A recent, well-publicized report on the Los Angeles economy paints a relatively dire future picture of the City, and in part, of the Los Angeles County region as a whole. Produced by the Los Angeles 2020 Commission, the report, A Time For Truth, suggests that short of major changes in local economic and fiscal policies, the City and County of Los Angeles, will face tough times and slow growth in the future. This stands in contrast to Beacon Economics’ forecast, which shows the area growing at a decent pace over the next few years.
While the outlooks may differ, our understanding of the underlying issues at play in Los Angeles is much more closely aligned. Many of the issues raised in the 2020 report are, unfortunately for residents and businesses, very valid concerns. The report is incomplete, however, and the next step is to identify actionable policies that can help the area overcome its many challenges.
As Beacon Economics’ forecast is more positive, our view of the past is also more nuanced and upbeat. This interpretation of historical data suggests a more positive direction for the future. Ultimately, we know the City and County of Los Angeles have had their problems, but have muddled through, or to quote the Commission’s report:
"Like the hapless Mr. Micawber in Dickens’ “David Copperfield,” our wishful response to continued economic decline and impending fiscal crisis has become a habitual: “Something, my dear Copperfield, will turn up.”
Here and there things have turned up. And they will continue to. But think how much better it could be if we worked to remove some of the basic barriers to growth in the region.
Data related to the evolution of the Los Angeles regional labor market are some of the first pieces of evidence the Commission’s report points to as symptoms of problems in Los Angeles. For example, after brushing through two potential assets in the area, the Commission’s report notes that the entire region suffers from weak job creation, citing a higher unemployment rate and the fact that nonfarm employment was lower in 2010 than it was in 1990. While each of these facts is true, both omit important parts story. Their analysis focuses on a snapshot of two isolated moments in time: 1990 and 2010. Unfortunately, 1990 was virtually the height of the job market—and right before the Los Angeles region went into a deep recession following the end of the Cold War and subsequent pullback in aerospace and defense spending that had been a large segment of the local economy up to that point. At the same time, the Commission’s analysis chooses to use 2010 as its endpoint for jobs—the year that nonfarm employment was at its lowest point in the deepest recession the United States has experienced since the Great Depression.
So does the analytic weakness of comparing these two points in time mean we shouldn’t be concerned that we have fewer jobs today than we had in 1990? Absolutely not. Changes following the pullback of Cold War related spending and other economic contractions have been extremely tough on the Los Angeles economy, on individuals, and on businesses that had to fundamentally transform themselves or relocate in search of other opportunities. However, there are important traits of the local labor market that a static comparison like this misses.
The Commission’s report states that “From 1980 to 2010, LA added one million new residents but lost more than 165,000 jobs…” which implies that employment in Los Angeles has been in consistent decline for the better part of 35 years. In reality, Los Angeles employment has been growing over the past 3+ decades (albeit at a slower pace than desired), but has been punctuated by three major downturns. One was structural and related to defense, second was the collapse of the tech bubble, and third was the most recent recession triggered by the collapse of the subprime mortgage market. Compared with economies like Houston or Atlanta, which were relatively unaffected by two of these three recessions, Los Angeles should be much worse off than it is. Moreover, that Los Angeles was affected by these downturns disproportionately is not a direct indictment of the local economic environment, regulations, or tax policy. City and County leaders had little control over the loss of defense, or the rise and subsequent collapse of the tech and housing bubbles.
Perhaps more importantly, the Commission’s report focuses almost exclusively on nonfarm employment—the survey measure of formal payroll employment at firms located in Los Angeles County. The household survey, which measures the employment of residents—even if they are self-employed, independent contractors, and informal workers—shows that the local labor market fared much better than the nonfarm numbers indicate. In fact, the household employment figures show that Los Angeles County had 148,000 (+3.4%) more jobs at the end of 2013 than it had at the beginning of 1990.
