Mises Wire

Is California an Economic Paradise? Paul Krugman Thinks So

Paul Krugman is worried, very worried, that California voters will overturn all of the many progressive gains that the state has made in the past decade when they vote in the September recall election for Gov. Gavin Newsom. If polls are correct, there is the possibility that conservative Larry Elder might replace Newsom. He writes:

What would make this outcome especially galling is that California is in many ways — with the glaring exception of housing, which I’ll get to — a progressive success story.

He goes on to claim that the very policies that many believe would hold back economic growth, such as high taxes, a vast regulatory network, a heavy public sector burden, and the like have had no effect upon California’s economy and, in fact, probably enhance economic opportunities:

The Golden State took a sharp left turn in 2010, with the election of Jerry Brown as governor. Two years later, Democrats gained a supermajority in the Legislature, giving them the power to enact many progressive priorities. California soon raised taxes on the rich, increased social spending and increased its minimum wage. It also enthusiastically implemented the Affordable Care Act.

Conservatives predicted disaster, with some saying that the state was committing economic “suicide.” And California gets a lot of negative coverage in the business press, where one constantly finds assertions that business is moving en masse out of the state to lower-tax, less-regulated states, like Texas.

The data, however, say otherwise. Given all the trash-talking of California and trumpeting of Texas’ prospects one reads, it’s a bit startling to look at trends in real G.D.P. and employment between 2010 and the eve of the pandemic and discover that California and Texas had essentially the same growth rates. It’s also startling, given all the talk about people fleeing high taxes, to learn that highly educated, high-income workers — who do indeed pay higher taxes in California than in most other parts of the U.S. — were continuing to migrate into the state.

California’s experience, in other words, gives the lie to conservative claims that taxing the rich and spending more on social programs destroys prosperity. And the state didn’t just achieve rapid economic growth; its effective implementation of Obamacare helped it reduce the number of its residents without health insurance much more rapidly than the rest of the country.

In other words, don’t believe your lying eyes. The fact that residents of California pay the highest income taxes (and the rich are not the only ones hit hard by the state’s income tax, as the rates that are higher than most states kick in a lower income levels), the highest sales taxes, the highest gasoline taxes, and some of the highest utility rates in the United States. (My wife and I have estimated that if we were to move to a non-income tax state such as Tennessee or Florida that we would save a minimum of $40,000 a year, excluding any quality-of-life issues.)

Krugman goes on to admit that while California has the nation’s highest poverty rates, that situation has nothing to do with tax burdens (even poor people on average pay a tenth of their income to state and local governments in that state), but rather because of the high cost of housing. And why are California housing prices high? Krugman claims that those dastardly conservatives are behind that problem:

What’s behind California’s housing nightmare? Runaway NIMBYism, which has blocked new housing construction. California’s economic performance matched that of Texas in the 2010s, but it issued far fewer building permits despite having a larger population. California gained three million jobs between 2010 and 2019 but added fewer than 700,000 housing units.

NIMBYism, however, happens to be one of the few major issues that cut right across party lines. Conservatives are as likely as liberals to oppose housing construction; some progressives — among them Governor Newsom — are strong advocates of housing expansion. So California’s big policy failure shouldn’t be an issue in this recall election. What’s on the line are its policy successes.

As usual, Krugman wraps a bigger lie around a kernel of truth. While local zoning regulations (and I’ve never seen Krugman speak out against zoning) have contributed to the problem, the larger issue, according to James Broughel and Emily Hamilton of the Mercatus Center, revolves around state housing regulations that choke off new construction. They write:

…California’s state building code is also especially restrictive and deserves scrutiny from policymakers concerned about housing affordability. By itself, this section of the Code of Regulations contains more restrictive terms — more than 75,700 — than some states’ entire codes. The residential housing subsection alone has nearly 24,000 restrictions.

Lest one believe that progressive ideology has nothing to do with the construction codes, read on:

…California is also well known for its aggressive environmental and energy standards. Homes built in 2019 are required to meet energy standards that are 50% more stringent than the 2016 standards.

These energy rules reflect an important priority for Californians, but they contribute to staggering construction costs and, in turn, higher house prices. Affordable housing builders spend $400,000 per unit, on average, for new housing in Los Angeles, more than any other city in the country. State energy standards contribute to this cost.

These kinds of staggering numbers give the lie to Krugman’s argument that the NIMBY folks are to blame. Craig Eyermann of the Independent Institute lays the blame squarely where it belongs: California’s political culture:

California’s problems have not arisen by chance. Its housing shortage is a political choice, just as are many of its other problems.

As he often does, Krugman leaves out some important points as to why the recall gained momentum, failing to note the infamous French Laundry fundraiser that obnoxiously stated just how much California’s progressive elites despise everyone else. First, keep in mind that Newsom’s response to the COVID-19 surge in 2020 was one of the most restrictive in the nation, resulting in thousands of low-income workers losing their jobs as the governor shut down many of the businesses where they worked. (Note that during that same time, the state’s high-tech elites saw their income rising, as their economic fortunes were directly tied to the Internet and web-based commerce.) One Los Angeles television station reported:

Newsom received high praise for his aggressive approach to the coronavirus last spring, when he issued the nation’s first statewide stay-at-home order. Now there is growing public angst over subsequent health orders that have shuttered schools and businesses and a massive unemployment benefits fraud scandal, while a public shaming continues for his ill-advised dinner at the French Laundry in Napa Valley, an establishment that features a white truffle and caviar dinner for $1,200 per person.

Photos of the dinner — a birthday party for a Newsom confidante who also is a lobbyist — emerged showing the governor without a mask at a time when he was imploring people not to socialize with friends and wear a face covering when going out and around others.

