Business climate has little to do with California growth

How alluring is California’s business climate? And how much will it impact the state’s economic recovery? There are two popular ways to measure business climate:

taxes and business costs; and
productivity and quality of life.

While California is ranked 15^thon productivity and quality of life indexes, it comes in a dismal 46^th on tax and business cost indexes.

But just how important is the tax and business cost index to California? According to a study from the San Francisco Federal Reserve Bank, not very.

Tax and business cost indexes best predict growth for states with a high reliance on manufacturing. Why? The manufacturing sector relies heavily upon cheap labor and ultra-low production costs to compete with production overseas. In California, manufacturing only accounts for 9% of all non-farm employment.

For highly-skilled labor, the tax and business cost indexes do not come close to impacting economic growth the way a state’s pleasant weather and low population density does. Lucky for the Golden State, California ranks high in weather and low in population density.

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There’s a reason why, despite the high cost of living and operating a business, California is the most populous state in the nation. Population growth is at 1% per annum. Pessimists dare not look at why people just keep coming.

Using business climate indexes to measure a state’s likelihood of success demonstrates the fallacy of comparing California with states like Michigan. Instead, Californians focus on how to improve their potential for growth with existing resources. We have them in all aspects: human, financial and geographic.

Loosening local zoning restrictions in core urban areas would make it possible for professional service employees to live where they work. If builders are allowed to build whatever they can rent or sell, the price of housing remains at last year’s level, plus consumer inflation. Texas housing prices stand as the nation’s best example of zoning’s effect.

In turn, employers (small businesses of which we are primarily composed) are able to pay a decent living wage while avoiding paying premium wages just so their workers can afford high rents brought on by bad zoning policies.

Case in point: San Jose, the center of the technology industry, has the highest cost of living in the nation. If this city’s management permitted more housing per acre (high-rise density) and avoided profit-making fees for permits, then housing becomes more attainable. In turn, tech companies would be able to hire more of these productive workers, contributing immensely to economic growth.