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Press Release · August 25, 1999

Rethinking the California Business Climate

During the recession of the early 1990s, then-Governor Pete Wilson described California as a “bad product,” expressing a widespread concern that the state was not competitive with other states when it came to attracting and retaining businesses. Indeed, annual rankings of state business climates–the costs and benefits of doing business in one state versus another–are considered to be important barometers of state economic health and are widely reported by the media. But how accurate are they for California?

Not very, according to an analysis by PPIC research fellow Michael Dardia and research assistant Sherman Luk, who find that California defies an easy answer to the question of “What’s the condition of the state’s business climate?” The authors stress that while it is important for policymakers to be sensitive to the costs they impose on the business community, the idea that there is a uniform business climate throughout the state is too simplistic: A software firm in Palo Alto has little in common with an agribusiness in Fresno or an apparel manufacturer in L.A.

In the enclosed report, Rethinking the California Business Climate, Dardia and Luk look back over the years of the 1990s recession and recovery and find a variety of experiences among the different regions and industries of the state. Although Los Angeles experienced deep cuts in employment over a seven-year period from 1990 to 1997, the rest of the state fared much better; for example, the Riverside-San Bernardino and Sacramento areas saw solid growth. And while employment in manufacturing sectors declined sharply, the service sectors grew steadily over the entire decade.

Having a single number that captures the “competitiveness” of a state is guaranteed to attract attention and stimulate policy debates. But in the case of a state as large and diverse as California, the authors argue that such a ranking is inappropriate and, in many cases, misleading. Instead, they suggest that focusing on California’s economic “microclimates” is a more targeted, effective way to address the concerns of businesses and workers in the state.

The Public Policy Institute of California is a private, nonprofit organization dedicated to objective, nonpartisan research on economic, social, and political issues that affect the lives of Californians. The Institute was established in 1994 with an endowment from William R. Hewlett.