San Diego Housing Market News and Analysis
The Great California Exodus
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Submitted by paramount on April 28, 2012 - 1:13am
A leading U.S. demographer and 'Truman Democrat' talks about what is driving the middle class out of the Golden State.
Mr. Kotkin, one of the nation's premier demographers, left his native New York City in 1971 to enroll at the University of California, Berkeley. The state was a far-out paradise for hipsters who had grown up listening to the Mamas & the Papas' iconic "California Dreamin'" and the Beach Boys' "California Girls." But it also attracted young, ambitious people "who had a lot of dreams, wanted to build big companies." Think Intel, Apple and Hewlett-Packard.
Now, however, the Golden State's fastest-growing entity is government and its biggest product is red tape. The first thing that comes to many American minds when you mention California isn't Hollywood or tanned girls on a beach, but Greece. Many progressives in California take that as a compliment since Greeks are ostensibly happier. But as Mr. Kotkin notes, Californians are increasingly pursuing happiness elsewhere.
Nearly four million more people have left the Golden State in the last two decades than have come from other states. This is a sharp reversal from the 1980s, when 100,000 more Americans were settling in California each year than were leaving. According to Mr. Kotkin, most of those leaving are between the ages of 5 and 14 or 34 to 45. In other words, young families.
The scruffy-looking urban studies professor at Chapman University in Orange, Calif., has been studying and writing on demographic and geographic trends for 30 years. Part of California's dysfunction, he says, stems from state and local government restrictions on development. These policies have artificially limited housing supply and put a premium on real estate in coastal regions.
"Basically, if you don't own a piece of Facebook or Google and you haven't robbed a bank and don't have rich parents, then your chances of being able to buy a house or raise a family in the Bay Area or in most of coastal California is pretty weak," says Mr. Kotkin.
While many middle-class families have moved inland, those regions don't have the same allure or amenities as the coast. People might as well move to Nevada or Texas, where housing and everything else is cheaper and there's no income tax.
And things will only get worse in the coming years as Democratic Gov. Jerry Brown and his green cadre implement their "smart growth" plans to cram the proletariat into high-density housing. "What I find reprehensible beyond belief is that the people pushing [high-density housing] themselves live in single-family homes and often drive very fancy cars, but want everyone else to live like my grandmother did in Brownsville in Brooklyn in the 1920s," Mr. Kotkin declares.
"The new regime"—his name for progressive apparatchiks who run California's government—"wants to destroy the essential reason why people move to California in order to protect their own lifestyles."
Housing is merely one front of what he calls the "progressive war on the middle class." Another is the cap-and-trade law AB32, which will raise the cost of energy and drive out manufacturing jobs without making even a dent in global carbon emissions. Then there are the renewable portfolio standards, which mandate that a third of the state's energy come from renewable sources like wind and the sun by 2020. California's electricity prices are already 50% higher than the national average.
Oh, and don't forget the $100 billion bullet train. Mr. Kotkin calls the runaway-cost train "classic California." "Where [Brown] with the state going bankrupt is even thinking about an expenditure like this is beyond comprehension. When the schools are falling apart, when the roads are falling apart, the bridges are unsafe, the state economy is in free fall. We're still doing much worse than the rest of the country, we've got this growing permanent welfare class, and high-speed rail is going to solve this?"
Mr. Kotkin describes himself as an old-fashioned Truman Democrat. In fact, he voted for Mr. Brown—who previously served as governor, secretary of state and attorney general—because he believed Mr. Brown "was interesting and thought outside the box."
But "Jerry's been a big disappointment," Mr. Kotkin says. "I've known Jerry for 35 years, and he's smart, but he just can't seem to be a paradigm breaker. And of course, it's because he really believes in this green stuff."
In the governor's dreams, green jobs will replace all of the "tangible jobs" that the state's losing in agriculture, manufacturing, warehousing and construction. But "green energy doesn't create enough energy!" Mr. Kotkin exclaims. "And it drives up the price of energy, which then drives out other things." Notwithstanding all of the subsidies the state lavishes on renewables, green jobs only make up about 2% of California's private-sector work force—no more than they do in Texas.
