The Governor’s Gambit

By Joel Kotkin

Tuesday, May 23, 2023

 

Many conservatives may see Gavin Newsom as the epitome of the progressive Left, with some even calling his policies “communist.” But the policy preferences of the California governor (whose presidential ambitions are evident) represent something more plausible and thus more dangerous: a blending of Peronist income redistribution coupled with the fanatically “green” authoritarian agenda embraced by the state’s dominant tech oligarchy, public-employee unions, and climate activists.

 

California politics often do not follow the patterns seen in other places. Its governmental model has failed, having recently been rated by WalletHub as the least efficient in delivering services relative to the tax burden it imposes on residents, and yet it continues to win voters’ support. The Golden State, after all, still works for many who bought their homes decades ago and have seen their values soar. It remains the terroir of choice for billionaires, movie stars, and venture capitalists, and it remains home to three of the world’s five leading tech companies. It has natural advantages such as a pleasant climate and often spectacular topography, which surpass anything Chicago, Detroit, or even New York could boast.

 

However, California’s and Newsom’s political future now relies on one thing: the ability and willingness of the state’s wealthy to continue to fund an incipient Peron-style welfare state. Roughly 100,000 taxpayers with incomes above $1 million — one-half of 1 percent of all tax returns filed in the state — collectively pay about 40 percent of all of California’s personal-income taxes, the state’s primary source of revenue. Without the ability to tap into the incomes of the richest of the rich, the whole system tilts towards failure.

 

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Today the limits of the “California model” are being tested by realities such as a steadily declining population and a state deficit of $30 billion or more. Last year, a booming pandemic-driven tech economy, plus federal Covid transfers, generated a historic $100 billion surplus. Now, with the decline of start-ups, disasters such as Silicon Valley Bank’s failure, and falling real-estate prices, the revenue base has cratered. The decline in tech jobs — the San Francisco Chronicle estimates 100,000 so far — is shrinking California’s high-earning-taxpayer base, while the states that Newsom lambasts, such as Florida and Texas, enjoy large budget surpluses, generate more jobs, and, in some cases, initiate tax cuts.

 

During previous declines in the tech sector, California could look to other industries to sustain its economy. This is not so much the case now. Much of the blame for this lies with the state’s climate-obsessed regulatory regime. Once a major energy producer, California, desperate to get rid of both fossil fuels and nuclear power, now has the costliest electricity in the country. Companies that need power, including tech firms, are finding it increasingly challenging to stay in the state. One-third of manufacturing jobs — 1.3 million positions — have disappeared since 1990, well above the national average.

 

A state that once built the future now sees many of the rewards of innovation go elsewhere. Intel’s recent move to build its next-generation-chip fabs in Ohio represents a powerful symbolic loss for California. Except the original Tesla plant, even the battery and electric-vehicle industry, much of it nurtured by California regulation, is largely locating elsewhere. The electric-car future that Newsom craves likely won’t be built in “progressive” California but in Tennessee, Texas, Georgia, Kentucky, and Michigan. EV-battery plants in these states may owe their existence, in part, to subsidies, but California is more than willing to subsidize many things, such as movie-studio expansions that curry favor with Newsom’s political base. Even without adjusting for costs, notes the New York Times, no California city ranks in the U.S. top ten in terms of well-paying blue-collar jobs, but four — Ventura, Los Angeles, San Jose, and San Diego — sit among the bottom ten.

 

The green agenda has also devastated the housing sector. In San Francisco, whose density would be deemed ideal by state planners, is by some estimates laboring under the highest construction costs in the world, making building all but impossible. Elsewhere, the state’s insistence on “climate friendly” housing has all but banned new suburban construction and driven up housing costs to the highest levels in the country, sparking a powerful out-migration trend. Not one California metro was among the top-50 places with new housing units per capita in 2020; Texas had five cities listed, Florida had ten. In 2022, Los Angeles, the state’s dominant city and among the nation’s most afflicted by poverty, was close to the bottom of the list of all metros ranked by new residential permits per capita.

 

Regulation-driven high property prices have crushed the home-buying aspirations of an entire generation; California now has the nation’s second-lowest home-ownership rate. Indeed, one recent study found that the median family in San Jose or San Francisco would need 125 years (150 in Los Angeles) to collect a down payment. In Atlanta and Houston, the figure is twelve years. According to economist John Husing, not one unionized construction worker can afford a median-priced home in any coastal California county.

