Unleash the Entrepreneurs: bad policies are holding back the ultimate job creators

Three years have passed since the financial crisis of 2008, and unemployment rates remain painfully high. As of August 2011, America employed 6.6 million fewer workers than it did four years earlier. To try to fix the problem, the Obama administration has pursued a variety of Keynesian measures—above all, the huge stimulus package of 2009, which included not only direct government spending but also such features as tax credits for home buyers and temporary tax cuts for most Americans.

Such policies ignore a simple but vital truth: job growth comes from entrepreneurs—and public spending projects are as likely to crowd out entrepreneurship as to encourage it. By putting a bit more cash in consumers’ pockets, the tax cuts in the stimulus package may have induced a bit more car- and home-buying, but the next Steve Jobs is not being held back by too little domestic consumer spending. Tax credits for home buyers and the infamous program Cash for Clunkers encourage spending on old industries, not the development of the new products that are likelier to bring America jobs and prosperity.

Unemployment represents a crisis of imagination, a failure to figure out how to make potential workers productive in the modern economy. The people who make creative leaps to solve that problem are entrepreneurs. If we want to bring America’s jobs back, our governments—federal, state, and local—need to tear down barriers to entrepreneurship, create a fertile field for start-up businesses, and unleash the risk-taking innovators who have always been at the heart of our economic growth.

The U.S. Census’s Business Dynamics Statistics program shows definitively that entrepreneurs’ fledgling companies are the country’s jobs engine. Consider a good year, 2005, when American firms added 2.15 million new jobs to the economy. Most kinds of companies didn’t contribute to that growth; firms between six and ten years old, for example, added about 1.7 million new jobs but destroyed more than 2 million through contractions or closings, for a net job loss of more than 350,000. In almost every age group, job destruction exceeded job creation. The exceptions were two types of firms: the very old and the very young. Firms over 26 years old added slightly fewer than 100,000 jobs, on net, while brand-new firms added more than 3 million.

Or look at the period from 1996 to 2008. Every year, the new firms added more than 2.9 million jobs, on net; every year except 2000 and 2006, the other firms, considered as a whole, destroyed jobs, on net. Similarly, the boom of the 1980s was led by job creation from new firms. Even in 2009, at the bottom of the recession, new firms managed to add more than 2.3 million new jobs—though those job gains were overwhelmed by the 7 million jobs lost by older firms. The lesson here: older firms generally shrink, while new firms erupt, hire new workers, and make up for the older firms’ job losses.

Further evidence of the economic power of entrepreneurs is the strong connection between entrepreneurial activity and urban success. One way of estimating entrepreneurial activity is average firm size; the idea is that a city with lots of smaller firms must have a lot of entrepreneurs running them. Another commonly used measure is the percentage of a city’s employees who work in new firms. Over the last 30 years, cities that are entrepreneurial, according to either of these measures, have added jobs more vigorously than those that aren’t. Even within cities, researchers have found, more entrepreneurial neighborhoods add jobs more quickly.

These findings support the ideas of the economist Benjamin Chinitz, who argued 50 years ago that New York City was resilient—it could remake itself as economic conditions changed—while Pittsburgh was not, because New York had a remarkable history of entrepreneurship. New York’s garment industry, the largest industrial cluster in postwar America, was a hive of small companies where anyone could get started with a good idea and a few sewing machines. Pittsburgh, by contrast, was the home of U.S. Steel—practically the definition of corporate America—whose company men were exceedingly unlikely to become entrepreneurs when the steel industry faltered.

Even more than Pittsburgh, Detroit emblematizes un-entrepreneurial America. But before it was dominated by three gigantic auto companies, Detroit was filled with clusters of private, interconnected innovators. Indeed, without the economic energy that those innovators generated, Detroit would never have become the Motor City. So Detroit’s history testifies to two important phenomena: first, the link between American entrepreneurship and employment; and second, the ability of a successful, big-firm industry to destroy a local culture of small-firm start-ups.

Long before it made its first car, Detroit was one of the many economic hubs that grew up around water. The Erie Canal connected the Great Lakes to the markets of the East, and cities sprouted at convenient spots—such as the straits that gave Detroit its name—along the great inland waterway. Naturally, shipping companies emerged, like Detroit Dry Dock, where the young Henry Ford learned about engines. Ford soon found himself attracted to one of the great economic challenges of the 1890s: making affordable cars. The basic technology, including the four-stroke internal combustion engine, had been invented in German cities; it clearly had the potential to produce vast profits, but only if someone could use it to create a functional and affordable automobile. America’s tinkerers—bicycle producers, carriage makers, and engine experts like Ford—flocked to the challenge.

Charles B. King made Detroit’s first car in 1896. King had trained as an engineer at Cornell and gained practical experience working at the Michigan Car Company (which made railcars) and the Russel Wheel and Foundry Company. It may be just a legend that Ford followed King’s car down the streets of Detroit on a bicycle, trying to figure out how the machine worked. But it’s certainly true that for his own car, Ford started “borrowing freely from King for the transmission as well as from existing engines,” as the economic geographer Peter Hall writes. Ford also took advantage of Detroit’s stock of mechanics, parts suppliers, and lumber barons for financing.

Ford was only one of Detroit’s many automotive innovators. The Dodge brothers, the Fisher brothers, David Dunbar Buick, Ransom Olds, and Billy Durant, the founder of General Motors in nearby Flint—all were part of the creative cluster around Detroit that solved the problem of producing an inexpensive, effective car. The collective genius of this cluster helps explain why New York City, which had dominated the market at first, quickly ceded its primacy to Detroit, which boasted more than 40 car companies by 1905. Through the early 1920s, Detroit remained a model of innovation through competition, with more than 50 auto manufacturers supplying one another with parts, ideas, and financing even as they fought for market dominance.

One of those ideas was Ford’s method, quickly imitated by his competitors, of building big factories with mechanized assembly lines, which created massive economies of scale and enabled him to cut prices repeatedly. The Ford approach created tens of thousands of jobs, and initially, at least, they were pretty much all in the Detroit area. One of Ford’s Detroit factories, the River Rouge plant, was the world’s largest factory during the 1930s, employing more than 100,000 workers. The great majority of them had little formal education, but starting in 1914, they were earning $5 a day—far more than they could bring home doing almost anything else. Ford’s innovation had made them productive and well paid.

