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Thursday, April 13, 2017

How wrong is IBD on California? Let us count the ways

Investor's Business Daily has a hit piece out on California, as you can tell from the headline, "Taxifornia does it again." Here's the first paragraph of the editorial*, to give you a good flavor of it:
California's far-left government has done it again. Not realizing its real problems are excessive spending on misplaced priorities, excessive taxes, too much debt and a far-too generous welfare state, its legislature working in cahoots with Gov. Jerry "tax-and-spend" Brown has pushed through the largest tax hike in state history.
Amazingly, the editorial does not mention regulations once, though it did get around to the "job-killing $15-an-hour minimum wage" recently passed, along with the proposal for a single-payer health insurance system. I guess that counts as massive self-restraint on the editors' part.

The article calls California "the highest-tax state in the union." If that's so, it's just another example of the false claim (popular also with Arthur Laffer and the conservative American Legislative Exchange Council) that high taxes always mean bad policy outcomes. (FWIW, according to Forbes, California only has the sixth-highest state and local tax burden.)

So what have been the consequences of all of California's tax increases? According to IBD, "Since 2004, California has lost more than 1 million people, representing a $26 billion net income loss." Of course, no one has actually been lost. California's population grew by almost exactly 4 million between 2004 and 2016, from 35.25 million to 39.25 million. What IBD's editors are referring to is net interstate immigration and even there, the analysis is a little squirrely. From 2004 to 2008, the state had net interstate emigration of over 100,000 per year, with a low point of 288,000 net loss in 2006 (you know, during the housing disaster), but in every year since 2009, the number has been under 100,000 per year. Of course, interstate immigration is only one element of population change, and IBD conveniently omits the rest.

And the $26 billion alleged income loss due to interstate out-migration over that time period? A rounding error in an economy which grew from $1.8 trillion (2004) to $2.2 trillion (2015) annually in real 2009 dollars. I'm not even going to bother searching for their unlisted source.

The article further claims that because of taxes, over 10,000 firms, including Toyota, "have either fled the state or reduced their investments." Of course, Toyota has been replaced in its Fremont factory by Tesla, the most valuable auto company in the United States by market capitalization (yes, I agree: it does need to make profits sometime to maintain this). Again, we need to look at the bigger picture. California hit its pre-recession peak employment in January 2008 at 16,949,800 (6.1% unemployment rate), went below 16 million employed and over 12% unemployment in the worst of the Great Recession, but in December 2016 reached 18,376,600 employed with just a 5.2% unemployment rate. So something more than offset all the companies that "fled," I guess.

Of course, not everything is hunky-dory in California. As Woody Guthrie sang in 1940, "you won't find it [California] so hot, if you ain't got the do-re-mi." It's just as true today. California has persistent problems with a shortage of affordable housing, with studies rating it as having the highest housing costs in the country. But that means, contrary to the tax-doomsayers, that it is low-income people moving out and higher income people moving into the state, the opposite of what we'd expect if the anti-tax hype were true.

All in all, the editorial is Exhibit 538 in pressuring states to cut taxes, pretending you can provide infrastructure, education, and training without tax revenue, and that you can create prosperity by creating low-wage jobs.

* Thanks to a non-blogging friend for pointing out this editorial.


  1. Taxes in CA aren't that bad. My federal taxable income was nearly $55,000, and my CA income tax was $0.00.

    1. Yeah. Other states, for instance, charge electrics $100/year surcharge in lieu of gas tax - in California I don't pay $60/year in gas taxes! And I do slightly more than median driving. Although the new gas tax will raise that to $100/year, but that's what? Eight visits to Starbucks?

  2. Sure hope that you didn't lose any sleep over this editorial. The IBD editorial policy is much like the WSJ, which is to be just an echo chamber for its editors/owner. Read their books on investing and you'll see the same cherry-picking of facts and distortion of their meaning. They lost me years ago with their "closely-reasoned" series of articles against raising the minimum wage. I have no explanation for the need of this kind blind-to-reality attitude.

    1. No, I didn't lose sleep over it. It showed up in my Facebook feed and was merely annoyed. :-)

      But IBD did quote me once in an article on subsidies. As has the WSJ, multiple times, come to think of it.

  3. $26 billion in lost income from 1 million people leaving means a loss of $26,000 per person. Over some number of years. If ten years, that's under $3000 in production, wages, whatever, lost to the California economy from those people leaving per year.

    IBD considers all wages paid to be a horrible burden on employers, so logically they prefer all workers be slaves. With all workers slaves, profits will be high, creating wealth, and the wealth effect causes consumers, who are never workers, to spend more of their infinite wealth or wealth created by inflating asset prices (that can never be sold and spent lest asset prices crash).

    TANSTAAFL economics treats labor costs as an asset. Without labor costs, no economy will have the consumption needed to pay labor costs.

    Free lunch economics, which IBD is an unflinching propagandists, argues that slashing labor costs increases consumption, and thus gdp. After all, workers take the money they get in wages and just burn it out of spite. Or something. Cut wages and everyone gets More! Free lunch. Cut government spending and everyone gets more stuff and gets more income because incompetent government worker create new Google search and once liberated from the burden of government paychecks.

    Note conservatives are seeking liberals to blame for fewer and fewer individuals and households moving since the 70s, when free lunch economics started driving policies. Like telling employers to never provide job training, worker benefits like paying them to relocate.

    So, I'm sure IBD has the dueling views that it's bad the people are moving from California, and also, it's bad so few people are moving. Free lunch.

    Jerry Brown is very much TANSTAAFL, refusing to spend as much as the "left" wants and taxing to pay for lunch too much for "left" and "right".

    1. well done. exactly. the disinformational rhetoric the right always employs to justify funneling wealth constantly upwards.

  4. It's the red state / blue state paradox. Businesses do better in anti-business blue states and more poorly in pro-business red states. We've known this for years. The guys at IBD, WSJ and their ilk aren't just clueless. They're actively stupid.

  5. Let's see a comparison of how CA and KS have fared since Brown and Brownback took over, respectively, and THEN decide how tax rates affect the economy!

    1. Funny you should mention this, because Paul Krugman gave us a chart on exactly this point. Brown and Brownback both took office in 2011.

  6. "And the $26 billion alleged income loss due to interstate out-migration over that time period? A rounding error in an economy which grew from $1.8 trillion (2004) to $2.2 trillion (2015) annually in real 2009 dollars. I'm not even going to bother searching for their unlisted source."

    The economy grew by 400 billion at the cost of 26 billion? That seems like a fair trade to me!