Laura D. Tyson: California Capitalism’s Successes and Challenges

As part of the Future of Capitalism Project at the Council on Foreign Relations (CFR), Roger W. Ferguson Jr. is inviting a diverse range of thought leaders from academia, the private sector, and government to contribute to a series of blog posts to provide perspectives on the different types of capitalism in practice around the world, the challenges these systems face, and their future in the twenty-first century. This post comes from Laura D. Tyson, former chair of the Council of Economic Advisors under President Bill Clinton. Dr. Tyson is currently distinguished professor of the graduate school, Haas School of Business at the University of California, Berkeley. She is the co-chair of Governor Newsom’s California Council of Economic Advisers.

California has one of the largest, most diverse, and most innovative economies in the world.  Its economy rests on capitalist principles and institutions: private ownership, markets, and democracy.  But the state has built its own distinctive “California Capitalism” model, using the powers granted to it by the 10th Amendment of the U.S. Constitution to foster more sustainable and inclusive prosperity.  Its greatest successes are in education, health and climate.  Its greatest challenges are inequality and affordable housing.

California is a leader when it comes to world-class public universities, state and community colleges, and state-of-the-art research centers. The state’s community-college system is the country’s largest, accounting for around one-quarter of all U.S. community-college students. Community colleges are and will remain America’s largest source of workplace-skills training, conferring substantial wage and employment benefits on those who complete a two-year degree. California’s public university system is the largest research university system in the country, with the largest shares of Pell grant students in the country.

California outperforms the United States overall in health care with the smallest percent uninsured, the highest percent on Medicaid, longer life expectancy and lower infant mortality rates. California will extend health coverage to all low-income earners regardless of immigration status by 2024.  The foreign-born account for more than 27 percent of California’s population, double the percentage of the rest of the county. About 22 percent of the 11 million immigrants in California are undocumented and they account for about 6 percent of employment. 

California is a leader in reproductive and abortion rights, acting as a sanctuary state for those living in states that are banning abortion.  California is investing more in reproductive health facilities and training the necessary workforce to meet the surge in demand.  The state has also passed a law protecting out-of-state patients who come to California for an abortion from lawsuits in other states.  It is likely that California voters will approve an amendment establishing the right to an abortion in the state constitution in November.

California continues to lead the country in environmental and climate policies. The state is deploying a variety of tools to achieve carbon neutrality by 2045. These include the state’s cap and trade system, targets and incentives for clean energy and carbon capture, large investments in electric vehicle charging stations, and a bold regulation that will ban the sale of new carbon-powered cars in the state by 2035. Since California is the largest market for automobile sales in the United States and since several large states follow California’s lead on auto emissions, California’s new regulation will accelerate the transition to electric vehicles. 

Inequality and poverty remain major challenges to California capitalism. California has the fourth-highest Gini coefficient in the country, higher than the national average. The California tax system is progressive with about 90 percent of taxes coming from 10 percent of the population and 40 percent from the top 0.5 percent. The state has the highest top personal income tax rate in the country and taxes capital gains as ordinary income, which is a major reason why the state recorded a record surplus in 2021.

About 12 percent of the California population lives in poverty, roughly the same as the national average, but lower than in Texas, a state with which California is often compared. On a cost-of-of living basis, California’s poverty rate is among the highest in the nation. That’s despite numerous generous programs to help those living in or near poverty, including a state Earned Income Tax Credit (EITC), a state child credit, CalWorks, a public assistance program providing cash and services to eligible families, and a state minimum wage of $15 indexed to inflation. The state has also passed new legislation significantly expanding unpaid family-leave rights. Employers with as few as five employees now must provide this option as well as more time for paid sick leave for workers forced to self-isolate or quarantine as a result of COVID exposure or diagnosis.  The state has also provided funding for the California Rebuilding Fund, an innovative public-private partnership that gives loans and advice to small businesses, with a focus on underserved communities.

Affordable housing remains a major challenge for California capitalism; indeed, the lack of affordable housing is both a major reason why California is losing middle- and low-income citizens to other states, and a factor behind the surge in homelessness in California. The state has a shortage of one to two million units as a result of both rapid population growth and underinvestment in housing over several decades, largely the result of restrictive building regulations, often local, and NIMBY opposition, especially among wealthy residents.  The state has imposed quotas on local governments to zone more land for residential construction but they are resisting the pressure and taking their cases to the courts.

Despite its challenges, California remains a beacon of progressive federalism and a laboratory of democracy in the United States.