Of course, there are plenty of jobs to be had in energy, just not the type the new California regime wants. An estimated 25 billion barrels of oil are sitting untapped in the vast Monterey and Bakersfield shale deposits. "You see the great tragedy of California is that we have all this oil and gas, we won't use it," Mr. Kotkin says. "We have the richest farm land in the world, and we're trying to strangle it." He's referring to how water restrictions aimed at protecting the delta smelt fish are endangering Central Valley farmers.
And Democrats want to raise taxes even more. Mind you, the November ballot initiative that Mr. Brown is spearheading would primarily hit those whom Democrats call "millionaires" (i.e., people who make more than $250,000 a year). Some Republicans have warned that it will cause a millionaire march out of the state, but Mr. Kotkin says that "people who are at the very high end of the food chain, they're still going to be in Napa. They're still going to be in Silicon Valley. They're still going to be in West L.A."
That said, "It's really going to hit the small business owners and the young family that's trying to accumulate enough to raise a family, maybe send their kids to private school. It'll kick them in the teeth."
A worker in Wichita might not consider those earning $250,000 a year middle class, but "if you're a guy working for a Silicon Valley company and you're married and you're thinking about having your first kid, and your family makes 250-k a year, you can't buy a closet in the Bay Area," Mr. Kotkin says. "But for 250-k a year, you can live pretty damn well in Salt Lake City. And you might be able to send your kids to public schools and own a three-bedroom, four-bath house."
According to Mr. Kotkin, these upwardly mobile families are fleeing in droves. As a result, California is turning into a two-and-a-half-class society. On top are the "entrenched incumbents" who inherited their wealth or came to California early and made their money. Then there's a shrunken middle class of public employees and, miles below, a permanent welfare class. As it stands today, about 40% of Californians don't pay any income tax and a quarter are on Medicaid.
It's "a very scary political dynamic," he says. "One day somebody's going to put on the ballot, let's take every penny over $100,000 a year, and you'll get it through because there's no real restraint. What you've done by exempting people from paying taxes is that they feel no responsibility. That's certainly a big part of it.
And the welfare recipients, he emphasizes, "aren't leaving. Why would they? They get much better benefits in California or New York than if they go to Texas. In Texas the expectation is that people work."
California used to be more like Texas—a jobs magnet. What happened? For one, says the demographer, Californians are now voting more based on social issues and less on fiscal ones than they did when Ronald Reagan was governor 40 years ago. Environmentalists are also more powerful than they used to be. And Mr. Brown facilitated the public-union takeover of the statehouse by allowing state workers to collectively bargain during his first stint as governor in 1977.
Mr. Kotkin also notes that demographic changes are playing a role. As progressive policies drive out moderate and conservative members of the middle class, California's politics become even more left-wing. It's a classic case of natural selection, and increasingly the only ones fit to survive in California are the very rich and those who rely on government spending. In a nutshell, "the state is run for the very rich, the very poor, and the public employees."
So if California's no longer the Golden land of opportunity for middle-class dreamers, what is?
Mr. Kotkin lists four "growth corridors": the Gulf Coast, the Great Plains, the Intermountain West, and the Southeast. All of these regions have lower costs of living, lower taxes, relatively relaxed regulatory environments, and critical natural resources such as oil and natural gas.
Take Salt Lake City. "Almost all of the major tech companies have moved stuff to Salt Lake City." That includes Twitter, Adobe, eBay and Oracle.
Then there's Texas, which is on a mission to steal California's tech hegemony. Apple just announced that it's building a $304 million campus and adding 3,600 jobs in Austin. Facebook established operations there last year, and eBay plans to add 1,000 new jobs there too.
Even Hollywood is doing more of its filming on the Gulf Coast. "New Orleans is supposedly going to pass New York as the second-largest film center. They have great incentives, and New Orleans is the best bargain for urban living in the United States. It's got great food, great music, and it's inexpensive."
What about the Midwest and the Rust Belt? Can they recover from their manufacturing losses?
"What those areas have is they've got a good work ethic," Mr. Kotkin says. "There's an established skill base for industry. They're very affordable, and they've got some nice places to live. Indianapolis has become a very nice city." He concedes that such places will have a hard time eclipsing California or Texas because they're not as well endowed by nature. But as the Golden State is proving, natural endowments do not guarantee permanent prosperity.
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