The Shifting Economics of California - YouTube

This is California, the Golden state and one  

of the largest economies in  the world in it’s own right.

If California was counted as a sovereign nation  it would be the fifth largest in the world by GDP,  

with a 3.2 trillion dollar gross  

state product putting it just behind  Germany and just ahead of India.

The state has a lot going for it,  from the largest movie and technology  

centers in the world all the way to a  surprisingly strong agricultural sector.

All of this has meant that the  residents of California are on average  

doing very well for themselves,  and one look around the wealthy  

enclaves of las Angeles and san  Francisco would back this up.

Despite all of this however, the state is  going through a period of economic turbulence.

The economic fallout of the coronavirus has  hit the state’s economy particularly hard.

Major industries like tourism, and media creation  

have ground to a complete halt having widespread  knock-on implications throughout the economy  

hitting smaller vendors who were  once reliant on these industries.

This bump in the road however was by no  means the total undoing of the state.

California’s metrics before 2020 looked  very strong, with low unemployment,  

solid growth and booming industries,  but there were still cracks forming.

The state is home to the largest population  in the US but the industries that were truly  

driving wealth creation are famously  bad at actually employing people.

This had led to a sharp increase in  social issues like homelessness and crime.

All of these problems that were  bubbling away under the surface  

have now been massively accelerated,  so much so that many economists have  

predicted that the sun might be setting  on the setting on the sunshine state.

It may sound like absurdist alarmism but it  is a reality that shouldn’t be dismissed.

Remember in previous decades there  was another economic region in the US  

riding high on the new growth  industry of the age. but these days  

Detroit is not exactly seen as the  bastion of prosperity it once was.

So could the same grim reality  be in store for California?  

Well to answer this we need  to look at a few key areas.

What made the state so prosperous  before the 2020 downturn?

What were the underlying  issues impacting the economy?

How will these issues be impacted by this decline?

And finally while we are here we may aswell give  it an EE national Economy score and put it on our  

leaderboard. I know it’s state but with a GDP in  the trillions of dollars, it deserves an entry.

INTRO ADD

Now this year has certainly  been one for doom and gloom,  

and it is still important to  address what is working well.

Any economy that can grow to the level that  California has and provide so much wealth and  

prosperity to it’s citizens is probably doing  something right. So what was the driver of the

California Dream

California is both really lucky and  really unlucky in terms of its geography.

The state had a big headstart over  other states in the union when it  

was getting established because  it had access to decent farmland,  

a good year-round climate, oh and  an ocean for fishing and trade.

On the flip side of that same  coin, it was literally about as far  

away from the economic centers of the US as  one could reasonably be while still in the US.

None the less the state grew well as a  distant outpost that attracted farmers,  

gold diggers, and or people that would rather be a  

little bit removed from all of that  pesky law and order in the east.

The first big boon for the state in  the modern era was its film industry,  

which was curiously also at least partially  thanks to its geography and position in the world.

You see early film technology relied  heavily on lots of light and good weather.  

That’s one thing that California has in  abundance, I mean its right there in the name.

What’s more is that a lot of this new  cinema was filmed using technologies that  

had patents on them. Primarily patents owned  

by thomas edison and his businesses  that were headquartered in new york.

By conducting business in Las angeles,  

up and coming film companies felt more  comfortable not been found out for using  

much cheaper film equipment that was not paying  royalties back to eddison for his patents.

Now this all meant two things, for  starters it hopefully makes you  

feel less guilty about watching  a cheeky movie for free online.

But more importantly, it established  LA as the center of the movie business.

We actually plan to do an entire  video on the economics of hollywood,  

but for now just know that eventually of  course camera technology got to a point where  

film locations were not as important, and modern  studios do pay what they owe to their suppliers.

But once these studios were  established they got comfortable.  

Support Industries sprung up, film-related  unions were founded and it almost got to  

a point where it was really  hard to film anywhere but LA.

So through nothing but being in the right place  and looking the right way sume 100 years ago  

california is now the epicentre of one  of the largest industries in the world.

This would go on to be a common theme.

The tech revolution that started silicone valley  was mostly formed around stanford university,  

which was one of the first universities in the  nation to offer computer science as a course.

Once a few tech companies got going other tech  companies were attracted to the same area,  

and along with them came the people with  the expertise to create new technology.

