SPECIAL REPORT : The State...

Is California losing its luster as the beacon of the nation’s economic and technological future? Some national business publications--Forbes, Fortune and the Wall Street Journal--have laid out the case for a new phenomenon, “California declinism.” Angst over the future has also surfaced in the state’s traditionally more upbeat academic, corporate, governmental and media Establishment.

True, there is cause for concern. The continuing slowdown in military spending, the economic effects of the Persian Gulf crisis, the global credit crunch and resulting housing slump, all have braked the fast-growth pace of the mid- and late 1980s.

Yet despite these problems, California’s economic fundamentals remain remarkably strong.

Indeed, what the “decliners” see as harbingers of an economic fall are really signs of a healthy long-term transition from dependency on the warfare state to a more highly diversified economy with expansive global links. The region is well-positioned to emerge in the 1990s as among the most dynamic in the advanced industrial world.

The enormous vitality of this evolving California economy is evident even amid the pain and wreckage of the current recession. Despite some slowing, virtually all California’s vital signs--from exports and job creation to gross state product--remain healthier than those of the nation. The real-estate market, though drastically down from its recent boom levels, does not appear poised for the “meltdown” now hitting the Northeastern states and sections of the Midwest.

One critical factor is the state’s population growth. During the 1980s, California’s population grew by more than 26%, an increase of more than 6 million people. By contrast, New York’s population rose by less than 3%, or a total of 486,433 people.

This steady increase has helped keep California’s net absorption of office space--the supply of which has doubled in Southern California during the past decade--among the highest in the nation. Next year, even much-maligned Los Angeles, now overbuilt with largely Japanese-financed projects, will lead all the nation’s cities in new office-space acquisition, according to a recent Cushman and Wakefield survey.

“The Northeast’s perception that we’re ready for a fall doesn’t understand that we are still absorbing people and creating jobs, while both (those indices) are now negative in places like Massachusetts and Connecticut,” says Jerry Jordan, chief economist for First Interstate Bank. “As long as you have net growth and people coming in, the buildings should keep filling up, even if it takes more time.”

Jordan’s optimism about the state’s ability to churn out more jobs flies in the face of widespread hand-wringing over the impact of military cutbacks. By some pre-gulf crisis estimates, less Pentagon spending could wipe out as many as 140,000 of the 350,000 new aerospace jobs added in California during the 1980s.

The UCLA Forecasting Project, perhaps the most frequently quoted local voice of “California declinism,” predicts the state could soon be hit by a deep-seated recession similar to the one it experienced in the early 1970s. Then, California lost 25% of its aerospace jobs, and total employment, as well as real-estate values, plummeted.

Such gloom and doom, barring a worldwide economic catastrophe, is unlikely. Since the late 1960s, California’s dependency on military spending has been cut in half, to roughly 8% of state product. Meantime, the commercial portion of the aerospace business--dead in the water during the 1970s--continues to grow. Last year, for instance, Boeing alone contracted some $3 billion in components from Southern California businesses.

Despite the military-related cutbacks, California--which in the 1980s created more new jobs than all of Western Europe--generated more than 400,000 net new jobs in 1989. Together, San Bernardino and Riverside put more people to work than the New York and Boston areas combined. Although industrial employment has been slipping, this may simply be an effect of the emerging national and global recession. In the coming decade, Robert Dye, director of state forecasting for the WEFA Group in Bala Cynwyd, Pa., predicts that “California will continue to outperform the United States in industrial output.”

Another favorite chant from the “California decliners” mantra is based on reports of a mass exodus of California companies to other states. True, some firms have relocated or expanded into such lower-cost states as Utah, Texas, Colorado, Oklahoma, even Baja California. This was the centerpiece of Forbes’ hit piece on the state, titled “California’s Fading Boom.”

This and similar articles, however, ignore a basic fact: the decreasing importance of corporate relocation decisions. Today, most new jobs--including in the critical manufacturing and high-tech sectors--are created by locally owned small firms.

