Golden State may be blinded by its luster

California slipping in rate of growth and in job creation

Joel Kotkin

Sunday, February 25, 2007

For much of the past century, California has often seen itself -- and been seen by others -- as America's avant-garde state. John Gunther, writing in his famous "Inside USA" in 1946, gushingly described it as "the most spectacular and most diversified American state ... so ripe, golden." Recently, Gov. Arnold Schwarzenegger compared California to "the ancient city-states of Rome and Sparta," praising it as "the harmonious, the prosperous state, the cutting-edge state."

Perhaps it's time to ditch the celebratory rhetoric and take a closer look at the sober realities. Our magnificent state may still be the home to Silicon Valley, Hollywood, the nation's largest port complex and the world's richest agricultural valleys, but by many critical measurements the state is slipping.

The most obvious signs are economic. Although far from moribund, the state may not be as fundamentally strong as its boosters, including the governor, suggest. The state rate of GDP growth over the past decade has been strong, ranking fourth in the nation, but California has been losing ground in the new millennium. In 2004-05, it fell to 17th, behind not only fast-growing Arizona and Nevada but also Oregon, Washington and rival "nation-state" Texas.

Job creation has been even less impressive. In the Bay Area and Los Angeles, it can only be considered mediocre or worse. If not for the strong performance of the interior counties of the state -- what Bill Frey and I call the "Third California" -- the state already would be rightly considered a laggard when it comes to creating employment.

More disturbing, as California's population has grown -- largely from immigration -- per-capita income growth has weakened. From the 1930s to as late as the 1980s, Californians generally got richer faster than other Americans. In 1946, Gunther reported, Californians enjoyed the highest living standards and the third-highest per-capita income in the country.

Today, California ranks 12th in per-capita income. And it's losing ground: Between 1999 and 2004, California's per-capita income growth ranked a miserable 40th among the states.

This slow growth reflects a gradually widening chasm between social classes. Although the rest of the country has also experienced this trend, the gap between rich and poor has expanded more rapidly in California than in the rest of the country.

Today, notes a recent study by the Public Policy Institute of California, California has the 15th-highest rate of poverty of all American states. When cost of living adjustments are made, only New York and the District of Columbia fare worse. Tragically, many of California's poor are working. Somehow, this does not seem the best road to the governor's dream of a "harmonious" society.

How did this happen to our golden state? There are many causes.

Certainly poverty has been greatly exacerbated by huge waves of immigration, particularly from Mexico and other developing countries. But other states -- including Texas and Arizona -- have also absorbed many immigrants, as well as people from the rest of this country, and have not experienced similarly strong jumps in their poverty rates.

Changes in the economy are clearly suspect. From the 1930s to the 1980s, California created a broad spectrum of opportunities for white- and blue-collar workers alike. Even the 1990s expansion, suggests Debbie Reed of the policy institute, helped reduce poverty by expanding a wide range of employment opportunities.

Today, economic growth in California -- like that in much of the Northeast -- seems tilted largely toward elites. Once a state known for its relative social democracy, the Golden State is becoming what Citigroup strategist Ajay Kapur has dubbed a plutonomy, dominated largely by a small wealthy class and their spending.

For example, despite all the hype about the renewed Internet boom in Silicon Valley, there has been only modest expansion of employment, even in the past year. Undoubtedly lavish takings by a relative handful of engineers, managers and investors are boosting high-end restaurateurs in San Francisco and revving up BMW sales, but benefits don't seem to accrue as much to assemblers, midlevel managers and other high-tech workers.

Similarly, the governor's entertainment industry friends, as well as art and developer elites close to Mayors Antonio Villaraigosa and Gavin Newsom, may feel these are the best of times. But Los Angeles and San Francisco, along with Monterey, now suffer a poverty rate of more than 20 percent, among the highest level in the country.

Parallel to these developments, California is losing its once broad middle class, the traditional source of its political ballast and much of its entrepreneurial genius. Outmigration from the state is growing and, contrary to the notions of some sophisticates, it's not just the rubes and roughhouses who are leaving.

