California Must Bolster Its Strengths, Address Weaknesses
According to statewide unemployment and GDP statistics, California is doing okay. Unemployment is below 6% and year-over-year real GDP growth was 4% between 2014 and 2015. At the same time, however, the Tax Foundation rated it as having the 2nd worst state business tax climate and CEO Magazine consistently names California the worst state to do business.
Both sets of data points are used in Sacramento's age-old debate: is California a good or bad state to do business? But neither tells the whole story. Businesses take a lot into consideration when deciding where to start, expand, or relocate. There is one business climate index that attempts to capture all of the various considerations: CNBC's "America's Top States for Business". By examining ten categories - cost of doing business, the economy, infrastructure, workforce, quality of life, technology & innovation, business friendliness, education, cost of living, and access to capital - CNBC's index aims to illuminate a state's strengths and weaknesses.
As is all too common, though, most just focus and report on the overall topline ranking. The real information is below and it is quite informative and concerning for California. The Golden State hosts a series of considerable weaknesses and is showing deepening kinks in its historical strengths.
Overall, in 2016 California ranks as the 32nd best state to do business, much better than indexes like the Tax Foundation and CEO Magazine's, but still not stellar. Moreover, this is a 4 spot drop since 2007. Just nine states had a larger drop than California between 2007 and 2016 in their overall ranking; four of which still outrank the Golden State in 2016.
Before we get to the real concerns Sacramento should be focusing on, let's examine the two areas where California saw improvement since 2007: workforce and cost of living. The state improved 12 spots in the workforce category, which is an excellent sign, especially given that it fell quite heavily in the education category. And once again, California has Silicon Valley to thank for continuing to attract a quality workforce. This is additional evidence that Sacramento should be paying more attention to policy threats facing the Silicon Valley-Bay Area - first among them housing affordability. Which segues into the next area of improvement - cost of living. Here California improved two positions. But don't celebrate too much. California still ranks 47th in the nation. While its ranking improved, the state is still facing a serious affordability problem and it is hard to imagine how California's economic engine continues to fire on all cylinders if this isn't fixed.
Out of ten categories, though, California only saw an improvement in two of them. Every other one saw deterioration since 2007. Three of them - education, infrastructure, and quality of life - saw decreases greater than its overall ranking drop. This is a problem for California as all three of these categories have been historical strengths for the state.
The Golden State's K-12 and higher education systems were once the national standard. Now they struggle. And we see it in the rankings. Since 2007, California has dropped 7 spots in the education category. A quality education is the single most effective means to improve opportunity and economic mobility. This isn't just an economic problem; it is also a social one.
As he did with education, Pat Brown created a first-class infrastructure system, which his successors - including his own son - have let fall into an abysmal state of decay. Between state mismanagement and underfunding, California has squandered a once valuable asset. And again, we see it in the rankings. In this category, the state has dropped a whopping 14 spots since 2007. Because maintenance is also cheaper than rebuilding, this will be an expensive issue to resolve.
Finally, when all else failed, California could always fall back on the fact that it is a nice place to live. You can surf in the morning, ski in the afternoon, and wine taste in the evening. You have natural wonders and an ideal climate. But the state's quality of life ranking also dropped 14 spots since 2007, going from the top 10 to barely in the top half. This was a core strength for California and now the state is just average.
But most concerning are the two areas where California ranks the best: technology & innovation and access to capital. In both these categories, the Golden State ranks second in the nation. Yet, this is still a downgrade from 2007, when the state ranked first. Because of Silicon Valley, California continues to hold a near national monopoly on technology investment. But since 2007, California has lost the top perch to Washington - for technology & innovation - and Wisconsin - for access to capital. Don't get me wrong, being second is still very good, but the fact that California is slipping in the areas that it has become most dependent on economically should give Sacramento pause.
One reality these rankings highlight is how states are always in competition with each other for business, for investment, for people and ideas. Just as companies must always be cognizant of their competition and their strengths and weaknesses, states must too. California has, historically, had a lot going for it, but has become lethargic in bolstering its strengths and addressing its weaknesses. Focusing on these issues won't be easy, but the first step is prioritizing them.
