Is California Really the 6th Largest Economy in the World?
In June, it was reported that in 2015 California's economy ranked as the 6th largest in the world. This is a substantial rebound from 2014 when the U.S.'s largest state slipped from the 7th spot to 8th place, falling below Brazil. To many in Sacramento, the news of California jumping two spots globally was vindication for the criticism that the "California Comeback" was anemic. Unfortunately, for our state's leaders, their celebrations are, once again, a bit premature.
At face value, California's economy is impressive. But don't forget that California has a lot of core advantages that should make it a very wealthy state. It is home to Silicon Valley; it's a key import-export location between the United States, Mexico, and Asia, and has a large and generally young and productive population - not to mention a very favorable climate and topography. But one should take such reports of California's global rankings with a grain of salt and a particular level of hesitation as these ignore and overshadow the very serious challenges lying underneath the surface.
Global GDP Rankings Ignore Cost of Living: Yes, California's 2015 nominal GDP of $2.46 trillion ranked as the 6th largest economy in the world, notching in about $37 million more than France's 2015 level. But this doesn't really say much about actually living in California. It is common knowledge that California is among the most expensive states to live in - if not the most expensive. Housing costs more; electricity and gas cost more; and even most goods and services cost more than the national average. In many respects California's cost of living is much more like a Western European nation than it is like the rest of the U.S. The widely reported global rankings ignore this reality. Luckily, though, we can control for cost of living. Using the cost of living adjusted data from the International Monetary Fund and adjusting California's GDP data provides a better snapshot of California's economic standing in the world. Doing so shows that California is actually the 12th largest economy - a drop of 6 spots - and actually puts the state below Mexico. Maybe this explains why California has seen essentially net zero migration from Mexico recently.
California's Surge May Be More about Brazil and France: Sure, California's nominal GDP increased a healthy 6% between 2014 and 2015, but its surge into the 6th place spot might actually have more to do with the economies of Brazil and France than it does with its own economy. Between 2014 and 2015, Brazil's GDP dropped a stunning 27%, while France fell by a hefty 15% from the previous year. If instead the top 10 had experienced their 2010-2014 average annual GDP percent change, California would have remained in 8th place, coming in behind both France and Brazil. Thus, California's surge in the rankings appears to have occurred not because of an economic boom in the Golden State, but because of economic doldrums in South America and Europe.
Global Rankings Ignore Disparities within California: Let me state the obvious; California is a very large and diverse state. I say this because all too often state leaders and the general public take statewide numbers for California at face value and forget about (or ignore) the amount of variance that lies underneath. In fact, just focusing on statewide numbers seriously undermines finding and addressing structural problems facing the state. For instance, between 2009 and 2014, the Silicon Valley metro areas - a region that accounts for just 1/5th of the state's population - accounted for 50% of California's private industry real GDP growth. Thus, even if California's surge in the global GDP rankings can be entirely attributed to the state itself, it is actually the function of just one region within the state. This lack of economic diversification, however, is entirely missed if you just focus on the topline number.
California both is and isn't the world's 6th largest economy. While Sacramento will naturally celebrate the recent reports as an example of their continued success in guiding the nation-state through hard economic times and a sluggish recovery, focusing on information like this is a huge disservice that ignores the real and structural long-term challenges facing the Golden State.