So far, so good. But when change happened, Detroit was unprepared for it. Seeking to reduce costs and fleeing the powerful Michigan unions, auto companies started building factories in lower-cost areas soon after World War II. (Comparing the industrial growth of adjacent counties in states with differing union rules, economist Thomas Holmes has found that between 1947 and 1992, manufacturing grew 23 percent faster on the antiunion side of the state line.) By the late 1970s, the car companies were also struggling to compete with a new set of foreign firms offering attractive prices, quality, and fuel efficiency.

So Ford’s legacy to Detroit has been mixed. On the one hand, he surely brought many jobs there. But the scale of his success transformed a city of small, smart entrepreneurs into a city of vast factories filled with less educated workers. Decades of dominance by big companies in a single industry left Detroit with an ample supply of company men but a dire shortage of the kind of entrepreneurs who can reinvent a city when the economic climate changes. Even today, only 12 percent of Detroit adults have college degrees, and firms remain big. Meanwhile, urban success over the past 40 years has been tightly tied to having an abundance of educated workers and lots of little firms. The scale of Detroit’s decline is breathtaking: a city of 1.85 million residents in 1950 has fewer than 720,000 today.

Detroit also has much to teach us about how wrongheaded public policy can discourage entrepreneurship. The federal government, to begin with, has repeatedly acted to save the auto industry. In 1979, President Jimmy Carter signed the Chrysler Corporation Loan Guarantee Act, which guaranteed $1.2 billion of Chrysler debt. In 1981, the U.S. government pressured the Japanese into accepting “voluntary export restraints” that limited the number of Japanese cars imported into America to 1.7 million per year. (A side effect of the restraints was pushing Japanese manufacturers to open production plants within the United States; needless to say, they typically chose spots far from union-dominated Detroit.) Most recently and spectacularly, the feds bailed out General Motors with $50 billion and Chrysler with $10 billion.

It’s easy to understand why the government wanted to keep two large companies from collapsing in the middle of a recession. But the Big Three were synonymous with industrial stagnation; for all we know, a dissolution of General Motors would have led to a cluster of smaller, more nimble companies. Some might have failed, but others might have been innovative enough to start adding employment. What we do know is that we haven’t produced a world-beating car industry that will be a future jobs machine. These companies will probably keep sputtering along, making money in good years and requiring more bailouts in bad.

On the local level, Detroit is an object lesson in the failure of policies that emphasize physical capital rather than human capital and entrepreneurship. In the 1950s, Mayor Louis Miriani guided a sizable urban-renewal program, spending tens of millions of federal dollars on subsidized housing and overseeing the completion of the $70 million Cobo Convention Center. Miriani’s successor, Jerome Cavanagh, similarly used the federal largesse that showered Detroit in the 1960s to build new housing. And four years after Cavanagh left office, Detroit elected its first African-American mayor, Coleman Young, who spent millions supporting projects like the Joe Louis Arena and General Motors’ Poletown plant. He also invested in a monorail system, using the federal funding for urban transit made available by the National Transportation Act of 1973.

Detroit’s People Mover now glides over underused, often empty, streets, a reminder of the mistaken notion held by all three mayors and by the urban-renewal movement generally: that shiny new buildings can make a shiny new city (see “Urban-Development Legends”). Subsidizing new housing never makes sense in a declining city, since the hallmark of declining cities is that they have an abundance of structures relative to the level of population and demand. At the moment, more than 90 percent of Detroit’s houses are priced below construction cost, so it hardly makes sense to bribe people to build more of them. As for infrastructure, it can be valuable, especially when it radically reduces the costs of doing business, as the Erie Canal did. But today, America and its cities are already well connected, and new infrastructure investments are likely to have fairly modest effects. They are especially unlikely to bring back declining cities.

What would help is knocking down the barriers that block entrepreneurs from thriving. Here, alas, Detroit is a leader in erecting barriers. Take Pink FlaminGO!, a food truck operated by entrepreneur Kristyn Koth, who sold “Latino-influenced locally-sourced fresh food,” as the blog Eat It Detroit put it, out of a Gulf Airstream. Rather than cheering her on, the city gave her so many tickets that she had to close. What Crain’s Detroit Businesscalls “Detroit’s archaic ordinances governing all types of vending in the city” block food trucks from locating near existing restaurants or “in the most populated areas of Detroit”; they also tightly limit which foods street vendors may sell, partly to limit competition with restaurants.

Just as it isn’t the federal government’s job to prop up failing companies, it isn’t a city’s job to defend the status quo against innovative entrepreneurs. Detroit’s heavy regulations are a big reason why there aren’t enough new firms rising to offer alternatives to the Big Three.

Declining industrial cities don’t have to follow Detroit’s path—thanks to entrepreneurs. Forty years ago, as Boeing chopped down its local workforce, two jokers put up a billboard on a Seattle highway that read:WILL THE LAST PERSON LEAVING SEATTLE TURN OUT THE LIGHTS? Today, of course, Seattle looks nothing like Detroit. A stream of innovative companies—Microsoft, Amazon, Starbucks, Costco—has completely transformed the city. Between May 2010 and May 2011, it added more jobs than any metropolitan area except Dallas and Houston.

Like so many examples of American entrepreneurship, Costco has its origins in New York City’s garment industry, which employed the parents of one Sol Price. Price left the Bronx, moved to Southern California, and worked as a business lawyer for years. When he turned 38, some entrepreneurial gene awoke in him and he began to open discount warehouse retail chains—first FedMart, which catered to government employees, and then Price Club. In 1983, one of Price’s top managers at both companies, James Sinegal, borrowed Price’s idea—Sam Walton did, too—and took it to Seattle, where he founded Costco. Today, Costco has more than 400 stores and is the third-largest retailer in the United States, with $60 billion in domestic sales and nearly $20 billion abroad. Costco employs almost 150,000 people; many of them lack significant formal education, but smart management has made them far more productive.

