A Crucial First Step to Reignite the California Dream

By Carson Bruno

It is no secret that the Silicon Valley-Bay Area has been and will continue to be crucial to California's economic recovery. The sudden lack of diversification in the Golden State's economy will be a serious challenge when the next economic downturn occurs, or if the major policy threats facing the Silicon Valley-Bay Area - such as housing unaffordability, onerous business regulations, and high taxes - are not addressed. But this doesn't mean Sacramento should only be concerned about the issues facing this one dominant region. In fact, Sacramento should be trying to re-diversify the state's economy as quickly as possible.

For example, the recent death of winemaking legend Peter Mondavi has reminded us just how important California's wine country, specifically the Napa Valley, is to the Golden State's ethos. Even before the 1976 Judgement of Paris, when two Napa Valley wineries respectively beat out top French competitors for best Cabernet Sauvignon and Chardonnay only to put the Napa Valley on the international wine-making map, California wine had been a point of pride for the state. Since then, of course, California's wine industry has only grown in size and prominence.

But using data for the Napa, Santa Rosa, and San Luis Obispo-Paso Robles-Arroyo Grande metropolitan statistical areas (MSAs) - which represent the heart of California's wine country - suggests that this economic region is quite small and of limited impact on California's overall economic output. Between 2001 and 2013, California's wine country's real private industry GDP grew by an average of just 1% per year and as of 2013, the region's real private industry GDP was just 96% of its pre-recession peak, compared to 104% for California as a whole. But California's wine country accounts for just 2.4% of the state's population, on average. As such, examining the wine country on a real GDP per capita basis takes into account the wine country's small size. On this measure, the wine country reveals greater robustness. On average, between 2001 and 2013, the wine country's real private industry GDP per capita was 87% of California's real private industry GDP per capita.

In fact, wine country's real GDP per capita was over 100% of California's level in the early 2000's, recently falling to an average of 76% over the last few years. This mimics, conversely, the rise of the Silicon Valley-Bay Area essentially taking command of California's economy and hence, crowding out the impact of small economic actors within the state. If we remove the Silicon Valley-Bay Area from California and then reassess the ratio between the wine country's real GDP per capita and California's, wine country's level jumps to 95%, on average, between 2001 and 2013.

But these GDP statistics likely undervalue the impact of California's wine country on the state. For example, some estimate California's agriculture industry's economic impact is just 2% of the state's economy; yet, most would agree that agriculture is more significant to California than that number would suggest. The same is true of California's wine industry.

For example, between 1999 and 2014, on average, 76% of all U.S. wine shipments came from California and California accounted for 65% of the total U.S. wine retail value. And it isn't just the product that puts California's wine country in a league of its own; the industry is one of the most dominant tourist attractions for the Golden State. In 2014, California's wine country accounted for almost one-third of the state's economic impact, employment, and employee wages connected to tourism and on a per tourist basis, the average wine country tourist spent about 44% more than the average California tourist. And the industry is only continuing to grow. Since 1998, the number of winery businesses has increased almost 8% per year, on average.

Thus, not only is California's wine country an important piece of the state's economy, it is also one of the state's best cultural diplomats. And while there are unique policy threats that challenge vineyards and vintners, addressing many of the policy threats facing California's dominant economic region would also benefit the smaller economic regions. For instance, wineries are in many cases small businesses that face the same onerous business regulations and high taxes that other businesses must deal with. These add burdensome costs to an industry that is already very capital-intensive. Moreover, since the end of the recession, the median value per square foot in California's wine country has been, on average, 37% higher than California's median value per square foot and 3 times higher than the United States' average. Thus, housing affordability is just as salient a business and cost of living concern within the wine country as it is in the Silicon Valley-Bay Area.

Here's the bottom-line: The Silicon Valley-Bay Area's top policy threats are not that regions' alone. There may be slight variations, but by tackling these concerns, Sacramento would be making the entirety of California a better place to start and expand a business and that would go a long way to re-diversifying the Golden State's economy, which is a crucial first step to reigniting the California Dream.


Hoover Institution research fellow Carson Bruno studies California's political and policy landscape. Follow him on Twitter @CarsonJFBruno.

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