The Peter Zeihan Podcast Series - Let's Talk California (Has Their Lucky Streak Run Out?) || Peter Zeihan

Episode Date: July 17, 2023

California has been one of the most successful states in the US, primarily because of things outside its control. But all those external factors are flipping on them, so California must reinvent itself. Full Newsletter: https://mailchi.mp/zeihan/lets-talk-california

Hey everybody, Peter Zine here, come to you from my home in Colorado. I'm in the process of packing up for an extended backpacking trip, so I am going to be mostly out of pocket for the remainder out of the summer. We've recorded a couple dozen videos already, and I'll still be recording things while I'm out, but I'm probably not going to be able to comment on events of the moment because I will be out of reach. I'm unable to access news and definitely unable to upload a video on a regular basis. We have still aimed to man the newsletter to at least the tune of three or four per week. However, so plenty of content. You may have noticed the world's a mess right now. Plenty of things to talk about, even if we're not about events that have boiled up in the last 24 hours. And so I want to give you a kind of an idea of what some of those videos might look like.

And so this one is on California. Now, California has been one of the most successful economic cases in the United States for the last four decades, for a mix of reasons that are largely beyond the control of California. The first one is immigration. Natural population growth, even among migrants in California, has been negative for some time. And it has only been with large-scale inward international migration that California has continued to grow in terms of population.

One, two, the millennials. One of the things that we saw when the millennials came of age in the 2000s and the 2010s, is they wanted an urban coastal experience, and California, L.A., San Francisco were some of the big beneficiaries of that. So you've got millennials going from the middle of the country to the coast, and L.A. thrived in that sort of environment.

It was still not enough to overcome internal population decline, but having this constant influx of people in their 20s and then later in their 30s really helped with tax rates, really helped with labor force. You put these two things together and then you apply the third factor, which is capital availability, and you get a very different economic model. One of the things to remember about capital availability is it's deterrent by the number of mature workers you have to be the rest of the population. Basically, when you're your 20s and your 30s, you're borrowing a lot to fund consumption for college, for raising kids, for buying homes and

whatnot. That capital comes from people who are in their late 40s to early 60s where the kids have gone away, and they're at the height of their earning experience, but their expenses have gone down. So that has been the baby boomers since roughly 1990, and it's generated a capital environment that's been wonderful. This has been great for economic development for a lot of regions, a lot of states, a lot of countries. But in California, when it came together with those millennials that were influing, we got the tech sector. Because what is technology except imagining things that don't yet exist. And in order to make the future happen, you need two things. Number one, you need a huge number of people in their 20s and their 30s to do the imagining,

to do the design, to make the prototype, to figure out how to operationalize it. But that entire process from idea to operationalization, that generates no income. And so you have to have a lot of cheap capital to pay those people and to pay for the work. Well, that has been the environment in California for the last. 25 years. And so we get Silicon Valley. And then fourth and finally, California has been the gateway to the United States from East Asia. In two ways. Number one, California with the tech sector, with all of that imagining, has designed new processes that could be applied to new manufacturing in new locations, whether that's Japan, Korea, China, and Vietnam, or the rest. And so part and parcel

of the American de-industrialization process under globalization has been made possible by the the ideas generated in Silicon Valley, and then California makes money on the other side of things, because as these products are coming back into the United States, a lot of them go through the port of Long Beach, so California is the first landfill. Well, folks, all four of these trends that have made California, California, have now flipped. The American political system, both left and right, has turned anti-migration. People forget that the most anti-migrant, group in the country is first and second generation Mexican Americans who see themselves have had been crossed the right way and everyone else needing to stay on the other side of the

border. In California, populations of Hispanics coming up from the south has been the single large source. That has now turned flat to negative. In fact, overall migration from the south across the border to the north has been flat to negative for 17 years. This is that's only now hit California. Number two, the capital situation has changed dramatically. The baby boomers are no longer mature workers. They're majority retired. So capital costs have gone up by about a factor of five in the last 16 months. They're probably going to go up by a similar amount in absolute terms over the course of the next year and a half, which means Silicon Valley in its current form has been totally screwed by the last capital and now the lack of people. The millennials are no longer in the age group where they're seeking those formative experiences. They may be late to the party, years later than most generations to this point so far, but they are doing all of the normal things now, getting married, having kids, buying homes, and none of them want to do in California. And so they're moving out of California back to the states that they're from or to places that have

brighter economic horizons, for example, Texas. And that's why we see Texas grabbing more seats in the Electoral College at California's extent, because the millennials are no longer benefiting California on a net basis. They're moving away. And then finally, there's Asia. The Chinese, system is arguably in terminal decline. Their demographics are beyond atrocious. Higher capital costs globally make it difficult for companies to justify fresh investment outside of their home domiciles. Trade tensions are forcing near shoring and reshoring, and the Chinese themselves have now entered into kind of a narcissistic political system that is ossified and incapable of making long-term decisions or plans. That is weakening the case for exports from

the East Asian sphere to the United States. California is the loser for all four of these trends. And just as all four of these trends owed nothing in the original development in the 70s, 80s, and 90s, to anything done in Sacramento, same with their end. So California is going to have to reinvent itself. It's going to have to come up with a new economic model that doesn't require cheap capital and ample labor and international connections and high IT development. it's going to have to do something new. Whether it can, well, that's a question for a different video.