Starbucks employs only 10,000 fewer people than Costco does, and its origins were far more modest. Two teachers and a writer decided to get into the coffee-roasting business. One of them learned the trade by working in the Berkeley store of legendary Swiss émigré Alfred Peet. When Starbucks opened in 1971—mere days before the jokers’ highway sign went up, as it happened—the company just roasted and sold beans, initially avoiding the sale of brewed coffee.

The transformation of Starbucks was led by Howard Schultz, a kid from Brooklyn who also once worked in the Garment District. Schultz was working for a housewares company when Starbucks piqued his interest by buying so many plastic cone filters, unusual in the coffee industry at the time. He quickly saw the potential in specialty coffee—how an increasingly affluent world would want to brew better joe. Schultz joined the company as head of operations and marketing in 1982. But on a trip to Milan, Schultz became convinced that Starbucks should sell lattes as well as beans. Breaking with the company’s founders, he left and started his own coffee shop, Il Giornale, which was inspired by the cafés that he had seen in Italy. It specialized not only in higher-end coffee but also in trained baristas who were supposed to provide a better retail experience. The success of Il Giornale enabled Schultz to buy Starbucks and create the chain as it is known today.

The company is another brilliant example of how entrepreneurs can create employment for the less skilled. Both Schultz and the original founders saw the demand for better coffee. Schultz’s vision, though, required thousands of workers who didn’t need much formal education but did need the right kind of training. His model became an employment machine. Remember, unemployment represents a crisis of entrepreneurial imagination—and people like Schultz and Sinegal had the imagination to see how they could make thousands of lightly skilled workers amazingly productive.

Seattle also owes its success to its formidable skills base, a major boon to high-tech giants Amazon and Microsoft, which both employ large, highly skilled local workforces. More than half of the city’s adults have a college degree, which makes it one of the more educated places in America. We know that the share of a city’s population with a college degree in 1970 is a strong predictor of its subsequent employment growth. Another predictor is the presence of a land-grant college in an area prior to 1940, which supports Senator Daniel Patrick Moynihan’s old claim that the best way to create a successful city is to found two world-class universities and wait 50 years. One reason an educated population leads to jobs is that it helps entrepreneurs find—and create—opportunity in today’s complicated, technologically intense world. After all, the occupation and skills of prospective workers shape the choices of entrepreneurs; no one would start an engineering company in a city without engineers.

Brainy Minneapolis’s success—per-capita incomes are higher there than in nearly any other metropolitan area between the East Coast and Colorado—shows that having a skilled population can enable a city and its entrepreneurs to overcome even freezing temperatures, which often chill urban vitality. Take Earl Bakken, who studied engineering at the University of Minnesota and later connected with C. Walton Lillehei, a pioneer of open-heart surgery who worked at the university’s hospital. The flow of knowledge between the two led to the invention of the first battery-powered artificial pacemaker, a device that would make Bakken’s company, Medtronic, a major firm. Medtronic remains on the cutting edge of medical technology and now employs 38,000 people, many of them in the Minneapolis area.

Unfortunately, today’s America seems to have too many Detroits and not enough Seattles and Minneapolises. How can more cities become centers of skilled invention and entrepreneurship?

Entrepreneurship doesn’t happen overnight, and it’s rarely the direct creation of government. Bureaucrats aren’t experts in finding unexpected market niches, so politicians are prone to throwing money at the fad of the moment, like “green jobs.” Also unhelpful are policies that privilege older, big-firm industries. My research with William Kerr has found that places blessed—or cursed—with natural resources, such as coal or iron mines, 100 years ago still have larger firms today, across all their industries, and that the employment picture there is correspondingly bleaker than in cities with fewer natural resources. So we should worry about policies like auto bailouts, which are the artificial equivalent of coal mines, encouraging big, stagnant companies at the expense of job-creating start-ups.

Still, certain policies can help entrepreneurs and boost American employment. Since an educated workforce is so important to urban success, America needs better schools, especially in its dense urban areas. Perhaps the most hopeful development on this front is the emergence of charter schools. Since entry to the most successful of these schools is typically by lottery, social scientists can compare the test scores of those who won and got in with the test scores of those who didn’t. A significant number of papers now show the remarkable long-run effects that getting in can have on children’s academic outcomes.

That’s particularly satisfying because charter schools themselves channel American entrepreneurship, replacing poorly performing public monopolies with something closer to the free market. Not every charter school is a success, obviously—not every big-box store is, either—but the good ones attract students and the bad ones eventually fail. That’s how entrepreneurship works.

Another badly needed reform that would help unleash entrepreneurs: every level of government needs to rethink and reduce its regulations, which have grown excessive and stifle innovation (see “The Regulatory Thicket”). The federal government could lead the way by establishing a federally funded independent body, perhaps attached to the Congressional Budget Office, to analyze state and local regulations. Localities that instituted entrepreneurship-killing regulations would lose their power to issue federal-tax-exempt bonds.

Cities play an outsize role in supporting entrepreneurship, especially the kinds of entrepreneurship that employ the less skilled. Our three largest metropolitan areas—New York, Los Angeles, and Chicago—produce 18 percent of America’s output while housing only 13 percent of America’s population. Yet many of our policies, like subsidized highways in low-density areas, pull Americans away from the urban centers that are the country’s true economic heartland. We need to eliminate those policies.

In general, we should never use public dollars to bribe people to remain in dead-end jobs. We should place far less emphasis on the industries of the past and more on those of the future. Federal policies that bail out auto companies and subsidize agriculture aren’t merely expensive; they also encourage people to stay in declining industries rather than strike out on their own.

And we should work diligently to support free markets, whose most important function may be to allow human genius to create new ideas that give jobs to thousands. As America looks to the future, it must renew its commitment to economic freedom, a climate in which entrepreneurs—and America’s workers—can thrive.

Edward L. Glaeser is a professor of economics at Harvard University, a City Journal contributing editor, and a Manhattan Institute senior fellow. This piece was first published at City Journal.

