The Liberty Papers

Ezra Klein links an interesting story by econoblogger Ryan Avent about declining cities. His post is a fairly interesting read about how (or whether to) try to save dying manufacturing cities.

But one of his passages discusses a greatly different topic. As a California resident, I’m stuck with a very high-tax, heavy-regulating, dysfunctional state government that tries to milk its residents of their lifeblood to pay for bloated, inefficient, and overpriced social services. Like most governments, even when facing a brutal economic clime like the one we’re currently in, they don’t want to face the music and truly cut spending to the bone, they’re going to try to clamor for federal help. Even with crippling taxation on the nation’s largest economy, they can’t make ends meet.

So what do they constantly do? They make it worse (I’ll have a post on 2010’s new CA laws making it worse soon). Each time they do so, the pronouncement from all those with right-of-center economics is that they’re going to destroy jobs and kill our state economy.

This is true — to an extent. Their policies do harm the economy. But its effect is greatly overstated for a reason that Avent points out:

The value in economically dynamic cities is the people that populate them. Where once, firms would pay high land prices to be near coal deposits or harbors, based on the economic advantages those amenities conferred, they now pay high land prices to be near talent. This yen to concentrate in particular areas has a number of dynamics. Firms want to be near customers and clients. Workers want to be near firms. Firms want to be near workers. Where there are lots of firms and workers, there will also be businesses serving those workers — in business and in the provision of consumption opportunities — and those services attract additional firms and workers. Everyone wants to be where everyone is, and it’s tough for anyone to go somewhere else because somewhere else is where people aren’t.

As every reader here knows, I’m a pretty hardcore libertarian. I hate California’s 9.3% state income tax, sales taxes hovering around the 8% mark, property taxes which aren’t high on a percentage basis (if you can avoid mello-roos) but are very high due to the cost of housing, nanny-state restrictions, and generally the higher price for almost all goods and services brought on by the taxes and regulations imposed on businesses. As a frequent traveler, I’m sometimes shocked at how much cheaper FOOD is elsewhere in the country. You’d think that the biggest thing I’d want to do in life would be to leave.

But I’m still here. Why? Because there’s a lot here worth living for. The job market is plentiful. If I were to leave my current employer there’s plenty of other engineering opportunities within very close proximity. The weather is absolutely perfect (something many readers may hate me for saying on January 5). I’m in close proximity to beaches and mountains, to great entertainment and dining options, and generally live in a very culturally rich and diverse place.

So what happens? Educated professionals want to be here. Companies want to be here to make use of the talents of those educated people. Support and service industries want to locate here to cater to those people. Those industries need labor, so labor all across the education spectrum is in demand. And this creates a cycle, attracting more professionals starting more companies requiring more services requiring more labor. The region grows.

And this attracts government. Make no mistake — economic activity is a tasty morsel, and government is a parasite that grows fatter and fatter on that morsel. Parasites steal from their hosts, they act as a drag and harm their hosts, but the good ones ensure that they never grow large enough to kill their host. Economic activity comes first, and government feeds on it second.

Why do the booming economic areas of the country correlate with some of the highest-taxed and highest-regulated locales of the world (think Massachusetts, New York, SoCal and NorCal, Chicago, etc)? Because the economic activity and the people came first, and once enough people wanted to live in the location the government knew it could feed and grow fat. While CA and MA have both been struggling with a domestic outflow of migration (Americans moving from those states to other US states), they are both growing in population due to international inflow. Despite the growth of government, these states are still alive. Where are the hottest “new” areas of growth? Places with critical mass of talent, such as Atlanta, Austin, or Minneapolis, but without a highly-developed parasite. The parasite is getting ready to feed, though.

To bring this back to Ryan Avent’s point, places like California and the northeast corridor, or Chicago, are not dying because their economies haven’t changed. The talent in the locale is still generating economic activity. The areas getting killed are the manufacturing-heavy rust belt areas, where as labor-intensive manufacturing is offshored and only capital-intensive manufacturing is retained, there is much less need for people. The talent in those locales has been made obsolete, and the “critical mass” of the newer type of talent was already established elsewhere.

There are a lot of things I like about California, and a lot of things I don’t like. But despite the proclamations of my right-leaning colleagues, the rest of the country need not write their eulogies for California yet.