For California, the ‘90s Will Be Nothing to Fear

A single paragraph in a gloomy report on California’s economic outlook, by analyst George Salem of Prudential Securities, inadvertently predicts a boom:

“California, especially Los Angeles, has been to the 1980s and 1990s what New York was to immigrants in the early 20th Century: The No. 1 destination of all immigrants to the United States.”

New York in the early 20th Century had an awesome future before it. And so does California today. With immigration, California’s population will continue to grow twice as fast as the rest of the United States. The state will be one of the few growth markets for the ‘90s.

To be sure, that feeling is not widespread these days, as views of California--such as Time magazine’s recent cover--see the state as a faded movie star.

Nor can such comments be dismissed as the work of envious outsiders. Such eminent Californians as the Los Angeles Chamber of Commerce, Southern California Edison and the Business Forecasting Project at UCLA have worried for more than a year about the state’s rising unemployment, falling real estate prices and bureaucratic business regulation.

Where Time, Prudential and others get California wrong, however, is when they talk about dreams. “California grew out of Los Angeles, with its Hollywood image full of dreams and fantasies,” one report says.

No it didn’t. California grew out of Mexican land barons, gold rush speculators, railroad capitalists and immigrant laborers, financiers who made deals for water and poor migrants from the Oklahoma dust bowl and the Mexican highlands.

And it will grow, as will America.

But the 1990s will see a special kind of growth, a renewal of historic U.S. productivity gains. The economy will go through a many-sided change, and confusion is inevitable. But understanding is possible.

Productivity, a big word meaning output per unit of economic input, will translate in the ‘90s to wringing more crops from less water, more sales per worker and dollar of investment, more houses per acre of land, more educated students per school.

This is not a local problem. For more than 100 years U.S. productivity grew 2.5% on average; California and Japan grew slightly faster. And from that seemingly slight gain came all our prosperity.

But since 1973, productivity growth has averaged 1% a year or less. And the slowdown has resulted in stalled income growth for most Americans, bitter arguments over rich versus poor and now a lingering recession.

The ‘90s will turn that around. That’s why business investment next year will be up 5% as companies try to boost productivity in a time of falling prices and profits.

Government, too, will invest. Congress just passed a six-year, $151-billion transport bill--$10.5 billion for California--that will boost highway and mass transit construction.

Big news locally will come from another kind of spending on infrastructure. In response to new laws mandating cleaner air and cleaner fuels, oil and other industries will spend tens of billions of dollars in this decade to re-equip plants. Lodwrick Cook, the chairman of Atlantic Richfield Co., said last week that reformulating gasoline will be the most significant expenditure for the oil industry since the removal of tetraethyl lead 20 years ago. Arco is budgeting $700 million for its Los Angeles refinery alone.

That will mean jobs in construction and engineering, and increased sales of sophisticated machinery. Initially, however, such environmental spending will be classed as a cost, a hindrance to productivity.

“The government is going to experiment with accounting methods that show environmental improvement,” says economist Lynn Reaser of First Interstate Bancorp. Meanwhile, the economy will be stronger than statistics show.

So don’t be over-impressed with statistics--even in real estate where the numbers are frightening.

Commercial rents in downtown Los Angeles are falling 50%, promising a fall in values and loan problems for banks. But understand how the commercial game works: At some stage, big investors will see opportunities in such buildings. Meanwhile, in new growth areas around Southern California, commercial property is faring better.

In housing, prices in many areas have fallen 10% to 15% in the past two years. And they’re going lower, “at least 25% from the 1989 highs,” says Edward Abbott, head of Western Pacific Capital, a San Francisco investment company that is investing in Texas.

Meanwhile less attention has been paid to pent-up demand for housing among working people. As The Times Business Section reports today, home builders in the Antelope Valley are working overtime to build $80,000 starter homes. The pattern is repeated elsewhere in outlying areas.

Nationally, housing starts will have to double this decade to accommodate 2 million first-time buyers a year. In Houston, which went through years of housing deflation, demand for single-family homes is causing a vacancy of building lots.

What has happened in Houston and is happening in California is that prices of urban land have come down so movement and home building can resume; so a more productive economy can resume.

That’s not looking at the economy through rose-colored glasses but with the perspective of history. The clue is in recalling New York in the early 20th Century, crowding up with immigrants from Italy and Ireland, Poland and Russia--and from the Caribbean and American South. Today Los Angeles is refuge to multitudes from Latin America and Asia, the Mideast and Soviet Union--from the Caribbean and American South.

They come for menial work and the promise that America will give their children education and a better life.

Keep that promise, and California’s future will be awesome.