While trying to soften the criticism of Newsom’s actions, Politico noted that the governor clearly antagonized much of the voting base that saw his actions as “do and I say, not as I do.”

The news came less than two ours after Newsom strongly discouraged residents from traveling for the holidays or bringing together multiple households for Thanksgiving.

Regardless of the governor’s assertion that the meal abided by coronavirus restrictions, he faced an immediate backlash on social media over his decision to partake in an event at an opulent, multiple Michelin-starred restaurant as businesses around the state reel from the pandemic and Californians chafe under social limitations. Some drew a connection to the governor sending his four children to private school classrooms while most of the state’s public school students continue to do remote learning, as POLITICO reported last month.

On top of the news that the high-tech billionaires that give massive amounts of political contributions to progressive candidates and their causes, voters also have found that while many Americans lost wealth during the pandemic restrictions, many of the billionaires tied to progressive politics gained, including Jeff Bezos and Mark Zuckerberg, who made out very well.

Then there are the quality-of-life issues that Krugman refuses to address, since they fall upon the kind of “deplorables” that rarely make personal contact with the multi-millionaire economist. The rise in street crime in California cities does not affect progressives, since they are more likely to live in wealthy (and often gated) communities and don’t have to worry about having the catalytic converters stolen from their vehicles or have their mansions burglarized. As I noted in an article last year about living in California, the quality of life for non-elites is rapidly deteriorating and much of it has to do with progressive governance, the very governance that Krugman effusively praises.

Wealthy progressives like Krugman rarely are affected directly by street crime, so they tend to look at such problems only in abstract terms and refuse to see any connection between the rise in crime and the decline of quality of life of those that are most likely to become crime victims. If there is a rise in crime, then it only – ONLY – can be blamed on capitalism. Crime occurs because of capitalist-induced economic inequality, so, by definition, progressive government reduces crime, since progressivism seeks to replace that rapacious capitalism with something kinder and gentler.

In Krugman’s world, capitalism is predatory while the state, through spending and regulation, improves the economy. California journalist Steven Greenhut, who (unlike Krugman) must pay out of his pocket for the excesses of the state’s government, noted more than a decade ago that government employees in California are outright plundering the taxpayers through bloated systems of pay, benefits, and pensions.

However, as Krugman notes, the migration patterns of people leaving and moving into California favor wealthy people, as a recent think tank study showed. His point is that the wealthy people are moving in but the less-than-wealthy and middle-class people are the ones making up the exodus from the state.

As usual, Krugman comes to the wrong conclusions. First, the higher-income people are not moving to California because the state has implemented Obamacare or because wealthy people pay the highest state income taxes in the country. Obamacare is something the rich can avoid; however, at the present time, much of the growing high-tech sector of the economy – with its extremely high pay and benefits – is located in California. Entrepreneurs – the kind of people Krugman tends to denigrate in his columns – are the engines of economic growth in that state, and as long as those companies are there and as long as the vast number of entrepreneurs that live there can churn out high-performing companies, talented and wealthy people will move there.

In other words, entrepreneurs are not flocking to California because of the bloated state and local governments there. Instead, they are coming to California despite governmental excesses. However, those that are not going to command seven-figure incomes are the ones that leave the state. Many of them can sell their houses at prices substantially higher than the average cost of housing in most of the USA, and then move to lower-tax and lower-cost states, pay cash for homes they never could afford in California, and start a new life being nearly debt-free.

The Krugman theme has always been that progressives create something this side of paradise whenever they have a free hand to govern, that is, can operate as a one-party state. Yet, Krugman cannot point to one thing as to how progressives have made life better in California for those ordinary people he claims to care about.

It is not just the wealthy that pay a large portion of their incomes in taxes. There is no “graduated” gasoline tax, nor a special sales tax for the rich. California residents, the vast number of whom are not in that special group of entrepreneurs or are graduates of elite universities, receive little or nothing from the entitled bureaucrats that have life-and-death holds on the lives of those they rule, and the vast number of Californians do not receive the six-figure pensions enjoyed by many government workers.

Progressives did not create the natural beauty that defines so much of the California landscape. They did not create the state’s spectacular coastline, the majestic Sierra Nevada, the Cascades, and the contours of the scenic San Francisco Bay. We do know that progressive policies of fire suppression and setting vast tracts of forest and brushland aside – the antithesis of sound forest management – have helped lead to massive conflagrations that now are becoming a regular occurrence in the state each summer.

Yet, what is the progressive response to the wildfires? Force people to purchase expensive and inefficient electric cars, and require utilities to use extremely costly methods of producing electricity from renewables, all the while knowing that these measures will not contribute a whit to bringing down summer temperatures or bringing more rainfall to the state.

Even if California voters throw out Newsom and even if (Krugman shudders) they put Larry Elder into the governor’s mansion, nothing will change in state government. The AFL-CIO government employee unions still will run the state government as their personal fiefdoms and the taxes will continue to be the highest in the nations. Not one iota of all these progressive “successes” that Krugman imagines will be changed. Elder will be there for a year, and then the Democrats that run California’s government and other institutions will choose another partisan who will prove to be unfit for the job.

Paul Krugman is a very wealthy man, part of that one percent he regularly condemns. He has become wealthy by peddling inflation as sound economic policy and having a highly-paid perch at the New York Times to claim that the massive spending by California politicians and bureaucrats actually enhances wealth because, as every Keynesian knows, wealthy economies got that way by spending themselves into prosperity.

And if California voters do what Krugman has begged them not to do, he can make money complaining about their bad choices and about the tyranny of minority government. But he won’t have to worry about the consequences of progressive rule; that is for the little people who are not part of the arrangement.

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