America Learns to Love L.A. : Innovative People, Diverse Businesses Extend Boom
The following is from the Dec. 24-Jan. 6 issue of the Economist, London.
Like its surfers, Southern California has ridden one wave after another; farming, oil, movies, aerospace and electronics. Now its economy is growing so fast that Los Angeles hopes to ride the ultimate wave into the next century, and to rival New York as America’s business capital.
It is not just Hollywood and Disneyland that have taken Southern California so far. Los Angeles is also America’s biggest manufacturing center. While manufacturing employment has fallen nationally in the past decade, in Southern California it has increased by a fifth. If the whole of Southern California (from Santa Barbara down to San Diego) was an independent economy, it would rank as the eighth largest in the industrial world. In the past 10 years its gross regional product has grown by an average of 3.8% a year--well above America’s national average of 2.6%. A recent report by Wells Fargo Bank predicts average annual growth of 3.5% until 2010, compared with 2.8% in the nation as a whole.
Los Angeles is the only big city in the industrial world that is still growing rapidly. The population of the Los Angeles Basin is forecast to swell from today’s 13.5 million to 19 million in 2010.
--The region has plenty of resources ranging from fertile farmland to oil and gas, and--not to be underestimated--a glorious climate. It also has an abundance of world-class education and research establishments, among them UCLA, USC and Cal Tech.
--Its economy is one of the most diversified in the world: from farming to films, aerospace to clothing, biotechnology to banking. This provides a shield against recession.
--It specializes in high value-added goods and services. Silicon Valley in Northern California may be America’s best-known center for high-technology--semiconductors, computers and communications--but the Los Angeles Basin has about 25% more high-technology jobs than Silicon Valley. Los Angeles is also the biggest aerospace center in the world.
--But more lowly forms of manufacturing also thrive because Los Angeles has a unique combination of first-world infrastructure and third-world labor. The influx of immigrants--many illegal--from Asia, Mexico and Central America has encouraged the growth of industries like clothing and furniture. Employment in the region’s clothing industry has grown by almost 60% in the past 15 years, compared with a fall of 20% nationwide.
--Southern California is adaptable; quick to move out of declining industries and into expanding ones. In the 1980s many heavy industries like steel, tires and cars (at the end of the 1970s Los Angeles was second only to Detroit as a car maker) almost vanished with the loss of 75,000 jobs. But this was more than offset by new jobs in computers, aerospace and defense.
The key to much of this success is partly California’s innovative population; always willing to try new ideas and fads. With a society more open than that on the East Coast, Los Angeles is one of the easiest places to set up a business. Helped by the large influx of immigrants and by a big community of venture capitalists, the economy is powered by small, flexible businesses.
A large number of the new jobs created in Southern California in the 1980s were related in some way to the military build-up of the Reagan Administration. California won a fifth of the total value of defense contracts, with Southern California taking the lion’s share. Real defense spending in the state rose 60% between 1979 and 1986, boosting firms like Lockheed, Northrop and Litton, which have headquarters around Los Angeles.
Will the expected fall in defense spending over the next few years (as a result of budget cuts and arms reduction) bring growth to a halt? In the early 1970s, the winding down of the Vietnam War and the Apollo space program resulted in a severe recession in the aerospace industry and temporarily cut growth in Southern California to well below the national average.
But that is unlikely to be repeated. Today, aerospace and defense account for less than 4% of all jobs in the region, compared with 7% in the 1960s. And while defense accounts for perhaps 40% of aerospace, the region also has substantial commercial-aircraft production facilities. Orders for new commercial airliners are booming.
Another reason that a decline in defense spending may not drag down the economy is that business and financial services linked to international trade have already taken over as the new engine of growth. Los Angeles stands at the crossroads of the expanding trade of the Pacific Rim. It gains whether America is importing or exporting.
The trade handled by the Los Angeles customs district has risen by 150% since 1980 to an estimated $88 billion in 1988--second only to New York’s $112 billion. Los Angeles could overtake New York in the 1990s. Shipping, insurance, wholesaling and banking are blossoming. Perhaps 1 in 10 local jobs are supported by international trade, and by the end of the century it is forecast to be 1 in 6.