 

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Newsom sees California as a model of social justice, “the envy of the world.” “Unlike the Washington plutocracy,” he boasts, “California isn’t satisfied serving a powerful few on one side of the velvet rope.” This view of California is widely accepted by many progressives. In the words of two leading academics, “California Capitalism” represents a “distinctive political economy,” a model of an environmentally friendly state that epitomizes “fiscal responsibility, innovation,” as well as “inclusive, sustainable, long term growth.”

 

Yet, as the raison d’être behind a future Newsom presidency, this rhetoric has very little to do with reality. Venture capitalist Marc Andreessen recently compared California to the decaying Late Roman Empire, characterized by ever-greater regulation and an ever-widening class divide. According to the California’s Legislative Analyst’s Office, 20 percent of state wealth is held within 30 zip codes that account for just 2 percent of the population. Less than 33 percent of state wealth is held within 1,350 zip codes that house 75 percent of Californians.

 

Increasingly California resembles both sides of a vast gated community, with unimaginable wealth coexisting with the nation’s highest cost-of-living-adjusted poverty rate. Nearly one in five Californians — many working — lives in poverty; the Public Policy Institute of California estimates that another one-fifth — roughly 15 million people — live in near-poverty. Since the 1970s, California middle-class incomes, once ebullient, have stagnated.

 

This is painfully true even in Silicon Valley. Once among the most egalitarian economies in the nation, the Valley has deindustrialized, losing over 160,000 manufacturing positions over the past two decades, with the rewards of this progress going mostly to elite investors and top-flight tech talent. Overall, however, most new jobs pay less than $50,000 annually, according to an analysis by the liberal Center for American Progress, which is far below what is needed to live a decent life in this ultra-high-cost area. According to a 2018 University of California, Santa Cruz study, nine in ten jobs in Silicon Valley now pay less than they did 20 years ago, adjusted for inflation. Silicon Valley now resembles, as analyst Antonio García Martínez puts it, a “feudalism with better marketing.”

 

Particularly disadvantaged are the mostly contract-based workers who clean the offices, provide catering for investors, managers, and professionals, and take care of their children, lawns, and estates. Bloomberg’s CityLab has described the Bay Area as “a region of segregated innovation.” San Francisco, arguably America’s premier high-tech city, and where Newsom formerly served as mayor, has devolved into an urban disaster zone with high crime rates, economic decline, homelessness, and social disorder.

 

Rather than try to restore California’s economic diversity, Newsom and his Democratic allies have adopted the redistributionist script of the Argentine dictator Juan Perón. This program, as historian Robert Crassweller suggests, was neither fascist nor communist but based on elevating and gaining the fervent support of the “anonymous masses” through subsidies and by granting unprecedented power to organized labor.

 

California progressives, of course, don’t hum “Don’t Cry for Me Argentina”; they dream of creating a version of mid-century Sweden by the Pacific. But that welfare state was built on a strong, diversified economy with a vibrant blue-collar sector. In contrast, the Peronist model focused on handouts and left a legacy of decades-long economic decline. During the tech boom, Newsom found his inner Perón by handing out subsidies to poorer Californians, creating, enthused the Nation, an ideal “blue welfare state.” California spends more of its budget on welfare than virtually any other state — twice as much as archrival Texas does — while it generally neglects basic infrastructure such as roads and the water supply. Just last year, the state sent checks of roughly $1,000 to some 23 million residents.

 

In many cases, these transfers — including promising subsidies and rent control for people barely able to pay for the state’s artificially high housing costs and gas prices — have merely addressed distortions caused by Newsom’s own policies. For instance, the state just enacted a policy that allows poorer people to pay less for electricity, the cost of which has risen due to the state’s policies. This agenda may undermine the ability of members of the working class to rise above their station, and yet it enlists their support by offering what Marx recognized in the Communist Manifesto as “the proletarian alms bag.”

 

Newsom goes beyond Perón by adding race-based welfarism to his agenda. He has embraced reparations proposals (though he is apparently not yet willing to fund them) that could cost upwards of $640 billion, even though California was never a slave state. Newsom, born with the curse of “white privilege,” has been a firm backer of racial quotas, and he has already pledged to replace Senator Dianne Feinstein with a black woman, even though blacks make up barely 5 percent of the state’s population.

 

The governor has also backed the state’s new “ethnic studies” curriculum for high schools, which stresses white oppression and embraces a largely Marxist deconstructionist perspective. Californian high-schoolers may have some of the poorest academic records in the country, but Newsom seems determined that they become the most woke. Almost three of out of every five California high-schoolers are not prepared for either college or a career; in most school subjects, the state scores below the national average.