Small Business Gears Up to Participate in Legislative Races

Small business associations in California are discussing coming together to influence the coming legislative elections. Marty Keller, former Small Business Advocate for the state of California, has formed the Small Business Revolution, intended to be a PAC supporting candidates who will form a business friendly majority in the state legislature.

At a meeting held in North Hollywood yesterday, Keller suggested creating a Small Business Coordinating Council consisting of many of the state’s small business associations to help choose candidates that will support a business friendly agenda and receive PAC money.

Small business feels lost in the tug-of-war political battles in Sacramento, between big business and big labor. As one commentator said, while the term “organized labor” is often heard in these tussles, “organized business” does not exist.

Los Angeles activist and attorney, David Fleming, suggested that small business has the ability to be a force. He cited the Los Angeles Business Federation (BizFed) that he helped create. In Los Angeles, union membership is 500,000; BizFed membership is 1600. However, there are as many small businesses in LA County as union members. Fleming said the 95 business associations in the county accounted for 170,000 businesses with 2.6 million employees – a potential potent political force.

He said a similar situation exists statewide.

Bringing small businesses together to change the tone of the legislature on business issues will be a challenge for Keller. The interests of various business associations can differ.

Small business is not a monolithic group when facing certain issues. For example, while many small business organizations like the National Federation of Small Business opposed AB 32, the Global Warming Solutions Act, and the recent cap and trade requirements adopted by the Air Resources Board, the progressive Small Business Majority endorsed both measures.

Keller hopes small businesses will rally around certain issues to test candidates’ support for small business.

During Tuesday’s meeting, Keller sought consensus on various issues that the Small Business Revolution might ask candidates to support. Attendees agreed on measures such as eliminating the minimum state business tax, expanding small business access to alternative sources of capital and creating a process to review existing regulations.

Keller said he used the word “revolution” in his organization’s title because basic reforms are needed to create a business friendly environment. He said he would be willing to team up with big business to reach the organization’s goals of supporting candidates who are business friendly. “If Wells Fargo is willing to give to the Revolution, I ain’t going to turn it down,” Keller said.

MC for the event, Chuck Ashman, a former LA radio and TV personality who now is Executive Producer of Business Matchmaking, suggested a way for the group to make an impact right away is to focus on one of the biggest anti-business offenders in the legislature and take him or her out in the next election.

Keller believes the new organization can have such an impact as soon as the 2012 election.

(Joel Fox is President of the Small Business Action Committee and Editor of Fox & Hounds, where this article was first published.)

CA Business Climate Just Gets Worse

You’ve read it here many times. But I was surprised that the Los Angeles Times ran an op-ed about California’s Khmer Rouge attitude toward businesses. It ran in the opinion section, which otherwise never heard of a tax it didn’t want to increase or a regulation it didn’t want to enact.

The op-ed is by Wendell Cox and Stephen Malanga and is excerpted from City Journal, whose articles we sometimes reprint. Our editor-in-chief, Steven Greenhut, also writes for the publication.

Cox and Malanga write:

Last year, the medical technology firm Numira Biosciences packed its bags and left Irvine for Salt Lake City. When asked about the firm’s departure, its chief executive praised Utah’s quality of life but also blamed California’s business environment for the move. “The tipping point was when someone from the Orange County tax [assessor] wanted to see our facility to tax every piece of equipment I had,” Michael Beeuwsaert told the Orange County Register.

Mind you, that was Orange County, commonly derided as the most conservative are of California, except for rural areas. The authors continue:

In surveys, executives regularly express the view that California has one of the country’s most toxic business environments, and they say it is one of the least likely places they would open or expand a company. Many firms headquartered here say they have forsaken expansion in the state….

Using a statistical method, they found that the California economy boomed in the 1990s, creating copious new jobs, but crashed in the 2000s. It really was a “lost decade.” They don’t point it out, but this “lost decade” occurred under the hideous governorship of high-tax, high-regulation, jobs-”terminator” Gov. Arnold Schwarzenegger, whose policies continue to grind this state into the dust.

Lost Decade

Cox and Malanga continue:

A study by City Journal using the National Establishment Time Series Database, which has tracked national job creation and migration from 1992 through 2008 (the latest data available), suggests that California’s economy started showing signs of sclerosis a decade ago. So even after a national recovery takes place, the Golden State may keep struggling –unless Sacramento moves to improve the business climate.

Of course, the opposite is happening. Although Gov. Jerry Brown vetoed a couple of anti-business bills this year, he signed scores more of them. And he’s as obsessed as the Democratic Legislature — and the Times’ editorial page and its four top columnists — with gouging even more tax money from already tax-shocked Californians.

The authors write:

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. Indeed, from 1992 to 2000, California added 777,000 more jobs from start-ups than it lost to closures. But this dynamism vanished in the 2000s. Between 2000 and 2008, California lost 262,000 more jobs from closures than it gained from start-ups.

Between 2000 and 2008, some 80,000 more jobs left California for other states than came here from other states. The leading destination of the job migration was Texas, with Oregon and North Carolina running second and third. California managed to add jobs only through the expansion of existing businesses, and even that was at a considerably lower rate than a decade earlier….

While there are many reasons for these troubling trends, the state cannot ignore the role its policies have played in the economic decline. For seven consecutive years, executives polled by Chief Executive magazine have ranked California as having the worst business environment in the country. In a 2011 survey of its members by CalRecovery, a California coalition of businesses and industries based in the state, 84 percent of about 400 executives and owners who responded said that if they weren’t already here, they wouldn’t consider starting up in the state, while 64 percent said that the main reason they stayed in California was that it was tough to relocate their particular kind of business. In a recent op-ed, Andrew Puzder, chief executive of Carpinteria-based CKE Restaurants, which manages 3,000 eateries around the country, called California “the most business-unfriendly state we operate in.

Los Angeles and San Francisco long beckoned as gleaming jewels of jobs production. No more. Now they’re jobs-killing sloughs of despond:

Another dark sign has been that economic growth in California’s major cities stalled after 2000. Los Angeles and the San Francisco Bay Area had been the engines of California’s economic growth for at least a century. But between 2000 and 2008, California’s two big metropolitan areas produced fewer than 70,000 new jobs — a nearly 95 percent drop from the 1990s and a mere 6 percent of job creation in the state. This was a collapse of historic proportions.