Once this moden gold rush hit a critical mass  silicone valley just became the logical place  

to conduct tech business because  it naturally ticked all the boxes.

Access to suppliers, access to  investors and access to skilled people.

Given that technical development by its  nature can be virtually rolled out anywhere..  

being in an amongst a huge pool of competitors  is not as much of an issue as it would be in  

customer-facing industries like retail,  hospitality or even manufacturing.

In fact having this ecosystem actually makes  everything much easier. You need a part that only  

one niche tech manufacturer in the world makes?  Good chance that will be in silicone valley.

You need to consult with the world leader  is some type of technical infrastructure  

chances are silicone valley is  the best place to find them.

This whole process is called agglomeration,  which is a fancy word the inherent benefit  

industry receives by being geographically  close to its industry partners and peers.

Being lucky enough to just happen  to have the nucleia around which  

the largest industry in the world formed  became par for the course for california.

Of course, a lot of it was good planning  and the state did a lot of things right  

to nurture the growth of these industries  but luck did play an undoubtedly huge part.

All the same even if north dakota happened to  be an early centre for technical innovation  

it is hard to see it having the same  appeal to tech companies and their staff  

as the blue skies and sandy beaches of California.

Now so far this all sounds great,  California has a diverse portfolio  

of wealth-creating industries that are not  dependant on limited resources to sustain.

But suffering from success does start  to become an issue in it’s own right,  

especially when California is home to a  lot of people that don’t call it home.  

For lack of a better way of  putting it, welcome to the

Hotel California

Gold rushes throughout history were  not good for local economies long term.

They see a massive spike in new workers  all desperately seeking their riches and  

this does create some big short term wins,  businesses catering to this foot traffic can  

be built and maybe even some taxes can be  levied on the wealth that is extracted, but  

once the gold is dug everything  goes right back to where it was.

Now the californian gold rush is  but a distant memory these days,  

however, the state is not immune  to a lot of the same effects.

Moving to LA to try and make it in  the film industry or San Fransisco  

to earn fat stacks as a developer  are pretty common endevours.

The issue is that these types of employment  don’t actually give too much back to the economy.

An influx of computer programmers getting paid 6  figures for graduate positions means that things  

like real estate become unaffordable to long  term residents that moved into other industries.

Real estate also drives up rents for commercial  

buildings which gets passed along to  consumers as higher costs of living.

It would be next to impossible for a  worker earning the national average  

wage to move to the bay area and expect to live  a comfortable lifestyle even as a single adult  

not to mention a with a family.

So people either make sacrifices, like living  with roommates or parents, or they move away. 

Now if you are particularly cold-hearted  you might argue that trading in some  

average income earning local residents  for some exceptionally skilled  

and well-compensated computer nerds is  probably a good trade to make. But it isn’t.

For starters, you can’t run a  city on computer code…. Yet…

Someone needs to be there to stock  the whole foods and unless produce  

packer is a job role that starts to attract  a six-figure salary these people need to be  

accommodated in some way or else demand-pull  inflation can get to dangerous levels fast.

But the real issue is that these  people don’t stay for long.

San fransicso has the highest level  of internal migration withing the USA.  

That means lots of people are moving  in and lots of people are moving out.

that ‘s because people working in silicone  valley don’t tend to do it for very long.  

A few years in the industry gets  people great experience and a nice  

big pile of cash to take back to their hometowns.

During this time most of thse workers will live  below there means and focus pretty heavily on  

work. They won’t be living family lives that  give back to local industries because well  

it’s too expensive, even these  well-compensated employees  

would struggle to raise a family in southern  California given the general cost of living.

Its a pretty common industry gameplan. Graduate  university, get a job at a FAANG company,  

stick it out for 5 years, save up  some cash, live in a tiny apartment  

and then move back to your home city and  live like a kind doing consultation work.

People paying alot of money for  a short stay in modest comfort?  

I guess the Hotel California is open for  business, but you can actually leave.

To try and make the best of a  bad situation the Californian  

government levies the highest  state income taxes in the nation.

The general idea is that sure these outside  workers can come and make their millions  

but at least it will generate lots  of revenue for the government that  

they can then use to address some of  the issues caused by said workers.