A recent study by the Center for the New West of California and other Western metropolitan areas found that, during the late 1980s, locally owned firms generated all net manufacturing jobs and as many as 10 times many new jobs in such areas as business services.

Equally important--although some California companies will migrate in search of less expensive labor, cheaper land and fewer environmental restrictions--the state is unlikely to lose out in sectors like time-sensitive fashion and technological products.

Rather than a sign of decline, the shift of some assembly and lower-end functions to the hinterlands represents the continued expansion of the coastal California economy. In some senses, it parallels the shift earlier this century of assembly and mass-production industries from the Atlantic Coast to the Middle West and South.

This movement will cause dislocation for industries that are both labor-intensive and low value-added or pose severe pollution problems.

Value-added refers to the amount of cash added at each stage of the economic process. Low valued-added means that relatively little of the final cost of a product is added at a particular stage of the process. For instance, cables assembled for a General Dynamics aircraft at a plant in Mexico may represent a shift of jobs but very little of the final product’s total value. The effects in terms of pollution will be particularly severe in such industries as furniture, chemicals and certain metal-related manufacturing.

These losses can be offset with the growth of other more advanced industries. With more engineers and scientists than any other two states combined, for instance, California’s key growing industries--computer systems, software and telecommunications products--should continue to grow well into the next decade.

Paced by Orange County and Silicon Valley, for instance, the value of California’s export licenses surged, between 1987 and 1989, from roughly $30 billion to nearly $35 billion. During that time, exports in mid-Atlantic states dropped to $14.1 billion. U.S. television exports, mostly from Hollywood, will more than double by 1992, according to estimates from Frost and Sullivan, to nearly $3 billion annually.

Finally, as the industrial power of the region stretching from the Inland Empire of California to the Rockies--as well as Baja California--increases during the 1990s, Southern California and the San Francisco Bay Area will enjoy great opportunities in meeting its financial, international trade and other business-service needs. With the decline of the New York money-center banks, this is even more the case now than in the ‘80s, when California bank assets grew twice as quickly as those of their Gotham rivals.

But the pushers of “California declinism” don’t rest their predictions merely on economics.

UCLA’s School of Architecture and Urban Planning has been building the case for the idea of Los Angeles as the “capital of the Third World.” Here and in other parts of the state, there is a widespread impression that massive foreign immigration is being accompanied by a swelling exodus of middle-class whites to other states.

Belief in this scenario is widespread, if largely unspoken, in California’s elite ranks. One top official of the Southern California Association of Governments recently complained that most newcomers to his region were “uneducated Latinos” unsuited for our developing high-tech economy.

Immigration, particularly illegal, does pose long-term employment and social problems. But stories of a mass walkout are far off the mark.

In 1989, about as many people “immigrated” to the state from the rest of the country as from the rest of the planet. Among the leading net exporters of people were many of the states crowing loudest about the exodus of skilled professionals and businesses from California--including Minnesota, Texas, Colorado and Washington State. The latter sent three times as many emigrants here as Californians moved there. Utah, the state Fortune described as the best place for finding employees in America, sent almost 4,000 more people to California than vice versa.

California, then, still enjoys, nationally and abroad, widespread appeal as a place to live and work. Unfortunately, the state’s leadership, compared with past eras, lacks a common vision that could inspire California to tap its latent energies.

In the 1990s, California must go beyond the approach of the George Deukmejian years, when planning didn’t go much beyond building prisons and, whenever possible, expanding the executioner’s franchise.

Perhaps more than anything else, we need to return to the enlightened activism practiced by turn-of-the-century Republican Progressives and the Democratic administration of Edmund G. (Pat) Brown.

Instead of playing the politics of racial division and class warfare, these leaders focused on creating the transportation and education infrastructure that allowed previous generations of newcomers achieve their own dreams.

Rather than mimicking the deepening malaise of the East Coast, California should strive to recover the spirit that built it--”can-do” optimism. A revival of that spirit is our best hope of extending the California dream for the next generation.