The False Republican Narrative that California’s Problems are Because Democrats Control the State
At the recent National Conservatism Conference in Miami, Tech Billionaire Peter Thiel cited California as being plagued by a Tech Curse, suggesting California’s problem is corrupt government a weak economy.
The Economist effectively refuted Theil’s claim California has a weak economy, as in fact California has one of the strongest economies among the 50 states, and indeed in the world. (September 22, 2022 edition”Peter Thiel says California suffers from a “tech curse”. Is he right?”)
But the Economist did not address the bigger issue of whether Democratic government policies are primarily responsible for California’s problems. Theil’s finger pointing is equally misleading on the source of California’s problems.
GDP, National debt and income inequality data for the US in the last 100 years overwhelming lead to the conclusion the Federal Tax Policy shaped by the Republican party since Ronald Reagan is responsible. The same policy pushed by big supporters of the Republican Party, people like Peter Theil — low marginal tax rates and abundant exemptions that have allowed the wealthiest to pay a tiny fraction of their income in taxes for the last 40 years.
In a nutshell the data shows that in the 50 plus years before Reagan the top tax rate was 70% or above and the economy grew on nearly 3% a year, income inequality dropped to the lowest level in modern US history, and we paid the National debt down from 116% of GDP to about 30% of GDP. In the 42 years since Ronald Reagan dropped the top top tax rate below 40% the National debt has grown faster than the economy. We’ve gone for a National debt of 30% of GDP to a National debt of about somewhere around 125% percent of GDP, which exceeds total GDP growth for that period.
(See the note *** at the end of this article for check the veracity of this data)
How does this relate to California?
By far California’s biggest problems, that stem from political policy, are unaffordable housing and homelessness. Both result directly from the Republican tax policies that have dominated Federal Tax law since Ronald Reagan.
California’s tech industry has played a big part in building up fabulous personal personal wealth in the State so there are lots of wealthy folks with idle money looking for investments beyond Wall Street to preserve and grow their money. In 1996 the Republican Congress revised the tax law to make investing in housing very tax advantaged. (For those old enough to remember, suddenly in 1997–98 cable TV was full of programs about flipping houses, a programming niche that did not exist prior to 1997.)
People looking to buy a house were now suddenly competing with folks who could buy the house and fix it up a little and flip it for a higher price with minimal or no tax consequences. The supply and demand equation for housing in California and the much of the rest of the US began a rapid tilt toward higher and higher demand. The result was a housing market meltdown 10 years later followed by the Great Recession. The Great Recession did not become a Depression because of all those policies enacted by the Democrats in the 1930’s that created a base of demand, but we never fixed the tax policy problems that led to the Great Recession. So over the last decade to avoid a stagnant economy the Federal Reserve has steadily dropped interest rates to allow the economy to stay afloat by borrowing money, which further fueled the demand for housing as speculators competed with buyers. Eventually the exploding cost of housing, coupled with Covid’s impact on supply chains, fueled inflation.
Many Californians, even in some rural areas, have been priced out of the chance to own their own homes — the single biggest indicator of long term financial security. In many areas, even as more people are priced out of owning homes, rents have also risen to the point of being unaffordable for many. The homeless population has exploded in California’s largest cities because real estate speculation has driven exorbitant property and rental prices.
In other States Federal Tax law and low interest rates have also had pernicious effects, increasing income inequality, but it is not as pronounced as in California. Ironically that is in part because the Tech industry pays its people a lot of money. Other industries (other than parts of the financial industry) may also pay top management enormous amounts of money, but most employees make far less, compared to tech companies. So the percentage of people in California with really high incomes creating pools of wealth they want to stash in Real Estate is far higher than most other states.
Peter Thiel’s misguided economic ideas are understandable. He went to Stanford University, home of the Hoover Institute, a think tank funded 80 years ago by Herbert Hoover to try to rehabilitate his reputation destroyed by the Great Depression. President Hoover was convinced that government would do more harm than good and markets were going to solve the depression, so he effectively did nothing for three years as the country sank into one of the worst economic funks in our history.
Voters tossed Hoover, and elected FDR and the Democratic government that pulled us out of the Depression. FDR recognized economies expand on economic stability for workers/consumers and government plays an important role in creating the circumstances for stability. The Roosevelt administration oversaw the enactment of the first Federal unemployment compensation, created Social Security and host of other social programs, and raised the top income tax rate to above 60%. Within months of FDR’s inauguration the economy turned around and began growing again.
Interesting Fact: in the 65 years from the Civil War to the Great Depression Republican’s dominated the Federal Government and the US averaged a Depression every 6 years or so. Since Democrats enacted Social Security, unemployment insurance and other social programs in the 1930’s there has not been a Depression in the United States.
Modern Hooverism: In the 80 or so years since ex-President Hoover doubled down on his failed economic theories by giving Stanford University funding for a think tank to promote his ideas the data that has piled up completely discrediting Hoover’s economic notions. Nonetheless the Hoover institute, Conservatives and Peter Theil are still busy promoting them.
Since Ronald Reagan was elected Republicans have kept the top income tax rate to below 40%, have rewritten tax law to encourage speculation, handed out special tax benefits to the wealthy and generally taken us back to the Hoover-esqe notions that dominated in the years leading up to the Great Depression leading in turn to the Great Recession and now this downturn, whatever its ultimately going to be called.
In the meantime the Republican obsession with cutting taxes on the wealthiest taxpayers and allowing speculation in Real Estate has exploded the National debt and aggravated income inequality.
While at Stanford Theil was probably too busy planning how to get rich to question the Hoover institute theories, or to actually check them against some facts. Besides, he could build much more personal wealth when his vast income was taxed at lower effective rates than working folks. Sadly someone with as much personal wealth as Theil, Donald Trump, or other billionaires can use wealth to cultivate influence that greatly exceeds their understanding. They are obviously clever enough to know how to accumulate money for themselves. Equally obviously they are clueless or uninterested in what the data says about the effect on our country of the Hoover-ish economic theories that focus on catering to the fantasy’s of the wealthy.
***The basic data is laid out in the book “Curious Correlations, Politics and Economics” available on Amazon in Kindle or hard copy form. However, if you are really sceptical I suggest you do the computations yourself. Start with this simple, easily verified fact — between the end of World War II through 1981 the top marginal Federal income tax rate exceeded 70%. From 1982 to the present the top income tax rate has been below 40%. Plug that into a chart. Then go on the internet and get GDP figures from 1946 to the present and National debt figures from 1946 to the present — plug both into the chart. You will see immediately that when the top tax rate was 70% or above GDP grew even as we paid the National debt down. Since 1982 the National debt has grown faster than GDP.
Then go to the internet and get some income inequality figures and plug them into the chart. You will see income inequality shrank from 1946 to 1981, then reversed course and has grown ever since.