California’s demise on hold for now

A funny thing happened along California’s road to economic ruin. The state that couldn’t shoot straight suddenly has emerged as a national leader in creating jobs.

Shaking off the effects of the housing bubble and its bursting, the Golden State is using its core strengths in technology, trade and tourism to push its way toward the head of the class.

California still has a long way to go before it draws even with the number of jobs that existed here before the Great Recession. And there is no sign that the state’s manufacturing sector is ever going to return to the glory years when jet airplanes, rocket engines and automobiles rolled off factory assembly lines from San Diego to Fremont.

But the persistent problems in government, especially at the state level, have obscured the fact that California’s core, services-oriented economy held its own through the recession and is rebounding faster than the nation as a whole.

Over the past 12 months, California has added about 300,000 jobs, more than any other state. California’s payroll growth rate over the past year is 2.1 percent, ninth in the nation and well above the national average of 1.3 percent, according to numbers from the US Bureau of Labor Statistics.

That growth came almost entirely from the service sector, as manufacturing payrolls in the state continued their long slide. The biggest expansion came in professional, scientific and professional services, information services, and health and education. Leisure services – the tourism industry – also grew rapidly, as evidenced by the fact that hotels in Orange County and Los Angeles hotels were about as full in July as they ever have been.

“It is a good time to be a Pacific Rim state and a financial center as opposed to being more tied to Europe,” Steve Levy, director of the Center for the Continuing Study of the California Economy, told me last week.

Indeed, over the past year San Francisco, a city that once looked like it was in decline, added 38,300 jobs and the San Jose area, home of the Silicon Valley, added nearly 30,000. Orange County added nearly 29,600, while San Diego’s payrolls grew by 28,700. Even Los Angeles County and the Inland Empire, which were especially hard hit by the collapse of the housing industry, are showing signs of life.

This might come as a surprise to people who hear the constant chatter about California’s high taxes and its regulatory burden, or witness the fiscal dysfunction that has plagued the Capitol for more than a decade. But while it is true that California is a high-tax state and regulations on business are tougher here than elsewhere, those factors are not the only things that matter when it comes to job creation.

It seems that California’s intrinsic qualities – the weather, the geography, the culture – are just as important.

“We get away with a lot because in a real sense California has one of the best standards of living you can have,” says economist Christopher Thornberg, who, as a native of Rochester, New York, should know. “Sometimes we fail to acknowledge just how important it is to be a highly desirable location. California is a paradise.”

The state’s advantages go beyond the weather and the ocean views, the wine country and the Sierra. California’s location as a gateway to the Pacific Rim is important, especially for the export sector, which is booming. And, despite recent budget cuts, the University of California and the California State University systems still produce thousands of graduates every year who fuel the state’s long-noted drive for innovation.

A case in point: The Wall Street Journal last month published its annual list of the 50 hottest new companies in America, the start-ups most likely to succeed. An astonishing 37 of those 50 firms are headquartered in California. Of the remainder, four are in New York, three in Massachusetts, two in Washington and one each in Texas, Colorado, North Carolina and New Jersey.

And these new firms are not all social media mavens vying to become the next Instagram, the San Francisco-based photo-sharing application that came out of nowhere and was quickly sold to Facebook for $1 billion earlier this year. The start-ups on the Journal’s list include such companies as Achaogen Inc, which is developing anti-biotics to treat multi-drug resistant bacterial infections; Neoconix Inc., which makes sophisticated electrical connections; and Laguna Hills-based Glaukos Corp., which makes medical devices and therapies to fight glaucoma.

Plant closings make big news – like Campbell Soup’s decision last month to shutter its historic Sacramento tomato processing plant or Comcast’s decision to move hundreds of call-center employees out of state. But the hundreds or thousands of small businesses starting up or expanding every year hardly ever become a story. They should, though, because they are the engine driving California’s job growth.

The trick for California will be keeping all those new companies here once they become established and stable. It’s no secret that the Apples and the Intels of the world have moved most of their manufacturing out of state, if not out of the country. Taxes and regulations might be part of the reason. High housing costs for their employees are surely another big factor. But even if California is not destined to be a hotbed of manufacturing again, the engineering, design, and administrative jobs at these companies are still good, high-paying positions.

The bigger question may be whether California’s government will ever be able to innovate at anything approaching the level of the state’s creative private sector. The state government needs to get its budget balanced. It also desperately needs a simpler and more stable tax system, a reliable way to finance education from kindergarten through the universities, and a health and social safety net that catches people when they fall and then helps them get back on their feet and off government assistance.

If those things don’t get done, California’s opportunity society will continue to fray around the edges. Eventually, the state’s location, its weather and its diverse, dynamic population may no longer be enough to power an economy in the face of those heavy headwinds.

For now, California’s economy is doing better than predicted, and better than the conventional wisdom would have you believe. But there is no guarantee that the naysayers will be wrong forever.

Daniel Weintraub has covered California policy and politics for 25 years. He is editor of the California Health Report at

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