It’s a new year, a time for resolutions and fresh starts. Of course, only 9 percent of people who declare New year’s resolutions ultimately fulfill them. Most will give up before January ends. Such a dour outlook is a bit of a wet blanket, but it is apropos for California’s economic prospects in the coming year.
Our political leaders optimistically crow about the state’s future. Gov. Gavin Newsom calls the state “an economic powerhouse.” From Biotech Beach in San Diego to Silicon Valley in San Jose, the future has often been invented in California. However, the Golden State is one of the world’s largest economies because of its past achievements, not its economic prospects, which are an entirely different story.
Once a population magnet, the state’s emigration problem persists. The governor highlights the return of population growth, but this is due to international immigration. Californians continue to move elsewhere to a much larger extent than residents from other states move here.
California’s economy has been stagnant relative to the rest of the country since 2021 when the state accounted for 14.5 percent of the national economy – its peak contribution. Today, it accounts for 13.8 percent. Had the state simply maintained its 2021 peak share, California’s economy would be 4.6 percent larger today – the equivalent of an additional $14,000 for every household.
Along with the diminished growth in economic activity, the state is no longer creating new job opportunities. Over the first two decades of the 21st century, job creation was stronger in California compared to the rest of the country; the growth in private sector jobs, the jobs that drive innovation and foster prosperity, were also faster.
Then something changed.
Following the COVID lockdowns and recession, jobs in California grew on average around one-third as fast annually as the rest of the country. And the news is even worse than this comparison indicates.
Health care jobs, while essential, have different economic drivers than other private sector jobs. Excluding the jobs associated with the health care and social assistance industries, there are fewer private sector jobs in the state today than before the COVID recession. Growth in small businesses, another essential metric, has been average at best.
These are bleak signs. California is losing jobs in key private sector industries that helped turn the state into the fifth largest economy in the world.
These include jobs in high paying growth industries such as finance, biotechnology, and information technology. California is also losing entry level jobs in limited-service restaurants, which include fast food establishments.
While less flashy than jobs creating artificial intelligence, a vibrant entry level job market is essential for any state hoping to expand the breadth of economic opportunity. Entry level jobs teach valuable work skills to people who lack them but are hoping to start climbing the economic ladder. Their loss will derail people’s economic opportunities before they have a chance to start.
These job losses are to be expected from a declining economic power, not that of an “economic powerhouse.” Such is California’s difficult position. Without a course correction, the state’s economic prospects are troubling.
The course correction needed is not mysterious. California’s growth in jobs and economic activity is faltering because Sacramento politicians have been driving away businesses, families, and wealth for years. Not intentionally of course, or at least we will assume it is unintentional, but the impact is the same. California businesses continue to leave the state while businesses from other states are hesitant to set up shop here.
Analyses documenting why there is an exodus of people and businesses from the state consistently cite the same culprits. The state overtaxes and overregulates making California an unappealing place to live.
California levies the highest state personal income tax rate (13.3 percent) in the country and one of the highest corporate income tax rates (8.84 percent). The maze of regulations including labor regulations and the California Environmental Quality Act (CEQA) drive up the cost of doing business. Environmental mandates, such as the state’s cap and trade program, drive up the cost of energy, further increasing business costs.
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William W. Bedsworth: Reflections on the Great Leader’s first year back Susan Shelley: Trump’s first year back was a victory for America Larry Wilson: How could 2026 be any worse than 2025? Jon Coupal: Blue states have a fraud problem Huntington Beach gets a new nickname: City of Losers It’s not just businesses that are being driven out by these policies either. High taxes and burdensome regulations have created the growing unaffordability problem, which is driving away families who are discovering that they can obtain a higher quality of life for less outside of the Golden State. Accelerating the vicious cycle, businesses, aware that the state is unattractive to families, are then further incentivized to either leave or not expand their business to California.California’s economic leadership is undeniably in jeopardy. Californians are becoming too familiar with slowing income growth, falling job opportunities, and ever rising costs of living. But despite all the gloom, there are reasons for optimism.
California has a lot of comparative advantages including Silicon Valley and vibrant financial and biotechnology clusters. Reinvigorating their potential is not only possible, but also logical. All that is required are fundamental reforms that restore fiscal and regulatory sanity to the state.
Wayne Winegarden, Ph.D. is a Senior Fellow in Business and Economics at the Pacific Research Institute. He can be reached at [email protected]
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