The Long Stall: CA’s jobs engine broke down well before the financial crisis

Everybody knows that California’s economy has struggled mightily since the 2008 financial crisis and subsequent recession. The state’s current unemployment rate, 12.1 percent, is a full 3 percentage points above the national rate. Liberal pundits and politicians tend to blame this dismal performance entirely on the Great Recession; as Jerry Brown put it while campaigning (successfully) for governor last year, “I’ve seen recessions. They come, they go. California always comes back.”

But a study commissioned by City Journal using the National Establishment Time Series database, which has tracked job creation and migration from 1992 through 2008 (so far) in a way that government statistics can’t, reveals the disturbing truth. California’s economy during the second half of that period—2000 through 2008—was far less vibrant and diverse than it had been during the first. Well before the crisis struck, then, the Golden State was setting itself up for a big fall.

One of the starkest signs of California’s malaise during the first decade of the twenty-first century was its changing job dynamics. Even before the downturn, California had stopped attracting new business investment, whether from within the state or from without.

Economists usually see business start-ups as the most important long-term source of job growth, and California has long had a reputation for nurturing new companies—most famously, in Silicon Valley. As Chart 1 shows, however, this dynamism utterly vanished in the 2000s. From 1992 to 2000, California saw a net gain of 776,500 jobs from start-ups and closures; that is, the state added that many more jobs from start-ups than it lost to closures. But during the first eight years of the new millennium, California had a net loss of 262,200 jobs from start-ups and closures. The difference between the two periods is an astounding 1 million net jobs.

Between 2000 and 2008, California also suffered net job losses of 79,600 to the migration of businesses among states—worse than the net 73,800 jobs that it lost from 1992 through 2000. The leading destination was Texas, with Oregon and North Carolina running second and third (see Chart 2). California managed to add jobs only through the expansion of existing businesses, and even that was at a considerably lower rate than before.

Another dark sign, largely unnoticed at the time: California’s major cities became invalids in the 2000s. Los Angeles and the San Francisco Bay Area had been the engines of California’s economic growth for at least a century. Since World War II, the L.A. metropolitan area, which includes Orange County, has added more people than all but two states (apart from California): Florida and Texas. The Bay Area, which includes the San Francisco and the San Jose metro areas, has been the core of American job growth in information technology and financial services, with San Jose’s Silicon Valley serving as the world’s incubator of information-age technology. During the 1992–2000 period, the L.A. and San Francisco Bay areas added more than 1.1 million new jobs—about half the entire state total. But between 2000 and 2008, as Chart 3 indicates, California’s two big metro areas produced fewer than 70,000 new jobs—a nearly 95 percent drop and a mere 6 percent of job creation in the state. This was a collapse of historic proportions.

Not only did California in the 2000s suffer anemic job growth; the new jobs paid substantially less than before. Chart 4 reveals the sad reversal. From 2000 to 2008, California had a net job loss of more than 270,000 in industries with an average wage higher than the private-sector state average. That marked a turnaround of nearly 1.2 million net jobs from the 1992–2000 period, when 908,900 net jobs were created in above-average-wage industries. Further, during the earlier period, more than 707,000 net jobs were created in the very highest-wage industries—those paying over 150 percent of the private-sector average.

Chart 5, which indicates job growth or decline in selected industries, again suggests that a lopsided amount of California’s economic growth in the 2000s was in below-average-wage fields. It included nearly 590,000 net jobs in “administration and support”—clerical and janitorial jobs, for example, as well as positions in temporary-help services, travel agencies, telemarketing and telephone call centers, and so on. The largest losses in the state during the 2000s were in manufacturing, which traditionally provided above-average wages. After adding a net 64,900 manufacturing jobs from 1992 to 2000, California hemorrhaged a net 403,800 from 2000 to 2008. But information jobs also went into negative territory, while professional, scientific, and technical-services employment experienced far lower growth than in the previous decade.

The chart also shows that California’s growth in the 2000s, such as it was, took place disproportionately in sectors that rode the housing bubble. In fact, 35 percent of the net new jobs in the state were created in construction and real estate. All those jobs have vaporized since 2008, according to Bureau of Labor Statistics data. They are unlikely to come back any time soon.

These are troubling numbers. Fewer jobs and lower wages do not a robust economy make. A continuation of this trend, even if California’s recession-battered condition improves, would result in a far more unequal economy, shrunken tax revenues, and a likely increase in state public assistance—all at a time when officials are struggling with massive deficits.

