California’s economy may surpass Germany’s, but what’s beneath the numbers?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: John Letzing, Digital Editor, Strategic Intelligence, World Economic Forum

• The US state of California is projected to pass Germany to register the world’s 4^th-biggest economy.

• But that’s based on GDP, a metric that’s less than comprehensive.

• Comparing the two places more broadly raises questions about how we measure prosperity.

“The future always looks good in a golden land,” one of California’s most clear-eyed chroniclers wrote, “because no one remembers the past.”

I lived a large chunk of my adult life in that golden land, and I’m liable to shrug off dark observations like this to keep believing in its promise – probably to an embarrassing degree. Don’t mess with the fantasy.

But something felt off about a recent, rosy editorial on California’s clear path to surpassing Germany, Europe’s biggest economy by far, to register the world’s fourth-largest GDP.

California has long been subjected to scrutiny of its economic prospects that can be shortsighted or unfair. Still, assessing these two places as the same type of competitor running the same race, with California as the clear winner, seems to point to bigger questions about how we build and measure prosperity.

The editorial focused on the market value of publicly-traded companies and the revenue they generate. On both counts, Germany pales in comparison. But what about other factors that might impact how well-off the average person feels?

Germany’s tax revenue as a portion of GDP has been about 25% of late, compared with less than 10% in California. In terms of using that revenue, Germany provides a system of universal health coverage. In California, about one in 10 people under 64 have no coverage at all.

The two locales also differ in terms of work. Many German companies have “works councils” that compel employers to account for employee interests, and the country’s been ranked among the best in terms of protecting workers’ rights.

About a sixth of employees in Germany are union members. That figure’s been in decline, yet remains above California’s membership rate even following recent gains for unions in the state – where an agricultural workforce generating nearly a fifth of US crop sales is almost entirely foreign-born, largely undocumented, and enjoys few safeguards.

Differing historical development may explain each economy’s quirks. After Germany was unified in the late 19^th century, it became a harbinger of the modern social safety net; the government played a proactive role in everything from health to retirement. At that same time, California had recently been both a spoil of war with a neighbouring nation, and (briefly) a makeshift republic – a frontier in a country where adopting any sort of social safety net would always prove politically fraught.

California dreams, German aspirations

California’s growth has come in successive waves powered by farming, the aerospace industry, and the internet. Silicon Valley, formerly an agricultural hub called the Valley of Heart’s Delight, became a profound source of wealth and jobs in the decades after the first semiconductor lab was founded there in the 1950s.

Other trends are less upbeat. Annual tuition and fees to attend a public university in California like Berkeley in the 1950s were less than $100 for residents, compared with nearly $20,000 now. Buying a house in some places has become unimaginable for most people. As wealth inequality worsened, zip codes home to 2% of the state’s population came to hold a fifth of its net worth. Among other things, Silicon Valley is a place where half of the children live in households struggling to get by.

In Germany, every state had abolished tuition at public universities by 2014. A lack of affordable housing is a concern there, particularly now during a cost of living crisis, and so is wealth inequality – though according to one report wealth inequality actually declined slightly from 2009 to 2021.

Still, no one can deny the lingering economic disparity between the former East Germany and the rest of the country, which has helped feed populism and right-wing political extremism.

There’s also been some resentment of the tech giants California seems able to churn out regularly, drawing in users around the world – including in Germany. German carmakers once bettered Detroit, the Silicon Valley of the mid-20th century, so why can’t a similar trick be repeated in the digital era?

One reason might be conflicting social norms when it comes to the conspicuous wealth and disparity that can be byproducts of the Silicon Valley model. Not to mention the very different basic wiring of the economies. The same protections valued by German workers, for example, may not be as treasured by potential employers.

It could be California’s race to lose. Joan Didion, who wrote about the future always looking good in a golden land, also explored the busts that have followed the state’s boom eras.

Ultimately, though, instead of comparing the two places head-to-head on a purely GDP basis, it might be more interesting to consider how they’d stack up using an alternative measurement.

More reading on California, Germany, and well-being

For more context, here are links to further reading from the World Economic Forum’s Strategic Intelligence platform:

• More than 50 years ago, Robert F. Kennedy kicked off a US presidential campaign by talking about the limitations of GDP for measuring well-being, according to this analysis – which finds it odd that GDP somehow remains the predominant measure of progress. (The Conversation)

• Not a big part of its economic future – a century ago southern California was home to a quarter of the world’s oil production, but now some big oil companies that have been doing business in the state since that era are beginning to pull out, according to this report. (ProPublica)

• Pushing for greater enfranchisement in Germany – according to this analysis, there’s growing momentum to move the country’s federal voting age down to 16, and evidence suggests this may significantly boost turnout. (LSE)

• One way experts size up the challenge posed by a less familiar country is comparison with a better-known country, or “in the case of an American audience, a US state,” according to this analysis – though even when sticking strictly to GDP, there can be a lot of wiggle room. (Harvard Kennedy School)

• A worrying sign – this report describes a recent, far-right extremist rally in a mid-sized German city with 8,000 attendees and speakers demanding an end to the “forced cult of guilt,” or education about the Holocaust. (Der Spiegel)

• Something California and Germany share is a vulnerability to climate change impacts – this piece details a successful effort to restore a treasured California lake that otherwise would’ve diminished due to water diversions and global warming. (Inside Climate News)

• In search of a broader narrative about progress – this briefing offers insights on how to shift from “economic growth at all costs” to “well-being for all people.” (RAND Corporation)

On the Strategic Intelligence platform, you can find feeds of expert analysis related to Economic Progress, Financial Systems and hundreds of additional topics. You’ll need to register to view.