California Searches for Second Wind

CALIFORNIA's economy, once viewed as the rocket engine propelling national economic growth, is now more often regarded as a drag on the nation's recovery from recession.

America's challenges are magnified in the nation's largest state economy, where defense cutbacks, urban blight, corporate downsizing, the credit squeeze, and plummeting real estate values have sapped the state's vitality. Income disparities are stark, and have prompted comments about the state's first-world economy being dependent on labor that lives in third-world conditions.

But while California leads the nation in unemployment, incurring nearly 40 percent of the recent total job losses in the United States, it also holds the country's greatest prospects for job growth. The state is home to the largest number of America's small firms and fastest growing companies.

During this decade, the state's labor force is projected to grow by 20 percent, over twice the estimated 8.2 percent national average. But the public and private sectors have been hit by the loss of more than 800,000 jobs in the past three years. And many economists expect the unemployment rate to worsen before it improves.

"This is the worst recession in California since the 1930s," says Tapan Munroe, chief economist of Pacific Gas and Electric, the nation's biggest publicly held utility. Mr. Munroe has an ongoing dialogue with President Clinton's top economic policymakers.

While Mr. Clinton stresses the need for high-wage, high-tech job creation, Munroe calls for even greater emphasis on building mid-range manufacturing and service jobs, given the continuing trend in defense cutbacks and permanent corporate downsizing. He says joint public/private sector support for micro-entrepreneurs, by making loans, training, and continuing education available, is the best way to arrest the decay of diverse urban communities. (Local grants, Page 12.)

California's renewal centers on demographics and small-business development, asserts Los Angeles-based Joel Kotkin, author of the recently released book "Tribes: How Race, Religion, and Identity Determine Success in the New Global Economy." The state's burgeoning immigrant communities are vital, he says. "Asians have brought a technical base here in science and engineering, and the Chinese have brought in enormous amounts of capital. The family and work ethic is greater in the Asian and Latino communitie s."

These attributes, coupled with the immigrants' strong connections to the world's most robust economies (in Asia and Latin America), Mr. Kotkin says, constitutes "an energy level, in terms of business, that is so much more bracing than in the Anglo community."

But California Gov. Pete Wilson, who is mired in his state's fiscal turmoil (government costs are high and revenues are weakened by high unemployment and demand for social services, falling real estate values and lower business profits), says his state can ill-afford absorption of legal and illegal immigrants, many of whom are out of work. He is fighting for $1.45 billion in federal assistance to help ease that burden.

Governor Wilson also wants Washington to "help create the climate that encourages investment" and enhances job growth. California has been at the vanguard of cutting-edge industries and "we have prospered beyond our numbers because people had the guts to experiment in the marketplace," he says. "We need to give incentives for small businesses, because that's where our growth is now."

"The last thing government should do is provide jobs and training for jobs that don't exist," Wilson says.

The Clinton administration, the governor says, must respond to the "the most urgent need in this state ... to end the credit crunch ... which would give California three times as much money overnight as the stimulus package and would do more for us over the long term."

Despite a Clinton effort to loosen the credit reins, Kathleen Wedeking, California League of Savings Institutions senior vice president, warns that regulators will continue to hold them tight. "Career banking regulators in the field see a lot of administrations come and go, but they want to keep their jobs. They don't want to be perceived as approving lousy loans - whether they are for housing or business development," she says.

Industry leaders say incentives for entrepreneurship, including

access to capital, will best help re-build the job base.

With the state's industrial infrastructure based primarily on defense, its greatest challenge is "the commercial application of high technology," says John Paxton, senior vice president in charge of industrial automation at the Beverly Hills-based Litton Industries, a $5 billion-plus corporation that manufactures both defense and civilian technology.

With highly trained workers, research facilities and many start-up companies, Mr. Paxton says, California is in a unique position to create new jobs both inside and outside the high-tech field, "without government interference."

But Washington must "allow small business to spawn," he says, by providing research and investment incentives, reducing taxes, and easing regulation.