Green Jobs

Of course, there are positive signs, aren’t there? Thanks to AB 32, the Global Warming Solutions Act of 2006 and other far-sighted legislation, California must be leading the globe in “green jobs.” That’s what we were told, weren’t we? The actual text of AB 32 promised:

By exercising a global leadership role, California will also position its economy, technology centers, financial institutions, and businesses to benefit from national and international efforts to reduce emissions of greenhouse gases.

Then-Gov. Arnold Schwarzenegger and the Democratic Legislature that passed AB 32 didn’t lie to us, did they?


Cox and Malanga found:

California is even losing the battle for green manufacturing jobs. Earlier this year, Bing Energy, a fuel-cell maker, announced that it would relocate from Chino in San Bernardino County to Tallahassee, Fla., where it expected to hire nearly 250 workers. “I just can’t imagine any corporation in their right mind would decide to set up in California today,” Dean Minardi, Bing’s chief financial officer, said.

If you see any sunrise on the horizon for the Golden State, write it in the comments section. I just don’t see any.

If you talk to Democratic legislators, they’re obsessed with making happy the government unions that fund their campaigns. The legislators actually believe the way to get out of the recession is to increase taxes to pay for more union teachers and administrators, which then will produce smarter kids, who then will lead us to the radiant future of prosperity. And the legislators believe that even more regulations will make California such a paradise that jobs will sprout here like kudzu.

Republicans legislators remain obsessed with preserving redevelopment to help their local crony-capitalist buddies, while ripping off local small-business owners and homeowners.

Well, enjoy the weather.

(John Seiler, an editorial writer with The Orange County Register for 19 years, is a reporter and analyst for CalWatchDog, where this article first appeared.)

Disrupting Class: Why California’s teachers’ unions will eventually go the way of Betamax

Slowly but surely, “disruptive technology” is penetrating the nation’s ossified public education system. The effects may be liberating for students, but they would be devastating for teachers’ unions. In his extraordinary book, Special Interest, Stanford political scientist and Hoover Institution senior fellow Terry Moe describes a succession of union victories—for tenure, strike rights, and seniority protection; against accountability, charter schools, and vouchers for disadvantaged families. But Moe argues that those victories won’t last. Union power will be marginalized, in part, by online learning. Emerging technology-based education, Moe writes, is the “long-term trend . . . and the unions cannot stop it from happening.”

Economic imperatives are pushing education policymakers to accelerate this trend. Due to California’s dire fiscal situation, the University of California system is looking to online learning as a way to cut costs. In a report released late last year, UC’s “Commission on the Future” proposed “a pilot program to explore the quality and feasibility issues regarding fully online courses for UC degree credit.” While online classes and degrees are nothing new, UC’s chapter of the American Federation of Teachers, sensing a major upheaval in the works, decided to launch a preemptive strike. Its website, full of fighting words, challenges the claims of better and less expensive education online. The union’s real concern, of course, is a significant loss of membership: UC-AFT represents all non-tenured lecturers, as well as librarians, across the system’s 10 campuses. “[W]e are looking to . . . protect our members from potential adverse effects of UC’s rapid adoption of online instruction,” the website announced.

For the moment anyway, the union appears to have succeeded. UC officials and UC-AFT tentatively agreed to a new deal that includes a provision stipulating that no campus could institute a course or program resulting in a “change to a term or condition of employment” of any lecturer without UC-AFT’s consent. In other words, the union is determined to keep all of its dues-paying members on the payroll whether they’re needed or not—and whether students can afford them or not. Tuition at the University of California this year is $12,182, not including room, board, and sundry campus fees. That’s more than triple the amount undergraduates paid ten years ago. The UC Regents are considering a plan that could double tuition again in the next five years. Saving money for California’s beleaguered parents and taxpayers with quality online classes is of no interest to UC-AFT. They fiercely protect their turf at any cost.

But the greater ramifications of digital learning—and the greater threat to union preeminence—will be seen at the K-12 level. Rocketship Education, a charter school network, is using a “hybrid” or “blended” model (a combination of computers and flesh-and-blood teachers) at five campuses in San Jose. Rocketship launched in 2007 and serves a predominantly low-income and minority student population. It plans to open 23 more campuses by 2017. Rocketship schools achieved an overall score of 868 on California’s academic performance index in 2010, placing the chain among the top-ten performers in Santa Clara County and the fastest improvers in the state.

The undeniable superstar of online learning is Salman Khan, a former Silicon Valley investment banker who got his start by posting a few tutorial math videos for his struggling cousins on YouTube. The videos quickly went viral and soon attracted the attention of Microsoft’s Bill Gates, who called Khan his “favorite teacher.” Khan Academy now offers more than 2,600 videos and serves more than 1 million students globally. Locally, Khan has gained a foothold in the Silicon Valley community of Los Altos, where schools have begun to use his online materials in their math programs. The students have shown noticeable progress in less than a year. Starting as a pilot program last year, Khan’s videos are now used in all Los Altos schools.

The blended-learning approach has attracted a great deal of interest from foundations and think tanks. Its appeal is obvious: students would potentially achieve more with the help of technology and fewer classroom teachers. No wonder the unions are terrified. The National Education Association proclaims on its website “an absolute prohibition against the granting of charters for the purpose of home-schooling, including online charter schools that seek home-schooling over the Internet.” Lance Izumi, an education policy analyst with the Pacific Research Institute, notes how the unions have tried to erect contractual barriers against technology: “The California Federation of Teachers, in model contract language, says: ‘No employee shall be displaced because of distance learning or other educational technology.’” But a superior education for far less money will eventually overwhelm and decimate the unions, and for some, that will come not a moment too soon: the late Steve Jobs, for one, insisted that teachers’ unions were the “worst thing that ever happened to education.”