Recognizing Los Angeles’s strategic location, many foreign firms are choosing it for their American headquarters. Eight of the nine big Japanese car makers are there. Los Angeles has already replaced San Francisco as the West Coast’s business and financial capital.
Total deposits at banks and savings and loan institutions in Los Angeles are still 25% smaller than those in New York, but they are catching up fast. Since 1980 deposits have doubled in Los Angeles; in New York they have risen by only one-fifth. Most East Coast banks now have a Los Angeles office, preparing for 1991 when the California market will open to out-of-state banks. There are also about 130 foreign banks in Los Angeles (again, second only to New York).
Japanese banks’ share of total assets has jumped from 11% to 24% in the past five years, mainly by buying up British-owned banks. The Japanese also now own almost 30% of all downtown office space, prompting the joke that Los Angeles is Japan’s fastest growing city.
If, as throughout history, finance follows trade, could Los Angeles overtake New York as America’s financial capital in the 21st Century? Probably not, given the deep-rooted financial infrastructure of New York, including the Federal Reserve Bank of New York (the operating arm of the Federal Reserve Board) and Wall Street. Los Angeles’s financial business does not have the diversity of Wall Street, tied as it is more closely to serving business and trade. But with a Los Angeles operation becoming increasingly important for the success of any big financial firm, Los Angeles will give New York a run for its money.
Another brake on Los Angeles’ growth is rising land and house prices. A house in Los Angeles costs roughly twice as much as the national average. This could drive away workers and employers. But, so far, there has always been a “next frontier” where land and house prices are cheaper--but still within Los Angeles’ labor market. People have moved inland to Riverside and San Bernardino. This can mean commuting times of up to two hours, but jobs have swiftly followed the people as industry has also moved into the suburbs.
Since 1980 the number of jobs in aerospace, for example, has risen by 91% in Riverside and San Bernardino counties, compared with 11% in Los Angeles County. But how far out can the commuters and businesses go? Environmental pressures may force companies to go well away. McDonnell Douglas, for instance, has considered how long it can continue making airliners in Long Beach. It has concentrated its helicopter manufacturing in Arizona, with a big desert instead of noise-conscious neighbors who complain about test flights.
House prices alone are not enough to keep people away. A recent survey by the Union Bank of Switzerland of 52 cities worldwide (including New York, Chicago and Houston) found that taking account of wages, housing and other costs, Angelenos were still better off than everybody else.
A big concern is whether Southern California can remain competitive. In the 1990s, when the number of entrants to the labor force will be falling elsewhere in America, firms in Los Angeles will be able to draw on an expanding labor pool. This could give local firms a big advantage--but only if the work force is adequately trained. Phillip Vincent, an economist at First Interstate Bank, points to a potential mismatch between the future skills of the labor force and industry’s needs.
Though California’s higher education ranks among the best in the country, its elementary and secondary schools have dropped behind. In the 1960s the state of California was one of the top spenders per head on education. Today it ranks in the bottom 10 of American states. By 2000, 70% of Los Angeles school children will be from ethnic “minorities,” many from non-English-speaking homes and so requiring higher spending per head.
While the structure of the school system is partly to blame, the Gann amendment, which limits state spending to its 1978-79 level in real terms, has not helped. With current tax rates this will result in the seemingly absurd position in the 1990s where revenues will have to be returned to taxpayers, even though in a recent survey by the RAND Corp., three-quarters of people said they were willing to pay higher taxes to improve education and the environment.
The price of success for Los Angeles has been a city less attractive to live in: plagued by pollution, water shortages and clogged freeways. Even the surfers fight for space. This has resulted in an anti-growth movement, formerly confined to Northern California. New construction is already restricted in some parts of Los Angeles, though not downtown. There are also proposals to ban trucks on main highways in peak periods and introduce stricter exhaust emission standards, both of which would add to business costs.
But pollution control and waste management are, with tougher regulations, being seen as profitable new businesses to apply new technology. Hambrecht & Quist, a San Francisco-based investment bank, has set up a special venture-capital fund for chemical and environmental technology, which could eventually be on the same order as its commitment to biotechnology. Los Angeles’ next growth industry could be turning garbage into gold.
