When Will They Ever Learn?

Run, Baby, Run

We have posted several times in the past on how labour and capital are mobile. If a government, enabled by governed who consent to it, continue to oppress by rules, laws, taxes, and other impositions, capital and labour will end up moving elsewhere. This is the dismal reality in New Zealand, where over 25% of our native born now live offshore. Entrepreneurs, labour, and capital have voted with their feet, and got up and moved.

The governing secularist classes in the United States have forgotten that their nation was begun by people who made themselves mobile so as to escape the oppression of Stuart monarchs claiming they ruled by Divine right. These folk were continuing a long held, noble tradition. Throughout most of the sixteenth century Protestants and others moved from city to city, province to province, country to country when threatened by oppression (there being no passports or border controls in those days.)

A form of soft-despotism has crept over the United States--and exactly as you would expect, people and capital are moving elsewhere. As state and federal taxes rise inexorably to fund the messianic madness of statism, businesses and people are becoming mobile, once again. Capital and labour flight is hollowing out the most despotic areas in the US. In 2008, the state of Maryland had a budget shortfall, so it increased taxes on millionaires in that state to help pay for it. Within one year, the number of people earning over a million dollars had fallen by one third. Some had ceased to earn that much; many others had just up and moved out of state.

We heard recently of a US company that was moving its business to Canada. Why? Wait for it . . . Canadian tax rates were lower! And now, Forbes magazine has publisheda piece on McAfee, the virus protection software company, which is leaving Silicon Valley. Why? Taxes and employee expenses. It too expensive to hire suitable labour in California, with all the state impositions and add ons which are required.

Security giant McAfee has had a very nice run. The company has doubled revenues to $1.9 billion in the past four years and aggressive hiring has followed. This should be fantastic news for California, where McAfee was founded. But it isn't, and the reasons are troubling.

David DeWalt, who heads McAfee, is very intentionally not hiring new staff in the Golden State. Even worse for California, the company a while ago transferred entire departments elsewhere. Is McAfee based in California? Kind of. Only 14%, or roughly 900, of McAfee's 6,500 employees are left in Silicon Valley.

This is a cost-saving measure. McAfee ranks Silicon Valley fourth with the dubious distinction of most expensive places to do business, behind Russia, Japan and London. That's kind of shocking. Mountain View, Calif. sure ain't Tokyo in any sense.

DeWalt figures he can save 30 to 40% every time he hires outside of California. And that's roughly the premium he has to pay in the form of a moving bonus to get someone to relocate to California. Sunshine, pretty hills and nice beaches aren't enough? Apparently not.

"We have to compensate them generously for coming here," he says. There is, of course, the higher housing costs that push up salaries. And California's high income tax rates, which act as immediate surcharges on salaries. But DeWalt also has to make up for the state's lousy public schools, which push people into distant suburbs where schools tend to be better (meaning longer commute times) or pay for those pricey private school tuitions.

It's not just that labour and capital flight is out of particular states either--it's that the flight is offshore to other countries. In McAfee's case it is to Canada and India.

The job flight extends to areas that California, and Silicon Valley in particular, are supposed to be ideal for: engineering. DeWalt has been expanding research labs in Oregon and Ontario. Both places gave him nice tax credits. Where does McAfee have the most employees, overall? India. He's hiring there, too.

The growth of soft-despotic state is gradual and incremental. It is like the frog in the pot syndrome. Then things reach the point of no return, where even if you removed the pot from the heat dramatically it's too late. The frog is going to die. California has reached that place, as have several once-leading US states. It's hard to see California "coming back" without a radical rejecting of its soft-depotism of choice, and even then the rebuilding will take decades.

This is bad on a lot of levels. It means Silicon Valley's high joblessness will likely continue. It also means a crucial slice of California's tax base is gone or leaving just as the state is facing a $52 billion deficit, double the next worst, New York. According to public policy lecturer Joe Nation, who recently spoke at Stanford's SIEPR economic summit, California's debt service soon will balloon to 10% of the state's budget, from just 1 or 2% historically.

Californians are already taxed more than most. And this only increases as Washington imposes more taxes on high earners and investments. Some well-heeled residents will flee for income-tax-free havens like Texas, Nevada and Wyoming.

This doesn't seem like a big deal until you consider that half of California's income tax revenue is from a stunningly elite group of some 142,000 taxpayers.

The last sentence says it all. More and more people and larger and larger amounts of capital are going to be checking out of Hotel California, regardless of what happens now. This development has a long and noble tradition. As the despotic ambitions of statism grow relentlessly, "Run, baby, run" will ever be the outcome. Those who will not learn from history are condemned to repeat it.

Hat Tip: Patterico