Hasta la Vista, Baby! What Happens if California Leaves the Union?
By now, we’re all familiar with "Brexit" and the impact it had on the U.K. economy, American businesses and the global economy. When Brexit was announced, the pound took a nose dive, dropping to a 31-year low and caused Britain to drop down one spot -- from the world's fifth biggest economy, to the sixth.
But what about “Calexit”? Could a similar exit happen here, involving the state of California? And, if so, what kind of impact would that have on our economy?
“Calexit” is an independence campaign that caught fire after the November election, when a group of Californians began talking about secession. “Yes California,” a ballot-measure campaign committee, hopes to collect enough signatures to include the measure on the 2018 ballot, which, if passed, will bring the state one step closer to legally seceding.
Were Calexit to happen, California would become the world’s sixth largest economy, overtaking France and bypassing India. Domestically, the Golden State is the federal government’s largest contributor, with a GDP of $2.5 trillion. The state’s economy grew by 4.1 percent in 2015, compared to just 2.4 percent for the rest of the country.
The implications are many, at home and abroad. But before you dismiss “Calexit” as sour grapes and think, "This can’t happen," take a look at the current state of affairs: People didn’t think Brexit would happen, but it did. No one thought Donald Trump could become president, but he is. And, if you watched Super Bowl LI, you saw yet another impossible outcome come to fruition.
If California were to secede, here are the five likely results that would have the most impact on the national economy.
1. Food prices would skyrocket.
California’s producers of fruit, tree nuts and vegetables account for a large share of U.S. production, accounting for nearly two-thirds of the state’s agricultural crop value. In fact, the state’s ranches and farms brought in $47 billion in crop cash receipts in 2015, making California’s state agricultural industry the largest in the nation. While the industry itself might be able to withstand secession, the ripple effects for the rest of us would be pretty steep, from Wall Street to Main Street.
In fact, costs for fruits and vegetables would skyrocket because:
- Shipping would be more difficult as shipments would be considered international shipments, rather those that cross state lines.
- The U.S. government could also impose higher tariffs, passing the costs directly to consumers.
The dairy industry would also be heavily affected. Since 1993, California has been the biggest producer of milk, ice cream and butter, coming in second to Wisconsin in the production of cheese. If California goes, so does a large chunk of our food supply.
2. We would have to say goodbye to Mickey . . . sort of.
Tourism is a big part of any country, or state, and California is no different. In fact, California is the most visited state in the United States. It's known for its national parks, beaches, Disneyland, the Golden Gate bridge and wine country. In 2015, tourism alone brought in more than $122 billion to the state’s economy -- and more than three-quarters of its visitors were state residents. This helped create more than one million jobs.
Those are pretty good numbers, but if California were to become its own country, would people still go west? The tourism numbers might plummet because tourists might actually need a passport to get into California. Considering that more than half of Americans don’t have a passport, travel could prove difficult. Another reason? The rest of America might be angry at California for leaving and go elsewhere.
3. Tax hikes would occur.
Come tax time, America would miss the Golden State. As the biggest contributor of federal taxes, California contributes 13.3 percent of all federal taxes collected. To put this in simpler terms, imagine losing 13 percent of your income. While not a high number, this percentage certainly would have a significant impact on the budget -- yours, mine, and the federal government’s, too.
If Calexit were to happen, taxes would have to rise in order to cover the loss of income. Tariffs would also be imposed to help bridge the gap, but that wouldn't solve the problem entirely. California could also find other international partners with fewer restrictions and tariffs than the United States, which would leave this country scrambling for another trade partner.
4. A weakened dollar would surely result.
Amidst the uncertainty of the stock market, the 2008 recession and constant global turmoil, our one national constant has been the strength and value of the U.S. dollar. In many instances, this has been the standard by which we've compared the world’s markets.
But, like Brexit, will history repeat itself?
We saw the British pound plummet, something which also happened in Quebec, in 1995, when that province held its referendum to leave Canada. The value of the “Loonie” dropped by 30 points. So, there is an economic precedent to consider. Another consideration is the peculiar fact that while neither Quebec nor the U.K. are the largest regional economies in Canada and Europe, respectively, California is the largest economy in the United States. What this means is that California’s secession would have a bigger impact on the U.S. dollar than Brexit did on the euro,
5. Recession 2.0 would likely occur.
The United States is known around the world as "the land of opportunity." The U.S. is seen as a place where, if you work hard, you are rewarded for your efforts. It’s also one of the reasons why our economy is seen as one of the world’s economic pillars. We have the highest nominal GDP in the world, so if the dollar crashes, so does the global economy.
We caught a glimpse of the collapse of the global economy back in 2008, albeit for different reasons. It was the biggest economic collapse since the Great Depression, and it had a global domino effect. The departure of an economy as large as California’s is bound to bring down the entire house of cards.
How does this affect Main Street, USA?
The answer to this question is a long one; however, the short answer is, this affects everything on Main Street. If you own a "mom and pop" shop and sell water, wine, tech gadgets or clothes, prepare to see an increase in prices and a potential decrease in customers.
California’s water supply also comes from the Colorado River and what happens with that massive waterway doesn’t affect just California, but six other states as well. New agreements will have to be put in place, and this could limit the supply, causing still more prices to go up. Not to mention that the Port of Los Angeles (one of the busiest in the world) would have to be dealt with as an international port, incurring higher tariffs and taxes -- which, like everything else mentioned here, would be passed on to the consumer.
Is the scenario likely that California will secede? Probably not, but it never hurts to prepare. Who knew Brexit would happen? Everyone dismissed it until it was too late. Indeed, if you ignored Brexit or did not prepare for it, you might be feeling the pinch now.
It’s always good to keep a contingency plan in your back pocket. If you never use it, great! But what if you need it and don’t have it?