped out of the burst dot-com bubble. Since 2010, though, coastal California's average annual real GDP growth has been 1.1 percent annually, about 2 ½ times larger than its inland neighbors, suggesting only coastal California has been enjoying the recovery.

North vs. South: The north/south divide is both geographical and cultural. Yet, the difference in the economic growth could rate as another reason to separate the two. Between 2002 and 2012, the two economies grew at roughly equal rates: NorCal at 1.3 percent and 1.4 percent for SoCal. However, since 2010, Northern California has outpaced its Southern neighbor by almost 5 times - 1.9 percent versus just 0.4 percent.
But even these two regional breakdowns overshadow the inconsistency in California's economy. By getting more granular, we can see that California's economic growth is dangerously uneven.

Silicon Valley vs. Central Valley vs. San Diego vs. Greater Los Angeles: Arguably, these are California's most well-known regions, yet, particularly during the recovery, these economies vary wildly. While the Central Valley saw strong growth across the entire 2002-2012 decade (real annual average of 2.6 percent), more recently, the agriculture and natural resource hub has suffered (1.2 percent since 2010). However, the Central Valley is still doing better than both San Diego (0.4 percent) and Greater Los Angeles (0.2 percent). The economic star, though, is Silicon Valley, which has seen average annual real GDP growth of 2.9 percent since 2010, outpacing the entire state's 2010-2012 growth by roughly 1 ½ points.

Inland Empire vs. Central Coast vs. Greater Sacramento vs. Wine Country vs. Rural NorCal: These lessor known parts of the Golden State have fared even worse than their more heavily populated and famous neighbors. Indeed, since 2010, on average, these economies have actually shrunk (-0.2 percent). The Inland Empire leads the pack (at just 0.2 percent since 2010), followed by the Central Coast and Greater Sacramento, both at 0.1 percent. But both Wine Country and Rural NorCal have shrunk (-0.4 percent and -1.1 percent, respectively).

Not only are many parts of California struggling, but it is the most under-represented areas in California's political discourse that are really suffering. And more disturbing is California's over-reliance on just one region: Silicon Valley. Indeed, between 2002 and 2012, Silicon Valley accounted for, on average, over one-quarter of California's total economic growth. And since 2010, that has increased to 56 percent, on average. Removing the region reduces California's 2010-2012 average annual real GDP growth of 1.4 percent to 0.9 percent.

True, a state's regions will not all perform equally, but continued growth inequality could lead to serious policy problems. Failing to recognize the differences in California's regional economic performance masks the state's growing poverty challenge, budget dependence on a volatile tax base, crumbling infrastructure and schools, and business hostility. And by relying, almost solely, on just one region to inflate its overall growth, the Golden State finds itself in a particularly fragile position. Diversifying a state's economic portfolio is just as important as an investor diversifying their investments.

There isn't a one-size fits all fix to jumpstarting economic growth across all regions. But a good starting place is improving the anti-business attitude many in Sacramento seem to relish (or at least, ignore).