The Economist, 25 Jan 2014

[Warning: f* word used in the original article]

The not so Golden State

For all Silicon Valley’s vibrancy, California can be a lousy place to do business


IN THE gold rush of the late 1840s, chancers dreaming of quick riches flocked to San Francisco. It is the same today, only this time they are armed with computer-science degrees rather than shovels and picks. It is boom time again in Silicon Valley. Startups are sprouting like mushrooms after rain. Investors are showering them with cash. Hoodie-clad geeks are quaffing champagne in trendy bars, as they celebrate their nascent firms’ multi-billion-dollar valuations. Meanwhile, Google and Apple continue their march towards world domination.

Those observing from afar the valley’s burgeoning entrepreneurial scene could be forgiven for concluding that California must truly be a Golden State for business. But beyond the gilded strip of land between San Francisco and San Jose is another California, an inhospitable place plagued by over-regulation, mindless bureaucracy, high taxes and endless lawsuits. Last May, six months after the state raised its top income-tax rate to the highest in the land, Chief Executive magazine named it America’s worst for doing business—for the ninth year in a row. Four months later Governor Jerry Brown signed a bill raising the minimum wage from 2016 to $10 an hour, also the highest of all the states.


Entrepreneurs who survive the ordeal of gathering all the permits needed to start a business—opening a restaurant can take more than two years in California—are then micromanaged by labour laws telling them when to pay overtime, and how much. They suffer electricity prices that are already among America’s highest, and which may rise further to meet the state government’s ambitious carbon-emissions goals.

Then there is the California Environmental Quality Act (CEQA). A well-intentioned law to curb the damaging effects of development has mutated into a monster. Almost anyone can file a CEQA lawsuit against any project they dislike; plaintiffs win half of the cases they enter, and when they lose they do not need to cover defendants’ legal fees (the reverse does not apply). Builders are compelled to hire expensive unionised labour to ward off union bosses’ threats of spurious CEQA suits. Shops and petrol stations file cases to prevent competitors from opening up. A longtime observer sums up the attitude of Californian state government to business as follows: “[expletives].”

So whereas venture-capitalists and coders may be rushing to California, others cannot wait to leave. Joseph Vranich, an expert on company relocation, totted up 254 “California disinvestment events” (firms with over 100 workers leaving, or expanding elsewhere when they could have chosen California) in 2011. He reckons 2012 and 2013 will have been worse. For much of the post-war period California’s diverse economy, with vibrant manufacturing, aerospace and entertainment industries, was the envy of the world. Today its success is largely limited to the technology sector. Without the job-creation and tax revenues of Silicon Valley, California’s much-vaunted recovery would look a lot shakier.

How do the valley’s firms thrive in this climate? Partly it is because their cluster effect is as strong as ever. Firms, workers, investors and universities benefit from proximity to one another. And partly it is because many of California’s most onerous regulations hit manufacturers hardest and creative types least: iPhones are “designed by Apple in California” but made in Shenzhen. Indeed, Silicon Valley’s greenish tech folk are among the biggest supporters of the sort of rules that they can live with, but which make life hard for other types of businesses. To the extent that tech tycoons involve themselves in politics, it is at national rather than state level and comes with a strong whiff of self-interest: witness the push for immigration reform led by Mark Zuckerberg of Facebook. Schumpeter recently met a San Francisco-based CEO who had never been to Sacramento—the state capital, just 90 minutes’ drive away—and who had no idea who Mr Brown was.

Though he has helped to make things worse, the governor is not deaf to businesspeople’s laments. He has spent the past three years fixing California’s state finances, which were in dire shape when he took office. Last year his administration announced several promising measures, including tax credits for manufacturers to buy equipment and for firms to create jobs in poor parts of the state. Mr Brown is resisting calls from members of his Democratic base to ban fracking in the oil-rich Monterey shale formation, which some think could bring a jobs bonanza. “It’s like AA,” says Ken McNeely, the president of AT&T California. “First we recognise that we have a problem.”

Passing reforms will not be easy. In the state legislature’s most recent session, the stars seemed aligned for an overhaul of CEQA; even some environmentalists concede that this is necessary. But the state senator shepherding the bill suddenly quit, union allies took charge and the reform that emerged was diluted to homeopathic levels. So it goes, so often, in California.

First, do less harm


It seems unlikely that California will ever challenge the likes of Texas or North Dakota at the top of business-friendliness tables. It is a progressive, high-tax, high-regulation place, and most voters like it that way. So reformers speak not of scrapping CEQA but of making it harder to file frivolous lawsuits; they urge not a relaxation of workplace rules but an end to their capricious implementation. If he wants to ensure that California’s recovery lasts, Mr Brown must back these efforts. He must also resist pressure from some Democratic allies for a renewed spending splurge, which might eventually mean even higher business taxes. Above all, he should apply himself to making the daily lives of California’s businessfolk a little easier and more predictable. Only then might the rush of businesses out of the Golden State be halted.