California’s extraordinary economic imbalance: The urban-rural divide and public policy

Last week we wrote about Washington’s urban-rural economic divide, raising issues that parallel this assessment of California’s uneven economy by Joel Kotkin and Bill Watkins. Their commentary points has resonance for analysts of Washington’s economy. It’s a tale of geographic and industrial concentration.

As Chapman University economist and forecaster Jim Doti recently suggested, the California boom is exceedingly concentrated in one region. “It’s not a California miracle, but really should be called a Silicon Valley miracle,” Doti noted in his latest forecast. “The rest of the state really isn’t doing well.”

The Bay Area has experienced a phenomenal recovery from the Great Recession, but San Jose has just exceeded, finally, its pre-dot-com boom jobs total. San Francisco has done a bit better, but it still took about 13 years to recover from the dot-com bust. The tech sector has provided a huge portion of the state’s job volatility, and has been on a roll.

There’s also an imbalance in the California revenue stream that poses a greater threat than Washington is apt to face should there be another downturn.

True, California’s short-term budgetary issues have been somewhat relieved, largely due to soaring capital gains from the tech and high-end real estate booms. But the state inevitably will face a soaring deficit as those booms slow down…

The state’s current budget surplus is entirely due to a temporary tax and booming asset markets. The top 1 percent of earners generates almost half of California’s income tax revenue, and accounts for 41 percent of the state’s general fund budget. These affluent people have incomes that are much more closely correlated to asset prices than economic activity, and asset prices are more volatile than economic activity generally.

The California experience recalls for us the Brookings study we cited last week, which said, 

An advanced economy that works for all would achieve a higher trajectory of long-run growth by improving the productivity of individuals and firms in ways that raise the standards of living for all people while reducing racial, spatial, and income disparities.

Broadly shared prosperity reduces the volatility of an imbalanced economy, breaks down geographic and social divisions, and expands opportunities for all residents of the state. Our roadmap is intended to further that goal.