Only a year ago many Californians thought they could sidestep the slump. As the rest of the country sank into recession, they counted on robust population growth and an enormous diversity of industries to pull them through. But now the state has been hit with a wallop that’s harder-and potentially longer lasting-than almost anywhere else in America. California’s economy now lags behind the nation’s for the first time since 1970. Nearly every sector-from high-tech Silicon Valley to downtown Los Angeles-is hurting; even Hollywood, contemplating another season of box-office duds, is singing the blues. Once prosperous bankers are driving cabs at Los Angeles airport. How-to books on filing for bankruptcy and making money are selling briskly. Coupled with California’s notoriously high costs and deteriorating quality of life, the recession has left the state as demoralized as a wiped-out surfer. As Los Angeles economist Jack Keyser puts it: “We don’t have one foot in the grave but we’ve got 10 toes hanging over the edge.”
Experts worry that what’s ailing California’s economy-which is larger than the economies of all but five countries in the world–is more than just a bad case of the business cycle. Many of its critical industries are undergoing fundamental shifts that may leave them permanently weakened. The aerospace-defense industry, which accounts for more than 8 percent of the state’s employment, has been devastated by military-spending cuts. Having already shed 72,000 jobs in the last three years, it could lose as many as 100,000 more. The state’s once powerful financial-services sector is also shrinking. Dozens of savings and loans have failed or merged. BankAmerica’s merger with Security Pacific will cost more than 10,000 jobs. Real estate is suffering, too: sales of existing homes have fallen to 1988 levels and office-vacancy rates are sky high. While the national unemployment rate edged down to 6.7 percent in September, California’s jobless number jumped from 7.3 to 7.7 percent.
Even Silicon Valley, the symbol of California’s entrepreneurial vigor, is reeling. The area has lost at least 17,500 jobs in three years. Stiff global competition makes a big turnaround unlikely even when the slump ends. Says Philip Kohlenberg of the state employment-development department: “We are faced with long-term decline and we don’t know where the bottom is.”
As if the job market weren’t bad enough, many companies are moving or expanding out of state, distressed by California’s high labor costs and heavy regulation. McDonnell Douglas said it didn’t even consider California as the site to build a new commercial airliner. The only people relishing California’s problems are in nearby states like Arizona, Nevada and Utah, which have mounted campaigns to woo away businesses. “Every company in California has an escape plan,” concedes Republican Gov. Pete Wilson.
Can California bounce back? It’s still a lot better off than New England. California can count on a healthy influx of 2,200 new citizens a day and enjoys an enviable position as an investment gateway to the booming Pacific Rim. But as state Treasurer Kathleen Brown says, “We can’t rely on our good looks anymore.” Palo Alto economist Stephen Levy argues the state must refocus its goals–downplaying low-cost manufacturing, for example, and playing to strengths like entertainment and foreign trade. Levy even dares to suggest that “If twice as many people left California, I’d say “Great’.” Once that would have been a heretical notion in the land of sunshine and opportunity, but today it captures the state’s new-more realistic-view of itself.