Why the divergence in outcomes between these two major surveys? There are a number of reasons. First, with the rise in modern technology, the internet, and telecommunication, many occupations that used to be filled by formal permanent hires are being filled by consultants and independent contractors; second, workers who were adversely affected by the cyclical fluctuations of past recessions and faced difficulty finding formal employment, have become self-employed; and third, workers in the informal and household services sectors have increased their share of the labor force. This does not imply that focusing on the household survey radically changes the rankings, as the other areas including Houston, Atlanta, Miami, Chicago, New York, and San Francisco were all farther along by the end of 2013. However, it does rebuff the notion that Los Angeles has been in a long-term downward trend.
It isn’t just labor market data that indicate Los Angeles is not going over a cliff, it’s also the local population. One point the Commission’s report mentions, but glosses over relatively quickly, is that the population of both the City and County of Los Angeles has continued to expand over the past three decades—hardly a sign of a region that is slowly rotting. Between 1980 and 2010, the U.S. Census Bureau reports that the population in the City of Los Angeles expanded by more than 825,000 residents, while the population in Detroit—a city that has actually been experiencing a long-term downward trend—declined by nearly 500,000 residents. The broader Los Angeles County region expanded by more than 2.5 million residents during the same time, with just over one-third of that increase occurring in the City of Los Angeles, according to California Department of Finance estimates.
While it’s true that there has been a wave of out-migration by domestic residents in more recent years, and that this has been occurring across the whole of Los Angeles County, Los Angeles also continues to attract new residents from all over the world, with almost 115,000 people immigrating to the Los Angeles County area in the past three years. In addition, much of the out-migration is motivated by the region’s high housing costs, rather than by regulations or taxes. Housing costs are something that city and county officials can only affect indirectly through affordable housing policies, rent controls, and a cheaper and more streamlined permitting process. Unless of course they can find a way to reduce both the cost of land and the strict regulatory environment that affects development across the entire state.
This does not imply that we should ignore the cost of housing, or leave our local regulations, taxes, and permitting procedures alone, but it is important to recognize what is within the control of local leaders and what is not. High housing costs are in some ways reflective of the desirability of the local area. It is arguable that no matter what we do to our permitting processes or how much we reform CEQA or other regulations, homes in Los Angeles will never be as cheap as they are in Houston or other parts of the country. The beaches, idyllic climate, close proximity to virtually every type of recreational activity, and the pool of highly skilled workers who flow out of the many world class educational institutions in the region each year do not come cheap.
It is also important to note that despite its problems, the City and County of Los Angeles continue to serve as a hub for business activity in the state. For example, since the mid-1990s, the City of Los Angeles has consistently accounted for between 29% and 30% of all taxable business and consumer spending in the Los Angeles County region, while the County has hovered between 23% and 25% of taxable sales throughout the state. In addition, firms based in Los Angeles County have attracted more than $2.6 billion in new venture capital funding since 2010. Relatively advanced industries such as Software, Media and Entertainment, Retailing Distribution, Consumer Products and Services, Industrial Energy, IT Services, and Biotechnology are a few of the top performers. Importantly, more than one-third of this investment went to firms developing early-stage technologies and another one-third went to finance firms in the expansion stage. At least from the perspective of venture capitalists, firms located in Los Angeles County are not on their way out.
Los Angeles is also a hot-spot for tourist activity and a desirable place to visit in the eyes of many travelers from around the nation and the globe. Hotels in Los Angeles County are amongst the busiest in the nation, with occupancy rates hitting 75.7% in the fourth quarter of 2013. That is second only to San Francisco in the state, and is well ahead of the average occupancy rate nationwide (61.5%). In addition, nearly 38% of all airport passenger traffic in the state flowed through LAX last year. Not only should this help to prevent local tourism-oriented businesses from heading for the hills, but sales taxes generated by restaurants and hotels in the region contributed more than $141 million to City and County sales tax revenues last year.
