State’s Economy Booming Again--but It’s Different

Dramatic evidence that California’s economy has both recovered from its harrowing recession and undergone profound change came last week in robust job figures and news that the state treasury is overflowing with tax receipts from individuals and small businesses making good money.

The state added more than 450,000 jobs in the past 12 months, as California’s unemployment rate sank to 6.5% last month--its lowest level since 1990. That was a time when defense jobs were still plentiful and home prices were still rising.

Then came the worst recession in the state’s history, 500,000 jobs lost, the state treasury subsisting on IOUs to the banks, people and businesses leaving California and experts from afar predicting that the once-golden state would never shine again.

Yet now all is changed. The California economy is back and it is a different economy, as was clear from the most revealing, instructive news of last week--the surge of tax receipts into the state treasury.

The state Department of Finance, in releasing a revised budget as it does every May, disclosed that “extremely strong growth in personal income tax revenues” had lifted tax receipts almost $1 billion ahead of expectations for the current fiscal year. And more than $1 billion in added revenues is projected for fiscal 1997-98, which begins July 1.

Take note: Individuals, not big corporations, are the source of the tax windfall. Individuals paying taxes on stock option and bonus income, on profits in business partnerships and small companies, and on investment gains in the stock market accounted for the billion-dollar surge.

That reflects the new industries that make California once again the U.S. leader in job creation. And it reflects a new pattern--innovative and yet risky at the same time--for this or any other economy.

High technology, entertainment, business services, the so-called “information industries” are now the economy’s mainstay.

“Growth in high-technology sectors, including electronic components, computers, software, motion pictures and biotechnology has more than offset [job] losses resulting from defense cuts,” the finance department reported.

To be sure, the recovery is not restricted to advanced industries. Jobs in apparel trades are growing 4% a year and similar job growth is occurring in warehousing and transportation relating to the state’s booming foreign trade.

But the unprecedented number of high-income workers paying taxes on bonuses and stock options was sufficient to push the state budget into a surplus, giving Gov. Pete Wilson the opportunity to fund extra programs in education and child care.

And California’s pattern is reflected in the national economy. “The federal government has just received $25 billion more than anticipated in taxes,” said economist Ted Gibson of the state finance department. “That’s why the federal budget is suddenly so easy to balance.”

The implications are profound. In place of an economy dominated by large corporations and contracts from the federal government, California has become an economy of entrepreneurial companies connected to world markets. It is an economy increasingly based on innovation--a fast-paced economy, demanding of skills.

But it is also filled with risk, a volatile economy subject to sudden reversals. For example, Hewlett-Packard, the Palo Alto-based world-leading company in computers and technical instruments, said Thursday that sales of computers and printers are slowing down.

Partly as a result of that simple announcement, stock markets swooned Friday. And Californians are all connected to that stock market now. A prolonged decline would directly affect the bonuses, stock options and capital gains that have produced the state’s budget surplus.

Sacramento is aware of the risk. The Department of Finance “has warned the Legislature of the economy’s volatility,” Gibson said.

The volatility undoubtedly plays a role in widespread fears about the new economy--the unease expressed in the frequently asked question: Can this last?

It’s a good question. Can an economy based on innovation long endure? The answer is yes, given the new economy’s broad base of industry and its links to world markets. But we need to understand the challenges as well as the bright prospects.

First of all, we should understand that the past was, if anything, more unstable than the present.

“The only times California has lagged national job growth occurred during two defense downturns, in 1971-73 as Vietnam wound down and in the early ‘90s after the fall of the Berlin Wall,” said economist Tom Lieser of the UCLA Business Forecasting Project.

With the old dependence on Pentagon budgets, California had dramatic downturns and recoveries--the money spigot would be turned on in Washington and immediately there would be large-scale hiring in California. Home prices often surged, before turning down sharply in the ‘90s recession.

Today, even though the economy is gaining, real estate presents a mixed picture. In Northern California, home prices are rising strongly. In most of Los Angeles and Orange counties, prices are picking up at a modest 3% annual rate. In the vast San Fernando Valley, home prices have “bottomed,” said Fred Sands, head of a major Los Angeles real estate firm.

Typically, the new economy exhibits few large-scale hiring efforts or real estate surges, but is more broadly based. Information industry covers 11 categories in the U.S. standard industry codes, from electronic components to computer software. California leads in them all.

And the state leads in new industries, such as Internet communications, in which new jobs are being created at a ferocious pace. Cisco Systems, a San Jose-based leading supplier of computer communications components and services, is hiring 700 employees a month. It’s a company, like so many in the Silicon Valley, that gives stock options to all employees--options that in turn have produced the surprising growth in state tax receipts.

The state’s link to world markets also strengthens its economy. The entertainment industry is producing films, television programs and music recordings at a historic pace to meet worldwide demand.

Universal Studios said last week that it will double its production and distribution of movies to 40 or more per year for the next three years because of global demand. To finance such an expansion, Universal plans partnerships with overseas investors.

California leads in providing engineering, consulting, graduate business school education and other services to the rising economies of Asia and Latin America.

In a word, the state’s principal product is brainpower, whether in biotechnology or computers or films or business services.

And that is why the challenge of the new economy is centered so much on education. In California today, 60% of the jobs require community college or university training. In the 1970s, only 30% of the jobs did.

The demand for educated employees challenges the state to improve elementary and secondary education. And the fact that booming foreign trade is creating low-wage jobs and attracting immigrants from everywhere challenges the state to deal with resulting social problems.

Yet, challenges to provide education for good-paying jobs and to spend a budget surplus wisely are problems of prosperity.

“California’s economy is in the midst of a strong expansion,” Wilson declared Friday. Because it results from a new and changed economy, the expansion was not anticipated. And because of that, this expansion could be more lasting than many booms of old.