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California's High Taxes and "Spatial Equilibrium"

Friday, April 21, 2017 6:23

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Back 25 years ago, Sherwin Rosen tried to teach me many economics ideas. I think of him as I read Robert Reich’s December 2016 piece “Have Liberal States Won America’s Tax Experiment?” Here are a few quotes from Mr. Reich.

“But what about so-called over-taxed, over-regulated, high-wage California? California leads the nation in the rate of economic growth — more than twice the national average. In other words, conservatives have it exactly backwards.

So why are Kansas and Texas doing so badly? And California so well?

Because taxes enable states to invest in their people – their education and skill-training, great research universities that spawn new industries and attract talented innovators and inventors worldwide, and modern infrastructure. “

I certainly agree that UC Berkeley, UCLA, UCSD and the other UCs are great schools. I think they would be even better universities if they went private. I believe that Mr. Reich is omitting the key variable. California’s great quality of life (due to climate and topography and its coast) provides the “exogenous amenity” (or the golden goose) that can be taxed without consequence (Mitt Romney wouldn’t sell his house) that raises the revenue that then can be spent on all of the stuff (including Jerry Brown’s bullet train) listed above.

If California had the Texas climate and terrain, the state’s public finances would be a train wreck because home prices would be 50% or more lower and the super-rich (think of Zuckerberg and Musk) wouldn’t be living here.

A final question, if taxes enable such California human capital attainment, why are California’s public schools so weak? California attracts talent because it is beautiful here. Unfortunately, I’m not convinced that California is good at taking lots of tax payer money and creating new human capital. Even UCLA and UC Berkeley are not that cost-effective at producing such human capital. When I retire, I will write a short essay explaining why (based on my 10 years at UCLA).

The answers (related to public sector union strength) can be seen in my two recent NBER papers posted here and here.

Source: http://greeneconomics.blogspot.com/2017/04/californias-high-taxes-and-spatial.html

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