As California Goes ...

California, the nation's economic engine, has lost 800,000 jobs since 1990, most in the south. Still, its potential is enormous - if the right strategic investments are made.

WALLACE STEGNER, the marvelous novelist and historian of the West, once said, "California is America, only more so." Mr. Stegner was not thinking of economic cycles, but his idea applies to economics. California led the nation through much of the 1970s and 1980s with years of unparalleled economic growth. Now the Golden State leads the nation in the depth and complexity of our country's economic downturn. In the case of the economy, what happens in California is of more than trivial concern and is more t angible than the prediction of the next change in lifestyle.

California accounts for 14 percent of the total output of the US economy. Its economic engine is roughly the size of Great Britain. As the White House has noted, the dramatic lag in the recovery in California has been a key obstacle to consistent national recovery. California is in the midst of its worst recession since the Great Depression. The state's slump has been deep, prolonged, and concentrated geographically. Nowhere is this more apparent than in the area of jobs. The key issue facing the US econ omy is a jobless "recovery" - that is, an actual recovery in output, but no recovery in jobs. California has lost more than 800,000 jobs since June 1990. More than 80 percent of these have been in Southern California. California alone has accounted for 40 percent of the job loss in the country during this period, and Los Angeles County has been responsible for 18 percent of total job losses in the US during this period.

Why is the California economy struggling? As with all big questions, there are few simple answers. California's current difficulties are a mixture of cyclical and structural problems. Defense downsizing began in 1986 and has been accelerating. Contrary to popular perception, the importance of the defense sector to the California economy is no greater than in many other states. In terms of per capita defense dollars received and percentage of workforce in defense related jobs, California ranks only ninth and fifth, respectively, among states, despite the fact that the state is No. 1 in total defense dollars received. Defense downsizing is not the leading cause of job loss in the state. Between June 1990 and October 1992, the state lost 190,000 jobs in nondefense related manufacturing, 196,000 in wholesale and retail trades, 196,000 in construction, and nearly 95,000 in defense-related industries.

The data suggests California's downturn is not just a function of defense cutbacks, but of corporate downsizing, business retention and attraction problems, the hollowing out of urban economies, and the effects of the business cycle.

Corporate downsizing, though necessary for the survival of Fortune 500 companies, is nearly as big a problem as defense cutbacks. It is caused by global competition, a rise in employment costs relative to capital costs, technology, and deregulation of many industries.

Cost-of-doing-business issues such as workers compensation, litigation, and taxes are of concern to many California businesses. In the past several years, the state has lost a large number of manufacturing businesses and jobs to other states and countries. Business climate, strategic business reasons, and quality of life issues were the key factors underlying the flight of business out of the state. But all of California's problems cannot be explained via business retention problems alone. No more than 1 0 percent of the job losses in this state in the past two years have been due to businesses pulling out.

If the causes of this prolonged downturn are complex, then clearly the strategies for economic recovery must be diverse and comprehensive. The state needs to build on its strengths. First, as recognized by the Clinton administration and as advocated by those in the industry, it is absolutely essential that the cluster of computer electronics and information industries meet the competitive challenge of a demanding global economy. Some projections show that by the year 2010 nearly one-third of the economic

output of the state will be dependent on this sector. The policies proposed by the administration aimed at nurturing this sector are absolutely essential, as are vigorous public/private partnerships such as "Joint Venture/Silicon Valley," which aims at revitalizing the heart of the nation's computer and semiconductor industry.

Several rapid but strategic investments in infrastructure are the best way to stimulate short-term and mid-term job growth within the state. The construction or refurbishment of basic infrastructure - roads, bridges, airports, transit systems - produces jobs, makes the economy more efficient and will make the state more attractive for the travel industry, a sector that still has tremendous potential. Investments in advanced communications infrastructure, particularly information networks as proposed for the "Smart Bay Area" or "Smart Valley" and pushed by the administration, provide high quality jobs and promise to position the area to compete efficiently in the new century.

Investment in education, training, and worker readiness are crucial to California's social and economic viability. Support and assistance of appropriate job training and worker readiness programs are of critical importance to the state's future. Expanding the economy via human investment is likely to be a lot more sustainable than concentrating just on expanding the economy via creation of physical capital alone.

The research universities and national laboratories are California's critical assets. If the state is to succeed in the 21st century, their role in the state's economic future needs to be fully realized. We must encourage the development of a "manufacturing extension service" based along the lines of the highly successful agricultural extension services associated with land-grant universities. We need to enhance the role of community colleges in economic development activities, including job training for

emerging industries and small business development. California could lead the nation in the development of an "education industry cluster" combining education, high technology, and communications.

Since most of the job creation in the state will be in small businesses, we need to encourage the growth of business "incubators" including those that develop suppliers for emerging industries. Tax incentives for small businesses that create jobs should be enacted.

One promising area of job creation in the state is in the environmental cleanup industry. Enhancement of this industry will have the additional advantage of preserving the state's natural assets such as parks and recreation areas. This will maintain the attractiveness of the state to workers in high-tech industries, research universities, and national universities who desire a high quality of life. Furthermore, the state's vital tourism industry also requires maintenance and enhancement of the natural as sets of the state.

While California is currently beset with many problems and difficulties, let us not forget that the state is still the chief spawning ground for new businesses. According to Fortune magazine, California had 33 percent of America's fastest-growing companies in the US in 1992, and a recent Inc. magazine study reported that 23 percent of America's fastest-growing small companies were also in California last year. California's many assets, including its world-class universities, entrepreneurship, high- tech leadership, a well diversified economy and its location on the western edge of the dynamic Pacific Rim economies, give it the potential for continued success in the 21st century. It will need very aggressive public and private strategies if that potential for success is to be realized.

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