Some critics say the recent decisions by Toyota and Occidental Petroleum to move their U.S. headquarters from Southern California to Texas are just the latest signs of how toxic the state’s business climate has become. Yet the state continues to attract more manufacturers and create more jobs than almost any other. The numbers don’t lie: California still exerts a powerful magnetic force on some types of employers. All the same, the state’s economy has changed dramatically since the days when Toyota and Occidental first set up shop. And lawmakers have to stop acting as if businesses have nowhere else to go.
The changes in California have been driven in part by forces that affect all states, such as productivity increases, globalization and the shift toward service-sector jobs. Unlike Texas, however, California can no longer absorb the kind of growth that characterized the state through the 1980s. Its enormous population strains its infrastructure and safety-net programs, demanding ever-larger investments in roads, water, schools and healthcare. Its topography traps smog, requiring costlier efforts to clean emissions. The results are a cost of living and a cost of doing business that are among the highest in the country.
Of course, cost is just one of the factors businesses consider when deciding where to locate (or stay). Another is proximity to suppliers and customers. Occidental once did most of its drilling in California. And Toyota used to build cars in Japanese factories and then ship them to U.S. ports, with most of them selling to buyers in the Golden State. Today, Occidental’s main source of U.S. oil is in Texas and New Mexico; Toyota now builds cars for the U.S. market in factories from Texas to West Virginia.
While Toyota and Occidental are sending employees out of state, other companies are moving operations in. For example, Boeing plans to move 1,000 engineering jobs to Long Beach and Seal Beach. Manufacturers have actually added jobs in California for three consecutive years, reversing a 10-year slide. They’ve done so, though, more through smaller investments and new businesses than through the kind of headline-grabbing moves Texas Gov. Rick Perry likes to tout.
The brightest spots are the state’s ability to incubate new companies and tech innovators, putting its businesses in the vanguard of new industries as they emerge (see, for example, wireless computing and biotechnology). California businesses grab the lion’s share of venture capital investments in the U.S., and they were responsible for more than a quarter of all patents issued domestically last year. Upstarts sprout or transplant themselves here because of the talent pool and the cluster of related businesses that can help them develop their products and services. The state’s investment in its universities over the years has been crucial to sustaining these advantages.
Policymakers need to bear in mind, though, that other states and cities are competing for businesses. And as the Hollywood studios have shown, it’s easy for some companies to take their workers where the subsidies lead them. That’s not necessarily an argument for matching other states’ subsidies; such programs may reward companies for decisions they would have made anyway (as Texas did when it paid Toyota $40 million for moving its headquarters), and there’s no return guaranteed on the taxpayers’ investment. It is, however, an argument against laws that would make it harder and more expensive to do business here, as the Democrats who control the Legislature seem to propose reflexively.
We can’t turn back the clock to the days when huge manufacturers here helped usher thousands of blue-collar workers into the middle class. Instead, policymakers have to recognize where the state’s strengths lie today — in entrepreneurial start-ups and new tech-driven industries, to cite just two areas — and do what they can to keep the barriers to entry low and the talent pool full. Like the rest of the country, they have to adapt their schools to give students who aren’t heading for college a way to develop the skills demanded by the 21st century economy. And as they work to preserve the environment and protect the vulnerable, they need to pay more attention to the costs that make California less attractive to business. Because California’s rivals don’t need any more help convincing companies that the grass is greener on the other side of the state line.
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