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Spoils of War

California's economy could grab back old defense jobs in a new surge of military spending

August 08, 2004|Joel Kotkin | Joel Kotkin, a contributing editor to Opinion, is an Irvine fellow at the New America Foundation and the author of "The City: A Global History," to be published early next year.

The prime cause of California's steep economic downturn a decade ago -- defense spending -- could emerge as a major contributor to a new boom. With both presidential candidates committed to expanding intelligence, homeland security and military spending, the state stands to gain a large portion of the new federal outlays.

Already, the tide of military dollars flowing into California -- up about 44% since 2000, to nearly $30 billion last year -- has washed over a broad range of companies, from Northrop Grumman and TRW to scores of small suppliers. The surge in defense spending has been most felt in Southern California, with Los Angeles County as the second-leading recipient of the Pentagon's largess in the nation; San Diego and Orange counties rank among the top 15.

California's main advantage in attracting new defense dollars is the high-tech orientation of its existing defense industry. The state has a powerful presence in guided-missile technology, navigation equipment, electronic surveillance, radar-evading technology and unmanned aircraft -- critical components in a defense strategy that relies on a qualitative edge in the war on terrorism.

The end of the Cold War cost California a huge portion of its defense-related employment; as many as 150,000 jobs disappeared in the early 1990s. The losses were concentrated in traditional military manufacturing, most heavily in aircraft and related construction. The defense industry not only created high-paying science and engineering jobs, it also spawned many blue- and pink-collar positions in manufacturing and administration. In short, the defense industry significantly contributed to the expansion of the state's growing middle class.

There were other factors contributing to California's diminishing share of the defense budget, in particular the lack of a coordinated lobbying strategy by the state's divided political leaders. But the result is clear: The state's portion of military-related spending shrank from roughly 23% under President Reagan to barely 15% today.

Much of the heavily unionized defense-related employment of yesteryear will never return. Even when job growth picked up in the mid-1990s, much of it was in retail, light manufacturing and tourism, sectors that tend to pay low wages. As a result, the gap between the state's cadre of richly rewarded information-industry workers and everyone else widened. The prospects for well-paying blue-collar jobs have so diminished that as many as 20,000 people are expected to apply for about 3,000 such part-time positions this month at the Port of Los Angeles.

This is why the state's current opportunity to gain defense and homeland security contracts, and their higher-wage jobs, is so critical, especially when the stars of the late-1990s expansion -- computer software, entertainment, etc. -- have been hit by industry restructuring and foreign competition. Some entrepreneurs already have a newfound appreciation for the slower but steadier business offered by the Pentagon or the Department of Homeland Security.

Take E Team. Founded in 1998, the Woodland Hills company didn't have many customers for its Internet-based security systems until the last year or two. It is now a 40-person shop, up from 25 two years ago, and counts among its clients 10 states and several cities -- including Los Angeles and New York -- as well as the Athens Olympics.

"Sept. 11 was the defining moment for companies like ours," said Matt S. Walton III, founder of E Team. "When you get involved in this kind of business, it takes time to get going, but there are a lot of opportunities to make money over the longer term."

The defense and homeland security boom also could stimulate the state's long-suffering industrial sector, which has lost 250,000 jobs since 2000, largely because of increased outsourcing to China and a severe decline in civilian aircraft orders. In contrast to the computer and apparel sectors, defense work is largely insulated from foreign competition.

The state's technological base may be the main beneficiary of the new defense spending. Overall, California is responsible for about 20% of the nation's high-tech output; more defense contracts would increase the state's share.

In the wild days of the late-1990s dot-com boom, many pundits and venture capitalists believed that a combination of capital, entrepreneurial moxie and research at elite universities would sustain the state's technological supremacy. Largely overlooked was the less glamorous truth that much of California's high-tech reputation flowed from defense investments made during the Cold War. The origins of such industries as wireless communications, semiconductors, lightweight and bullet-resistant materials and, most critical, the Internet can be traced to the Defense Department or NASA.

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