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Drought in California Part 12: The California Economy in General

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This is Part 12 in my series Drought in California. It will focus on a few facts about California’s economy that will be needed if we are to construct an estimate of the economic impact of the drought.

California’s economy is usually described in superlatives. Gross Domestic Product (GDP) is the total output of goods and services in a region. When the region is a state, sometimes it is called State GDP, and sometimes it is called Gross State Product. California’s Gross State Product was $2.31 trillion in 2013. It is the largest Gross State Product in the United States, accounting for 13.35% of all economic output in this country. It is 40% larger than the economic output of the state in second place, Texas (Bureau of Economic Analysis 2014a). If California were a country, its GDP would rank as 7th largest in the world, behind only the United States, China, Japan, Germany, the United Kingdom, and France. (Wikipedia 2015a)

The industry sector group “Finance, Insurance, Real Estate, Rental, and Leasing” is the largest in California, with a 2014 output of $484 million, or 21% of the total. Next are “Professional and Business Services,” and “Government.” (Bureau of Economi Analysis 2014b) Agriculture is one of the smaller industry group, with a 2014 output of $34.8 billion, or 1.5% of total economic output. (I have been saying 2% in previous posts, due to the effect of rounding.) Agriculture, though a small part of the total economy, will be important for my economic analysis because of its outsize consumption of water.

Figure 35: California and United States GDP Growth, 1964-2014. Source: Bureau of Economic Analysis.

Figure 35: California and United States GDP Growth, 1964-2014. Source: Bureau of Economic Analysis.

Historically, California’s GDP has grown faster than that of the United States. Figure 35 compares growth in California’s GDP to that of the United States as a whole from 1964 to 2014. For California and the nation as a whole, GDP growth has fluctuated, but it has been positive except for the period of the Great Recession in 2008-2009. Sometimes California has grown faster than the USA as a whole, other times slower. However, over the whole time period, California has grown more rapidly 31 out of 51 years, and its average GDP growth outstrips that of the USA 7.09% to 6.70%. While a 0.39% difference doesn’t sound like much, in economic terms it is a significant advantage.

(Click on chart for larger view.)

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Figure 36: California and United States Decadal Population Growth, 1860-2010. Data sources: U.S. Census Bureau, 1996 and Undated.

Figure 36: California and United States Decadal Population Growth, 1860-2010. Data sources: U.S. Census Bureau, 1996 and Undated.

There are many reasons that California’s economy has grown robustly. One of the reasons is that California’s population has grown (Figure 36). For most of its history, California’s rate of population growth (blue bars) has significantly exceeded that of the USA (red line). California experienced an initial surge in population following the discovery of gold (the famous 49ers). It experienced a second surge during the 1930s, when the Dust Bowl caused huge numbers in the Midwest to seek a better life in the Golden State. Since then, however, California’s rate of population growth has been slowing, to the point that in 2000 it was approximately that of the USA as a whole, and in 2010, it was slightly less.

Now, the role of population growth in economic growth is controversial. The bottom line is that nobody has been collecting data long enough or reliably enough to settle the issue. Many factors other than population also affect economic growth, and without a lot of very reliable data over a long time, it simply is not possible to parse out the effects of each. Thus, people argue. Further, GDP is a measure of total economic output, not a measure of individual well-being. Companies want GDP to grow, because it tends to increase their revenues, and hence their profit. If they have significant debt, growing revenues can make it easier to pay it off. Governments tend to like GDP also, because growing GDP means increased tax revenues, making it easier for them to afford the services they are supposed to deliver. Growing GDP, even though it is not a measure of individual well-being, tends to be associated with well-being. Periods of shrinking GDP tend to be periods of depression, times of privation and hardship for many. However, it is at least conceptually possible for individual quality of life and well-being to be independent from GDP. (Coleman and Rowthorn 2011)

It is not possible to statistically relate California’s economic and population growth. However, it doesn’t take a rocket scientist to see that, when a state’s population grows by about half every 10 years, as California’s did for many decades, there will be a lot more people around. They will produce and consume goods and services in every increasing amounts, and the economy will grow. (So will the consumption of water, by the way, and that is part of the problem California now faces.)

There are no conclusions to be reached here, but the data suggests a question that is very important for our economic analysis of how the drought will affect California: how will the drought affect California’s population growth? Will the state continue to grow as before? Will growth slow, or even stall? In Part 11, I briefly recounted 3 stories; two involved cities where opposition to development had arisen because of the drought, and one involved a city devastated because the wells went dry. Add in the costs and inconveniences associated with water conservation and desalination, and put it all in the context of long term trends towards slower economic and population growth. Will the effects of the drought transition California to a long-term population decline, and how will that effect the economy?

Sources:

Bureau of Economic Analysis. 2014a. Regional Data. http://www.bea.gov/iTable/iTable.cfm?reqid=70&step=1&isuri=1&acrdn=1#reqid=70&step=1&isuri=1. This is a data portal. For the data in this post, I selected GDP in current dollars, Total output for all industries, All states, and 2014.

Bureau of Economic Analysis. 2014a. Regional Data. http://www.bea.gov/iTable/iTable.cfm?reqid=70&step=1&isuri=1&acrdn=1#reqid=70&step=1&isuri=1. This is a data portal. For the data in this post, I selected GDP in current dollars, All industries, California, and 2014.

Coleman, David and Robert Rowthorn. 2011. “Who’s Afraid of Population Decline? A Critical Examination of Its Consequences.” Population and Development Review. (37-Supplement), 217-248. Downloaded 9/12/2015 from http://onlinelibrary.wiley.com/doi/10.1111/j.1728-4457.2011.00385.x/epdf.

United States Census Bureau. 1996. Population of the States and Counties of the United States: 1790-1990. Downloaded from http://www.census.gov/population/www/censusdata/PopulationofStatesandCountiesoftheUnitedStates1790-1990.pdf

United States Census Bureau. Undated. Table 1. Intercensal Estimates of the Resident Population for the United States, Regions, States, and Puerto Rico: April 1, 2000 to July 1, 2010. Downloaded from http://www.census.gov/popest/data/intercensal/national/nat2010.html.

Wikipedia. 2015a. Comparison Between U.S. States and Countries by GDP (nominal). Viewed online 9/12/2015 at https://en.wikipedia.org/wiki/Comparison_between_U.S._states_and_countries_by_GDP_%28nominal%29.

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