Dan Walters examines the obvious in today's Sac Bee, pointing out that the economic forecasts for California are becoming dire:

Consider, for example, this dark, but perhaps realistic, projection by University of California, Santa Barbara, economists:

"The … economy will likely continue to decline for another two years, perhaps longer. We expect the number of California jobs … economic output … retail sales (and) tourism revenues will fall throughout the forecast horizon. There is no measure of economic strength that provides even a glimmer of hope for California's economy in the near term, none."

The UC Santa Barbara forecast has California's unemployment rate, now over 10 percent, nearing 14 percent by next year, which means another half-million workers would join the jobless ranks.

The UCSB forecast (for which I'm unable to find a link, unfortunately) jibes with what leading economic observers like Nouriel Roubini are saying - that we will see a recession into 2010 and then a slow recovery from there.

All of that begs the question, of course, of exactly what's supposed to drive that recovery. If we look back at the last three recoveries, we can see a pattern of dependence on one or two sectors of the economy to produce a boom, but little long-term planning beyond that:

1980s recovery: Driven mostly by defense spending (especially in Southern California, a major beneficiary of the Reagan arms race boom) and, later in the decade, by a housing bubble. High tech began to make its presence felt later in the decade in the Silicon Valley. All of this masked the effect of the beginning of neglect of basic government services, including schools, which began in the immediate aftermath of Prop 13's passage in 1978.

Core weaknesses: Defense spending and housing boom were both unsustainable. When Cold War ended in 1989, which was perhaps coincidentally the peak of the '80s housing boom, CA's economy had no real safety net to avoid a recession. Much of this was fueled by debt, but at far smaller levels that what we have seen recently. Economy began shifting away from manufacturing.

1990s recovery: The 1980s boom turned into a particularly nasty bust by 1991-92, with unemployment in Southern California pushing 10%. This recovery was led primarily by the high tech sector, which spread throughout the Bay Area and into Southern California (former defense industry workers turned out to be very good at high tech). Tax increases at the outset of the decade helped support this growth by arresting the decline of the UC and CSU system into unaffordability and loss of quality, sending a steady stream of qualified workers into the high tech field. Additionally, CA became a center of the deregulated financial industry. Housing did not actually become a major part of this boom until much later in the cycle.

Core weaknesses: High tech work could be easily outsourced. The manufacturing decline that began in the '80s accelerated in the early '90s recession. Late '90s spike in tax revenues led politicians to recklessly cut taxes to unsustainably low levels, endangering the state's ability to recover from the next crisis. By decade's end housing was becoming a larger part of the economy, and much of this was based on sprawl dependent on debt and cheap oil.

2000s recovery: Based almost wholly on housing and deregulated financial products - and on a pile of debt. Soaring cost of UC/CSU led to exacerbation of a generation of inequality - high cost of higher ed combined with fewer high-wage job options limited upward mobility of millions. Government recovery was anemic at best. Health care costs began to spiral out of control, as did housing costs. Often known as a "jobless recovery".

Core weaknesses: Required endless supply of debt and cheap oil to sustain what little growth there was. When cheap oil vanished after 2005 entire economy was imperiled. Erosion of government and safety net meant that next recession would not only be nasty, brutish, and long but that government would not be in a strong position to lead recovery.

As you can see, the recoveries of the '80s and the '00s were fundamentally weak, whereas the '90s recovery had somewhat of a stronger base but was susceptible to underlying problems (free trade, anti-tax policies, loss of manufacturing base, increasing tendency toward dependence on sprawl and housing markets to produce consumer spending). And I haven't even mentioned the enormous environmental costs of these recoveries, which should further suggest the undesirability of repeating any of these models.

Ultimately the problem was that at no time in the last 30 years did California plan for the future. Each recovery just sort of happened, partly by federal design and partly due to state laws, from Prop 13 to land use, favoring sprawl. Each recovery was dependent on debt in one form or another, and each recovery failed to fix the long-term decline in government resources (although the '90s recovery began to address this before Pete Wilson and Tom McClintock got their hands on the till).

What this means is that California needs, desperately, to start thinking about how it can produce long-term sustainable growth and not just try and inflate a fourth bubble or a recovery whose bases are fundamentally weak. Over the flip I propose some elements of what this strategy might look like.   Read More »