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California capitalism

Feb 25,2020 - Last updated at Feb 25,2020

By Laura Tyson, Lenny Mendonca

BERKELEY — Despite multiplying policy challenges, the United States is crippled by political polarisation and consumed with rancorous partisan arguments (often on Twitter and without facts). The resulting paralysis at the federal level means that progressive federalism and initiatives by individual states will be the main channels for policymaking in 2020, and likely beyond.

Once again, California, the world’s fifth-largest economy, is leading the way. The state is developing its own distinctive political economy, “California Capitalism”, through fiscal responsibility, innovation and cross-sector partnerships to foster inclusive, sustainable, long-term growth. 

Since its last employment peak before the 2008 financial crisis, California has added more than two million payroll jobs, the unemployment rate has fallen to a record low of 3.9 per cent and average per capita income has increased almost 25 per cent. Since the expansion began in 2010, California has added 3.4 million jobs, more than 15 per cent of the nation’s total. With almost four million small businesses, California also leads the country in new business formation, reflecting the fact that it receives more than half of all US venture-capital funding. Whereas national economic growth is projected to slow in 2020, California will continue to outpace the rest of the country, owing to forward-looking tax credits and its diverse set of global industries, from manufacturing, agriculture and trade to technology and entertainment.

But “California Capitalism” is not just about raw economic growth. For policymakers, the real focus is on job quality, regional inclusivity and environmental sustainability. Hence, one of the state’s immediate concerns is to address a simmering housing and homelessness crisis. After creating a $1 billion affordable-housing fund last year, Governor Gavin Newsom’s 2020-21 budget proposal includes an additional $750 million in emergency funding for the homeless, to encourage California companies to invest their own resources and work alongside state and local governments to address the housing problem.

California continues to lead the country in environmental and climate policies, too. With its commitment to achieve carbon neutrality by 2045, the state is deploying a variety of tools to slow the pace and reduce the risks of climate change. The proposed budget calls for $12.5 billion of additional government investment over five years in pursuit of these goals, around $4.8 billion of which would come under the state’s innovative cap-and-trade system. The new budget would also create a $1 billion Climate Catalyst Fund to finance low- or no-interest loans for projects to deploy cleaner technologies and infrastructure in areas neglected by private funding sources.

Finally, the budget calls for a 2020 ballot initiative to approve a new $4.75 billion Climate Resilience Bond, which would finance investments in natural and built infrastructure. Around 80 per cent of bond revenues would be used to address near-term climate risks such as wildfires and floods, and the remaining 20 per cent would be devoted to longer-term risks such as those relating to rising sea levels.

In the past, California has demonstrated its climate leadership by negotiating a breakthrough agreement with four major automakers on tough fuel efficiency standards. The state’s deal with Ford, BMW, Volkswagen and Honda represents about 30 per cent of the US vehicle market, and would cut these automakers’ emissions by 3.7 per cent per year between 2022 and 2026. Since 2013, California, along with 14 other states accounting for 40 per cent of the US auto market, has operated under a federal waiver that permits it to regulate greenhouse-gas emissions. In a strong display of “resistant federalism”, California, along with 22 other states and several major cities, has responded to an effort by US President Donald Trump’s administration to revoke that right by suing the National Highway Traffic Safety Administration. Both precedent and public opinion indicate that the states’ lawsuit will succeed.

US states are also filling the leadership void on automation and the future of work, a topic occupying policymakers around the world, even as the US federal government has neglected it. To develop fact-based policies for managing the impact of technology on employment in California, Newsom has created a Future of Work Commission. Business leaders, civic organisations, non-profits and academics are charged with crafting solutions to ensure that workers compete in a fair labor market and develop the skills required for good jobs. The commission, no doubt, will confirm findings from around the world that higher education, retraining and apprenticeship programs offer invaluable pathways for workers to meet ever-changing labour-market needs.

California is already a leader when it comes to world-class universities, state and community colleges and state-of-the-art research centers. The state’s community-college system is the country’s largest, accounting for around one-quarter of all US community-college students. Community colleges are and will remain America’s largest source of workplace-skills training, conferring substantial wage and employment benefits on those who complete a two-year degree. Yet only about one-third of community college students in California and nationally graduate or transfer to a four-year institution. Over 60 per cent of California workers lack a four-year college degree. Around one-third of California jobs, compared to about 44 per cent of jobs nationally, pay less than two-thirds of the median wage.

To address these threats, the 2020 budget envisions continued investments in higher education, focusing on access and timely degree completion, with the goal of creating 500,000 “earn-and-learn” apprenticeships by 2029. To that end, the budget dedicates $165 million over a five-year period for multi-craft, pre-apprenticeship programmes in the fast-growing construction industry, and to the High Road Training Partnerships to support industry-based training and job-placement partnerships.

But regional and demographic disparities also loom large in California’s labour markets. Mirroring national trends, job growth in California has been unevenly distributed, with nearly 70 per cent of job growth from 2010 to 2018 concentrated in the coastal areas around Los Angeles, San Diego and San Francisco. And while Latino Californians make up roughly 40 per cent of the state’s population, about 50 per cent of them make $15 per hour or less, and many live in low-growth rural areas.

To counter these trends, Newsom has launched a new Regions Rise Together initiative, which will convene regional leaders to create a comprehensive plan for developing all parts of the state. To jump-start the plan, the state government will establish offices in the Central Valley, Inland Empire, Central Coast and North State to help develop key sectors tied to regional economies, for example, wood products in the northern forested counties.

With the federal government paralysed by Trump, policy innovation in the US now depends on the states. In this sense, California Capitalism is not about the Golden State alone. It is about reviving the American Dream.


Laura Tyson, a former chair of the US President’s Council of Economic Advisers in the Obama administration and a professor emerita at the University of California, Berkeley, is a senior adviser at the Rock Creek Group and a senior external adviser to the McKinsey Global Institute. Lenny Mendonca is chief economic and business adviser and director of the California Office of Business and Economic Development. ©Project Syndicate, 2020.

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