Of course, any innovation requires a judicious dose of skepticism. But just as the horseshoe business became significantly less relevant with the advent of the automobile, education will undergo a similar transformation. It’s a fair bet that teachers’ unions ultimately will go the way of the eight-track cassette player, Betamax, and the floppy disk.

(Larry Sand, a retired teacher, is president of the California Teachers Empowerment Network. This article first appeared in City Journal.)

1 Year and Counting for the “Underdog” Obama

If Obama is to win re-election one year from today, he’ll need to prove a “historic” candidate in less esoteric and more statistically significant ways than propelled him to victory for his first term. He’ll have to defy the historic trends for presidential elections as they presently stand. As the Washington Times notes:

At 43 percent approval in a Gallup poll conducted Oct. 28-30, Mr. Obama recently referred to himself as an “underdog” — with good reason. Of all the presidents since World War II whose job-approval scores were lower than 50 percent one year before Election Day, only one went on to win a second term.

That was President Nixon, whose job approval stood at 49 percent in November 1971. He rebounded to defeat Democrat George McGovern in a landslide in 1972.

Obama’s approval rating is much lower than Nixon’s and, hopefully, the GOP candidate will prove more formidable than McGovern.

Unemployment is another statistical guide.

No president since Franklin D. Roosevelt has won a second term when the unemployment rate was higher than 7.2 percent. Reagan won in 1984 with a jobless rate at 7.2 percent.

Obama, of course, is no Reagan and present unemployment hovers at 9%.

So, Obama has his work cut out for him. But he does have a few advantages going for him.

He is still a formidable fundraiser, having amassed more than $150 million for his campaign and the Democratic National Committee this year.

Also, his re-election operation is more robust than any of the GOP camps, which are waging a long and costly primary battle. Mr. Obama’s campaign is able to build on a 50-state network from 2008, an email list of more than 9 million potential supporters and an experienced staff with unequaled savvy in digital marketing and social networking.

In early polling of head-to-head matchups with potential GOP candidates, Mr. Obama comes out on top in nearly every instance. One poll in the battleground state of Florida this week showed former Massachusetts Gov. Mitt Romney tied with Mr. Obama.

And the Times contemplates the possibility of a third party candidate siphoning votes from the Republican nominee – but I don’t foresee such a option in the tea leaves.

As I’ve noted previously, Obama is not being blamed by the American people for the state of the country. The buck, it seems, has not stopped with the president. It must be a priority for the GOP candidate to lay blame were it belongs and tie the economy as an albatross around the president’s neck. Where the media has deflected blame from Obama, the GOP must nail it to his campaign bus. A Republican cannot win if Obama is not recognized as the culprit responsible for America’s woes and deserving of its righteous anger.

(Justin Paulette is an attorney specializing in international and constitutional law. This article was first posted on Ashbrook.)

Court Case Shows Republican Hypocrisy

We all know that California’s Democratic Party is running the state into the fiscal ground, given how beholden its members are to public-sector unions and how devoted they are to expanding government and raising taxes. The state needs some political competition, but a major court case reminds us why the state Republican Party is a useless vessel that’s incapable of broadening its base and changing the state’s political trajectory.

On Thursday, the California Supreme Court began oral arguments in a lawsuit brought by defenders of the state’s redevelopment agencies (RDAs), which are seeking to overturn recent laws that essentially shut down those agencies. Gov. Jerry Brown isn’t often right, but he was on target when he proposed shutting down these central planning agencies that primarily dispense corporate welfare to big businesses and drive small property owners off their land so that big-box stores can prosper.

Brown’s plan wasn’t perfect. It allowed the agencies to buy their way back into existence as many of them have since done. The law wasn’t passed entirely for the right reasons. Brown and legislative Democrats had typically supported RDAs, but were looking for quick ways to close the state’s gaping budget hole. As Bloomberg reported, “The governor and supporters of the law said the redevelopment agencies have become little more than slush funds for private developers, and they want the tax money generated by new developments to be diverted from the agencies to local schools, law enforcement agencies and other services.”

When your political enemies give you a gift, you ought to take it. Instead of taking it, California Republicans actively opposed the governor’s plan and shamelessly sided with the people who run roughshod over everything the GOP is supposed to stand for. Forget all the talk about property rights, limited government, free markets and family values.

GOP Votes to Protect

“Almost like in ‘Alice in Wonderland’ where up is down, and down is up, this past year Democratic Legislators voted to abolish redevelopment and most Republicans fought tooth and nail to protect 425 redevelopment agencies from being abolished!”explained Jon Fleischman, California GOP vice chairman and publisher of the GOP-oriented Flashreport. Fleischman noted that over two crucial votes, only six Assembly Republicans voted to abolish RDAs and only one Senate Republican voted to do so. This indeed is shameful.

In fact, one of the GOP’s leaders, Sen. Bob Huff of Diamond Bar, received the League of California Cities’ Legislator of the Year award for his efforts to save redevelopment agencies. His wife, by the way, works for a developer who is one of the state’s biggest redevelopment beneficiaries. This is the type of thing that makes me want to join the unbathed wretches occupying city parks.

In the thick of the debate, I recall talking to multiple Republican legislators and most of them were defiant defenders of redevelopment. They said that it worked in their city. They championed the economic benefits of redevelopment. It became clear that with the exception of Chris Norby of Fullerton, Beth and Ted Gaines of Roseville and a couple of others, Republicans don’t even understand the nature of free markets.

Started in the 1950s to combat urban blight, redevelopment has become a tool by which localities maximize tax revenue within their boundaries. In the redevelopment process, local bureaucrats identify areas that they want to see improved. The agency declares these areas blighted based on a wide-ranging set of criteria. Basically, if officials want to redevelop an area, the well-paid consultants will always find blight.

Then within that area, property rights magically disappear. City officials call the shots. They can, and often do, use eminent domain to clear away properties and hand them over to politically well-connected developers who promise to build tax-generating projects. Even when cities don’t use eminent domain, the threat of its use is enough to cause small business owners and even homeowners to flee. Then the agencies run up debt to fund the projects. In Sacramento recently, a restaurant developer received millions of dollars in subsidies to build a mermaid bar — mermaid-costumed women swim around in a giant fish tank — that caters to lobbyists. How’s that for a core government service?

