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New business creation in California drops off a cliff

For most of the last decade, California was first or second in new business creation. In 2009, it ranked first. In 2010, new business creation imploded. Actually, that’s an understatement. California was almost dead last in 2010 with only Michigan behind them. That’s right, it went from #1 to #50 in just one year for business creation (The list includes the District of Columbia, so there are 51 entries.)

In 2008, California created 32,829 businesses, in 2009, it created 12,529, but in 2010 it lost 4,632. The golden state has 12% of the US population, more than any other state. All other things being equal, California should always be first because it has more people, but the trend line is clear. Something has gone badly wrong and furthermore, it happened with lightning speed.

So, what are the causes of this precipitous drop in business creation?

First and most obvious is the ailing economy. Much of this was caused by the real estate bubble and subsequent crash. This had a particularly insidious impact in states where the bubble was the biggest, and where the foreclosure rate is now the highest. Real estate and related businesses like construction and home improvement all got hammered. Lots of people lost their jobs. These states include Florida, Nevada, and Arizona. Yet, even though they are ailing, they still rank higher than California for business creation.

Unemployment in California was 12.0% in July, yet Nevada, the only state with higher unemployment, still managed to rank higher than California in business creation. One reason for this may be that at least some are relocating from California to states like Nevada and Utah and opening businesses there instead, where the business climate is perceived as more friendly.

Actually, this is more than just a perception. I spend considerable time in Utah. If you call a Utah state agency, you almost always have an actual human answer the call within 15 seconds, and they generally have the answer you are looking for. By contrast, you can’t even make phone calls to the California DMV and get a person. Plus, taxes are lower and businesses are much easier to open in states neighboring California. So, there is a small but growing migration from California to nearby states for both new businesses as well as established ones.

Much has been made in environmental and cleantech circles about how renewable energy can lead California out of the recession by creating new businesses and jobs. This is simply not so, and the California business creation numbers show this. Cleantech can and is creating jobs, but is doing so maybe on a scale of tens of thousands. California needs millions of new jobs.

So, where is Sacramento on this? Moving at the speed of a turtle with sore knees, that’s where. The California legislature is just now getting around to pondering that maybe they should take some sort of action about jobs in the final three weeks before they adjourn for yet more time off. Really, they make the DMV look like a model of efficiency and speedy service by comparison.

California has all the resources and entrepreneurship it needs, but it has a broken government. This is perhaps its biggest problem. It has no rudder. Sacramento should have acted long ago on jobs and the economy yet continues to do little, if anything.

(Crossposted from CAIVN)

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