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SPECIAL REPORT : The State of California : California's PRESENT : The Foolish Trend That Started on the East Coast : Economy: Hand-wringers and crystal-ballers have embraced California declinism. But their favorite evidence is really a healthy sign of a state moving to cut its dependency on war.

December 30, 1990|Joel Kotkin | Joel Kotkin is an international fellow at the Pepperdine University School of Business and Management and a senior fellow at the Center for the New West in Denver

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.

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