Bogus Claims

Of course, most of the claims by redevelopment’s advocates and beneficiaries of new jobs are bogus. The nonpartisan and highly respected state Legislative Analyst’s Office found, “While redevelopment leads to economic development within project areas, there is no reliable evidence that it attracts businesses to the state or increases overall regional economic development.” LAO debunked the absurd job-creation claims made by the California Redevelopment Association.

Mostly, redevelopment shifts jobs around a region as localities fight with one another to lure the businesses in a mad rush for tax revenue. They have to find some way to fund those lush city manager salaries and police pensions. This may be pro-business in a way, but it’s the sort of anti-market, bailout, subsidy-driven philosophy that is angering Tea Partiers and Occupiers alike.

The state Supreme Court case centers on Proposition 22, the November 2010 statewide ballot initiative that banned fiscal raids on redevelopment funds. That’s why the governor’s approach was to shut down the agencies in their entirety and then allow some of them to come back into existence. As the state argued, “RDAs are creatures of statutes — and their existence is not guaranteed in the state Constitution — so the Legislature was free to dissolve them.”

Republicans should be standing with the small property owners and business people — often working-class people and minorities — who want to pursue their dreams and not be bullied by these urban-renewal agencies. They should be standing up for fiscal responsibility and against debt and subsidies. Instead, they have stood up for the Armani-suit-wearing developers and bean-counting bureaucrats who treat private property like pieces on a monopoly board. It’s shameful and a reminder of why the GOP is dying in California.

(Steven Greenhut is CalWatchdog’s editor in chief. Greenhut was deputy editor and columnist for The Orange County Register for 11 years. He is author of the new book, “Plunder! How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation.” This article was first published on CalWatchdog.)

Occupy Protests and Political Backlash

The Occupy Wall Street protests, especially in Oakland, and the news it has generated, brings up memories of former United States Senator from California, S. I. Hayakawa. The former English professor and president of the then named San Francisco State College achieved world-wide attention for standing up to protests at the school during the raucous 1960s. His stance led him to eventually win a U. S. Senate seat when he upset sitting senator John Tunney in the 1976 election.

In a feature article on the senator, People magazine described the event that gained Hayakawa fame.

Newly elevated to the presidency of riot-besieged San Francisco State College, the diminutive (5’6″, 150-pound) academic clambered to the top of a radical-held sound truck, ordered the dissidents to “get the hell out of here,” and yanked the wires from their loudspeakers. Photographs of that incident, with Hayakawa wearing an incongruous tam-o’-shanter, were flashed to the world. He was enshrined forever as a man who dared stand up to the anarchy that seemed to be engulfing the nation.

While no individual stands up as a symbol of resisting the Occupy movement as Hayakawa did to the protests of the 1960s, candidates who support the Occupy movement could be the focus of negative attacks.

Already in what is viewed as a hotly contested Massachusetts senate race, Elizabeth Warren, the Harvard professor taking on incumbent Scott Brown, is targeted by the conservative PAC Crossroads GPS in an ad that says Warren sides with Occupy Wall Street protestors “who attack police, do drugs, and trash public parks. They support radical redistribution of wealth and violence.”

Yesterday, in Oakland, Occupy protestors drowned out a press conference of five city council members, increasing tension in the city. The images from Oakland continue to make national news.

California and its electorate is certainly not the same as it was when Hayakawa made his stand and turned it into a political victory for himself a few years later.

However, the images and arguments over the Occupy protestors are sure to find their way into coming political campaigns and make or break a few political careers.

(Joel Fox is President of the Small Business Action Committee and Editor of Fox & Hounds, where this article was first published.)

LAUSD Blows Billions on Construction

At a hearing last week, officials from the Los Angeles Unified School District appeared proud of the massive spending on new school construction and renovations. The officials appeared before a joint hearing of the Senate and Assembly education committees, although only three of the 21 committee members attended.

The LAUSD was asked to update the committees on the new construction and renovation and updating projects for the district. Mark Hovatter, in charge of contracts for LAUSD facilities department, presented a report prepared by the Los Angeles County Economic Development Corporation. “Founded in 1981, the LAEDC was created by the Los Angeles County Board of Supervisors to implement LA County’s economic development program through land development, project financing and marketing activities,” the LAEDC website states.

Hovatter said that LAUSD has been doing exactly that — acquiring land, building new schools and “modernizing” since the late 1990s.

Hovatter appeared excited to report to legislators that 132 new schools have been built by the district. “I get invited to speak a lot. It’s something we are very proud of,” he said.

Of the more than $19 billion in construction and improvements for the LAUSD, financed through five bonds, Hovatter said that 331,000 jobs were created over a 15-year period. “There are 24,000 modernization projects right now,” he added, touting the numerous construction jobs financed by the district. “But we still need modernization projects. It’s exciting to see a new school and drive through a transformed neighborhood.”

Hire Everybody!

“It’s evidently that simple,” said Lance Izumi, Koret Senior Fellow and senior director of education studies at the Pacific Research Institute, CalWatchdog’s parent think tank. “Why don’t we run a giant general bond and hire the 2 million unemployed Californians? Why limit yourself to hiring just a few construction workers? Hire everybody!”

Izumi was critical of the LAUSD spending because of significant declining enrollment, and reckless spending despite California’s historic economic crisis. Izumi said the LAUSD’s wasteful spending on construction projects included the $578 million Robert F. Kennedy High School, “the most expensive government-run school in this nation’s history.” LAUSD voluntarily increased costs by agreeing to employ only union labor through Project Labor Agreements, despite evidence from throughout California that such agreements contribute to higher construction costs.

Not one legislator questioned Hovatter about the RFK High School costs, the $337 million Edward Roybal Learning Center or the $232 million Visual and Performing Arts High School, totaling $1.2 billion in new construction for the LAUSD.

