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Could California Make a Comeback?

Wednesday, May 15, 2013

An unexpected glimmer of hope might cast a new light on the Golden State.

It’s getting depressingly repetitive to keep writing about California’s problems, which are legion and seemingly intractable. But this time, I’m pleased to report on an unexpected glimmer of hope that might, just might, cast a new light on the Golden State.

First, a catalog of our recent woes, which, as ever, revolve around businesses and middle- and upper-income individuals decamping for other states that don’t suffer from California’s high-tax, high-regulation infection.

William Ruger and Jason Sorens of the Mercatus Center at George Mason University observe in their new rankings, “Freedom in the 50 States,” that about 1.5 million Californians departed for other states between 2000 and 2010, amounting to roughly 4 percent of the state’s population.

The Golden State’s not-so-golden regulatory and tax scheme, the authors contend, “costs Californians billions of dollars a year, makes their lives harder, and encourages more and more of them to move somewhere else.” They rank California 49th in terms of overall freedom.

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Ruger and Sorens are not alone in attributing this disturbing trend of emigration to unbalanced labor and employment laws, a high minimum wage, stringent zoning regulations, loose worker-compensation requirements, and burdensome licensing requirements across professions and trades. Earlier in the year, Governor Rick Perry of Texas, through a combination of his recruiting visits to California and his radio ads on local stations touting the advantages of the Lone Star State, sought to draw Golden Staters inexorably toward an economically freer alternative.

Fleeing businesses and taxpayers mean lower tax receipts and a more uncertain fiscal future. In March, the state auditor found California’s net worth to be negative $127.2 billion. “Expenses that exceeded revenues and increased long-term obligations resulted in an 81.4 percent decrease in the total net assets for governmental and business-type activities from the 2010-11 fiscal year,” the auditor’s report stated.

Some liberal cheerleaders — most notably Paul Krugman of the New York Times — have erroneously hailed a California “comeback.” While it’s true that Governor Jerry Brown’s budget appears to be in balance, it relies heavily on the usual fiscal gimmicks, and even more heavily on a temporary tax hike that, in the long run, threatens to drive yet more companies and executives to Nevada, Arizona, Colorado, and Texas.

Victor Davis Hanson, a Hoover Institution scholar, historian, and second-generation farmer in California’s once-fertile, now-parched Central Valley, calculates that only 144,000 Golden State households “accounted for about 50 percent of the aggregate state-income-tax revenue — and personal income taxes usually account for about 50 to 60 percent of all state revenues.” Even if only a small fraction of those 144,000 depart for a warmer business climate, California’s already-shaky finances will fall even further out of whack. “We are learning,” Hanson notes, “that it does not take too many businesses or wealthy households moving to Austin, Paradise Valley, or Henderson to make a big difference.”

One such recent example: Bristol-Myers Squibb, the New York City-based pharmaceutical behemoth that absorbed San Diego-based Amylin Pharmaceuticals last summer, decided to close the doors of its San Diego facilities by the end of next year. BMS laid off 100 Amylin employees shortly after the merger and now seeks to relocate some 100-125 workers to its other facilities outside of the Golden State. But the remaining 300 or so California-based research and development, business, manufacturing, and administrative jobs will disappear entirely, while more than 700 former Amylin employees working outside the state — some in facilities in Ohio, others in sales or medical roles around the country — will keep their jobs.

As many as 15 billion barrels of oil lie in the Monterey Shale — constituting 64 percent of all shale oil reserves in the United States, and four times as much as in North Dakota’s Bakken formation.

But if dwindling jobs in industries of the future are threatening California’s fortunes, the promise of new jobs in a critical industry of the past may be the key to reviving them.

The Monterey Shale Formation stretches from Modesto, in the northern portion of the Central Valley about 60 miles east of San Francisco, almost 200 miles south to Bakersfield. It spans 1,750 square miles, an area larger than Rhode Island.

As many as 15 billion barrels of oil lie in the Monterey Shale — constituting 64 percent of all shale oil reserves in the United States, and four times as much as in North Dakota’s Bakken formation. The existence of the formation has been known to drillers and state officials for decades, but only with the advent of advanced techniques like horizontal drilling and hydraulic fracturing has a realistic opportunity for extraction arisen.

According to a recent University of Southern California study, these reserves could generate 500,000 jobs and up to $4.5 billion in tax revenue for the state by 2015, plus another 2.3 million jobs and another $20-plus billion by 2020.

The USC authors cite “the possibility that greater-than-expected in-state energy production not only could support a return to stronger economic growth within the state, but actually accelerate the state’s economic turnaround, perhaps profoundly so.”

Unsurprisingly, the usual suspects have harrumphed loudly about the perils of fracking. “If and when the oil companies figure out how to exploit that shale oil, California could be transformed almost overnight,” Kassie Siegel, a lawyer at the Center for Biological Diversity, told the New York Times in February. “Fracking poisons the air we breathe and the water we drink. It is one of the most, if not the most, important environmental issue in California.”

But to his credit, Governor Brown — affectionately known here as Moonbeam for his liberal, hippie tendencies — has taken some small steps in the right direction. “The fossil fuel deposits in California are incredible, the potential is extraordinary,” Brown stated last month, also noting that “between now and development lies a lot of questions that need to be answered, and I feel confident that the people are in place in my administration to handle the issues as they come up.” Brown also reaffirmed his commitment, such as it is, to the state’s oil economy, declaring that “our permits are dramatically up … California is the fourth-largest oil producing state and we want to continue that.” It may be some time before fracking becomes a reality, but Brown is plainly both feeling the pressure and sensing the promise.

So for all the talk of a new, high-tech, white-collar economy bringing California back from the brink, it may turn out that one of the oldest and dirtiest industries around will save the future of the Golden State.

Michael M. Rosen, a contributor to THE AMERICAN, is an attorney and writer in San Diego.

FURTHER READING: Rosen also writes “Will California Become a Right-to-Give State?,” “Greens’ Irrational Fear Flies Again,” and “Free Speech for Me, But Not for Thee, PC?” Pete Peterson observes “Creative Californians Redefine Rahm’s ‘Rule One,’” Michael Barone notes “America Looks Like Texas, Not California,” and Mark J. Perry comments on “The Economic Ripple Effect of the Bakken Shale Oil Boom.”


Image by Dianna Ingram / Bergman Group

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