U.S. President Joe Biden’s first months in office have been impressive. The number of Covid-19 vaccines that have been administered is more than twice what he promised, and the spread of the coronavirus has slowed sharply. In the first quarter of this year, the U.S. economy grew by 6.4% (the fastest quarterly rate since 1984), owing to monetary and fiscal stimulus and the broader reopening of the economy.
Economists at Goldman Sachs expect the 2021 U.S. growth rate to be the fastest in three decades and recent research by the McKinsey Global Institute finds significant acceleration in productivity growth to follow. Under Biden, consumer confidence has rebounded: 55% of voters feel good about the state of the economy, up from 43% when he took office and 34% in May 2020.
Many commentators have compared the Biden administration’s economic agenda to Franklin D. Roosevelt’s New Deal or to Dwight D. Eisenhower’s post-Sputnik expansion of federal science and infrastructure spending. But the best analogy for Bidenomics is California, which has pioneered a strategy of innovation-based sustainable and inclusive growth.
A fundamental component of both Bidenomics and California’s economic strategy is robust world-class research to support innovation in global growth sectors. It is these sectors that will drive productivity growth, create good jobs, and fuel U.S. exports and wealth creation now and in the future.
California has led the United States (and the world) in innovation since World War II. It is home to a first-rate public college and university system, private universities like Stanford, CalTech, and the University of Southern California, and six federal research labs (along with hundreds of private ones). While skeptics have once again been proclaiming the impending demise of the California economy, the state has in fact extended its lead in the innovation economy during the pandemic.
A few indicators demonstrate the point. In 2020, more than 440,000 Californians started a new business, up 22% from 2019 and far exceeding all other states (not adjusted for population).
Moreover, in 2020, 50% of the country’s venture capital funding went to California—double the combined share of the next three states (New York, Massachusetts, and Texas). Of approximately 750 venture funding rounds or initial public offerings with valuations exceeding $1 billion, roughly 494 have been in California (San Francisco alone has had more than Texas, Florida, and North Carolina combined). And 17 of the 22 U.S. startups ever to have been valued at $10 billion or more in a funding round are based in the San Francisco area.
Whereas the 236 publicly listed companies in Silicon Valley, Salinas Valley, and Monterey Bay had a combined market cap of $4.75 trillion a year ago, that figure has now surpassed $8.5 trillion, implying 80% growth in one year (and during a recession, no less).
Although the rest of the U.S. cannot become another Silicon Valley, new mechanisms to spread investment and venture capital more broadly around the country certainly would help the national economy, not least by helping firms everywhere take advantage of remote work and other pandemic-driven trends. Likewise, a more open immigration system would allow the U.S. to tap into a global pool of talent. It is worth remembering that around half of all Fortune 500 companies in the U.S. were founded by immigrants or their children.
California has benefited greatly from its leadership in the innovation economy. With a highly progressive tax system that taxes capital gains as income, approximately 90% of the state’s income tax revenues come from the top 10% of taxpayers. And because innovation drives so much growth in the state’s capital and real-estate markets, it generates a large (but volatile) revenue base with which to invest in education, infrastructure, and safety-net programs. Even during the Covid-19 recession, California maintained a budget surplus, now projected to reach a record $75.7 billion for 2021-22.