Indeed, an analysis of the most recent migration numbers shows a disturbing trend: an increasing out-migration of educated people from California's largest metropolitan areas. Back in the 1990s, this was mostly a Los Angeles phenomena, but since 2000, the Bay Area appears to be suffering a high per-capita outflow of educated people.

A look at data from the 2004-05 American community survey, these emigrants include many workers in technology, arts, finance, science, management, high-end sales and medicine -- the creative class. Perhaps the only saving grace is that some migrants are still staying in California, largely in the Sacramento and Inland Empire regions.

This middle class flight is likely driven by two things: greater opportunities outside the state and the cost of housing in-state. Over the past 50 years, housing prices in coastal California in particular have grown much faster than elsewhere; the Bay Area's rate of housing inflation over the past 50 years has been twice the national average.

Given the shrinking per-capita income advantage for being in California, moving elsewhere increasingly makes sense, particularly for those who do not already own homes and don't have wealthy parents. In some parts of the state, barely 10 percent of households can now afford a median-price home; in the rest of the country that number is roughly 50 percent.

Taken together, these trends suggest that California could be devolving toward an unappealing model of class stratification. As educated white-collar and skilled blue-collar workers leave, businesses in the state will be forced to truncate their operations -- perhaps having an elite research lab, design office or marketing arm in California but shunting most midlevel jobs elsewhere.

Remarkably, neither political party seems to have a clue about any of this. David Crane, Schwarzenegger's economic adviser, seems to think the state can make do by concentrating on the highest value-added work. He seems untroubled that more mundane jobs go elsewhere. That may make sense if you are a venture capitalist, dot-com wiz or movie producer, but it's not so great if you are an electronics technician, customer support employee or movie grip.

Doctrinaire Republicans don't have many answers, either. Some like to blame immigration, which may well be diminishing, for virtually all our problems. But singling out immigration is like howling at the moon: The immigrants are already here and most will stay. Sure, we should control the borders, but for the foreseeable future the newcomers, and more importantly their children, will shape our future, like it or not.

Beyond bashing immigrants, the only clear priority for the right seems to be keeping property taxes low for their core home-owning constituency. Any shift in Proposition 13 -- like even slightly revising its profound generational bias toward older Anglos -- is off limits. So we are stuck with a dysfunctional system that benefits the already affluent and encourages local governments to pursue sales-tax-inducing big-box development over plans for new housing or industrial construction.

The Democrats, for the most part, are positively harebrained. Over the past decade, their support for a corrupt workers' compensation system certainly helped drive potential expansions and relocations to other states. Their economic program of redistribution and regulatory excess has hurt small business and the middle class while benefiting favored constituencies such as trial lawyers, politically connected developers and public employees.

Yet for all its problems, California still possesses the means to retool and grow its economy. One step would be to invest much more in its basic infrastructure -- the recent bond measures for transportation and levees, while welcome, are woefully inadequate. A particular priority should be to make trading with other countries easier and faster so that critical employment does not migrate to Houston or the Hampton Roads area of Virginia, which now have our lucrative global business in their sights.

We also must reform our education system so that businesses can find the workers they need here. The fanciful notion that all California youth should go to four-year colleges should be scrapped for a targeted vocational project that can allow many of them to find better futures as plumbers, technicians, welders and machinists -- respectable professions that offer a realistic chance of a middle-class life and socially beneficial employment.

At the same time, housing for middle-income people can be stimulated by reducing the onerous regulations and fees on builders that drive prices ever upward.

Most of all, to regain its promise, California needs to stop stroking itself and reverse course. A state that's great for a relative handful of moguls -- no matter how enlightened -- and their servants cannot serve as the national model for anything but decadence and decline.

Joel Kotkin is an Irvine senior fellow at the New America Foundation. He is the author of "The City: A Global History" and is working on a book on the American future. Contact us at insight@sfchronicle.com.

http://sfgate.com/cgi-bin/article.cgi?f=/chronicle/archive/2007/02/25/ING0BO934F1.DTL

This article appeared on page E - 1 of the San Francisco Chronicle