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May 17, 2014
Viewpoints: Why Toyota's Texas move isn't a true bellwether for California

Toyota.JPG(May 17 - By Christopher Thornberg, Special to The Bee)

Toyota's recently announced plan to move more than 2,000 jobs from Southern California to Plano, Texas, has made big headlines and set off a firestorm of finger-pointing and soul-searching here in the Golden State. For some, the message is clear: If the state doesn't do something quickly to improve its business climate, the flow of companies to "friendlier" places like Texas will only accelerate, leaving behind the hollowed husk of a once great economy.

But the Toyota relocation is just an anecdote and does not paint a full picture of what is happening economically in the state - thus, it is unlikely to point to a cure for what ails California. The real solutions to the state's problems are actually quite simple, but unfortunately don't appeal to politicians, pundits or lobbyists. Unless something changes in that calculus, the state will continue to legislate largely by anecdote rather than analysis, ultimately failing to help California grow.

As far as anecdotes go - this isn't even a very good one. As it turns out, Toyota is moving only a portion of its workforce from Southern California to Texas - mainly employees in marketing and sales. Moreover, the company is moving people not just out of California, but out of a number of states that are thought to be considerably more "business-friendly" places, including Kentucky and Ohio.

This corporate consolidation is occurring after a number of years of turmoil at the world's second-largest automaker. The changes are specifically designed to bring staff and senior management closer to Toyota's production facilities spread out across the southeast United States - an effort to avoid the systemic failures that got the company into trouble in the first place. In short, Toyota likely would have made this move regardless of the business climate in California or the millions in give-backs the company was handed by state and local government in Texas.

But even if we dismiss Toyota as an anomaly, there is a litany of other anecdotal evidence of businesses moving out of California, from Occidental Petroleum to Campbell Soup. However, add up all the anecdotes, and they still don't paint an accurate picture of what is happening in the state.

Far from being an economy in decline, California is actually a leader in economic growth. In 2012, the most recent data available, the state posted the sixth-fastest pace of output growth in the nation. In 2013 it posted the eighth-fastest pace of employment growth, which translates in absolute terms to 320,000 payroll jobs - as many as were added in Texas. None of these statistics were included in the stories about Toyota's planned departure, nor was the fact that the 2,500 jobs Toyota will be taking represent one-twentieth of 1 percent of all jobs in the Los Angeles County economy. This represents a tiny portion of the 80,000 jobs added over the last year in the county. While there should be concern about the workers who may end up displaced, in this context, the changes seem quite small. Also, the job losses will be made up for in other corners of the economy over the numerous years in which the transfers will take place.

The rapid rate of job gains in the state over the past several years means that California has already erased the job gap that developed during the recent recession, at least as measured by the payroll data. And this success is not short-term. Over the past two decades California has been in the top 20 states in terms of job growth, and in the top 10 for output growth. And these aren't all "bad" jobs being added. The average California worker earned $54,000 last year - 13.6 percent more than the overall U.S. average. This wage gap is larger today than in 2003, when it was 12 percent. If this seems to fly in the face of all these business climate indexes that consistently rank California near dead last - you're right, it does.

These indexes, despite their great media attention, have little to no correlation to actual economic outcomes. For example, some anti-tax groups have claimed that California's highest-income individuals are fleeing because the state has the highest marginal income tax in the nation. In reality, over the past five years, California has had more high-income workers ($100,000-plus per year) move into the state than move out. The vast bulk of residents who have moved out of the state earn less than $50,000 per year. This isn't a surprising result; the vast majority of available literature suggests that people move due to quality of life and housing costs, not taxes.

This isn't to say that taxes, the regulatory environment or the opinions of CEOs aren't important; they're just not as important as many advocates claim relative to other sources of economic growth. And California has plenty, including vital established industry clusters, a phenomenal climate, great physical location, and some of the brightest entrepreneurs and best research universities in the world.

And while moves by large companies from state to state receive lots of attention, in reality, the movements of firms generally play an insignificant role in what is happening in local labor markets. Research has shown that local businesses adding and subtracting workers from their own workforce play a much larger role than the movement of workers in or out of an economy from company fiat.

Does this mean that California is fine and needs no economic development or fiscal or regulatory reform? Of course not. The state should and could be doing even better than it is, but we have to confront our real problems and start focusing on the overall data, rather than on anecdote-fueled opinions.

An annual survey conducted by Area Development, a trade magazine for business location consultants, asked its members to rank the factors that make one location more desirable than another. In the most recent survey, taxes and tax exemptions are down on the list (Nos. 7 and 9), while public incentives and environmental regulations are even lower (tied for 13). Topping the list are labor costs and skills, communication and road transportation infrastructure, and the cost of construction. At some level California is challenged on every one of these counts.

Consider that the costs of housing and construction are dearly high in the state, largely because abuses of CEQA, the California Environmental Quality Act, have allowed small groups of local interests to slow the process, drive up costs and inject a degree of capriciousness that makes it difficult for companies to plan.

The subsequent housing shortage that has been created has contributed to a skills gap as mid-skilled workers flee the state in search of cheaper housing options. Additionally, the state's education system and public infrastructure projects are stumbling along because of a revenue system that has created massive boom-and-bust cycles over the past two decades, fueling wasteful spending in times of plenty and massive cutbacks on maintenance and investment when deficits inevitably arise. And don't forget the drain caused by excessively generous pensions.

Add it up, and it turns out that true economic development efforts are not about slashing tax rates, handing specific companies or favored industries special tax perks - or landing some big-name business relocation.

The real solutions are far more mundane: Simplify the regulatory process and make it more predictable, scale back CEQA to allow firms to invest and end the housing shortage, enact fiscal reform to push funds toward long-term public infrastructure needs, and carry out educational reform to make sure the state has a skilled workforce for the future.

Unfortunately, these aren't solutions politicians, pundits and lobbyists want to hear. "Build it and they will come," while effective, doesn't lead to sexy sound bites or big political contributions. These solutions would also require politicians in Sacramento to take on deeply rooted special interests. All big barriers.

But the first step toward changing this stacked deck is for Californians to realize what isn't important about Toyota's move.

Christopher Thornberg is a founding partner of Beacon Economics LLC (www.BeaconEcon com).