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Enron Mail |
NOT-SO-GOLDEN STATE
Looks Like a Recession Economy on the edge Michael J. Boskin Sunday, July 22, 2001 ,2001 San Francisco Chronicle URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/07/22/I N144927.DTL California, the world's fifth largest economy, the global capital of technology and entertainment, is teetering on the brink of a serious recession. Unemployment is rising, job creation is falling and respected forecasters are painting a bleak future for the state. California is not alone. Nationally, the employment picture is also troubling. Income is flat. Industrial production has been shrinking for nine months. Only the mighty consumer has kept the economy going. The key problem is the slowdown in information technology spending, so important for California. Once the engine of productivity growth, and the source of rising standards of living, the double-digit pace of those spending increases slowed dramatically, beginning in the second half of last year. Since then, Silicon Valley companies have experienced sales declines of 5 to 10 percent, not calamitous drops, but compared to the 40 percent growth they had been used to, an enormous gap. Hence these companies have been cutting back on everything from production to personnel to facilities. The "new economy," it turns out, is not immune to the basic laws of economics. Nationally, the most respected "blue chip" private forecasters believe we will avoid a recession. They see the economy growing just over 1 percent this year and by 2 to 3 percent next year. Having been more optimistic for some years, I became more pessimistic last year, and remain so despite the Federal Reserve's interest rate cuts and the Bush administration's tax refunds. Whether we skirt the technical definition of a recession -- two consecutive quarters of negative growth -- will be a close call. We should see a modest recovery late this year, and a pick-up of steam in 2002. The California economy is in for a rougher time, at least in the short term. And this time -- unlike the early 1990s, when Southern California bore the brunt of the severe downturn in the defense industry -- the Bay Area will be hit much harder. While the region grew much faster than the rest of the state in the '90s, most of the symbols of that growth -- full employment, exploding property values, shrinking commercial vacancy rates -- are already history. Workers who just a short time ago were getting BMWs as a signing bonus are now being laid off. Statewide unemployment -- 5.1 percent last month -- is likely to increase another percentage point or more as layoffs continue in high tech and aerospace. Still -- and here's some good news -- Bay Area unemployment, even in Santa Clara County, which took a major hit in June, is still below the statewide rate. In per capita income, the San Francisco and San Jose metropolitan areas are ranked first and second nationwide, 75 percent above the national average. What of the longer term? California faces serious problems, not the least of which is the energy mess, which has exacerbated the current slowdown. Our recovery will probably lag several quarters behind the rest of the country. But the long-term picture is brighter. Information technologies have brought about permanent productivity improvements and transformed virtually every major industry in the so-called "old economy." Such enhancements will themselves result in renewed information technology spending, if not at the frenetic pace of the late 1990s. The main concern is whether California will degenerate into an even more anti-business climate. We are already viewed by the business community as an overtaxed, over-regulated state. Gov. Gray Davis' rhetoric, and some of his actions, during the energy debacle have only added to the impression. While Davis deserves credit for using the bully pulpit to encourage energy conservation, his demagogic attacks on "outside" energy companies, and the suggestion that California should go it alone, are not only poor policy solutions but suggest a degree of economic illiteracy on his part. His plan to have the state play an expanded role in energy production and transportation will require the expenditure of billions of dollars. Do we believe the state government could make those investment decisions wisely, efficiently and devoid of politics? California would be better off if the governor got out of the energy business. The state will also continue to pay for the financial mishandling of the energy situation. The initial refusal by Davis' appointees on the Public Utilities Commission to allow utilities to enter long-term contracts worsened the shortages and sharpened the price spikes. Then, at the peak of the market frenzy, the governor's office negotiated long term contracts that lock the state into paying unnecessarily high prices. And by keeping prices to consumers unrealistically controlled, he has passed the burden for energy costs on to the taxpayers -- current and future. With all the problems and missteps, however, there is great reason to be optimistic about California's economic future. We are still a beacon of opportunity. We still attract the best and the brightest. We are still the best incubator of new ideas and businesses. However, our current woes should remind us not to take economic growth for granted. With better state policy -- lower tax rates, less regulation, reforms to improve our schools, and a more efficient energy and transportation infrastructure -- California will reemerge as the leader of a strong national economy, providing opportunity, mobility and still higher standards of living. Michael J. Boskin was chairman of the President's Council of Economic Advisors from 1989 to 1993. He is now a senior fellow at teh Hoover Institution and the the Tully. M. Friedman Professor of Economics at Stanford.
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