 

 

 

A final indicator of California’s growing economic weakness during the 2000–2008 period is that the average size of firms headquartered in the state shrank dramatically. As Chart 6 shows, California had a huge increase over the 1992–2000 period in the number of jobs added by companies employing just a single person or between two and nine people, even as larger firms cut hundreds of thousands of jobs. Many of the single-employee companies may simply be struggling consultancies: if they were doing better, they’d likely have to start hiring at least a few people. While start-ups are indeed crucial to economic growth, small companies are especially vulnerable to economic downturns and often feel the brunt of taxes and regulations more acutely than larger firms do. The awful job numbers for the bigger companies—including a net loss of nearly 450,000 positions for firms with 500 or more employees—suggest the toxicity of California’s business climate. After all, bigger firms have the resources to settle and expand in other locales; in the 2000s, they clearly wanted nothing to do with the Golden State.

What is behind California’s shocking decline—its snuffed-out start-ups, unproductive big cities, poorer jobs, and tinier, weaker, or fleeing companies—during the 2000–2008 period? Steven Malanga’s “Cali to Business: Get Out!” identifies the major villains: suffocating regulations, inflated business taxes and fees, a lawsuit-friendly legal environment, and a political class uninterested in business concerns, if not downright hostile to them. One could add to this list the state’s extraordinarily high cost of living, with housing prices particularly onerous, having skyrocketed in the major metropolitan areas before the downturn—thanks, the research suggests, to overzealous land-use regulation.

One thing is for sure: California will never regain its previous prosperity if it leaves these problems unaddressed. Its profound economic woes aren’t just the result of the Great Recession.

Wendell Cox is the principal of Demographia, a public policy consultancy. This article was first posted in City Journal. City Journal thanks the Hertog/Simon Fund for Policy Analysis for its generous support of this issue’s California jobs package.

Legal Reform = Job Creation

We all agree that the number one priority in this state and nation should be job creation. However, it seems like some people are more focused on spending money than saving money, at the expense of job creation.

A new study published by the U.S. Chamber Institute for Legal Reform called Creating Conditions for Economic Growth: The Role of the Legal Environment sheds some light on how the high cost of tort systems in the United States is raising the cost of doing business and hurting job creation. This study is based on a data set of state liability costs never before made available to public policy researchers, which provides an excellent basis for a reliable state-by-state comparison of costs.

I have often cited the Pacific Research Institute’s U.S. Tort Liability Study, which stated that just one tort reform in California would create 141,000 jobs. This study, looking at updated data, concludes the same thing: improvements in states with the costliest legal environments could increase employment between 1% and 2.8%. In California, that could mean more than a quarter million jobs.

Will this latest study simply be placed on a bookshelf with all the other studies and rankings or will someone (in the Legislature or Governor’s office) clue in and get it? We need to make legal reform part of California’s jobs package and thoroughly examine our regulations so we can get California back on track.

It is pretty clear that if we want people to invest or expand businesses in our state, we need to make the business climate more inviting. Right now, it is fair to say (and many CEOs agree) California’s business climate is among the worst in the nation. Legal and regulatory reform will create a positive business climate where investors will come and build.

Are you listening California? Legal reform = Jobs. Don’t just take my word for it – there are plenty of materials you can read to back it up.

(Tom Scott is the Executive Director for California Citizens Against Lawsuit Abuse.  This article was first featured in Fox & Hounds.)

AT&T, T-Mobile USA Merger Means Jobs

From CA Majority Report:

California’s dismal economic outlook has squelched many job opportunities, including those that would allow employees to organize and demand better conditions. With the jobless rate hovering somewhere around 12% since 2009, one of the highest in the country, nearly two million Californians are looking for work, but are unable to find jobs. On the street, most visibly in the Occupy Wall Street movement, you can sense the frustration.

Californians are impatient with the state of the economy – and afraid that the future may not bring better circumstances.

During the worst economic downturn in a generation, it’s our job to make sure no opportunity to create new jobs and protect existing jobs is left on the table.

(Read Full Article)

U.S. economy added 80,000 jobs in October, fewer than expected

From the LA Times:

The nation’s economy continued to grow sluggishly in October, adding just 80,000 jobs as concerns about the future weighed on employers and consumers, curtailing both hiring and spending. 

