Two California Economies Head In Different Directions

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On Monday a judge ruled that Stockton, Ca. could enter bankruptcy. The city of 291,000 counts among its woes hundreds of millions of dollars in retirement promises it hasn't funded and hasn't been able to afford since a steep economic decline began several years ago. Today, unemployment in the Stockton metro area is a daunting 15.5 percent, which doesn't do much for the local tax base.

But Stockton is not alone among California cities. Of the 372 metro areas nationwide whose joblessness the Bureau of Labor Statistics tracks, 12 of the 20 with the highest unemployment rates are in California, including Fresno (16 percent), Modesto (15.6 percent) and Salinas (14.3 percent). Californian Joel Kotkin described the gloom in some of these areas in a City Journal article in which a local observer branded the district around greater Fresno as, "California's Detroit, an area where workers and businesspeople are fast becoming a more endangered species than Chinook salmon or delta smelt."

Then, however, there are places like greater San Francisco, San Jose in Silicon Valley, Napa, and San Diego to the south, where unemployment levels are more in line with national levels and where job growth has revived. These are places fed by the state's university system, generating high-tech, high-wage jobs in the global economy for the well-educated. No wonder incomes are well above the national average in counties like Santa Clara, San Francisco, and Marin. And no wonder with assets like this California is home to perhaps the eighth largest economy in the world.

These two very different versions of the Golden State are now the nexus of much debate about where California is headed. In January Gov. Jerry Brown, fresh off a tax increase handed him by voters, offered the state a balanced budget and proclaimed that California was back. New York Times columnist Paul Krugman earlier this week decreed the California fiscal and economic model sound despite carping by the state's critics. By contrast, Art Laffer and Steve Moore, writing in the Wall Street Journal last week, offered the state as an example of the high-tax, highly regulated approach that's losing jobs and investment to more business-friendly places like Texas.

Both Californias offer enough examples to help one make either the case for a resurgent state, or for decline. But the real point may be that of divergence. A jobs engine that once drove many sub-economies in America's most economically diverse state is now providing winners again, but there are still deeply troubled losers. And this is not just an artifact of the recent downturn and the sluggish recovery. It's been going on for more than a decade, as demographer Wendell Cox demonstrated in a 2011 study tracking the state's job dynamics. In that study, Cox noted that when you compared jobs in California generated by start-ups to those lost to firms failing, California stopped creating a net of new entrepreneurial jobs in 2000. By contrast, California had produced a net gain of three-quarters of a million jobs from start-ups, when contrasted with business failures, throughout the 1990s.

Still, the presence of high wage jobs and highly visible industries, including Hollywood, make a place like Los Angeles feel vibrant. And the latest iteration of the IPhone or the IPad coming out of Cupertino will add to the glow of the state's tech industries, just as the unique combination of technology, weather and soil make the state an agricultural powerhouse.

But can these places pull the rest of the state along, or are they are war with it? Today, argues California native Victor Davis Hanson, "Many of the state's political problems result from a bifurcation between the populous coastal strip from San Diego to San Francisco, where the affluent make state policy, and the vast, much poorer interior, from Sacramento to San Bernardino, where policy dreams about immigration, agriculture, public education, and resource use become nightmares in practice." That divide may be one reason why, in the last two Census counts, California has done a 180-degree demographic turn from a place where Americans migrate to, on the one hand, to one of the biggest exporters of people to other states, behind only New York in net outmigration.

New York may be an apt comparison to California. The state that preceded California as the nation's economic engine began to decline more than half a century ago when jobs started exiting to more competitive states. New York officials, notably from the Rockefeller administration, were quick in the mid-1960s to dismiss the exodus and to proclaim that the state would always be the country's industrial capital. Although the warnings of critics seemed to come true when New York City faced bankruptcy in the mid-1970s, three successive Wall Street booms, led by junk bonds in the 1980s, tech stocks in the 1990s, and mortgage securities in the last decade, fed the greater New York City economy and nourished the state budget.

Meanwhile, another New York developed somewhere starting about 50 miles north of Gotham. Today, far from Manhattan's luxury high rises, much of New York is a shadow of its former self. Despite talk of rich Wall Street bonuses, wages in 52 of New York's counties are below the national average. Fourteen counties have fewer people today than in 1970. Places like Binghamton, Buffalo, Elmira, Syracuse and Kingston have a smaller private employment sector than 25 years ago. Gubernatorial candidate Eliot Spitzer in 2006 compared portions of upstate New York to Appalachia.

In New York, much of the state's decline outside of greater New York City is hidden in plain view. These areas are not media centers and not home to cool, hip creative types who are part of the global economy. They get attention every four years during elections, and then seem forgotten.

The woes of California's Central Valley, or its Inland Empire, where unemployment is about 12 percent, are similarly often obscured by the hotter, more appealing economies of places like Silicon Valley. It's not surprising that the state's two big municipal bankruptcies right now, in Stockton and San Bernardino, are located in the valley and the empire.

It's clear where the policy initiatives come from in both states. Though California and New York have ample energy resources buried beneath the surface, each state has declined to pursue them, in the process missing out on the energy-led revival in blue-collar jobs we have seen in places like Texas, North Dakota, West Virginia and Pennsylvania. One recent study by the University of Southern California schools of engineering and public policy estimated that tapping California's Monterey Shale, which stretches from Modesto in the north to south of Los Angeles, could generate more than 2 million jobs in California. Much of untapped potential is in places being left behind by the budding California recovery, like Stanislaus and Merced counties.

California is big enough and geographically diverse enough to generate a revival that still leaves behind whole swathes of the state. The state may already be there.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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