The Decline of California

Duncan Black writes that California succeeded as a high-tax, high-service state but is going to fail as austerity transforms it into a high-tax low-service state.

I think this gets the relationship between population growth and service mix wrong. When I look at California’s historical population growth trajectory and current real estate dynamics, what I see is a state that managed to provide a high level of public services on a relatively modest tax burden thanks to a rapidly growing population. That works through several mechanisms. One is that if you have a large number of people who move to your state as adults after having gone to school elsewhere, you can maintain a high ratio of currently working taxpayers to kids enrolled in school. Another is that if you have a rapidly growing population, then you have a high ratio of currently working taxpayers to retired public sector workers drawing pensions. Once population growth slows, a much higher share of your public employee compensation is going to retirees who aren’t actually providing any services. Last, a growing population supports a lot of new infrastructure building. Texas, which is the new California in terms of population growth, has excellent roads with low taxes by continually adding to its stock of taxpayers.

I’m reasonably certain that California’s deteriorating public services aren’t really driving the declining population growth. That’s because if you look at someplace in California where it would be nice to live—Santa Monica, say, or Palo Alto—it turns out to be incredibly expensive. All the best land is occupied and the people in those communities don’t want it to get filled up with more density and California’s environmental legislation gives them powerful tools with which to block new residents.

Part of the price the state needs to pay for this induced slowdown in population growth is a downshift to a much less desirable tax/service tradeoff. But it would certainly be possible to open the floodgates to construction in Silicon Valley and all along the coast, which would bring in a huge flood of new tax revenue and create the possibility of lower tax rates and return to more generous levels of public expenditure.