STRENGTHS & weaknesses
Expert breaks down the state’s economic challenges and why there’s a glimmer of hope
California’s economy once seemed like an unstoppable force nationally and globally thanks to economic powerhouses including Silicon Valley’s technology behemoths, Southern California’s dominant entertainment industry, a booming real estate market and one of the largest agricultural sectors in the world.
These days, John Lettieri, CEO of the Economic Innovation Group, has a lot less to be optimistic about with California’s economy. His Washington, D.c.-based organization was founded by billionaire Sean Parker of Napster and Facebook fame to research and work on public policy issues around entrepreneurship, economic mobility and the struggles of those left behind by the U.S. economy. We spoke with him about the strengths and weaknesses of the California economy, which has gone from global darling to having one of the highest unemployment rates in the nation. This interview has been lightly edited for length and clarity.
Q
What are some of the strengths you see in California’s economy that might protect it from this downturn?
A
If you look at the Bay Area, Los Angeles, those are two entrepreneurial and innovation ecosystems that are tremendously successful and a huge part of the state’s overall economic success story. There’s no doubt that when you think about places that are going
to be, at least on some level, immune to the worst effects of an economic crisis like this, having those types of centers of entrepreneurship, high growth entrepreneurship in particular, and technology- oriented innovation, that’s going to help. But those are outliers. Those are outliers in the world. Those are outliers in our country, and those are outliers within the state of California.
If you look at the aggregate numbers, California is also a deeply unequal state in terms of economic well-being and in terms of indicators like entrepreneurship itself. And so it’s going to be a much more uneven story than what you get with statewide numbers. But California is a large economy. It’s a diverse economy. It has everything as you know, from agriculture to technology, heavy manufacturing, natural resource extraction.
That diversity is a strength as well because it creates a broader economic base, but it also means that from one part of the state to another, you’re going to see some very different outcomes in terms of how the pandemic affects the economy. One particular challenge that I think is coming ripe for the state is the inability really to build housing near those centers of economic opportunity, which is a man-made problem, not an outside crisis. The zoning and land-use regulations that prevent, for example, in San Francisco, adequate housing to be built to meet demand means that it’s driven a lot of inequality in the state and that the growth of cities like San Francisco and Los Angeles has not always benefited, and in fact actively harmed in some ways, people who are more vulnerable, who are unable to afford housing near where the jobs are, which drives all kinds of other problems.
Q
Do you see the housing crisis weighing down California’s efforts to recover economically?
A
Absolutely. I think it’s a tax on growth. It’s a particular tax on people who are least able to afford the detrimental effects that California’s housing policy has. There is also some rebalancing that could be happening. The nature of this crisis driving at least some people away from urban areas, and out of some of the higher cost urban areas in particular, there could be some countervailing effects where that inadvertently helps to take some of the acuteness, the edge, off the crisis to begin with.
If there’s less demand in cities like San Francisco, for example, mechanically that … drives (down) rents and the cost of housing in a city like that. But that’s the wrong way to get there. You can either build enough supply to accommodate demand so you have a growing, healthy, vibrant city, or you see housing values and rents plummet because people give up on trying to live there. What is a potential liability for cities like San Francisco is an opportunity for cities like Austin, Salt Lake City and many others.
Q
Your organization has been tracking small businesses, analyzing the Census Bureau’s Small Business Pulse Survey and more. What are you seeing from those companies, which are a significant part of our economy?
A
The numbers are very sobering in California. California is one of the top 10 states in the country when it comes to the share of businesses reporting a large negative effect from the pandemic. And in California’s case, it’s 36% of all businesses reporting a large negative effect. That alone is very sobering.
If you look at the pulse survey on the question of does a business expect to need to obtain financial assistance or additional capital in the next six months in order to survive, over a quarter of California’s businesses say they do and 6% on top of that say they expect to permanently close the next six months. Six percent may not sound like a lot, but that’s, that’s very, very bad.
Let’s zoom out to the federal level. This is a crisis now stretching into its seventh month. A lot of the key features of the early response federally have expired, particularly the small business piece, which inexplicably Congress has allowed to expire with over $100 billion of funding left undistributed.
And we know the consequences of this. Those small businesses die off. It makes every aspect of the recovery harder to get right. It means a slower, more painful recovery. It means a recovery that takes longer to reengage workers who have lost their jobs, to pull them back into the labor market, it means destabilization for the most vulnerable people and communities. So this is really the job of the federal government in a crisis, to help bridge that gap. And they’ve fallen down on the job.
Q
Do you see any silver linings or any hopeful signs that maybe we can rebuild the economy going forward to address some of those inequities you’ve mentioned that were maybe papered over by a growing economy?
A
There is certainly opportunity in every crisis including this one. And so I think to the extent that it shines a spotlight on the unfinished business that was there before this crisis hit and makes that unfinished business less acceptable to ignore, I think that’s my hope, that things that would have otherwise been papered over, as you said, for who knows how much longer, this shines a spotlight on the urgency of taking care of that.
Another one that I would point to actually relates to entrepreneurship. The census has started tracking what are called high-propensity business applications, which means a business that has a very high likelihood of starting and hiring employees. Those have gone way up since the crisis hit. Initially, they took a huge dip as you would expect, but then they’ve surged, and that includes in California. And that’s also a hopeful sign in terms of building a more inclusive economy because we know that entrepreneurship is such an important pathway to economic independence.