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With all the troubles in California, don’t be surprised if the state drifts into economic stagnation. California’s policies have not been that dissimilar to France’s over the past few decades, and France is one of the worst performing developed economies in the world. There are three major problems:

(1) Stringent real estate development restrictions,
(2) High tax and regulatory burden, and
(3) The power of the public employees’ unions

FDR warned of the dangers of public employee unions in the 1930’s and many state politicians didn’t listen. Nearly every single state with a powerful public employee union has paid out unrealistically high returns on pensions (guaranteeing 8%+ actuarial returns); which has created a situation where the states are forced to perpetually raise taxes in order to cover the unsustainable guarantees of the pensions.

California’s real estate development restrictions are actually just as big of a problem. California has the highest cost of living in the nation primarily because the massive hoops developers have to jump through to build anything. Height restrictions prohibit upward building in many places, as well. The end result is that real estate prices continue to skyrocket every year and since real estate is a major component of virtually every company’s costs, the prices of everything else skyrocket. California could jump-start its economy in dramatic fashion by merely allowing developers more free reign, creating real estate policies more similar to Houston, Dallas, or Atlanta.

Thus far, California’s politicians have responded to the crisis by trying to raise taxes on the wealthy, which is a recipe for disaster. The state’s economy is highly dependent upon investment in high-tech industries, and it’s that investment that creates jobs and wage growth. Whenever you raise taxes, you decrease investment. It’s that simple. It’s been spun as an issue of “fairness”, but that’s a flawed prism to examine the issue under. It’s not about “fairness”; it’s about the fact that you can’t create growth without investment and high taxes take money away from investment.

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