This is California, the Golden state and one of the largest economies in
the world in it’s own right. If California was counted as a sovereign nation
it would be the fifth largest in the world by GDP, with a 3.2 trillion dollar gross state product putting it just behind
Germany and just ahead of India. The state has a lot going for it,
from the largest movie and technology centers in the world all the way to a
surprisingly strong agricultural sector. All of this has meant that the
residents of California are on average doing very well for themselves,
and one look around the wealthy enclaves of las Angeles and san
Francisco would back this up. Despite all of this however, the state is
going through a period of economic turbulence. The economic fallout of the coronavirus has
hit the state’s economy particularly hard. Major industries like tourism, and media creation have ground to a complete halt having widespread
knock-on implications throughout the economy hitting smaller vendors who were
once reliant on these industries. This bump in the road however was by no
means the total undoing of the state. California’s metrics before 2020 looked
very strong, with low unemployment, solid growth and booming industries,
but there were still cracks forming. The state is home to the largest population
in the US but the industries that were truly driving wealth creation are famously
bad at actually employing people. This had led to a sharp increase in
social issues like homelessness and crime. All of these problems that were
bubbling away under the surface have now been massively accelerated,
so much so that many economists have predicted that the sun might be setting
on the setting on the sunshine state. It may sound like absurdist alarmism but it
is a reality that shouldn’t be dismissed. Remember in previous decades there
was another economic region in the US riding high on the new growth
industry of the age. but these days Detroit is not exactly seen as the
bastion of prosperity it once was. So could the same grim reality
be in store for California? Well to answer this we need
to look at a few key areas. What made the state so prosperous
before the 2020 downturn? What were the underlying
issues impacting the economy? How will these issues be impacted by this decline? And finally while we are here we may aswell give
it an EE national Economy score and put it on our leaderboard. I know it’s state but with a GDP in
the trillions of dollars, it deserves an entry. INTRO ADD Now this year has certainly
been one for doom and gloom, and it is still important to
address what is working well. Any economy that can grow to the level that
California has and provide so much wealth and prosperity to it’s citizens is probably doing
something right. So what was the driver of the California Dream California is both really lucky and
really unlucky in terms of its geography. The state had a big headstart over
other states in the union when it was getting established because
it had access to decent farmland, a good year-round climate, oh and
an ocean for fishing and trade. On the flip side of that same
coin, it was literally about as far away from the economic centers of the US as
one could reasonably be while still in the US. None the less the state grew well as a
distant outpost that attracted farmers, gold diggers, and or people that would rather be a little bit removed from all of that
pesky law and order in the east. The first big boon for the state in
the modern era was its film industry, which was curiously also at least partially
thanks to its geography and position in the world. You see early film technology relied
heavily on lots of light and good weather. That’s one thing that California has in
abundance, I mean its right there in the name. What’s more is that a lot of this new
cinema was filmed using technologies that had patents on them. Primarily patents owned by thomas edison and his businesses
that were headquartered in new york. By conducting business in Las angeles, up and coming film companies felt more
comfortable not been found out for using much cheaper film equipment that was not paying
royalties back to eddison for his patents. Now this all meant two things, for
starters it hopefully makes you feel less guilty about watching
a cheeky movie for free online. But more importantly, it established
LA as the center of the movie business. We actually plan to do an entire
video on the economics of hollywood, but for now just know that eventually of
course camera technology got to a point where film locations were not as important, and modern
studios do pay what they owe to their suppliers. But once these studios were
established they got comfortable. Support Industries sprung up, film-related
unions were founded and it almost got to a point where it was really
hard to film anywhere but LA. So through nothing but being in the right place
and looking the right way sume 100 years ago california is now the epicentre of one
of the largest industries in the world. This would go on to be a common theme. The tech revolution that started silicone valley
was mostly formed around stanford university, which was one of the first universities in the
nation to offer computer science as a course. Once a few tech companies got going other tech
companies were attracted to the same area, and along with them came the people with
the expertise to create new technology. Once this moden gold rush hit a critical mass
silicone valley just became the logical place to conduct tech business because
it naturally ticked all the boxes. Access to suppliers, access to
investors and access to skilled people. Given that technical development by its
nature can be virtually rolled out anywhere.. being in an amongst a huge pool of competitors
is not as much of an issue as it would be in customer-facing industries like retail,
hospitality or even manufacturing. In fact having this ecosystem actually makes
everything much easier. You need a part that only one niche tech manufacturer in the world makes?
