The Back Story: The California Exodus and Housing Costs
I was asked to speak a bit about the future of the state that we love. As I stand here, I am mindful of the irony of a group of business leaders listening to a government official babbling about fixing whatever ails California.
It invokes the old saw about the Midwest county fair exhibit, where local townspeople could watch hourly shows of a poodle playing a piano. As they were leaving one show, one departing spectator was asked by an incoming patron, “Hey, can this poodle really play very well?” “Who the hell cares? ,” the spectator responded. “I just applauded because the damned dog can play at all.”
“The-piano-playing-poodle” standard has largely defined the expectations that generations of Americans have held for the government tackling our greatest challenges. Nonetheless, I’ll do my best.
I don’t doubt that many in this audience could identify many signs of peril for the California Dream. Only 36% of Californians believe that the state is heading in the right direction, citing homelessness, crime, housing costs, struggling schools, drought, and wildfires. While tax rates have always been high, many business leaders tell me that our regulatory sclerosis may be inflicting an even heavier toll, ranging from Prop. 65 “shakedown” lawsuits, to AB5’s confusing array of exemptions. All of this has fed headlines and opinion pages of warnings about the great “California Exodus.”
Is there a California Exodus?
Two studies last year–out of UC San Diego and UCLA–suggest not. The rate of outmigration appears to be about the same as it has been for the last couple of decades.Yes, California lost more than 170,000 people last year, but demographers surprisingly point to factors other than outmigration: lower birth rates, fewer foreign immigrants nationally, and more than 55,000 pandemic-related deaths.
What about California employers, and the great Tech Exodus? Uber, Oracle, Hewlett Packard Enterprise, and other companies captured headlines for moving their headquarters out of state. Yet the data suggests that they didn’t take many employees with them. In my own City of San José, where unemployment is about 3%, we saw the departure of HPE’s executives to Texas, but the company contemporaneously added hundreds more employees to their North San José campus. In the same period, many other companies expanded into San José, including Amazon, Apple, Archer, Aruba Networks, Chargepoint, Google, Nio, Procept Biorobotics, Roku, and yes, Tesla.
So, the Great Exodus may be overwrought. But critically, its adherents aren’t wrong. Why? Because demographers generally agree about a more troubling piece of data: the sharp drop in migration into California–by 38% or more.
That is, the departure of Elon Musk or a few other cranky billionaires won’t doom California. What will doom California is the state’s declining appeal to hundreds of thousands of other creative and ambitious minds. As California loses its gravitational pull for innovators, risk-takers, and immigrants, our economic future will dim.
It was not always thus. For the past century, California reigned victorious in the war for talent, propelling its remarkable transformation into the planet’s 5th largest economy, because of what some call “low barriers to entry.” That is, California long had plentiful housing, accessible high-quality higher education, and an egalitarian, open-source ethos that welcomed everyone: immigrants, geeks, and eccentrics–many of the very people who drive our most innovative young companies.
But those“barriers to entry” are rising fast. Winning the war for talent requires reducing those barriers to entry.
So, “how do we do so?” you ask?
A woman named Lucy reveals an important insight. Unfortunately, none of us will ever meet Lucy–she died about 3.2 million years ago. Anthropologists found her remains in 1974 near Hadar, Ethiopia. Lucy is our oldest identified hominid ancestor who walked upright, on her two feet. Even today, out of 250 species of primates, humans are the only animal that walks upright. Lucy can take credit for that, although she was only a meter tall when she did stand
Scientists have spent a lot of time speculating about why Lucy was bipedal, when her long curved feet, and long, powerful arms suggest that she spent most of her existence living in trees. As author Bill Bryson tells it, some University of Texas anthropologists determined in 2016 that Lucy must have died from what they called a “vertical deceleration event.” What is a “vertical deceleration event,” you might ask? In prehistoric– Ethiopia, there weren’t a lot of parachuting accidents, so it’s fair to assume that the “vertical deceleration event” amounted to Lucy falling out of a tree. Yet Lucy’s skeletal framework suggested that she was very much at home living in trees — that is, at least, until the last two seconds of her life.
What’s the point? Lucy’s Creator–and our Creator–gave us the capability to adapt, so that we’d stop falling out trees. She enabled Lucy to walk upright. When Lucy’s children and progeny fully exploited this capacity for walking upright, a host of new discoveries awaited–the use of fire, the wheel, domesticated animals and agriculture, TV game shows. The rest is history. Quite literally–human history.
California has the capacity to overcome its challenges, if we’re willing to adapt. We can continue living in trees, or we can walk upright.
Take the greatest of our barriers to entry: housing costs. California won’t ever again be the place where an 8th-grade educated shopkeeper can affordably build a house and a white picket fence on half an acre lot, as my grandfather did in the 1940’s. But it should be a place where any struggling family or 22-year-old entrepreneur can afford a dignified apartment in a safe neighborhood.
The cost to construct an apartment building in the Bay Area now exceeds $800,000 per unit, however. We now have more regulations, more public money, and more government involvement in housing construction and policy than at any time in California history.
But we’re not getting more housing, and it’s not any more affordable.
Part of the answer lies in getting government out of the way. Exempting a much broader category of urban infill housing from CEQA’s regulatory burdens, for example, would save a lot of litigation and cost. Reforming California’s public finance system could dramatically reduce the fiscal NIMBYism that drives many suburban city councils to drag their heels on housing approvals. Cutting fees can also help. Early in my first term, I pushed to cut city fees on high-rise housing. Opponents loudly protested that we were only helping fat-cat developers at the expense of taxpayers, but the numbers say otherwise. Last month, for example, we approved a $4.4 million fee reduction on a residential tower, but if it gets built, public agencies will collect more than $25 million in taxes over the first decade alone.The public is clearly getting its money’s worth — and the housing.
In addition to getting out of the way, state and local governments need to be willing to adapt to new partnerships with the private sector. We have to dramatically expand the skilled labor pool in the industry, and that requires high schools engaging with contractors and the trades to restore and expand courses that apprise young adults to pathways to the good-paying jobs in construction.
We know that prefabricated and modular housing can dramatically reduce construction costs, but their factories have been overwhelmed with demand in recent years, and all are on backorder. State tax incentives and other mechanisms to expand housing factories in high-poverty communities–such as in the Central Valley–could dramatically boost prefabricated housing supply in expensive coastal cities like mine.
Finally, there’s ADU’s. Most California cities consist overwhelmingly of single-family neighborhoods, and have ample land to boost the affordable housing supply with backyard homes, or accessory dwelling units. In San José, we waived fees, partnered with prefabricated builders to pre-approve modular designs, and created a same-day approval process for homeowners applying for permits. We’ve seen applications increase 50-fold since 2016, to more than 800 last year alone. To go from hundreds to thousands of backyard homes, we need to overcome the obstacles that many homeowners have with financing. We’re willing to contribute city dollars for rent-restricted units, and we’re seeking lenders who are interested in partnering with the City to take advantage of this potentially huge market.
I’ve used housing as an example, but we can do far more to reduce California’s barriers to entry–around education, utility costs, crime, and a host of other challenges. But it will require adaptation. And adaptation is harder to do in more ideologically rigid political systems dominated by a single party–even if it is my own party. It’s even harder when people of different parties and with different ideas don’t communicate across that partisan divide. But we must.
Unlike our ancient ancestors, hopefully California won’t need a rapid deceleration event to adapt. The denizens of the state Capitol and our many City Halls may play the piano as well as any poodle can, but to hit the right notes, we’ll need to adapt to new roles, with many other players in the orchestra.