California Dreamin'

California’s Napa Valley gets the headlines, the wine-tasting awards and the black-tie charity dinners…California’s “Emerald Triangle” gets the cash.

That’s right, the Golden State’s marijuana crop generates about $14 billion in revenue each year, and most of that revenue flows into the three main cannabis-growing counties of Humboldt, Mendocino and Trinity — aka, the Emerald Triangle. $14 billion may not seem like much, as it is roughly the same sum as the bonus pool at Goldman Sachs. On the other hand, $14 billion is larger than the GDP of Iceland, double the GDP of Nicaragua…and seven times larger than the revenue of the California winegrape industry.

A few miles to the south of the Emerald Triangle in Napa and Sonoma counties, an array of deep-pocketed vintners and gentleman-farmers try to squeeze profits from grapevines. Very few succeed. California winegrape production generates only about $2 billion in gross revenue annually, and virtually no profit…on average. Thus, the California “weed” industry produces seven times more revenue than the state’s massive winegrape industry. This contrast may not mean anything in particular, but it may not mean nothing either.

Up in California’s verdant north, cannabis plants flourish as bountifully as liberal politics…and budget deficits. As a result — of the politics and the deficits — the Golden State has become a high-tax, quasi-socialist domicile that has become increasingly hostile to private enterprise. Once upon a time, the massive California economy featured shipyards, oil refineries, lumber mills, aerospace factories and many other forms of “heavy industry.” Not any more.

The modern California economy features a few legacy heavy industries — that continue to operate only because they had not yet been regulated out of existence — along with a quirky combination of light industries like tourism and marijuana cultivation. If, as a former Morgan Stanley analyst once observed, “Europe is a vast open-air museum,” California is quickly becoming a vast open-air love-in, where the marijuana and good vibes flow freely…as long as Mom and Dad don’t forget to send cash.

But Mom and Dad are having a hard time paying the bill these days. The longer the good vibrations in the public sector persist, the tougher it becomes to keep the love-in going.

Back in 1978, California chose a path that determined much of its ensuing future. The state voted itself a big tax cut. Proposition 13 — officially titled the “People’s Initiative to Limit Property Taxation — amended the California Consitution in 1978 to limit property taxes to a maximum of 1% per year. This feel-good amendment, which slashed property taxes by an average of 57% overnight – inspired a national “taxpayer revolt” throughout the country. Suddenly, Americans began to believe that they could, in fact, have something for nothing.

In 1978, California enjoyed a robust budget surplus. The economy was humming along and there seemed no reason not to believe that benefits could and should increase for everyone, especially for everyone who drew a paycheck from the state itself. Thus began the legendary tales of tenured university professors who work as hard as welfare recipients to receive six-figure paychecks, subsidized housing and a lifetime of generous retirement benefits. Likewise, the outlandish stories of municipal police officers who receive $150,000 in total compensation, or the state lifeguards who “tactically retire” on “disability” so that they may receive lavish lifetime pension and medical benefits, while also generating a second income working somewhere else.
But these are stories for another day…

Today’s story relates to a different historical footnote from 1978. Republican candidate for governor, Evelle Younger, crafted an election platform that included constructing 30 new nuclear power plants along the California coast. Younger lost the election by a landslide to Jerry Brown, the ultimate feel-good candidate.

We did not need nuclear power, Brown countered, anymore than we needed those billions of dollars of property tax revenues that Prop.13 eliminated. This was California, the Golden State…the dreamiest portion of the American Dream.

As it turns out, California probably could have used a few extra property tax dollars…as well as a few extra nuclear power plants. Because the state lost half its property tax revenues, it became dangerously reliant upon other forms of taxation, like income and capital gains. Since these latter two forms are uneven and unpredictable — and tend to drop when they are most in need — the State’s income tax rate steadily increased…which placed an increasing burden on the private sector.

Meanwhile, over in the power-generation sector, nuclear energy’s share of California energy production has dwindled to a paltry 12%. Three decades of No Nuke sentiment in the state — epitomized by the Diablo Canyon protests in 1981 — completely thwarted every effort to increase nuclear power production. One ironic, unintended consequence of the 30-year anti-nuke campaign is that coal-fired power plants now generate more electricity in California than nuclear plants.

But political opinion tends to oscillate between extremes. The “bad” policies of one generation become the “good” policies of the next. Thus, “bad” nuclear energy will return to California one day…just like it is returning to the rest of the planet. In fact, nuclear energy is enjoying a global renaissance — once that will produce numerous profit opportunities for forward-looking investors.

Eric Fry
for The Daily Reckoning