Now in theory this is fine and it actually  worked well for some time. But it was a  

precarious balancing act, the slightest breeze  could throw if off course. Which is exactly where  

the hurricane that was 2020 came in. The state  first the first time ever is starting to see

Mass vacancies.

The economic fallout of the coronavirus has been  a major hit to Everybody, but the consequences  

have been especially severe in the united  states, and especially severe in california.

For starters, nobody is making a  movie, going on a beach holiday  

or attending Disneyland at the moment  so that has been a major direct blow.

But what might end up being more severe is a  consequence that is a little bit harder to notice.  

People are starting to leave.

The push to work from home means  that the aforementioned tech workers  

no longer need to live in a cramped  1 bedroom apartment in the bay area,  

they can instead just do exactly the same thing  in a nice family home anywhere in the nation  

while enjoying a much better quality  of life and paying much less in tax.

The same income tax designed to make  the most of high-income earners while  

they were working in the state is  now pushing people away in droves.

The issue of capital flight is an argument that is  

often brought up to dissuade governments  for passing taxes on high-income earners.

To speak candidly most of the time these  arguments are weak at best. Most people will  

not move their families to a new nation to save  a few thousand dollars on taxes, but a single  

worker moving to a new city in the same country,  well that is a far more compelling prospect.

Infact while I was in the process of writing  this script Graeham Stephan, a personal finance  

YouTuber posted a breakdown of why he was leaving  California and moving to Las Vegas to live.  

Now Graham does not work in the tech industry but  he is still indicative of those types of workers.

Young, very well off, with a business  that he can do from anywhere.

Of course, one mans experience  does not a trend make.  

but his reasons for leaving were very in  line with the research that we conducted,  

so go and check that video out  he is a good e gg that graham.

Ranking.

Ok I know California is not a country and  this say’s national leaderboard but it is  

still interesting nonetheless, and I mean  Hong Kong gets a spot so why not right?

Size is simply phenomenal. California would make  for a huge national economy in its own right but  

the fact that it is just one part of the US gives  you and idea of just how influential the economies  

of the worlds super powers are. It gets  a 9/10, of course falling short of the  

14 figure GDP club but still one of the largest  most influential economies in the world.

GDP per capita is very high, as temperamental as  they may be the nation is still home to alot of  

very skilled very industrious workers, and with a  GSP per capita of 72,000 in 2019 it gets a 9/10.  

Curiously enough the state or territory in the US  with the highest GDP per capita is the Disctrict  

of Columbia with a whopping $162,000 as of 2018,  which puts it in line with places like Monaco.

Stability and confidence. This  is really subjective and had  

it been asked 12 months ago it  would have been a clear 10/10.  

But flying so high means it has a long way to  fall and it has historically felt the impacts  

of downturns more heavily than the national  average, so it gets an 8/10 which is of course  

still very well deserved for a state with such  a diverse portfolio of world-leading industries.

Growth is pretty stable. The economy is large and  

reflects a developed nation in its own  right and the growth figures reflect  

this. Outside of 2020 it has averaged  2-3% annual growth so it gets a 6/10.

Finally industry, well cmon what else could it  be. If anything could get an 11/10 it would be  

California. But in the meantime, it will  need to make do with a nice round 10/10.

Altogether this gives the sunshine state  and average score of 8.4 out of 10,  

just falling short of the top spot. Of course with  

the same big asterisk as hong kong  that this is not actually a nation.

Final thoughts

California would be a remarkable economy if  it was it’s own nation but in a way it is  

even more so as just a very productive  piece of the grander american puzzle.

But that does not mean it is without concern.  Yes has been fortunate enough to attract alot  

of very profitable industries and the  very skilled people that come with them.

Yes its loverly beaches and attractions  will continue to attract more tourists  

and businesses alike, but it  can’t rest on it’s laurels.

Many economies have thought they were the  epicenter of industries that would last forever,  

became overly reliant on them and then suffered  as those same industries faded into obscurity

There is no such thing as an unsinkable  ship, and when all of the smart people  

start heading for the life rafts, it might  be time to look out for icebergs ahead.

Who would have thought that the golden child of  American industry would have been hit so hard,  

in so many unusual ways, in such a short amount  of time, it’s one of those events you don’t see  

happening until it’s too late. Unless you  have some fantastic insights, like the ones  

you can get… On trends