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Michael Hiltzik / GOLDEN STATE

We're No. 5 -- but Who Cares?

September 25, 2003|Michael Hiltzik

Among the most commonly repeated catchphrases of this or any other political season is the one about California's having the world's fifth-biggest economy.

Often the ranking is cited as a matter of pride: This is not Rhode Island we're talking about here, or even Belgium. It's the great state of California, the world's fifth-biggest.... You get the idea.

A superlative like this always goes over great on the stump or as a sound bite on CNN or Fox News Channel. It conveys not only grandeur but also the aura of certainty that surrounds any hard-number ranking (the 10 best pizza joints in L.A., the top 25 college football teams, the 100 most powerful people in Hollywood).

In California's case, it also has been a convenient cudgel with which to beat the state's incumbent caretakers over the head, as in: "The world's fifth-largest economy deserves to be run more professionally than that bozo in the governor's office can manage."

But what isn't widely understood is that there are a few problems with ranking California in comparison with sovereign nations such as, to name the leading four, the United States, Japan, Germany and Britain.

The main problem can be summed up in the phrase: Sez who?

It turns out that no official agency produces an authoritative, up-to-date statistical series covering both countries and sub-national jurisdictions, the way the World Bank or the Department of Commerce produce surveys of gross domestic product, allowing worldwide comparisons at national levels.

The Commerce Department issues an annual survey of gross state products, but its figures generally run several years behind the calendar; in fact, its Bureau of Economic Analysis got around to issuing the statistics for 2001 only this summer. Even then, such data are useful mainly for comparing states with other states. (Here, California is ranked No. 1 by a comfortable margin.)

State-level statistics, in particular, are pieced together by federal government analysts out of a slop bucket of extrapolations.

Gross personal income, for example, is arrived at by taking the percentage of federal income tax revenue coming from each state and applying it to the figure for personal income nationwide. If 13% of the IRS' take comes from California taxpayers, in other words, the Commerce Department will simply assign California 13% of nationwide personal income -- a most imprecise measure. This, in turn, becomes a component of gross state product.

Economists also note that there's no reliable way to adjust state-level figures for interstate trade, which isn't a factor in national GDP but could have measurable effects on state numbers.

"All of that is guessed at," says Ted Gibson, the former chief economist for the Department of Finance in Sacramento, who took a few swings at generating more accurate statewide statistics during his tenure.

A region's cost of living also can skew the rankings: Housing and other expenses in San Francisco and Los Angeles, which run 15% to 25% higher than in the country as a whole, make California's economy look bigger than it would if it were possible to adjust for that factor.

The result is what Gibson calls "a spurious statistic": California's international ranking.

It's interesting to note that the earliest attempts to place California's economy in a global context were made by the state's big regional banks, which used such figures largely as marketing tools.

"At Security Pacific we had a gimmick where we used to draw a 60-mile circle around City Hall and say that there was an economy inside there bigger than India's," recalls Tom Leiser, now senior economist at the UCLA Anderson Forecast. (For those with short memories, Security Pacific National Bank was a major regional force that, after a 1992 merger, ended up as a crumb on the bottom lip of Bank of America.)

Despite these flaws, California's international ranking is treated by politicians and the media as though it has all the precision of an engineering specification at Boeing. If it wavers, people demand to know why.

Thus, when the Los Angeles County Economic Development Corp. concluded last year that California had dropped from a global fifth to sixth (mostly because of currency fluctuations), that "caused a rumpus in Sacramento," recalls the agency's chief economist, Jack Kyser.

"A certain elected official had been saying that California had grown to fifth because of his inspired leadership," Kyser says, cagily.

The Davis administration hinted that Kyser's group had miscalculated, but he stuck to his guns. For the record, he suggests that China's strong economic growth may soon drop California to seventh, surely dooming whoever is governor at that moment to public obloquy.

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