California Dreamin' of Robust Economy

State emerges from five years of recession with an economic structure for the post-cold-war era

IN a Los Angeles hanger once used to build military aircraft, DreamWorks, Hollywood's newest and most high-technology studio, is rising. The transformation is perhaps the most striking example of how the California economy is restructuring as it recovers from a deep recession and adjusts to the post-cold-war era.

Defense and aerospace industries, once cornerstones of California's prosperity, have chopped their work forces here, accounting for almost two-thirds of job losses during the state's five-year recession. More people are now at work making movies than building airplanes and rockets.

For some analysts, California represents the first case of a successful shift to a post-cold-war economy. But others focus on the still unmanaged problem of hundreds of thousands of workers left behind by the change.

"We are witnessing a dramatic shift from traditional manufacturing and defense to highly paid jobs in more specialized industrial, culture, and technology-oriented fields," economists Joel Kotkin and Stephen Levy wrote in an upbeat report on the California economy issued recently by the Center for the New West. The study is one of several that have examined how California has coped with the drastic defense cutbacks.

Analysts point to the emergence of powerful new engines for the California economy - ones more immune to the ups and downs of economic cycles. Computers, software, entertainment, biotechnology, and environmental engineering are now replacing aerospace as the high-technology drivers here, they say. Recent job gains have almost completely restored California to pre-recession employment levels.

But not everyone shares the optimism that has started to take hold again in this once-Golden State. A study released today on defense downsizing and conversion in the Los Angeles region argues that the new growth sectors, such as entertainment and services, are not able to replace the high-quality jobs lost in aerospace. More defense cutbacks are on the way, the reports' authors predict.

"You've still got an economy that lost over a period of five years a lot of high- and middle-wage jobs," says Michael Oden, a Rutgers University researcher and a co-author of the study. "It's replacing those with some high-wage jobs and a lot of low-wage jobs. The sky is not falling, [but] it's not a smiley-face picture."

The study advocates more active policies - including close cooperation between government, labor, and private firms - to aid displaced workers and to help defense firms diversify into new civilian markets.

Most analysts agree that defense cuts, which came with the end of the cold war, have been the single most powerful factor behind the depth of California's recession, which finally began to ease this past year. California lost 230,000 jobs in aerospace, almost half the entire work force in that industry. Together with base closings and the secondary effects of those losses, state officials estimate that the defense downsizing accounts for 500,000 of the 730,000 jobs lost during the recession.

WHAT remains unclear is what happened to those defense workers. "I am hesitant to use the word 'defense conversion' because in many instances people were not recycled into the new, high-tech, computer-software industries," says Ted Gibson, chief economist of the California Department of Finance.

Michael Dardia, co-author of a soon-to-be-released Rand Corporation study of California's defense cutbacks, contends that aerospace workers managed the downturn with less hardship than other reports suggest. He carried out a detailed tracking of some 517,000 aerospace workers, which found that about a third of the workers dropped out of the California work force. He estimates that most of those either took early retirement, moved out of the state, or became self-employed.

"The economy's actually pretty robust and is quite capable of adjusting to a big shock like this without government direction, but at a cost - and sometimes a quite heavy cost - to workers displaced in the process," says Dardia, a researcher at the Public Policy Institute of California.

Dardia disputes proposals to encourage investment in new technologies, such as electric vehicles, advanced by the authors of the Los Angeles-region study. "Government aid should be directed toward workers, not firms," he says. "I don't believe we can outguess what these firms should do."