 

Newsom’s pandering commitment to “anti-racism” and affirmative action has not prevented African Americans and Latinos from performing worse in terms of income and homeownership than the rest of the country. Even immigrants, in large part because of the lack of good jobs and the high housing costs, are heading elsewhere. In the last decade, Los Angeles actually lost foreign-born residents, who have instead been flocking to the very places — Houston, Dallas–Ft. Worth, and Miami — that Newsom likes to caricature as racist hellholes.  

 

Most Californians, according to a UC Berkeley poll, think the state is headed in the wrong direction, and many express strong concern over the impact of draconian green policies on the economy. Newsom and his allies place the blame elsewhere: on conservatives nationally or on the ferocity of the “climate apocalypse,” for everything from water shortages to a failing electric grid, devastating fires that essentially wiped out all the state’s emissions gains of recent years, and, most recently, floods.

 

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Newsom’s response to the crisis reveals the inner autocrat so often found within those who pursue Peronist policies. To address the housing shortage in the state, he has tried to take control of housing and zoning away from localities, while his union and green allies seek to undermine the state’s referendum system — the one (sometimes) effective way voters have to challenge the state’s one-sided regime. He has planned to get California into the pharmaceutical-manufacturing business and supported punishing doctors for not following the CDC party line. He also likes the idea of banning sales of tobacco products to anyone born after 2007 in a state where pot is legal and widely available. He has worked overtime on progressive hot-button issues such as encouraging early transgender treatments and abortion, central in Newsom’s recent criticisms of Texas and Florida.

 

But none of this is likely to finance reparations payments or lessen the calls for more state aid from transit agencies and hospitals facing huge deficits. Not surprisingly, the troubled “bullet train” is also short of financing. To make matters worse, a recent report suggested that it will take upwards of $100 billion more to address the state’s consistently awful homelessness situation, which Newsom has repeatedly promised to solve.

 

Newsom will either have to shrink the state’s ever-expanding welfare state or raise taxes. Forced to try to reinvent himself as a fiscally conscious moderate on the Clinton model — to keep his White House ambitions alive, and to pull California from the brink of economic collapse — he has to fend off proposals from Sacramento progressives. These include calls to institute a 32-hour work week, raise the state’s income tax (already the nation’s highest), and add new payroll taxes to pay for universal health care. Some are pushing a wealth tax that would apply even to some of those who move out of the state. Such approaches are already leading to an increasingly large exodus of wealthy residents: bad news for the state given how much of the tax base they constitute.

 

The governor has even pushed back against the powerful green lobby by keeping the last nuclear and natural-gas plants, which account for half of the state’s electricity, in operation to prevent politically unpalatable blackouts, while seeking to amend the state’s landmark environmental law, which has long plagued developers by allowing anyone to sue projects. The green lobby’s more draconian energy policies were recently dissed by a Newsom spokesperson as feeling “like fantasy and fairy dust.”

 

He has even moderated his behavior on some social issues. Newsom vetoed a bill that would have legalized “shooting alleys” — so-called safe drug-injection sites — in San Francisco, Los Angeles, and Oakland. Many of his progressive allies, who favor such programs, denounced the veto. They may be untroubled by rising street crime and drug overdoses, but Newsom knows that disorder in California’s major cities offers a devastating talking point for his opponents — especially those to his right.

 

Even if there is another tech boom, perhaps driven by artificial intelligence, the state faces enormous risks if it keeps spending wantonly. There’s also the small matter of unfunded pension and retirement liabilities, which based on some estimates are around $1 trillion. U.S. News & World Report places California 39th in fiscal stability among the states.

 

Of course, any sustained move toward the center could be constrained by the state’s political trajectory, which, lacking a decent GOP alternative, is shifting inexorably to the left. This reflects demographic change, as middle-class families are moving out to more conservative climes (a hegira that has, for example, made red Texas — where one in ten new residents hails from the Golden State — even redder). Meanwhile, the ranks of moderate Democrats continue to shrink, while fully fledged socialists begin to assume dominant roles within the party in urban areas such as Los Angeles, Oakland, and much of the Bay Area. Most of the leading candidates to succeed Senator Dianne Feinstein, for example, are well to Newsom’s left.

 

Ultimately, Newsom’s White House ambitions depend on restoring California as a credible economic and social model, and as a somewhat less dystopic place to live. Given what’s happening in the state, he has a long way to go.