Kotkin and Toplansky: Western states challenge California

For a generation, California has seen more of its residents and companies head elsewhere, but has found a way to respond, at least in terms of wealth creation, by constant innovation. But today, the Golden State’s hold on the elite reaches of the economy is slipping in ways that could threaten the state’s long-term prosperity.

Innovation is California’s best driver of high wages and upward mobility. Bureau of Labor Statistics data show that in the innovation industry — software, computer and semiconductor manufacturing, technology services and nine other sectors — the median wage was $208,000 in California last year. That’s almost three times the $76,000 median wage for all jobs in California.

But now, prime competition for innovation-based jobs comes not only from low-tax, low-cost states like Texas but also from bluish states such as Colorado and Washington. We found that Washington and Utah have actually created more innovation sector jobs per capita than California over the past decade, while Arizona, Colorado and Idaho have had higher per capita growth rates for such jobs.

Many of these states, noted Christopher Lloyd, chair of the Site Selection Guild, which follows investment flows, are duplicating “many of the great things about California.” This includes building elite university systems in places like Washington, Texas, Colorado and Utah. “The development model has turned on its head,” Lloyd suggests. “These states have learned from California. There seems to be a failure there to recognize things have changed and tech people are much more mobile.”

Some tech linchpins have already moved their headquarters to Texas, including Hewlett Packard Enterprise, Oracle and, perhaps most crucial, Tesla. Many other firms, like Apple, Airbnb, Amgen, Uber and SpaceX, are expanding largely outside of this state. These trends are accelerating, notes a recent Hoover Institution study.

Michael Malone, who has chronicled Silicon Valley over the last quarter-century, suggests the abandonment of production narrows the scope of employment. For example, shortages related to supply chain problems have made producing chips — a California invention — a priority, yet virtually all the new planned semiconductor facilities, employing thousands of workers, are not being built here but in Texas, Arizona and Oregon.

How can California revitalize and expand its tech imprint, with more widely spread opportunities?

Here, our competitors may be our guide. Increasingly, states like Utah, Colorado and Arizona focus not on corporate incentives and other traditional blandishments but on providing for a higher quality of life for people, particularly the young and not yet rich. “The No. 1 issue is to attract talent,” says Joe Snell, who spearheaded economic development efforts in Denver and now in Tucson. “California has had such a plethora of talent, everyone wanted to be there. But people have started to look elsewhere for lifestyle reasons.”

Historically, California appealed to people because, frankly, it was more attractive, with better weather, a stronger education system and a uniquely innovative spirit. Now California has the worst attraction rate in the country.

California need not respond to this by throwing millions at companies, drastically reducing taxes or even scrapping its regulatory regime, although reform is needed. Leaders’ priority should be to restore the state’s allure as a place offering a better way of life. This means confronting issues like high housing and energy prices, a poorly functioning basic education system, staggering traffic congestion and homelessness.

All the elements California needs to maintain and expand its tech economy — capital, talent, attractive locations, a first-rate higher education system — remain. But states need to address basic issues that drive workers and companies to seek their fortunes elsewhere.

Joel Kotkin is the presidential fellow in urban futures at Chapman University and executive director of the Urban Reform Institute. Marshall Toplansky is a clinical assistant professor of management science at the Argyros School of Business and Economics at Chapman University.