A LOS ANGELES TIMES - FINANCIAL TIMES SPECIAL REPORT : The Next California--The State’s Economy in the Year 2000 : ESSAY : The state’s basic business is brainpower. And with that, it will lead the West in an era of new growth.

One of the more perplexing aspects of California is its sense of impermanence, the fear inside the state that its economy will dry up and blow away. Then there is the smug belief--indeed, the green-eyed hope--in the rest of the country that prosperous California will go into long-term decline.

The truth is very different. California’s economy is not only big--it’s the seventh- or eighth-largest in the world, with almost $900 billion a year in total output. It is a driving force of the whole U.S. economy, and the anchor of a fast-growing Western regional economy.

That reality has been hidden in recent years because California has suffered as its neighbors prospered. The economies of Arizona, Nevada, Utah, Oregon, Colorado, Idaho and New Mexico have grown rapidly, in part on investment from companies leaving the Golden State or locating factories outside California.

Some 840,000 jobs were created in those Western states between 1991 and ‘94, compared to 220,000 jobs lost in California, reports Arizona State University.

Thus the question arises whether California’s economy is a supernova--a dying star giving off particles to seed fresh growth elsewhere--or a lodestar, an inspiration for other economies.

Despite myriad problems and challenges, the answer is mostly lodestar. “The West today is experiencing a historic process first seen in the United States in the 1820s, when New York extended a commercial canal to Lake Erie, and Baltimore started building a railroad to Ohio,” says Kevin Starr, California’s official state historian.

California is spawning warehouses in Nevada and semiconductor plants in Arizona, Utah and the Oregon forests. But these are adjuncts to California industry, not replacements for it. Regional growth is complementary, not the result of a contest.

Right now, in fact, the outflow of people and companies from California has slowed, as have job losses inside the state. The outlook is for California’s recovery to continue, with the other Western states adjusting to their giant neighbor.

That’s the sense in which population and job growth projections should be seen. In the next decade, California will grow to 38 million people, a population growth rate 50% faster than that of the United States.

Its work force, numbering 20 million, will also be younger on average than that of the United States as a whole. Thus a pickup in home-building compared to recent recessionary years is a certainty. California once again will be a growth market.

That’s the sense too in which the emerging multimedia industries should be seen. California is more firmly than ever the headquarters for both the computing and motion picture industries, the hardware and software of science and storytelling that now compose one-fourth or more of the U.S. economy.

“Silicon Valley is the future hub of American industry,” says Craig Johnson, founder of Venture Law Group in Menlo Park, one of the cities in that high-tech “valley” south of San Francisco.

It’s no idle boast. California contains more producers of electronics, software, computer networking, biotechnology and all around advanced scientific goods and services than any other state. Its basic business is brainpower, a commodity undercounted in government statistics but at the heart of every industry today.

“The four pillars of California industry are high tech, entertainment, tourism and trade,” says economist Stephen Levy, director of the Center for the Continuing Study of the California Economy, a Palo Alto think tank.

California has the busiest U.S. port--Los Angeles-Long Beach--through which passes almost half the goods the United States imports from Asia and a comparable proportion of the goods it exports there.

Legal, financial and professional services follow in the wake of such merchandise trade, as does California’s world-leading engineering industry. Designs for electric power plants in Asia are drawn up on computers in Irvine and sent 14,000 miles at the click of a mouse.

And California has been fostering brainpower industry in neighboring states that only yesterday were victims of the uncertainties of oil production, silver mining and other natural resource businesses.

Now networks of skilled industries are growing in the West; Phoenix and Albuquerque manufacture microprocessors designed in Santa Clara.

But if the future is so bright, why is the present so fretful?

One reason is that the economic emergence of California is so new and its recession so sudden. Decades of explosive growth began with the end of World War II and slowed down with a screech of brakes at the end of the Cold War in 1989.

Defense spending in California fell precipitously from more than $60 billion in 1988 to roughly $35 billion at present.

The adjustments have been wrenching. Defense employment declined from almost 400,000 to under 150,000. Tax receipts declined, but government didn’t adjust quickly enough. A governmental structure designed to dispense services and regulate business in a time of abundant resources hung on in a time of straitened finances.

And so a public finance crisis has occurred, with state and local governments grabbing for tax payments and haphazardly closing down services and facilities.

Problems common to all massive economies, from bureaucratic drag to traffic congestion, air pollution and crime, have dented California’s once-dominant optimism.

But setbacks can bring maturity. Today in California, a state that takes citizen participation seriously, public discussion groups are meeting in every city to map out reforms for the government in Sacramento.

One noted Californian, economist Arthur Laffer--who contributed a theory of tax cuts and government income called the Laffer Curve to the presidency of Ronald Reagan--would stimulate the state’s economy by taking a sharp shears to its government. “A flat tax proposal on the ballot would win in a landslide,” says Laffer, now a partner in Laffer Canto, an investment management firm in La Jolla.

Meanwhile, the state should shortly come out of its economic doldrums, predicts David Hensley, an economist with Salomon Bros. in New York who used to follow the state’s economy for UCLA’s forecasting project. “California’s job growth is recovering, and its overall economy will get back to the national growth rate of about 2.5% next year,” he says.

“But then there will be a spurt in 1997 when California will grow at more than 4%, leading the nation once again--for a while at least,” he adds.

The time of hand-wringing is ending in California. The outlook now turns to a newly growing economy peopled by ambitious recent immigrants and their offspring, an economy almost as large as that of Britain or Italy but with more industries of the future than either.

Leading the Western states in a linked economy of abundant skills and brainpower, California, once seen as the far edge of a vast continent, is set to become the new industrial heartland.

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Reality Check: Jobs

Opportunity: Led by the professional and technology fields, California will gain 3 million new jobs by 2005, placing it above the national norm for new-job creation.

Obstacle: But, through 1997, California’s jobless rate will be at least two percentage points higher than the national average because job growth in the state is not yet rapid enough to replace jobs lost to the recession.