When I was growing up in the 1960s, I recall people saying that global trends began in America, and American trends began in California. Sixty years later, that still seems to be largely true. The newest global trend is AI, which began here in America, and is dominated by firms located in California.

I thought about this recently as I read a number of articles about “American exceptionalism.” Our economy is currently booming, and the news media is full of articles about how places like Europe and China are lagging behind. In this post, I’ll argue that the exceptional economies of California and the US are better understood if considered together, not as independent entities. I’ll also argue that to some extent the US is resting on its laurels, and that’s even more true of California.

First a few data points:

1. US per capita GDP is unusually high, well above most other developed countries.

2. Most of the companies that are driving the global tech revolution are American, including Apple, Microsoft, Google, Amazon, Facebook, Tesla and Nvidia.

3. California per capita GDP is unusually high, well above most other US states.

4. Most of the companies that are driving the global tech revolution are headquartered in California, including Apple, Google, Facebook, and Nvidia.  (Tesla recently moved its headquarters to Austin, while Microsoft and Amazon are up in Seattle.  And even Tesla discovered that it had to keep its cutting edge research department in Silicon Valley)

In the past, I’ve argued that the success of the US is largely due to supply side policies.  For instance, the level of government spending is lower than in most other developed countries.  I still believe that to be true, but no longer believe that it fully explains American exceptionalism.  Our GDP isn’t just slightly above other developed countries, it’s substantially above most of them.  And we are even richer that countries like Australia, which has a similar size government sector.

Today, both the US and California are benefiting from the advantages of agglomeration.  To a much greater extent than in the past, highly successful people and companies like to be close to each other.  That was less true in the mid-20th century, when America’s industrial success was widely spread among cities like Chicago, Detroit, Cleveland, Pittsburgh, Milwaukee, Buffalo and numerous other places.  Soon after, similar industrial success was achieved in places like Germany and Japan.  There may be mild advantages to agglomeration in certain industrial sectors, but nothing like the advantages observed in 21st century tech.

When Elon Musk left South Africa, he could have chosen to move to Belgium, or New Zealand, or Canada.  Instead he chose the US, presumably because he felt it offered the greatest opportunity for entrepreneurial success.

I find the politics of “exceptionalism” to be quite interesting.  People on the right often claim that America is more successful than Europe or East Asia because we are more capitalist.  Leftist grumble that we are just lucky, or deny that we are unusually successful.  In the case of California, the politics flips.  Leftists tout the progressive model of governance in California, while conservatives grumble that California is just lucky.  Both groups are partly correct, and partly wrong.

California had a great economic model in the mid-20th century (plus good weather.). For decades, it was the number one boom state.  But California’s governance has been deteriorating for decades, as the business climate has turned increasing hostile and opposition to home building has made the region unaffordable for many average people.  

The quality of US governance peaked a bit later, during the Carter-Reagan-Clinton neoliberalism era, and has been deteriorating during the 21st century, with an increasing tendency toward protectionism, highly distorting subsidies, and regulation.

Fortunately, there is a “great deal of ruin in a nation”.  While we’ve deteriorated in some respects, Europe has been even more hostile to industries such as fracking and GMO foods.  China has recently adopted some capricious anti-business policies, which have slowed its economy.  Japan seems to have difficulty breaking out of traditional ways of doing things.

In a sense, the success of both California and the US was earned through sensible economic policies (including high levels of immigration, especially the immigration of highly talented people like Elon Musk.)  But now we are resting on our laurels.  The advantages of agglomeration make the US the true “lucky country”, and California the lucky state (even more so than Australia.). We will be able to rest on on laurels for an extended period of time.  But countries such as Canada now have substantially better trade and immigration policies than the US, and a few decades out they may begin eating into our tech dominance.

PS.  The WSJ has a good article on European stagnation.