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California’s Nattering Nabobs of Negativism


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Wow, I’m not feeling too good lately about what’s happening with the economy in California and its regions.

I was told a few months ago by the blue ribbon Los Angeles 2020 commission that LA was in danger of becoming a city in decline (see Jordan Levine’s recent blog post for a more in depth analysis of this report). As it turns out, this is the good news because UCLA claims it has already happened. They say in a recent report from the Anderson School of Management, Problems and Solutions for Los Angeles’ Economy: Human Capital, Public Education, Migration, that Los Angeles, along with Detroit and Cleveland, are the only major cities in the nation with fewer jobs in 2013 than in 1990. But don’t feel that bad, since according to another Anderson School researcher Los Angeles may just be like the San Joaquin Valley, which is in the midst of what he referred to as a “‘depression” in a recent op-ed in The Fresno Bee (“How To Lift The Valley’s Economy,” The Fresno Bee, February 5, 2014).

But then again, haven’t we asked for it? After all, California has consistently ranked as the most expensive place to do business on the west coast according to the Kosmont-Rose Cost of Doing Business Survey, which has been released annually for the past twenty years. The Tax Foundation ranks the state 48th for tax climate. Forbes puts it near the bottom on overall business friendliness. Maybe all this buzz explains why Neel Kashkari, state gubernatorial candidate, says California ranks 47th in jobs. No wonder Texas Governor Rick Perry keeps coming here to scoop up businesses and bring them back to his state with him—he may well be the Noah of jobs, saving industries two by two from the coming anti-business flood. He hasn’t swung by Beacon Economics’ offices yet, but we expect him at any time with a big check in hand. Austin here we come!

Then again, maybe not.

For all this negative “insight,” the reality is a bit different. Start with the basic fact that California’s labor market is actually doing pretty well. Job growth in the state last year was the 8th fastest in the nation, as clearly illustrated by the U.S. Bureau of Labor Analysis’s new job numbers, released last month in their annual benchmark revision. In absolute terms, the state added more jobs than any other except Texas. And this is on top of another couple of strong years, which means that the jobs gap that opened up between California and rest of the nation in the midst of the downturn has now been completely erased. In 2012, state output growth was the 6th fastest out of the 50 states, and by Beacon Economics’ calculations, California outperformed the nation handily in 2013 as well.

How does this jibe with Mr. Kashkari’s jobs’ ranking? Well, what he doesn’t mention is that this 47th ranking has to do with the net transfer of jobs in and out of the state between 1994 and 2008, according to numbers derived from the National Establishment Time Series (NETS) database. By those numbers, California saw 124,000 more jobs transfer out of the state than in. While this isn’t a good statistic, it isn’t terribly relevant either. California has the largest employment base in the nation, and as such this is less important than it would be for Delaware or Montana. More specifically, it means that California has lost about 8,800 jobs per year net to other states out of a workforce of roughly 14 million. This is smaller than the margin of error on the monthly jobs report, and of course dwarfed by jobs created in the state.

Some cynics have turned the corner and have finally had to acknowledge that California seems to be bouncing back nicely—yet they still critique the state for not growing as fast as North Dakota or Texas. Holding California up in comparison to two states supercharged by the new oil boom seems, at best, unfair. Why not compare it with the 42 states that are growing slower than California?

As for a “depression” in the San Joaquin Valley—well, this seems more than a little hyperbolic. If I asked you which regional economy in the state added the most jobs in percentage terms between 2007 and 2013 you would likely guess one of the two booming tech economies, San Jose or San Francisco. Wrong—it was Bakersfield, the anchor California’s Central Valley. Doesn’t sound like a depression to me. While some parts of the Central Valley continue to struggle, others are doing quite well. UCLA’s report similarly wrote off the Inland Empire—and that regional economy saw 3.5% growth in employment last year—well ahead of the statewide average of 2.6%.

This brings us back to poor, lowly Los Angeles, which can barely muster the growth of Cleveland or Detroit. Oy! Well again, the truth is not quite so dismal or dramatic. First, payroll employment is not the best measure of success in Southern California. This measure includes workers who commute into an area but misses residents who commute out to other locations for work. It also misses a large portion of employed workers who don't show up in the official payroll numbers, such as the self-employed. If we use household employment as the measure, it provides a much better read on the true health of a local economy.

How does Los Angeles rank then? The City is not only off the bottom, but doing much better than poor Detroit or Cleveland. From 1990 to 2013, those economies lost jobs by the household measure, while Los Angeles added jobs, about 5% from that initial baseline. But even here the numbers are a bit tricky. Remember that starting in 1990 Southern California was hammered by the collapse of the aerospace industry and massive declines in defense spending. Those structural changes at the start of the time period clearly distort the picture for Los Angeles—by a lot. And it begs the question: Why should the health and success of the City’s economy today be skewed by what happened over two decades ago? The honest answer is, it shouldn’t. And researchers who throw the numbers from that time around should know better.

What if we instead choose 1994 as the starting point, when the LA economy finally threw off the vestiges of that hit? Then the growth rate over the subsequent 20 years rises to about 15%, approximately the middle of the pack. And for the record, that is a tiny bit faster than San Francisco or Oakland, and just a fraction slower than New York City. I have yet to hear any of these cities being written off as irrelevant.

I’m not implying that all is fine in the state of California, nor am I being an apologist for the policy nonsense that comes out of Sacramento or various city halls. The state has many tremendous issues it needs to tackle in the short and long term. Some are self-created, such as the growing pension crisis and chronic lack of housing driven by abuses of the California Environmental Quality Act (CEQA) system. Others are out of the control of state policymakers, such as the massive inward migration of many low-skilled workers from Latin America that contributes to pulling down levels of income and raising the natural unemployment rate.

But other states have issues as well—even mighty Texas with its rapidly degrading environment, growing poverty, infrastructure problems, and, believe it or not, even a larger pension shortfall than California according to the bond rating agency Moody’s. And California enjoys enormous advantages from climate, to proximity to natural resources and beauty, not to mention some of the best schools and smartest entrepreneurs in the nation. There is a reason Rick Perry chooses to come to California to try and steal companies—because they’re here, not somewhere else.

Things can and should be better in California, and we should have real conversations about how to address the state’s problems.  We need real policy reforms, real tax reform, and real expenditure reform. But any real discussion has to begin on an honest footing, with a candid conversation about what is really happening in the state and local economies. Instead, headlines continue to be dominated by hype, hyperbole, and flat out nonsense.

Some might argue that you need to make extreme statements to get things accomplished in government—the squeaky wheel gets the grease. Perhaps. But we might also say that such rhetoric serves more to radicalize extremists on both sides and prevent the collaborative efforts that are so necessary in tackling these issues.

And the same tone of hysteria is used to drive bad policy as well as good. Take the issue of “desperately needed” Hollywood tax breaks to reverse a loss of film production in the state, despite the fact that California has not lost any employment share in the movie industry for well over a decade. How can you tell the difference between good and bad policies when everyone is misrepresenting the realities of what is happening?

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