Good chance that will be in silicone valley. You need to consult with the world leader
is some type of technical infrastructure chances are silicone valley is
the best place to find them. This whole process is called agglomeration,
which is a fancy word the inherent benefit industry receives by being geographically
close to its industry partners and peers. Being lucky enough to just happen
to have the nucleia around which the largest industry in the world formed
became par for the course for california. Of course, a lot of it was good planning
and the state did a lot of things right to nurture the growth of these industries
but luck did play an undoubtedly huge part. All the same even if north dakota happened to
be an early centre for technical innovation it is hard to see it having the same
appeal to tech companies and their staff as the blue skies and sandy beaches of California. Now so far this all sounds great,
California has a diverse portfolio of wealth-creating industries that are not
dependant on limited resources to sustain. But suffering from success does start
to become an issue in it’s own right, especially when California is home to a
lot of people that don’t call it home. For lack of a better way of
putting it, welcome to the Hotel California Gold rushes throughout history were
not good for local economies long term. They see a massive spike in new workers
all desperately seeking their riches and this does create some big short term wins,
businesses catering to this foot traffic can be built and maybe even some taxes can be
levied on the wealth that is extracted, but once the gold is dug everything
goes right back to where it was. Now the californian gold rush is
but a distant memory these days, however, the state is not immune
to a lot of the same effects. Moving to LA to try and make it in
the film industry or San Fransisco to earn fat stacks as a developer
are pretty common endevours. The issue is that these types of employment
don’t actually give too much back to the economy. An influx of computer programmers getting paid 6
figures for graduate positions means that things like real estate become unaffordable to long
term residents that moved into other industries. Real estate also drives up rents for commercial buildings which gets passed along to
consumers as higher costs of living. It would be next to impossible for a
worker earning the national average wage to move to the bay area and expect to live
a comfortable lifestyle even as a single adult not to mention a with a family. So people either make sacrifices, like living
with roommates or parents, or they move away. Now if you are particularly cold-hearted
you might argue that trading in some average income earning local residents
for some exceptionally skilled and well-compensated computer nerds is
probably a good trade to make. But it isn’t. For starters, you can’t run a
city on computer code…. Yet… Someone needs to be there to stock
the whole foods and unless produce packer is a job role that starts to attract
a six-figure salary these people need to be accommodated in some way or else demand-pull
inflation can get to dangerous levels fast. But the real issue is that these
people don’t stay for long. San fransicso has the highest level
of internal migration withing the USA. That means lots of people are moving
in and lots of people are moving out. that ‘s because people working in silicone
valley don’t tend to do it for very long. A few years in the industry gets
people great experience and a nice big pile of cash to take back to their hometowns. During this time most of thse workers will live
below there means and focus pretty heavily on work. They won’t be living family lives that
give back to local industries because well it’s too expensive, even these
well-compensated employees would struggle to raise a family in southern
California given the general cost of living. Its a pretty common industry gameplan. Graduate
university, get a job at a FAANG company, stick it out for 5 years, save up
some cash, live in a tiny apartment and then move back to your home city and
live like a kind doing consultation work. People paying alot of money for
a short stay in modest comfort? I guess the Hotel California is open for
business, but you can actually leave. To try and make the best of a
bad situation the Californian government levies the highest
state income taxes in the nation. The general idea is that sure these outside
workers can come and make their millions but at least it will generate lots
of revenue for the government that they can then use to address some of
the issues caused by said workers. Now in theory this is fine and it actually
worked well for some time. But it was a precarious balancing act, the slightest breeze
could throw if off course. Which is exactly where the hurricane that was 2020 came in. The state
