California's Population-Growth Problem

Last week, the California Department of Finance announced that California's population grew to 38.5 million, an increase of 335,000 (or 0.9%) between July 1, 2013 and July 1, 2014. More problematic for the Golden State is that since 1999-2000, on average, the state has seen less than 1 percent growth per year.

To understand why, we have to look at population growth's main two components: natural increases (i.e. the difference between births and deaths) and net migration (the sum of California's net immigration and net domestic migration). Here we a find troubling trend: stagnation.

These two population components are connected. California's resident population is growing older. However, immigrants tend to be younger. Yet, with static net immigration levels and young middle-class professionals the most likely to leave the state, California's troubling migration trends are likely driving its problematic natural increases trends.

Natural Increases: Between 1999 and 2000, natural increases accounted for 51% of the 582,258 population change. For the 2013 to 2014 period, it accounted for 72% of the 335,368. To some, the fact that natural increases as a percent of total population change have ballooned would be cause for celebration. But, this masks the changing dynamic between California births and deaths.

Over the 15 year period, California's natural increases have fallen by over 18%; a direct result of the birth to death ratio falling over 13% to just 2 births for every death. And the shift has accelerated more recently. Since 2008-2009, births have fallen by an annual average of 2.1% and deaths have risen by an annual average of 1.2%; both rates are over twice as fast as the 1999-2000 to 2007-2008 period. This suggests that despite natural increases accounting for a larger share of California's population growth (thanks to falling net migration), it is itself trending in the wrong direction.

Net Migration: Net migration as a whole has decreased over 67% since 1999-2000. Since 2000, California has experienced a rather large net domestic outflow (i.e., the number of domestic migrants leaving California have exceeded those coming to the state). Many point to economic reasons for California's floundering domestic migration, but there doesn't appear to be a pattern in economic growth (measured by real GDP percent change) and domestic net migration. Indeed, the correlation between the two is just -0.02. If California's net domestic outflow had been inflow, the state's total population would be almost 1.9 million larger, an increase of 5% - over 5 times the 2013-2014 population growth rate.

California's net immigration levels have enabled the state to grow, even when many have left for other states. But here again, the good news masks a problem. California's net immigration is stagnant; in 1999-2000, net immigration accounted for 169,240 of California's population change. In 2013-2014, the level was 151,076. Since 2008-2009, net immigration has grown, on average, by 3.4% annually, no different than the 3.1% annual average for the proceeding period. And from 1999-2000 to 2007-2008, net immigration accounted for 48% of California's total population change, the same as it has since 2008-2009 (47%).

Even though economic growth and California's net domestic migration aren't highly correlated, the Golden State's poor overall business climate likely is affecting its migration patterns. California's litigious nature, high tax regime, and excess regulatory environment make the Golden State unfavorable to business development. The state's high cost of living due to restrictive development policies and high energy costs make California an expensive place to live. This leads to young professionals leaving and incentivizes immigrants to look elsewhere, leaving behind an aging resident population.

If unchecked, California's population growth trends could have a seriously negative impact. As California's population nears retirement age, the state will become less economically productive. A retiree-centric population pays fewer taxes (because of fixed incomes and Prop 13 property tax caps), but requires more services. Add in the fact that more of California's non-natural increases are immigrants, who, on average, tend to be less educated (and hence, poorer) and the Golden State will find itself with less government revenue, but a population that requires more from its government. This will put significant stress on state, county, and municipal operations. On top of all of this will be lower economic productivity, further exacerbating this cycle.

There is no silver bullet to return California to the population dynamic of the 1990's when population growth exceeded, on average, 1% annually. Still, Sacramento needs to prioritize making California a holistically attractive place for young working professionals to start a business, start a career, start a family, and encourage others to do the same.