Project Labor Agreements

Labor union construction jobs done through Project Labor Agreements increasing school construction costs by 15 percent, according to Kevin Dayton, Associated Building Contractors’ government affairs director. “It’s what I call the corruption variable,” Dayton said. “California taxpayers would love to know how much money is going to Los Angeles Unified School District.”

Dayton explained that the State Allocation Board allocates one half of approved school bonds to the LAUSD — even though only about 12 percent of California school kids attend LAUSD schools. All of California’s taxpayers are subsidizing the Los Angeles area schools. “Taxpayers don’t want to be giving that school district money until they clean up.”

Dayton explained that, in inflation-adjusted dollars, the ABC found that the presence of a Project Labor Agreement is associated with costs that are $28.90 to $32.49 per square foot higher than with non-union contractors.

The ABC also found that unions in Los Angeles County force contractors to pay journeyman wages and benefits to non-union apprentices under under PLAs. And the unions use the PLAs to force non-union workers to deposit 12 percent of their wages into the International Brotherhood Electrical Workers credit union. “Workers should not be forced to have their paychecks deposited into a specific bank. They may object to that bank because of how it invests its deposits or how it uses their personal information,” Dayton said.

Mega-School District

LAUSD has 885 schools, 668,000 students, 37,000 teachers and 40,000 “other” personnel, such as counselors, nurses, janitors and administrative staff. The school district is the second largest school district in the nation and covers most of Los Angeles County’s 31 cities, and more than 700 square miles.

However, finding an actual budget for the monster district was like trying Whac-A-Mole at the county fair. The LAUSD currently reports, in press releases, $7 billion in total district spending, only slightly down from a $7.1 billion budget last year.

But that figure is suspect. The district claims per-pupil spending of $10,000. But a 2010 report by Adam Schaeffer of the Cato Institute’s Center for Education Freedom, found it was actually $29,780 when capital spending, such as from local and state bond measures passed by voters, is calculated into the actual per-pupil cost.

The school district reports, “We have so many reasons to give thanks in this District. Test scores are up. Attendance is rising. The graduation rate is improving.”

In 2011, the LAUSD school board voted to lay off 1,900 teachers, nurses and counselors. The cuts were less than an earlier proposal, which would have terminated more than 5,000 teachers, 2,000 cafeteria workers, office clerks, bus drivers and other administrative staff. LAUSD threatened repeatedly that if those cuts were made, class sizes would have increased in grades K-8.

Isumi says the class-size threat is not credible. Class size averages in South Korea stand at 66, but test scores and graduation rates are much higher, according to Izumi. “Hybrid blended learning models are part of daily learning settings. You don’t need as many teachers,” Izumi said. “It’s more about teaching techniques and really good, qualified teachers. California needs to eliminate state regulations that prevent online learning to make it more accessible for all kids. And it’s cheaper, too.”

A Lot We Can Learn

Dayton said that LAUSD has not commissioned an independent study since 2000, about how Project Labor Agreements affect construction costs. When the LAUSD first required contractors to sign a PLA in 1999, it agreed that the PLA “shall expire at the end of one year unless the District and/or Council demonstrate that expected economic savings to the District have materialized at a level sufficient to justify continuing the Agreement.”

But that has not happened, said Dayton.

Dayton said that a Price Waterhouse Coopers report was “unable to conclusively determine whether the PLA has to date had either a net positive or net negative economic impact…” But the LAUSD still requires contractors to sign a PLA to work on construction funded by its bond measures, dramatically increasing costs.

Assemblywoman Julia Brownley, D-Santa Monica, contratulated Hovatter. “It is extraordinary,” she said. “LAUSD has done a tremendous amount of building and modernization. There’s a lot we can learn from this program.”

(Katy Grimes is CalWatchdog’s news reporter. Grimes is a longtime political analyst, writer and journalist. This article was first posted on CalWatchdog.)

Let Taxpayers Be Heard

Although there were no statewide issues on the ballot last Tuesday, many Californians had the opportunity to vote on local measures, many of which sought approval for various taxes, fees or bonds. By our count, of the more than 50 tax increases on the ballot, about 75 percent passed. It may surprise some, but we at HJTA are not overly alarmed when local citizens choose to raise their own taxes as long as they are given the opportunity to cast an informed vote. And here is where the problem lies.

Most campaigns for tax measures receive strong support from those who will directly benefit. For example, whenever a school district places a bond on the ballot, it is not unusual for the construction companies who expect to contract for the work the bonds will pay for, to fund expensive campaigns to guarantee their approval. It is also commonplace for bond brokers, who will receive commissions on the bond sales, to supply consultants to advise the district on the best way to gain voter approval. Most local tax increases also receive the political and financial support of government employee unions, who clearly are a principal beneficiary of an increase in revenue.

What this means is that those wanting greater access to taxpayers’ wallets dominate the debate while individual taxpayers are often left feeling that any response is an exercise in futility. While tax promoters will see to it that slick arguments endorsing a measure appear in the ballot book all voters receive, all too often taxpayers leave it up to someone else to present a counter argument and the result is that no one responds. But it doesn’t have to be that way.

Illustrating the point is the e-mail message I received, the day after the election, from a local taxpayer advocate reporting the success of a low budge/no budget campaign in defeating a per-parcel property tax increase.

Among the keys to victory were writing a ballot argument against the tax, sending letters to local papers where they could be printed in the “Letters” section, and sending e-mails to friends and neighbors alerting them to the effort to increase their property taxes. Even though the taxpayer activists lacked the funds to send out mailers, print flyers or yard signs, they were able to convince 56.3 percent of their fellow citizens to vote “no.” Imagine what they could have accomplished with just a few hundred dollars.

Yes, average taxpayers can take on city hall, or any other local government entity, and win. All it takes is the will and using a few basic tools, most of which are free. Key to any of these efforts is as simple as preparing a good ballot argument. For those who believe that voters should hear more than just one side when it comes to tax increases, I invite you to visit www.hjta.org and look under “Taxpayers Action Tools” for more tips on defeating local tax measures.

(Jon Coupal is president of the Howard Jarvis Taxpayers Association -– California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights. This article was first posted on Howard Jarvis Taxpayers Association.)

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.