James Poulos notes that California legislators are betting that their rich citizens have too many social and economic ties to the state to leave. In the short term, they're probably right. But in the longer term, it's not so clear. The real question for California will be, do they get new rich people to replace the current crop? Or do high taxes impede capital formation, and encourage entrepreneurs to site their companies everywhere.
Contra the more dogmatic Republicans, I don't think it's obvious that the answer is "yes". California has a lot of complementary assets, especially its coastal location, that make it attractive to locate there. But as many European countries are finding out, even a very attractive location is not desirable at any price.
Part of the problem with these questions is that there is often a tipping point. The tax policies and so forth often look like they aren't costing the state any growth--right up to the point that a whole bunch of companies relocate at once, and build the kind of complementary cluster (finance, tech, media) that has been driving your economy in some more business-friendly clime. The same factors that made it hard to drive those companies out will make it hard to get them back once they've moved.
Though I'd assign air conditioning the larger role, in part this is what drove the movement south that devastated the Rust Belt. And it's telling that fifty years later, places like Buffalo are still saddled with a tax-and-spend system that they literally can't afford--the city recently ended up in receivership despite large transfers from the state government.
Another point to consider is that it's usually easier and cheaper to move a service business than it is to move a manufacturing business. If tax policies helped drive hard-to-move factories out of the Rust Belt, just imagine what they might do to California's easy-to-move service industries.
Posted by Peter | July 9, 2008 11:42 AM