Clearly, Los Angeles has its issues. While the 2020 Commission’s report overstates or confuses many of the issues that the City and broader region face, it is also clear that we are neither the fastest growing nor the most “business friendly” place around. Still, it is important to understand the root causes of why we‘ve lagged in the past if we hope to create a brighter future. Many of the forces that have affected employment growth in Los Angeles were outside of local control, though we’ve also managed our share of self-inflicted wounds.
Ultimately, Los Angeles still has many assets that it can leverage for future growth, including tourism, a skilled workforce, access to overseas markets through our ports and airports, and an idyllic climate. Housing is still too expensive, and perhaps poses the greatest threat to the local economic climate. And, while City and County leaders can make some modest improvements on this front through various policy measures, much of it comes down to state regulations (CEQA) and the general desirability and premium people place on living near the coast.
Valid Concerns, But Let’s Treat Causes Not Symptoms
Despite concerns about the overall tenor of the report, the 2020 Commission does raise valid points about the threats facing the City and the entire Los Angeles County area. Chief amongst these are the relatively high levels of poverty and rising inequality. Excessive poverty and inequality are becoming greater concerns for communities across the state and the nation. They destabilize our social and political regime, and can lead to a downward spiral where the situation is exacerbated. Yet even here, it is important to understand the underlying causes of these trends. Much of the difficulty stems from the relatively unaffordable housing market. Upper income earners in the region can still manage to afford a good quality of life in Los Angeles and the lowest income earners get help from various forms of social assistance. For everyone else, the high price tag that comes with living in Los Angeles has become difficult to stomach.
In some ways, this runs counter to conventional wisdom. For example, the out-migration from Los Angeles is often attributed to lackluster job growth. However, this view is not supported by the data. In fact, when you look at the largest beneficiary of outbound domestic migration in recent years, it is the Inland Empire—an economy that is growing even more slowly than that of Los Angeles. If jobs were the sole or even the primary motivator of outbound migration, you’d expect places like San Jose and San Francisco to pick up a disproportional share. However, the largest proportion of former Los Angeles County residents are moving to a region with fewer jobs and that is growing more slowly. This suggests that there are other, more important, forces at play. These outbound migrants can save between 50% and 60% of what they would spend to purchase a home in Los Angeles County (where the median price is in excess of $420,000). It is clear that high home prices are a strong financial incentive for outbound migration.
This is an important distinction because the two alternative viewpoints come with very different policy implications. Under the assumption that job growth is the key, the correct policy response is to do anything that might help bolster employment growth. However, if weak job growth and outbound migration is a symptom of housing costs that are too high, a campaign that succeeds in boosting employment can still fail to stem the tide of outbound migration because it is not addressing the root cause. At Beacon Economics, housing costs, and the permitting processes and difficult regulations that underlie them, represent one of the largest threats to future growth not only in Los Angeles, but across California.
The Commission’s report also cites the lack of new infrastructure investment as a negative for the entire regional economy. Beacon Economics agrees, however, it again comes down to “why.” Are City and County leaders unmotivated to enhance critical infrastructure? Do we believe that there is simply nothing wrong with our current economic environment? Is there apathy amongst local policymakers about traffic and other quality of life concerns? No. In fact, many local leaders have been pursuing critical infrastructure upgrades for many years without success. LAX is a prime example. The airport serves as a key hub for passengers from across the state, nation, and world, providing access, not just to Los Angeles, but to all of Southern California.
That the airport needs modernization and expansion is largely uncontested, and yet it is residents, not policymakers who have blocked those very efforts. The same is true with other large public infrastructure projects, where resident groups or individual communities and cities reject projects that might benefit the entire region. In other words, improvements to assets that service an entire region are often beholden to narrow, local considerations. And, while there should always be a cost-benefit debate amongst all parties involved in any large-scale project, it is misguided to think that there is a “magic bullet” at the local level that can dramatically alter the process and pave the way for a new wave of infrastructure projects.