The unemployment rate dipped slightly, to 9.0% from 9.1% the month before, and the government revised upwards employment figures from both August and September. But the economy still isn’t creating the 125,000 jobs a month economists say are needed to bring down the unemployment rate.

“Employers are riding a turtle when we were hoping they’d get on a Thoroughbred,” said Patrick O’Keefe, a former assistant secretary at the Department of Labor who is now director of economic research at accounting firm J.H. Cohn.

(Read Full Article)

Don’t Let Rural Jobs in CA become Extinct

If a tree can’t be cut down on rural property because of unjustified federal rules, and no one’s around to hear the owner’s frustrated grumbles, do they make a sound?

The question occurred when I read the headline on a magazine item about the regulatory manacles imposed on landowners by the U.S. Endangered Species Act: “Boring but important”

It’s true that the minutiae of environmental restrictions on farms, forests and undeveloped land is not the sexiest of subjects, even for many conservative/libertarian activists who are passionate about opposing the advance of big government.

But attention needs to be paid. If we want California to become a land of promise again, we need to liberate not just the over-encumbered entrepreneur, the overburdened employer, and the overtaxed working men and women in our cities and suburbs, but also the enterprises rooted in the soil — the forestry, agriculture, timber and land-development industries that were the foundation of the state’s prosperity from the beginning.

- Item: Record snowfalls blanketed the Sierras this year — but farmers in the agricultural Central Valley were still squeezed on water supplies for much of the winter.

The reason: federal “fish before people” policies under the Endangered Species Act. Over the past two years, a misguided scheme to revive a declining three-inch fish, the Delta smelt, caused draconian cutbacks in pumping from the Sacramento-San Joaquin Delta into the San Joaquin Valley and Southern California. Hundreds of thousands of farm acres were fallowed and thousands of jobs went down the drain.

Although the media now tell us “the water crisis is over,” that’s only half right. If the drought of snow and rain has ended (for now), the regulatory crisis continues. In explaining why water users still aren’t getting their full allocations, the California Department of Water Resources fingers the feds: a May 2 DWR press release said that a 100% allocation is “difficult to achieve even in wet years due to pumping restrictions” for ESA-protected fish.

Those regulations flow from “sloppy science,” Fresno-based Federal Judge Oliver Wanger found. No wonder that the smelt population has continued to evaporate. All that was achieved was to turn green fields brown in one of the most fertile agricultural regions in the world and a historic backbone of California’s economy. Look for more of the same in future dry years, if the feds’ don’t flush their scorched-earth formula for fish protection.

Item: In 2006, a federally commissioned study concluded that the valley elderberry longhorn beetle no longer needed ESA coverage, and land-use limits could be lifted on private property up and down Central California, from Redding to Bakersfield. Five years later, the feds still haven’t acted; the beetle remains designated as “threatened” – flouting their own scientific findings.

The victims include businessman and environmentalist Bob Slobe, who wants to put up a small, environmentally sensitive office park in Sacramento County. His land has been labeled “critical habitat” for the beetle, so he can’t disturb a bush or tree without paying a massive sum for “mitigation.”

Slobe spends his time and resources shooing away and cleaning up after transients who camp on the land that he’s forbidden from putting to productive use.

The beetle regulations also bug flood-control agencies. They can’t easily fix or build levees where elderberry bushes are present. Levee improvements in Yuba County were delayed for months last year, and the current cost to mitigate for one bush along a Sacramento levy exceeds $160,000.

Says Rep. Dan Lungren: “There is no failure to thrive on the part of the beetle, only a failure to act on the part of [federal officials]. We could not afford it five years ago, and we certainly cannot afford it now.”

Item: Federal officials insist on keeping the California gnatcatcher on the ESA protected status – even though the small, insect-eating bird can be shown to be part of a species that flourishes in Mexico.

The listing ropes off nearly 200,000 acres in San Diego, Orange, Riverside, San Bernardino, Los Angeles, and Ventura Counties. The Fish and Wildlife Service admits that the economic hit from these restrictions is nearly $1 billion – quite a price to safeguard a species that isn’t in peril.

All these useless regulations offer a reminder: The recovery route for the Golden State has to run through Washington, D.C. Unless the federal government adopts a more balanced, people-friendly – and scientifically defensible – approach to environmental protection, California’s rural economy – and probably the state’s larger economy as a result – will linger on the endangered list.

Harold Johnson is an attorney for the Pacific Legal Foundation

Fail-ifornia: Other Than the Weather, What’s So Golden about California?