Wednesday, June 24, 2009

California Economics 101: Ignore the California Manufacturers and Technology Association

According to a report commissioned by the California Manufacturers and Technology Association, California is losing manufacturing jobs faster than comparable states. Assuming you agree with their choice of comparable states, this is the one non-controversial statistic from the report Manufacturing 2.0: A More Prosperous California issued this month by the Milken Institute.

The remainder of the report is designed to support the idea that California is not "business friendly" despite the obvious fact that California has been a home for the technology revolution (Silicon Valley is located here), is considered likely to be the greatest beneficiary from the "Green Technology" emphasis in the Obama stimulus package, and is host to the much of biotech research industry.

Nonetheless, the Los Angeles Times published an article piggybacking on the study - the headline is Losses of factory jobs in California blamed on regulation. The article leads off with the story of a plant in El Monte shut down because compliance with air quality enforcement would cost too much. It then explains that the report talks about problems of too many agencies, frequent changes in labor law by the legislature, etc. Those are all issues worth exploring.

At least the Times article offers opinions contrary to the study:

Not everybody agrees with the report's conclusion. Christopher Thornberg of Beacon Economics said manufacturing output has been as high as ever in the state and that there's no evidence that jobs are going to other states.

"At least up to the last couple of years, the pace of job loss in manufacturing in California was no different than anywhere else," he said, basing his calculations on the state gross domestic product, the value of goods and services made in the state.

California GDP grew last year despite the global financial crisis, said Brian McGowan, the state's deputy secretary for economic development and commerce. And green-energy jobs in the state have grown at a rate 10 times faster than total job growth since 2005. To evaluate a state's business climate, he said, companies should focus on workforce skill, availability of capital and overall quality of life, rather than just on taxes and regulatory costs.

An article in the San Francisco Chronicle headlined California manufacturing jobs cross state lines offers no such counter-opinion. Instead it gives a platform for a spokesperson for the California Manufacturers and Technology Association, the powerful lobbying group that commissioned the report:

"Everyone says the regulatory burden in California is too much," said Gino DiCaro, spokesman for the Manufacturers Association. "Over time, we're dropping off the list of states that companies are willing to consider."

The report is not specifically connected to any bill, but manufacturers ultimately want lawmakers to change state policies that, they say, kill jobs. For instance, DiCaro said, California makes companies pay sales tax on new factory equipment, a practice followed by only two other states: Wyoming and South Carolina.

The report states: "California’s poor performance in this category is largely due to increases in taxes (corporate, individual, unemployment) during the study period." The one thing the report has buried in its tables is the reason why this is true. In fact property taxes in the seven states compared to California are much higher. For every dollar of property tax that California would charge a business,
  • Washington would charge $1.66;
  • Arizona would charge $1.78;
  • Oregon would charge $1.79;
  • Minnesota would charge $1.87;
  • Kansas would charge $3.07;
  • Indiana would charge $3.12;
  • Texas would charge a whopping $3.78.
Texas is perhaps the perfect example to compare. In California, the CEO of a corporation would pay an income tax rate of 9.3% on taxable income over $100,000. The CEO's of corporations in Texas pay no state income tax. California's corporation income tax is much higher than Texas. California's sales tax is also higher than Texas. Texas is considered more "business friendly." From a government standpoint, it is also more financially stable as property tax is a more stable sources of tax revenue.

Perhaps there is a lesson to be learned from Texas. Repeal Proposition 13, quadruple property tax revenue, and severely reduce or eliminate state individual and corporate income taxes.

I wouldn't support that but many of the folks who decided to have the Milken Institute study done most likely would.

The one thing Californian's do not need to do in the crashing California economy is panic over technology oriented jobs. Silicon Valley is the best example of the issues surrounding both technology oriented industrial growth creating jobs and the related subsequent job losses of the past few decades.

As we know it, Silicon Valley began to gain shape with a few entrepreneurs and corporations such as IBM in the 1960's. As the innovation expanded, demand for educated and skilled personnel arose. Wages went up to attract more people. Housing development didn't keep pace so housing prices climbed. It became more costly to live in the area. Wages went up again.

School districts and state and local government then had to raise wages so that employees could afford to live there. Because of Proposition 13, increasing real estate prices to did not result in corresponding revenue increases for schools and government. Schools and government scrambled to find revenue becoming "creative" and placing heavier burdens on income related taxes.

Better educated personnel became citizens who didn't like pollution and abusive labor practices. Ironically, they liked restrictive zoning and less development. So they pushed legislators for more regulation and more effective regulation.

Still, the region continued to attract innovating businesses. But chip manufacturing was sent overseas to (1) avoid regulation regarding toxins used in and toxic waste produced by manufacturing processes and (2) take advantage of cheap labor. As the Chronicle story notes, the report indicates that the steepest decline in factory jobs was in high-tech manufacturing which had an average annual wage of $115,000 in 2007.

The manufacturers lobby would like us to believe those jobs left mostly because of taxes and government regulations. Why, then, do I believe that those jobs were moved to other states where labor costs could be reduced by as much as 60% or to other countries where labor costs could be reduced by as much as 90%. This is a debugged version of the Milken Institute report - let's call it "California Economics 101: Ignore the California Manufacturers and Technology Association."

The California economy likely will experience The Great Recession as a depression, as noted in the previous six posts:
  • Because the schools, State Government and local governments will make significant layoffs in the coming months;
  • Because State Government may soon begin paying bills with IOU's;
  • Because of a drought significantly depressing agricultural production and related employment;
  • Because people are moving out of the state reducing growth to nearly none;
  • Because California abandoned its commitment to educate its children;
  • Because many service and retail business can't survive, and none can flourish, in this economic environment; and,
  • Because, yes, we haven't found a way to create technology industries and provide them with an adequate supply of affordable labor since it costs too much to live here.

No comments: