Governor Jerry Brown says California's success is no fluke.

Photographer: Ken James/Bloomberg

California Makes America's Economy Great

Matthew A. Winkler is a Bloomberg View columnist. He is the editor-in-chief emeritus of Bloomberg News.
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Most of what makes America great is happening in California, where on Tuesday voters will decide the largest of the presidential primaries. The horse-race reportage from the campaign trail gets caught up in delegate counts and the daily back and forth, but beneath all that there is a consensus about the challenges facing the world: globalization, urbanization, climate change. California is addressing them better than any country, while simultaneously setting an example as the world's most diverse and dynamic economy.

If the state were stacked up against nations, California would be the seventh-largest economy, with an equivalent gross domestic product greater than Brazil's. It's not just big, but also booming. California had a 3.29 percent growth rate last year, more than five times that of No. 3 Japan, almost twice No. 4 Germany, about half again as much as No. 5 U.K., almost three times No. 6 France and a third more than No. 1 U.S.

Fastest-growing state economies in the first three quarters of 2015.

California last year created the most jobs of any state, 483,000, more than the second- and third-most-populous states Florida and Texas combined (they added 257,900 and 175,700) and at a faster rate than any of the world's developed economies. The pace of employment growth was almost triple the rate of job creation for the 19 countries that make up the euro zone and more than 3.5 times that of Japan, according to data compiled by Bloomberg.

The high taxes and ubiquitous regulation critics cite when assailing Golden State government are proving no impediment to business and investment. They may even be a benefit, as public policy and people's preferences converge. Four of the world's 10 largest companies are based in California. Two of them -- Alphabet and Facebook -- were conceived in the past 18 years. San Francisco-based Wells Fargo, the world's largest bank by market capitalization, routinely outperforms any of its peers from Wall Street.

California produces almost all of the country's almonds, apricots, dates, figs, kiwifruit, nectarines, olives, pistachios, prunes and walnuts among dozens of crops that make it No. 1 in the U.S., with an equivalent GDP from agriculture, forestry and hunting totaling more than $37.7 billion, dwarfing No. 2 Iowa's $12.1 billion, according to data compiled by Bloomberg. No state comes close to California in manufacturing totaling $255.6 billion. Texas is next with $239.1 billion. The trailing 12-month revenue from California technology companies totaled $732 billion, or 53 percent of all tech revenues in the U.S. 

While all of the 10 largest companies by market cap are U.S.-based, in 2009, only one California company made the top 10. That said, 35 of the top 500 are based in California, and their market cap is 11.9 percent of the world's biggest 500. Analysts today are more bullish on California-based companies in the Russell 3000 Index than they are for companies in any other state. The 482 companies in the Russell 3000, which are based in California, produced a total return of 144 percent during the past five years, easily beating the 114 percent return for non-California companies during the same period. Companies based in Texas, which perennially boasts that it is the best state for business with the lowest taxes and least regulation, returned 55 percent, according to Bloomberg data. 

With a population approaching 40 million, California is known for its diversity. But it's not just the people; the industries are diverse as well. The state's largest companies are in banking, biotechnology, communications equipment and other technology hardware, health care, online retail, integrated oil and gas, movies and entertainment, semiconductors, and various software fields. In contrast, more than 60 percent of the largest publicly traded Texas firms are tied to oil and gas. 

No state comes close to California in recognizing the peril of global warming and addressing it with policies that expand the opportunity to develop clean or alternative energy. Among the 127 North American companies in the Bloomberg Americas Clean Energy Index, 26 are based in California, with average revenue growth of 11 percent -- 2 percent more than the average for the rest of the sector across the continent. Texas has three companies in the group, with revenue growth of 2 percent. During the past 12 months, the clean energy companies based in California spent an average 25 percent of their revenue on research and development and a median of 16 percent. Non-California firms spent an average of 13 percent and a median of 1 percent. 

The payoff for investors owning the shares of California clean energy companies is huge compared with returns from similar firms outside the state: An average gross margin of 42 percent, turning $100 of sales into $42 gross profit compared to a gross margin of 31 percent for non-California clean energy during the past 12 months. Analysts also say the shares of the California clean energy companies will gain 40 percent during the next 12 months compared with a predicted 23 percent for the non-California firms.

California's outstanding performance across so many metrics isn't a fluke -- if you ask Jerry Brown, the longest-serving governor of the state, now in his fourth term. 

"Climate change is real" and "a number of politicians have their head in the sand," Brown said during an interview with Bloomberg TV's Emily Chang this year. "It's a global challenge, but America can provide a lot of leadership and initiative," he said, adding that California "is committed to mobilize countries and states reducing their carbon footprint."

The jobless rate of California versus the U.S.

California still suffers from too much poverty, and its unemployment rate remains above the national average at 5.3 percent. But the state's jobless rate is falling faster and California's per-capita income is rising faster than the rest of the country, resulting in the greatest divergence since 1946. While California is No. 11 in per-capita income, its income growth is outpacing all of the top 5 per-capita-income states since 2007. That's part of the backdrop for the state's longstanding commitment to increase aid to the poor, sick and elderly. "We have a rich safety net," said Governor Brown. "Now is it up to the global standard? There's always more to do."

In the market for state and local government debt, where the lowest borrowing cost is an expression of confidence, the interest rate on California securities is the lowest among the most-populous states, according to Bloomberg data. Municipal bonds sold by California are averaging 1.68 percent, or 17 basis points less than the average cost of borrowing for all U.S. municipalities. That's the widest, or most favorable, advantage during the past four years when the difference was 15, 14 and 4 basis points. Even Texas, which has a higher credit rating than California, is forced to pay higher rates of interest on its debt than California, according to Bloomberg data.

Global traders share a similar perception of California's creditworthiness, even as Governor Brown anticipates slower revenue growth as the economy cools. In the market for credit-default swaps, where people pay the equivalent of an insurance policy premium to protect against the loss of value of bonds issued by governments, California's premium declined the most of any state during the past five years.

That's another way of saying that when investors look for a safe bet, they look to California.

(With assistance from Shin Pei.)

  1. Apple, Alphabet, Microsoft, Exxon Mobil, Berkshire Hathaway, Amazon, Facebook, Johnson & Johnson, General Electric, Wells Fargo

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matthew Winkler at mwinkler@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net