THE BLOG
11/20/2013 10:57 am ET | Updated Jan 25, 2014

Teslas at Costco: Welcome to California -- U.S. Economy of the Future

What is a luxury, $80,000 car (albeit with more subsidies than even ObamaCare's best option) doing in a Costco parking lot while the owners load up with discount groceries? Probably it's there as Exhibit A of the new California Economy -- coming soon, as most Californian things do, to a country near you -- one that features a "new frugality" of the rich. Indeed, stock market futures tell us that the rich are sitting on more cash than ever before and certainly more than the boom times earlier this century and in the bubbly 1990s. And to save on gas purchases, they are willing to pay more, with the help of gourmet "car stamps" from a State seeking to limit greenhouse gas emissions.

Just down a few streets from Costco in Palo Alto, The Fresh Market's parking lot shows off a few more Teslas, because this higher-end food merchant has put in multiple electric charging stations, ironically, right next to a Shell station! The Teslas don't yet outnumber the Priuses, but up the road at the movies in Redwood City, you can charge up your hybrid in the multiplex movie house lot. Here's another manifestation of the new California economy: active environmentalism isn't expected to exhibit sacrifice; now it's expected to be downright convenient!

But wait, you say: isn't California an economic joke, constantly in debt, a laughingstock of an economy with a housing market in free fall and cities going bankrupt left and right while public colleges cancel classes while jacking up tuition 15 percent a year? That was, certainly, the California of yesterday's news. But it's no longer the state of today.

California no longer has a budget debt. Its tax receipts, so far this calendar year, are actually running far ahead of expectations and are producing a surplus, thanks both to an improving stock market (with recently successful Silicon Valley IPO's likely to continue this trend well into 2014) and a program of increased sales and income taxes which the naysayers predicted would tank the economy but clearly have done the opposite. As a result, Janet Napolitano -- the new head of the State's public University system -- was able to announce a freeze on tuition at California's flagship schools, with the support of the Governor.

Housing prices have come back stronger in California than in most of the rest of the country, and stocks of homebuilders with large land holdings and development presence in California have performed exceedingly well this year. Some of the state's hardest hit communities -- a couple of which have pursued bankruptcy resolution to address public payroll and pension issues -- are seeing stabilization in home prices and speculative interest in rental conversions as well as a gradual reduction in homeowners stuck with "underwater" home values compared with mortgage indebtedness.

In no way does this progress against 30-50 percent declines in home prices constitute a replication of the housing bubble of 2001-2005, as some commentators have suggested. The only "bubbles' in this water are from homeowners coming up for air. Other states should be happy to copy California's aggressive approach to providing relief to struggling households in working through their mortgage debt. Moreover, new public companies providing important services to support the housing market like Zillow and Trulia have their roots in the Golden State.

California and its leading agricultural and technology businesses are also heading up the charge for comprehensive immigration reform, on economic grounds, among others. The State recognizes that regularizing the status of 11 million undocumented U.S. residents and liberalizing the nation's unduly restrictive Visa and green card rules would unleash a wave of economic activity (including taxpaying and extended financial support for Social Security and Medicare) that would make Federal Reserve stimulus programs unnecessary. Strangely, many of those who oppose the Fed's actions also are the most vocal critics of immigration reform.

California, better than other regions of the country, perhaps understands how many jobs are going begging in this period of profound and seemingly intractable unemployment. While 11.3 million Americans are shut out of the job market, nearly 4 million jobs are not being filled because our work force currently lacks the relevant skills or orientation to perform the tasks. California's leading universities continue to be a magnet for overseas students wishing to gain scientific and engineering credentials, but our country makes them unwelcome the moment they earn their degrees. California would like to take the underground economy where about four in ten undocumented residents consist of folks who have overstayed their Visas and bring it above ground where it can make a much more lasting and fulsome contribution to GDP.

California has shown that a state can take a stand against global warming, greenhouse gases and violent weather through a combination of subsidies and controls on emissions and at the same time generate economic growth. In the process, the state has taken the lead in an uphill battle to keep America from ceding future leadership in renewable energy generation to countries like China and Germany, while remaining a powerful force in terms of continued production of fossil fuels. California companies like First Solar, SunPower and Solar City have proved that renewable fuels are not a financial pipe dream but a profitable reality for their employees and their investors. The State's venture capital industry has embraced advanced biofuel technology as well, in ways that do not retard food production.

Even in "old" industries like ports and rail, California has become a leader in technology-driven logistics. It has been a voice crying in the wilderness of Washington D.C. for renewal of America's vital transportation infrastructure, which many in the rest of the country seem to believe we can't afford to keep up any more. If the rest of America wants to just let our roads and bridges and terminals and water systems literally rot, California will not join in such self-sabotaging madness.

In short, California is fast emerging as a beacon of optimism and American self-confidence in the face of rampant pessimism, "can't do-ism" and self pity. Optimism has always won out in the end in this country, so it would be wise to pay attention to what California is doing - it's too good to resist for much longer.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.