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A few days ago, Tesla founder Elon Musk claimed on Twitter that he had had enough of California and would move his company to Texas or Nevada.
In defiance of state and local authorities, Musk reopened the Fremont auto factory. Within a day, the company and county health office had apparently reached an accommodation that would let the plant operate legally.
It’s impossible to say whether Musk’s announcement that he would relocate his company was real. Perhaps it was merely a way to vent frustration and get the attention of state and county leaders. But, it is one more indication that California’s special advantage has come to an end.
Regional Advantage
In my recent book Friction, I show how ease of doing business drives the success of countries and regions. Thirty years ago, the economies of China and India were roughly the same size. Today, China’s is eight times larger. There are many reasons for that disparity, but one big one was India’s byzantine bureaucracy and, just prior to that period, what was known as the “License Raj.” Would-be Indian entrepreneurs found it easier to operate in the informal economy or simply leave the nation for better business environments.
In the early days of chip technology and mini-computers, California’s Silicon Valley prospered, ironically, because of its ease of doing business. Researcher AnnaLee Saxenian wrote an entire book about how Boston’s greater concentration of large technology companies and superior universities weren’t a match for the free-wheeling Silicon Valley business environment.
A potent mix of trust, helpful suppliers, easy financing, and inter-company mobility led to more rapid growth in California. Its dominance in chips and its low-friction business environment allowed Silicon Valley to lead the way first in personal computers, then in software, and finally in web and mobile technologies. The concentration of talent and capital fed the growth and pulled entrepreneurs from around the world to the Bay Area.
In recent years, the appeal of California has waned, even for technology businesses. The cost of living, driven by both taxes and housing, are some of the highest in the nation, with a typical family of four needing more than $11,000 per month in income.
Regulatory Friction
While living costs may be the biggest challenge to business growth in California business centers, laws and regulations also pose challenges. California, for better or worse, is a leader in stringent environmental laws, statewide rent control, contractor employment classification, and other areas generally seen as unfriendly to business.
In Friction, I suggest that there is an ideal amount of regulation that maximizes healthy economic growth.
Initially, regulation makes business more efficient, but as bureaucracy and red tape increase ... [+]
Some level of regulation is necessary to ensure contracts are enforceable, employees aren’t abused or endangered, and so on. Anarchy isn’t the alternative to bureaucracy. But, when laws and requirements proliferate beyond what is necessary, business costs go up and economic growth is stunted.
Cost of Doing Business
The most recent CNBC rankings put California dead last among U.S. states in “cost of doing business.” Forbes ranks California at #47 for “business costs,” and #40 for “regulatory environment.”
Aided by an ample talent pool and a historically strong economic climate, California ranks in the low 30s for business attractiveness in both lists. That’s below average, but explains how the state has managed to remain somewhat prosperous in the face of what seem to be serious handicaps.
The Beginning of the End
When a California booster like Elon Musk says he’s going to leave, it shows that frustration is reaching new heights. California’s draconian lockdown has kept the state’s COVID-19 infection rate lower than many other populous states. At least so far, though, their rate is still higher than in more relaxed Texas.
Indeed, Texas has been the top destination for firms departing California for the last twelve years. Always near the top of best states for doing business lists, Texas offers low costs and a business-friendly environment. As soon as Musk mentioned moving to Texas, Betsy Price, the mayor of Fort Worth pitched him in public.
“Message received.”
Symptomatic of California’s attitude toward attracting and retaining businesses was a tweet from a state representative, Lorena Gonzalez. She tweeted simply, “F*ck Elon Musk.”
His reply: “Message received.”
It’s likely business owners and CEOs with less clout than Elon Musk will get the message, too.