first the first time ever is starting to see Mass vacancies. The economic fallout of the coronavirus has been
a major hit to Everybody, but the consequences have been especially severe in the united
states, and especially severe in california. For starters, nobody is making a
movie, going on a beach holiday or attending Disneyland at the moment
so that has been a major direct blow. But what might end up being more severe is a
consequence that is a little bit harder to notice. People are starting to leave. The push to work from home means
that the aforementioned tech workers no longer need to live in a cramped
1 bedroom apartment in the bay area, they can instead just do exactly the same thing
in a nice family home anywhere in the nation while enjoying a much better quality
of life and paying much less in tax. The same income tax designed to make
the most of high-income earners while they were working in the state is
now pushing people away in droves. The issue of capital flight is an argument that is often brought up to dissuade governments
for passing taxes on high-income earners. To speak candidly most of the time these
arguments are weak at best. Most people will not move their families to a new nation to save
a few thousand dollars on taxes, but a single worker moving to a new city in the same country,
well that is a far more compelling prospect. Infact while I was in the process of writing
this script Graeham Stephan, a personal finance YouTuber posted a breakdown of why he was leaving
California and moving to Las Vegas to live. Now Graham does not work in the tech industry but
he is still indicative of those types of workers. Young, very well off, with a business
that he can do from anywhere. Of course, one mans experience
does not a trend make. but his reasons for leaving were very in
line with the research that we conducted, so go and check that video out
he is a good e gg that graham. Ranking. Ok I know California is not a country and
this say’s national leaderboard but it is still interesting nonetheless, and I mean
Hong Kong gets a spot so why not right? Size is simply phenomenal. California would make
for a huge national economy in its own right but the fact that it is just one part of the US gives
you and idea of just how influential the economies of the worlds super powers are. It gets
a 9/10, of course falling short of the 14 figure GDP club but still one of the largest
most influential economies in the world. GDP per capita is very high, as temperamental as
they may be the nation is still home to alot of very skilled very industrious workers, and with a
GSP per capita of 72,000 in 2019 it gets a 9/10. Curiously enough the state or territory in the US
with the highest GDP per capita is the Disctrict of Columbia with a whopping $162,000 as of 2018,
which puts it in line with places like Monaco. Stability and confidence. This
is really subjective and had it been asked 12 months ago it
would have been a clear 10/10. But flying so high means it has a long way to
fall and it has historically felt the impacts of downturns more heavily than the national
average, so it gets an 8/10 which is of course still very well deserved for a state with such
a diverse portfolio of world-leading industries. Growth is pretty stable. The economy is large and reflects a developed nation in its own
right and the growth figures reflect this. Outside of 2020 it has averaged
2-3% annual growth so it gets a 6/10. Finally industry, well cmon what else could it
be. If anything could get an 11/10 it would be California. But in the meantime, it will
need to make do with a nice round 10/10. Altogether this gives the sunshine state
and average score of 8.4 out of 10, just falling short of the top spot. Of course with the same big asterisk as hong kong
that this is not actually a nation. Final thoughts California would be a remarkable economy if
it was it’s own nation but in a way it is even more so as just a very productive
piece of the grander american puzzle. But that does not mean it is without concern.
Yes has been fortunate enough to attract alot of very profitable industries and the
very skilled people that come with them. Yes its loverly beaches and attractions
will continue to attract more tourists and businesses alike, but it
can’t rest on it’s laurels. Many economies have thought they were the
epicenter of industries that would last forever, became overly reliant on them and then suffered
as those same industries faded into obscurity There is no such thing as an unsinkable
ship, and when all of the smart people start heading for the life rafts, it might
be time to look out for icebergs ahead. Who would have thought that the golden child of
American industry would have been hit so hard, in so many unusual ways, in such a short amount
of time, it’s one of those events you don’t see happening until it’s too late. Unless you
have some fantastic insights, like the ones you can get…
On trends
