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California is the world’s fifth-largest economy — bigger than Britain. Its 2017 gross state product was $2.747 trillion, surpassing the United Kingdom’s $2.625 trillion gross domestic product. The other biggest world economies are U.S, China, Japan and Germany. Besides accounting for 20 percent of the U.S. economic growth since the recession, California contributes to the overall economy in a big way. With 39 million people, one-eighth of the U.S. population, California produces one-seventh of the nation’s gross domestic product.

A state with a diverse economy

Thinking about the California economy, your mind might first go to Silicon Valley, home to some of the biggest tech and social media companies in the world, and some of the richest people. In Santa Clara County alone, salaries average $130,000 per year. But California is also a major exporter of agricultural products and is the U.S.’ largest producer of fruits, vegetables, wine and nuts. But it’s not only brains and farms. California also has a huge entertainment industry centered in Los Angeles as well as two ports that receive almost 40 percent of the foreign goods that come into the U.S.

But, it’s not all wine and roses

California also has the honor of having the highest poverty rate in the whole country. While the national poverty rate is approximately 12 percent of the population, California’s poverty rate is estimated at 19 percent. Another problem is the lack of affordable housing in the state, a particular problem in San Francisco and other high-income areas but also a problem in many other places in the state. This is a big concern because the lack of suitable housing will result in a lack of workers if there is no affordable place for them to live. The second problem for California may result from the new federal income tax rules, which cap the amount of state and local taxes (SALT) that can be deducted. As a state with very high SALT, the housing market as well as other sectors may suffer if people leave the state.

California dreaming

Despite being an economic powerhouse, many people fear that the ‘California Dream’ may be ending. The state is heavily dependent on personal income taxes to finance itself. About 70 percent of California’s revenue comes from taxes. This makes the state very dependent on top money earners, the so-called 1 percent making the possibility of an economic downturn potentially very scary for California’s economy. And, according to Christopher Thronberg of Beacon Economics, a consulting firm in L.A, “So goes California, so goes the U.S.”

Takeaway

Right now, California represents one of the world’s largest economies, but there are clouds on the horizon. The large discrepancy between rich and poor makes it the highest-poverty state in the country. The lack of affordable housing means there might soon be a lack of workers. And some of the administration’s policies — such as capping SALT deductions and tariffs on Chinese goods — could affect California’s prosperity.

 

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Posted 11.08.2018 - 09:00 am EST