West of Eden: California's Economic Fall

Article excerpt

Economic catastrophe has struck California with the violence of an earthquake. For decades, California has been the most socially and economically dynamic state in the nation and one of the entrepreneurial capitals of the world. It truly has been America's Golden State - the El Dorado with its beaches and mountains, its sunshine, its majestic forests, its fountain of eternal economic opportunity. In the 1980s, California outperformed even the booming national economy.

The gold rush is over. California recently has been buffeted by natural and social disasters drought, fires, flooding, earthquakes, riots - and by a recession that has hit California harder than any other state in the nation. With 12 percent of America's population, California has accounted for one-third of the total national job loss.

California often has led the nation out of recessions. Now, the collapse of the country's most enterprising economy is holding back the national recovery. All forecasts call for California to underperform the national economy in the 1990s, with employment and income declining through 1995. California's crisis has revealed a state government with out-of-control spending and burdensome bureaucracy, with even worse news to come in the next few years if changes are not made. Meanwhile, despite a steady flow of foreign immigrants, California is experiencing net domestic outmigration (more people leaving for other states than arriving from them) for one of the few times in its history. In 1988, 100,000 people moved to California from other states; this year, nearly 100,000 may leave.

Economic Fault Lines

Fault lines in the California economy were cracking open beneath the surface of the 1980s boom. Government regulation increased rapidly, taxes crept back up to their ruinous levels before the Proposition 13 property-tax revolt of 1978, and rapid spending growth left the state budget vulnerable in a recession. Although the California economy was booming, per-capita income growth was actually lagging behind the national rate.

As early as 1983, then-chairman of Hughes Aircraft, Allen Puckett, criticized California for being anti-growth and declared that Hughes no longer would invest in new plants in California. Hughes kept its word throughout the rest of the 1980s, but with a growing economy, a high rate of new business formation, and vigorous job growth, it didn't seem to matter if or why businesses moved or expanded out of state. This attitude of invincibility persisted through the beginning of the national recession in the second half of 1990. When Forbes published a cover story about California's deteriorating business climate in October 1990 - "Is the Golden State Losing It?" - the article was greeted with a flurry of dismissive criticism by the local media.

State government joined in the miscalculation. In fall 1990, the Commission on State Finance, which makes independent economic and employment projections, predicted that California would experience a loss of 30,000 to 40,000 jobs in the coming year. By fall 1991, the number of jobs lost already had passed 300,000, and had not yet reached the half-way mark. The projected state budget "shortfall" for the fiscal year beginning on July 1, 1991, which was thought to be $7 billion in January, quickly grew to $10 billion in February, $12 billion in late March, and finally to more than $14 billion the following May. Budgets for 1992-1993 and the coming fiscal year are each more than $10 billion in the hole.

The causes of California's collapse, and whether some of them could have been avoided, are debatable. Almost everyone agrees that California's economic "bio-rhythms," so to speak, were all out of synch at once: a general recession, a cyclical real estate slump, a decline in foreign, especially Japanese, investment, and steep defense cuts.

California enjoyed a bigger real estate and construction boom than the rest of the country in the 1980s, and it has suffered from a bigger bust, as overbuilding in commercial real estate led to the savings and loan crisis and credit crunch. …