California as a 21st-Century Economy

Golden State emerges from worst recession in 60 years by reinventing industrial base.

Call it the Arnold Schwarzenegger of American states.

Like the actor's cinematic "Terminator," who returned taller and stronger to proclaim "I'm baaack" in the popular movie sequel, California is resurrecting itself as in few other times in history.

The Golden State - by itself the world's eighth-largest economy - has weathered its worst recession since the Great Depression in part by reinventing itself.

In a move that may hold lessons for other states and nations, California has shifted away from a defense-heavy industrial base to a more entrepreneurial high-tech economy of tomorrow. The new focus has helped the state emerge from seven years of natural and social disasters - fires, earthquakes, riots - with one foot firmly planted in the 21st century.

Underlying its striking reversal of fortune, however, linger several questions: Will California be able to cope with the dramatic surge in population being driven in part by its robust economy? Will the state's improved economic outlook help overcome entrenched social problems - including a rising underclass?

"It's time now for Californians to prepare to meet the tests of population growth a soaring economy will bring," says Steve Levy, director of the Center for the Continuing Study of the California Economy. "There is not a major growth industry in the world that California does not have a strong position in for the next two decades."

Evidence of California's comeback is coming from two directions.

First, economists are lauding the creation of nearly 1.5 million jobs since 1990 when the state's worst recession since the Great Depression began. The post war decline of aerospace cost the state between 300,000 and 500,000 jobs, and a sour economy took 300,000 more. But now, led by upsurges in foreign trade as well as in the movie industry, computers, software, multimedia, and other high-tech industries, the lost jobs have been recouped and another 700,000 added.

The state moved from its long-term, heavy reliance on aerospace and defense by both rewriting laws and tax codes and cutting the red tape that was driving firms to less-regulated states.

"California learned the lesson of arrogance, that you could ask businesses to pay a premium but you couldn't extort them," says Joel Kotkin, senior fellow at the Denver-based Center for the New West. "They also learned to embrace diversity and get off the Pentagon steroids [defense money]."

Jack Kyser, chief economist at the Los Angeles Economic Development Corporation characterizes the rebound primarily as "silicon and celluloid" - computer chips and films. The expansion and wealth of firms in Silicon Valley in northern California has been followed by the growth of similar firms south and east of L.A.

In between, a kind of hybrid sector of the economy dubbed "Siliwood" for its mix of Silicon Valley's computer wizardry and Hollywood's imagination, has brought Los Angeles into recovery. Dozens of firms are involved in multimedia - using computers to reinvent films (such as talking pigs in 1996's "Babe") and making laser video games and high-tech theme parks.

"It's one of the largest, national, big-city turnarounds in decades," says Mr. Kotkin.

Such expansions are predicted to help California outpace the nation for several years in rates of economic output, job growth, and lowered unemployment.

And partly because of this long-term economic optimism, a second consequence of the California comeback is that, according to the US Census Bureau, the state will add 18 million people by 2025. That would put it at about 50 million, roughly the size of France.

But a consequence of such growth would be new pressure on schools, prisons, water supplies, air quality, road congestion, and urban sprawl.

Cities such as Fresno and Modesto have already encroached on America's most productive farmland - producer of half the nation's fruits and vegetables. From 1980 to 1990, some 50,000 farm acres a year were lost. Historian Kevin Starr calls it "California's Third Force ... the offloading of congestion from the coast."

And there are many other caveats in the California comeback, economists say. Among them is the fact that the skilled labor necessary to staff the new high-tech firms is limited, as is space to house them. In addition, labor unrest is ripe for union activity, which may eventually drive prospective firms away, and some see a weakening in Republican Party fortunes, which could hurt recent pro-business legislative gains.

"The real fly in the ointment for California," adds David Hensley, an economist at Salomon Brothers in New York, "is that the longer its expansion continues, the more the state's fortunes begins to recouple with that of the nation. Then if the US goes down, the state goes with it."