Can We Soar Without Aerospace? : Defense cutbacks could be the trigger for a slowdown that the Golden State is ill-equipped to handle.
California’s economy is more vulnerable than is commonly acknowledged.
A host of problems--ranging from high home prices to severe traffic congestion--is causing a palpable rise in dissatisfaction with life in the Golden State and making business increasingly reluctant to locate or expand here. The failure to effectively deal with these problems, coupled with the rise in environmentalism, makes it appear that the state is headed for a protracted period of slower growth. Deep reductions in U.S. military spending could trigger such a slowdown.
Should a major rollback in military spending occur, the one reassuring fact is that nowadays defense constitutes a considerably smaller component of the California economy. For example, the two most defense-dependent industries, aircraft and missiles, currently account for 2% of total employment in California. In the late 1960s, that figure was 4.5%. Similarly, the California Commission on State Finance estimates that U.S. military spending in California currently equals 8% of California’s gross state product, down from 14% at the height of the Vietnam War.
Nevertheless, an examination of the states that have experienced regional downturns in the midst of this 7-year-plus national economic expansion indicates that 8% is still a considerable share of California’s output. For example, energy-related industries accounted for 10% of Texas’ gross product before oil prices collapsed and the economy there went into a severe recession. More disturbingly, the securities industry accounted for just 5% ofNew York state’s gross product when the stockmarket collapsed in October, 1987. Yet thecrash apparently is the catalyst of the current downturn in New York.
Moreover, while California has moved away from defense over the past 20 years--an advantage if defense spending is going into a prolonged contraction--the combination of rapid growth and stringent fiscal policy has produced a host of new problems--concerns over infrastructure, especially transportation; fears that the quality of education has declined; a perception that progress on cleaning up the environment has stalled; the spreading of crime and gang violence, and home prices that are nearly double the national average.
If defense employment begins to shrink, what industries might pick up the slack? In the 1970s, it was computers and semiconductors. Between them, these industries added 170,000 jobs from 1972 through 1984. But they have been shedding jobs ever since. Fierce international competition has forced these industries to invest in capital and raise labor productivity, eliminating them as important sources of job growth.
Many had hoped that the demand for commercial aircraft would offset any decline in military contracts since McDonnell Douglas (and Boeing in Seattle) have enormous order backlogs. However, these hopes were dashed by recent announcements that Douglas will lay off 4,000 workers by summertime.
Some believe that California’s booming rate of population growth ensures a robust economy. However, the recessions in Texas and Arizona in the 1980s are poignant testimony that continued high rates of population growth are not inevitable, nor do they provide insurance against future economic troubles. California itself learned this lesson in the early 1970s, when net in-migration plummeted to record lows as the state’s economy, punished by consecutive 10% declines in real military spending, ground to a halt.
Should deep defense cuts occur, there will inevitably be some shrinkage in defense employment in California. What has not been considered is a possible exodus of businesses and individuals, dislodged by the spending rollback. Both McDonnell Douglas and Lockheed recently announced plans to transfer defense work to out-of-state sites in pursuit of increased efficiency; an alternative explanation is that they are attempting to reduce their presence in high-cost Southern California. The loss of defense contracts provides a convenient time to do so. Similarly, individuals who lose their jobs either directly or as an indirect result of defense cuts might take the opportunity to leave the state.
The consensus view is that California is much better positioned to absorb defense cuts than before. Yet the arguments behind this view bear an eerie correspondence to the late 1960s. Then analysts cited the state’s industrial diversification, commercial aircraft backlogs and robust population growth as reasons why California would weather defense cuts in good shape. In truth, the cutbacks took a terrible toll on the California economy, although the state bounced back after several years. Moreover, this view ignores the other changes that have occurred over the past 20 years, many of them for the worse. These countervailing forces mean that major defense cuts could have a much bigger impact on the state’s economy than we realize.
