Is California’s Economy Really All About the Bay Area?

This era of regular and ongoing political “whoppers” coming out of Washington DC, seems to have ushered in an increased willingness outside the beltway to declare pretty much anything, regardless of having evidence to support said claim, or even worse, saying it in the face of contrary evidence. Deeply misleading comments about the economy can be particularly dangerous in my view. In the fashion world, the adage that saying things enough times makes them true may hold, but it certainly does not for the economy. These false narratives have the pernicious effect of focusing policymaker attention on things that don’t matter while allowing them to ignore things that do.

Recently, one of the most oft-repeated false narratives involves ‘conventional wisdom’ about the patterns of growth in California—or more specifically, where growth is occurring within the state. For all the doom and gloom pronouncements about California’s economy given its high taxes, high housing costs, and stiff regulatory environment, the state has vexed its critics by continuing to be one of the fastest growing economies in the United States. Job growth has been among the fastest in the nation, and the state recently became the world’s 5th largest economy, surpassing the United Kingdom in terms of output.

The standard explanation for this contradiction is the tech industry in the San Francisco Bay Area. Joel Kotkin, Professor of Urban Studies at Chapman University, author of multiple books, and a regular commentator in the media, explained it this way on Southern California Public Radio’s “Take Two” program on May 18, 2018 (California Baby Bust): “Almost all the income growth and high-end job growth took place in Silicon Valley.”

No one doubts the strength of Silicon Valley. The older tech companies that have traditionally driven the South Bay economy have been supplemented by a new surge of social media companies up the peninsula. Average payroll income across the area is now well over $115,000 per year, twice the national average. Until recently, these economies also had some of the fastest job growth in the state. And the latest slowing has been driven only by a lack of labor supply. Unemployment in the region is currently below 3%.

As for the rest of the state, the claim is that things are not so good. A recent study out of Harvard suggested that despite its hot tech economy, California has one of the lowest ‘quality of life’ rankings in the nation, something driven partly by high rental costs. High taxes and stifling regulations are typically cited as causing a mass outflow of business and higher income families from the state. Sounds grim.

Is the Bay Area truly the only source of California’s overall economic growth? Absolutely not. In fact, data completely contradict this interpretation of the distribution of economic prosperity within the state. Instead, the data reveal a picture in which economic prosperity is fairly wide spread.

Take, for example, personal income in the state, collected by the U.S. Bureau of Economic Analysis on an annual basis. The core 6-county Bay Area region generates not all or even a majority of state income. In 2016 the Bay Area generated slightly over 25% of California’s total income. Over the last 5 years the region has accounted for about one-third of all income growth in the state.