Despite all the criticism, California could soon become the world's 4th largest economy

Despite all the criticism, California could soon become the world’s 4th largest economy

California has long been criticized for driving out businesses and workers, due to high taxes and prices and strict regulations.

A few high-profile business titans have noisily departed, including Tesla and SpaceX chief executive Elon Musk, who moved Tesla headquarters — and himself — to Texas during the pandemic (although SpaceX remains based in southern Texas). California).

Nonetheless, some economists are increasingly predicting that the Golden State could soon overtake Germany to become the world’s fourth-largest economy.

Moving from the fifth to fourth largest economy in the world would be another leap forward for California – which would be behind only the United States, China and Japan, countries with populations more than three times that of the California. But some economic experts say the expected bump may have more to do with Germany’s struggling economy and the falling value of the euro than with California’s growth.

“The United States as a whole over the last decade has grown a bit faster than Germany, and California has grown faster than the United States, on average,” David Zeke said. , assistant professor of economics at USC. “So you have this growth trend there. But the reason it could happen next year is because of this 15% depreciation” of the euro.

California would likely topple Germany because of its “relatively resilient” economy, even during the pandemic and now in the face of high inflation, according to a recent Bloomberg opinion piece. The article analyzed the past and projected gross domestic product of California and Germany, which in 2021 measured $3.4 trillion and $4.2 trillion, respectively. Bloomberg’s analysis predicted that this year and next, California’s GDP would continue to grow slightly, while Germany’s would decline, allowing California to take the lead.

Eugene Cornelius, senior director of the Center for Regional Economics at the Santa Monica-based Milken Institute, said he found Bloomberg’s prediction on target and expects California to soon overtake Germany in economic size, if not. is already done.

“I think it was the best kept secret,” Cornelius said. “Everyone was focused on the California exoduses, the wildfires, the earthquakes and whatever negative things were happening, but I don’t think anyone was paying attention to the growth.”

Although Governor Gavin Newsom quickly touted the prediction as a sign of California’s prosperity, some experts note that the metric is just one measure of California’s economy. It fails to take into account important factors such as housing affordability, income inequality, cost of living and wealth distribution, all key areas where California has continued to struggle, making difficult for middle and low income families to prosper in many areas. of the state, according to economic experts.

“California’s GDP being quite large does not mean that your median [person] in California is necessarily better off,” Zeke said. “It just means that the overall economy is bigger, bigger, compared to other major economies.”

So what is GDP?

GDP stands for Gross Domestic Product and is an economic data point that is “widely used as a benchmark for the health of national and global economies”, according to the International Monetary Fund.

“It counts all the production generated” in a certain geopolitical region, such as a country or a state, according to the IMF.

GDP measures the monetary value of all final goods and services produced in a jurisdiction over a specific period, often quarterly or annually. GDP can be measured taking into account inflation, called “real GDP”, or population, called “GDP per capita”, but it is essentially measured in nominal GDP – simply the value of a region’s products to current prices. It is the measure used in global rankings in which California is compared to other countries.

“That’s just a statement on the overall scale of the California economy,” Zeke said, noting that nominal GDP doesn’t take into account inequality or wages. “It’s not a statement about the well-being of the average Californian, … it’s a completely different measure.”

Why is California able to overtake Germany?

Last year, California companies outperformed German companies, particularly in three of the state’s top industries: tech hardware, media and software, according to Bloomberg editor emeritus Matthew Winkler. But he also noted the state’s progress in renewable energy — a sector that Winkler said has seen the “fastest growth” in recent years in California and Germany.

“Germany’s nominal GDP margin of $4.22 trillion over California’s $3.357 trillion last year was the smallest on record and is on the verge of disappearing,” Winkler wrote in the item.

Other economic analysts have pointed to California’s low unemployment rate, strong entrepreneurial spirit, sustained tourism and development, and government spending that have helped ease potential economic stressors.

“California has a really innovative economy,” said Irena Asmundson, a researcher at the Stanford Institute for Economic Policy Research. “We have strengths and many different sectors, it’s not just technology. … And we are continually trying to invent the things that will make the difference in the future.

She pointed out that California is home to the nation’s largest manufacturing center as well as a huge agricultural sector, though it only accounts for a fraction of the state’s overall GDP — all points, she says, make California’s lead in the standings “a very real possibility.”

She noted that when California’s economy overtook the size of the UK’s in 2017, there was a need for a strong and resilient California, but challenges in Britain played a bigger role.

“The UK was a very similar situation, and the exchange rate moved a lot after Brexit,” Asmundson said, referring to Britain’s exit from the European Union in 2020. It’s not like it’s all Californian innovation, it’s also partly those external innovations that are the factors.”

While Winkler mentions in his analysis that “Germany, of course, was badly affected by the war in Ukraine”, many experts argue that this aspect of the equation has been heavily understated in the likelihood of California overtaking the ‘Germany.

“It’s true that California’s GDP has grown slightly faster each year than Germany’s over the past decade,” Zeke said. “But what’s been really dramatic lately is the deterioration of the euro against the dollar.”

When could California move to No. 4?

Winkler said some of Bloomberg’s “estimates suggest the state may already have caught up with Germany, with at least one forecast implying California is $72 billion ahead when considering the rate of recent growth of the state”.

GDP figures won’t be out until the spring of next year to confirm the projections, but most pundits who spoke to The Times agreed that it will likely happen, if not this year, by the end of the year. end of 2023.

“It’s likely to happen now because Germany is going to grow much more slowly, it seems, than California over the next two years,” said Mark Schniepp, director of California Economic Forecast, a company economic advice.

But leaders of the California Business Roundtable, a nonprofit that often criticizes regulations imposed on state enterprises, were not convinced the Golden State would usurp Germany in the standings. In the group’s “fact-check” of Bloomberg data, its analysts showed more conservative projections for 2023, in which the gap between California and Germany would narrow further but not turn around.

What does it mean to be the fourth largest economy for California?

Robert Lapsley, president of the California Business Roundtable, said a higher ranking for California is an indicator of “the health of the state as a whole”, although he doubted it would become a factor in decisions. of most businesses to relocate or expand in California. .

“It’s an important point to be able to understand where our economy fits in from a global perspective, and to be able to try to understand what the strengths of our different sectors are, and then how can we continue to help them develop” , says Lapsley.

Cornelius of the Milken Institute said this might not directly factor into a company’s decisions, but it could slowly change the way industries move forward.

“I think that means we’ll have access to even more talent,” Cornelius said. “It will make California more marketable.”

As for continuing to drive manufacturing or green standards, Zeke said moving up the global rankings increases California’s power to do so.

“The bigger California is, … the more companies will try to create a product that meets California’s requirements,” Zeke said. “I think to be a center of commerce, to be a place that attracts business, being big can help.”

Schniepp said a new ranking for California “essentially puts things into perspective” on the size of California’s economy. In his mind, it’s “just a ranking,” he said, calling GDP an “elusive and ethereal concept” that’s irrelevant to the average Californian.

What is missing in the GDP rankings?

The GDP ranking does not take into account issues such as the cost of living, high taxes, poverty and unemployment, which some experts say are still big problems for California.

Looking only at nominal GDP ignores the very real concerns facing average Californians and business owners, Lapsley said. “We would like to catch up with Germany, we are making progress on Germany ideally, but the main thing is that we have major problems,” he said.

The California Business Roundtable did a separate analysis, taking into account price parity – or cost of living – that showed California was well behind Germany at 11th in the world.

Zeke agreed that a data point as massive as GDP does not take into consideration factors such as poverty, unemployment, inequality and demographic changes – which are also important to consider.

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