California has pulled itself back from the brink of bankruptcy, but it’s not out of the woods yet. In an update on the state of the Golden State, The Economist gives Governor Jerry Brown partial credit for that recovery: for the first time in a long time, California’s budget boasts a surplus, politics in Sacramento aren’t as dysfunctional as they are in Washington D.C., and Standard & Poor’s recently upgraded the state’s outlook from ‘stable’ to ‘positive’. All of that is good news for one of the largest economies in the world, but California must do more to protect itself against dangerous vulnerabilities. The Economist points out that the recovery is shakier than it looks:
More than most people realise, California’s fortunes depend on the stockmarket. The state relies heavily on individual income taxes – this year they are expected to be two-thirds of general-fund revenues – and in particular, the capital gains of the rich.
But those sources of revenue are threatened over the longer term by Brown’s popular but perilous anti-business legislation. In fact, critics of his policies were quick to point out that the budget surplus is likely to be a one-off, the result of wealthy residents selling off investments before the Bush-era tax cuts expired. In its Schumpeter column, The Economist elaborates on these concerns:
Those observing from afar the [Silicon 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. […] So whereas venture-capitalists and coders may be rushing to California, others cannot wait to leave.
America’s federal system has provided us with fifty laboratories for democracy. States like California—or Kansas, or North Carolina—can test the efficacy of new policies without the US having to implement them at the national level. Their success or failure inevitably reverberates beyond their borders. These latest indicators in California are positive, but legislators should not be tempted into tinkering with the rudiments of the state’s recovery too soon. We’ll be watching.