California Dreamin' About Texas Jobs

A group of California legislators recently made headlines when they traveled to Texas to learn why the Lone Star State has lately been generating the kind of job growth that the Golden State was once known for, and even luring many companies that once made California their home.

But every politician in California of either party ought to know that the answer to the state's economic woes lies not in Texas, but in California. Job migration is a very sexy issue, and one blogger, relocation expert Joseph Vranich, is even keeping an online list of firms that have exited California. But migration makes up only a small part of the job gains or losses a state experiences. By contrast, job creation through expansion of businesses and the formation of new companies is far more responsible for job growth. California once knew how to create new jobs and new companies, and a few places in the state still do it fairly well. The answers to California's woes lie in those places, not in Texas.

Over the last 15 years, California ranks as the third worst state in the country in terms of job migration, with a net outflow of jobs that is 1 percent greater than the flow of jobs into the state, according to the National Establishment Time Series database. Texas, by contrast, is 10th best in the nation in that period, with a plus 1.3 percent inflow of jobs from other states. Based on Vranich's anecdotal list, Texas is the biggest beneficiary of jobs leaving California.

While those kinds of numbers won't make or break an economy, what the NETS database also tells us is that states that do a bad job attracting and holding onto businesses also generally do poorly in other areas of economic performance that matter more, especially in generating new businesses and in being home to firms that expand rapidly. California, for instance, ranks 34th in the country in the ratio of jobs created by new businesses compared to jobs eliminated by firms going under. The Golden State created just 3.3 percent more jobs than it lost through business births and deaths in the 15 years covered by NETS. By contrast, Texas created 9.3 percent more jobs that way. Texas also did better than California in jobs generated by local firms expanding compared to those contracting. The bottom line: Texas outpaced national job creation by 10 percentage points since the mid 1990s, while California underperformed the nation, according to NETS.

One theme is obvious and persistent when you peruse dozens of stories on California companies that have pulled up stakes in the past few years: Many are going somewhere else to lower costs, whether it's a shipping company moving HQ jobs from Oakland to Phoenix, or a software maker leaving North Hollywood for Austin, or a visual effects studio leaving Venice, Ca., for Port St. Lucie and Vancouver.

Some firms also say they are leaving because California's state and local budget crunch has made government voracious. LegalZoom, the online company, is leaving Los Angeles for Austin because of a lengthy dispute with city government over taxes. One thing that sealed the move: When the firm's 400 employees heard the company was contemplating leaving, some began asking to relocate. Meanwhile, Creators Syndicate, the media syndication company, has also contemplated leaving because of a dispute over taxes with the city of Los Angeles that prompted an official of the company to accuse the city of operating like a "banana republic" and its bureaucrats of acting like "Stalin's apparatchiks."

The greatest irony lies in the ‘green' companies exiting the Golden State, despite (or perhaps because of) the state's efforts to project itself as a leader in environmental legislation. CalStar Products Inc., a Newark, Ca. company, said shortly after receiving a federal clean energy subsidy that it expects to expand by building manufacturing plants in the Mississippi Valley. Cereplast Inc., an El Segundo, Ca., maker of renewable plastics, announced it was ‘reducing its footprint' in California to a mere 3,000 square feet and moving much of its operation to Indiana "to reduce drastically our costs compared to California from real estate to utilities," according to its CEO. Meanwhile CODA, an electric car and battery company based in Santa Monica, decided last year to build a new manufacturing facility in Ohio.

There are many reasons for the cost differences between the states, but government clearly plays a role. The chief executive of CKE Restaurants Inc., a California based owner of restaurant chains, told Bloomberg News that it takes only six weeks to get approvals to open a new eatery in Texas, but up to two years in California. Given those dynamics, is it any wonder that Texas has been generating more net jobs through start-ups and expansions than California?

Faced with the prospects of California Republicans heading to Texas for advice, Gov. Jerry Brown decided to send his lieutenant governor, Gavin Newsom, along for the trip. But Brown also offered insight into his own thinking on the jobs gap between Texas and California by raising the issue of Proposition 13, the property tax cap which seems to be the default excuse for every California shortcoming these days. Brown pointed out that Texas' eight graders do much better on achievement tests than California students, then reminded a reporter that Prop 13 restricts property tax collections which finance the schools, thereby implying that California's problems are a matter of a lack of resources for public education.

What Brown failed to point out is that even with Prop 13's limitations California spends more per pupil in its K-through-12 public schools than Texas does, and that Texas' recent public school gains are a result of curriculum reform in the 1990s, not some great explosion of spending in its schools. By contrast, the whole education debate in California, controlled and shaped by the state's powerful teachers' union, has focused on ever more resources for the schools to lower class sizes and pay teachers more, which doesn't automatically raise student performance. Despite Brown's carping about the limitations imposed by Prop 13, California's teachers are the highest paid on average in the country, according to statistics from the National Education Association.

Trying to strike a conciliatory note after boasting about his own state's economic gains, Texas Gov. Rick Perry agreed to meet with the California economic development delegation because he said the Golden State's economic future is vital to the interests of the United States. That certainly used to be true. But economies don't sit still. They evolve rapidly. Maybe it's just time to stop imagining that California still represents the way forward for the U.S.