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.