How California Can Weather the Economic Slowdown

The slowing national economy threatens California’s budding recovery. This time, a drastically more aggressive and positive response will be required if the state is to escape a downturn of its own.

Although some indicators, including the stock market, remain relatively bouyant, there are numerous signs of an impending slowdown. This Christmas’ retail sales were the worst since the last recession and, with consumer confidence at its lowest level in nearly two years, there is little prospect of a quick turnaround. Such consumer doubts are further exacerbated by continuing corporate mergers and layoffs, including big downsizings announced by AT&T; and Apple Computer. And last week’s government report that gross domestic product grew an anemic 0.9% in the 4th quarter--and 2.1% for the year--indicates the economy is gearing down.

Speaking before a congressional committee last week, Federal Reserve Chairman Alan Greenspan put the odds of a near-term recession at below 50-50, though that risk is heightened by the “soft patch” the national economy has now hit. David Hensley, regional economist for Salomon Bros., says that although California is continuing to show some strength, a “regional recession story” can already be put together for some states, particularly in the Northeast, and that dramatic slowing is also occurring in such previously growing regions as the Intermountain West.

California’s dependence on this national economy may be less appreciated than it should be, because Californians are accustomed to seeing themselves as unique. But the resurgence of the state’s high-technology companies has largely been powered by a wave of capital-equipment purchases by businesses across the Sierra. Automotive producers, for example, now spend as much or more on semiconductors and other high-tech equipment as steel or rubber.

California’s agricultural, tourist, entertainment and business-service providers also sell to customers in Salt Lake City, New York City and Boston. Apparel and textile makers in Los Angeles--the nation’s leading garment center--already feel the chill of the spreading slowdown.

When recession struck the rest of the country in the early 1990s, California was still living off the fumes of its enormous ‘80s boom. Little, if anything, was done to tune up the state’s economic machine. The state’s politicians didn’t pass budgets in a timely manner, failed to reform the workers’ compensation system and fiddled with divisive racial politics. The result was an economic, social and political meltdown that nearly extinguished the state’s ability to bounce back.

The good news is that California’s private sector, at least, appears to have learned something from the last recession. Companies once heavily dependent on defense spending--from giants like TRW, Hughes and Rockwell to hundreds of smaller companies--have either established or enlarged share in such markets as satellites, modem chips, automotive parts and commercial aviation. The defense-related component of California manufacturing is now under 10%, compared with about 17% in 1990.

Large and small companies, meanwhile, have successfully put down roots in global markets. California is home to a majority of the nation’s fastest-growing exporting companies, according to World Trade Magazine.

California also has more links than ever to trade and capital flows in the Pacific Basin, which, with Europe seemingly headed into recession, may prove critical to the state’s future growth. Los Angeles-Long Beach now ranks, behind Hong Kong and Singapore, as the world’s third-largest container port; no other port in North America ranks in the top 10.

Another key benefit: Chinese diaspora investors, now the world’s richest, are buying up hotels, offices and buildings throughout the state, often from distressed Japanese buyers. “To the Asians, this isn’t a very expensive market,” says Fred Cordova, a Pasadena developer who has sold several Pomona-area industrial sites to Taiwan- and Hong Kong-based companies.

Even local real-estate interests, finally regaining some ballast after the dramatic fall in prices, are investing in new warehouses, research and development, and factory space rather than in speculative office buildings. Some owners, especially those around the Marina, have offered bargain rates to multimedia, special-effects and other businesses with long-term growth potential.

Unfortunately, the increasing resiliency of the private sector is not matched by the development of a more long-term economic perspective in the public sector. Among Republicans, whose ideas on tort reform and business taxes are worthy of attention, there has been a dramatic shift toward enacting a destructive social agenda. Such ambition is counterproductive in a state whose greatest challenge lies in creating a common purpose among a highly diverse population. Furthermore, the Republicans, in their anti-government fervor, have paid too little attention to the state’s aging infrastructure and the obstacles it presents to continuing economic growth.

The needs of California’s burgeoning new economy seem to have escaped most Democrats. In part, this is because they have been overly reliant on Washington for answers. Still, they correctly identify the need to reinvest heavily in the state’s schools and infrastructure. But because most Democrats remain committed to healthy public employee unions, they continue to be associated with expensive government programs. With California bureaucrats, on average, now earning nearly one-third more than those who pay for their services--the third largest such gap in the nation--it’s not surprising that the public is unenthusiastic about handing over more money to government, even for worthy causes like rebuilding the infrastructure.

If the California economy is to weather a national slowdown, new public works must be funded but with a willingness to try more innovative approaches. The state’s private sector has vast experience in finding ways of coping with such challenges. Many companies, particularly in technology and entertainment, have relied on independent contractors when necessary, freeing them up to concentrate on their core products.

A pragmatic blending of public and private resources in inventory management, payroll and some security tasks could help save money while boosting the capacity of government workers to perform their jobs. Rather than focus on scoring ideological points or preserving layers of management, government, like business, should not maintain its own, usually lower, standards of efficiency for basic functions.

In this sense, government needs to undergo the kind of thoroughgoing self-review that the private sector has worked through over the past decade. Unnecessary layers of government should be shed, irrespective of union interests or political connections. At the same time, critical services--particularly in the area of public safety and transportation--should be thoroughly modernized.

Nowhere is the need to learn from the private sector more critical than in the case of education. In the business world, if a system such as public education in the inner city were failing, new entrants would be encouraged to enter the marketplace. In education, this could mean private-school vouchers for poor students, more charter schools and greater competition among public schools for achieving students.

Ultimately, the public must demand a more business-like and pragmatic approach from its elected officials. Utility, not ideology, should be the basis of government policy. Only by adhering to that standard--what is good for California’s long-term interests--can the state prepare itself for the coming slowdown and even deeper downturns that lie on the road ahead.