A Nicely Furnished Room In A House That’s Burning Down

Silicon Valley is a nicely furnished room in a house that’s burning down, the state of California.

From Joseph Vranich‘s blog “CA Business Departures Increasing–Now 5x 2009” June 20, 2011.

• From Jan. 1 of this year through this morning, June 16, we have had 129 disinvestment events occur, an average of 5.4 per week.
• For all of last year, we saw an average of 3.9 events per week.
• Comparing this year thus far with 2009, when the total was 51 events, essentially averaging 1 per week, our rate today is more than 5 times what it was then.

The same tracking system has been in place throughout the three-year period.

The top five destinations are (1) Texas, (2) Arizona, (3) Colorado, (4) Nevada and Utah tied; and (5) Virginia and North Carolina tied.

Our losses are occurring at an accelerated rate. Also, no one knows the real level of activity because smaller companies are not required to file layoff notices with the state. A conservative estimate is that only 1 out of 5 company departures becomes public knowledge, which means California may suffer more than 1,000 disinvestment events this year. The capital directed to out-of-state or out-of-country, while difficult to calculate, is nonetheless in the billions of dollars.

From Joel Kotkin’s “The Golden State’s War on Itself” in  the Summer 2010 issue of  City Journal:

California has long been a destination for those seeking a better place to live. For most of its history, the state enacted sensible policies that created one of the wealthiest and most innovative economies in human history.  […]

Recently, though, the dream has been evaporating. Between 2003 and 2007, California state and local government spending grew 31 percent, even as the state’s population grew just 5 percent. […]

Since the financial crisis began in 2008, the state has fared even worse. Last year, California personal income fell 2.5 percent, the first such fall since the Great Depression and well below the 1.7 percent drop for the rest of the country. Unemployment may be starting to ebb nationwide, but not in California, where it approaches 13 percent, among the highest rates in the nation. […]

Silicon Valley, for instance—despite the celebrated success of Google and Apple—has 130,000 fewer jobs now than it had a decade ago, with office vacancy above 20 percent. […]

And Cisco, whose fortunes rose supplying the “picks and shovels” of the Internet revolution plans to shed 10,000 employees, or about 14% of its workforce by laying off 7,000 and getting 3,000 to accept early retirement according to a report by Ashlee Vance “Cisco said to plan cutting up to 10,000 to buoy profit”

Cisco Systems Inc. (CSCO), the largest networking-equipment company, may cut as many as 10,000 jobs, or about 14 percent of its workforce, to revive profit growth, according to two people familiar with the plans.

The cuts include as many as 7,000 jobs that would be eliminated by the end of August, said the people, who asked not to be identified because the plans aren’t final. Cisco is also providing early-retirement packages to about 3,000 workers who accepted buyouts, the people said.

And Joint Venture Silicon Valley noted on Valentines Day 2011 that “Structural flaws in local government budget threaten to sabotage the regions gains.”

A growing crisis in state and local government finance is undermining the economic recovery in Silicon Valley, according to the 2011 Silicon Valley Index released today by Joint Venture: Silicon Valley Network and Silicon Valley Community Foundation.

The comprehensive yearly study on the economic strength and overall health of Silicon Valley shows signs of a slow comeback from the deep recession, but it also reveals a precarious road ahead for cities, towns and counties in the region as public revenue drops while the demand for services climbs.

“Silicon Valley’s economy is making slow but noticeable progress recovering from the major blow delivered by the recession,” said Russell Hancock, CEO of Joint Venture, “but unless we address the fundamental structural issues in our local governments we cannot sustain continued growth.”

As entrepreneurs we have to identify and pursue the opportunities that are available, not lament the loss of earlier ones we may not have taken full advantage of.   But I wonder if we paid a  little more attention to local and state government policies and decisions, it might pay a significant dividend in improvements to the economic environment that is the necessary platform for our new business efforts.

Update July 14: I have reflected on this post and realized how difficult it can be to restrict your focus to those issues you can control or at least affect. As Stephen Covey points in “7 Habits of Highly Effective People” under the first habit of “Be Proactive” your circle of awareness is much larger than your circle of influence.

It’s not my intent to start a political discussion or to to start a round of “Ain’t it Awful” but I worry that these structural issues were identified by independent observers with a stake in California’s ongoing economic prosperity, not people trying to complain or generate page views. I take them very seriously. I worry that the challenges they have identified will not be easy to address much less fix, and that for the most part the situation continues to deteriorate. Without thoughtful and concerted action a new equilibrium may be reached that looks closer to today’s Michigan than the California of the last few decades.

Update Sep-24-2012: a report from the Manhattan Institute,  “The Great California Exodus: A Closer Look“, by Tom Gray and Robert Scardamalia documents a migration of 3.4 million residents out of the state since 1990. Some excerpts:

Executive Summary

For decades after World War II, California was a destination for Americans in search of a better life. In many people’s minds, it was the state with more jobs, more space, more sunlight, and more opportunity. They voted with their feet, and California grew spectacularly (its population increased by 137 percent between 1960 and 2010). However, this golden age of migration into the state is over. For the past two decades, California has been sending more people to other American states than it receives from them. Since 1990, the state has lost nearly 3.4 million residents through this migration.

This study describes the great ongoing California exodus, using data from the Census, the Internal Revenue Service, the state’s Department of Finance, the Bureau of Labor Statistics, the Federal Housing Finance Agency, and other sources. We map in detail where in California the migrants come from, and where they go when they leave the state. We then analyze the data to determine the likely causes of California’s decline and the lessons that its decline holds for other states.

The data show a pattern of movement over the past decade from California mainly to states in the western and southern U.S.: Texas, Nevada, and Arizona, in that order, are the top magnet states. Oregon, Washington, Colorado, Idaho, and Utah follow. Rounding out the top ten are two southern states: Georgia and South Carolina.

Conclusion

California has an opportunity deficit that shows up in its employment data and its migration statistics. We can understand the nature of that deficit clearly when we compare the Golden State with those that lure its residents away. In such a comparison, as we have seen, one fact leaps out: living and doing business in California are more expensive than in the states that draw Californians to migrate. Taxes are not the only reason for this, but we have highlighted their effect because taxes—unlike rents, home prices, wages, or electric bills—can be changed through sheer political willpower.

California has cut taxes in the past, most dramatically with 1978’s Proposition 13, and when it has done so, prosperity has followed. Ballot propositions this November aim to do the reverse, raising taxes on business owners while the state is still struggling to hold its own against more aggressive, confident rivals. The results will send a strong signal, whichever way they go: the state’s voters will be deciding to continue on the path of high taxes and high costs—or to make a break with the recent trend of decline.

In the meantime, California’s leaders are not powerless to stem the state’s declining appeal. For example, they certainly can do something about the instability of public-sector finances, which is likely one of the key factors pushing businesses and people toward other states. They can also rethink regulations that hold back business expansion and cost employers time and money. And though there is no changing the fact that California is more crowded than it used to be and is no longer as cheap a place to live as it once was, policies can make the state more livable. One reason that land is costly now is that much of it is placed off-limits to development. Spending on transportation projects where they are really needed—in congested cities—can ease life on freeways that now resemble parking lots.

California’s economy remains diverse and dynamic; it has not yet gone the way of Detroit. It still produces plenty of wealth that can be tapped by state and local governments. Tapping that private wealth more wisely and frugally can go far to keep more of it from leaving.

Update Wed-Nov-2 2022 California Business Exits Soared in 2021, and There Is No End in Sight and update https://spectrumlocationsolutions.com/wp-content/uploads/2022/10/Company-HQs-Leaving-Calif-Hoover-Inst-2022.pdf