The GOP gubernatorial candidate promises to cut spending and suggests that lower taxes and less regulation will spur business. But experts say the bleak economy is mostly due to the real estate crisis.

By Michael J. Mishak, Los Angeles Times
September 18, 2010|6:26 p.m.

Reporting from Sacramento —

When Meg Whitman says California is bleeding jobs, the Republican gubernatorial nominee often cites the exit of Northrop Grumman.

After 70 years in Southern California, Northrop, the nation’s second-largest defense contractor, announced in January that it was moving its corporate headquarters to the Washington, D.C., area. On the campaign trail, Whitman uses the company’s decision to highlight the need for aggressive action as the state grapples with what she describes as a corporate exodus.

“We have got to have an economic development team that stands up and competes for California jobs,” she said at a recent appearance in Folsom, near Sacramento.

But Gov. Arnold Schwarzenegger created such a team in April — and it would have had little leverage with Northrop Grumman. The company said it left the state not because of high taxes or cumbersome regulations but to be closer to its key customer: the U.S. government. The exit represents a net loss of about 300 white-collar jobs, the firm says; the bulk of its California workforce — about 30,000 employees — remains in the state.

Whitman, the former head of EBay, promises to help turn California’s economy around by cutting government spending as much as $15 billion, including the elimination of 40,000 state jobs. She would become marketer-in-chief, using the bully pulpit of the governor’s office and the power of political appointments to draw business here.

She suggests that if the government also cut taxes, eased regulations and focused more on recruiting new companies and retaining those already here, California would not be suffering record unemployment.

But many policy experts say such plans will do little in the short term to create the 2 million new jobs Whitman promises: The state’s bleak economy is primarily the result of its deep investment in the real estate boom. The resulting mortgage crisis and credit crunch led to hundreds of thousands of construction-related workers being laid off in an industry that is unlikely to rebound anytime soon.

Most large corporations and small businesses are basing key decisions on factors over which a governor’s economic team would have little influence, the experts say. Credit markets are still tight and consumer confidence remains low.

Unlike Whitman, Democratic nominee Jerry Brown has not made the economy the centerpiece of his campaign or provided the level of detail in his proposals that Whitman has in the 34-page, magazine-style document that lays out her ideas.

Brown released a jobs plan last month aimed at expanding the renewable-energy industry and supports “strike teams” to help businesses cut bureaucratic red tape, in addition to advocating tax credits for manufacturers and less regulation. But on the stump he focuses on his past experience as governor and his ability to bring people together to solve the state’s problems.

Whitman’s ideas have been endorsed by the California Chamber of Commerce and the state chapter of the National Federation of Independent Business. And John Taylor, a Stanford University economist who advises her, said the plan would make California more attractive to business so that the state, which has retained many corporate headquarters, does not lose out on expansion opportunities to other places.

“Lower tax rates encourage businesses and create jobs,” he said. “You make it easier for firms to set up and expand.”

Economists agree that the state does not attract many new businesses from elsewhere. But according to the Public Policy Institute of California, the jobs it loses as a result of relocations total about 11,000 a year — less than one-tenth of 1% of California’s 18 million jobs. Moreover, in a downturn, marketing and outreach play a relatively small role in California’s economy, which, like the national economy, expanded and collapsed with the housing bubble.

The experts say California’s job growth has been closely tied to the national economy for the last 30 years — regardless of policies in Sacramento — after outperforming the country during the Cold War era, when the state was home to several large contractors and dozens of military bases.

The state’s jobless rate is higher than the national rate of 9.5%; so are those in neighboring Nevada, Oregon and Arizona. But experts say California’s unemployment is consistently higher because its population growth tends to outpace job creation. State unemployment surpassed the national rate during the technology boom of the late 1990s, even as California outperformed the country in job growth.

“There are limits on what governors can do,” said Stephen Levy, director and senior economist at the Center for Continuing Study of the California Economy. “Most of what happens is governed by world and national and macro-economic forces that we struggle to grab hold of even with all the tools a federal government has.”

Levy and others point to Schwarzenegger’s efforts as Exhibit A.

In 2004, he drove the Las Vegas Strip in an 18-wheeler bearing the words “Arnold’s Moving Company” to launch a nationwide marketing campaign. He put recruitment billboards in other states that read, “Arnold says: California Wants Your Business.”

He traveled on international trade missions. And he created the Governor’s Office of Economic Development. That has had some early successes, including wooing Tesla Motors Inc. to restart a manufacturing plant in Northern California formerly operated by Toyota and General Motors. About 1,000 workers will make electric cars there.

But Wayne Schell, president and chief executive of the California Assn. for Local Economic Development, said most of the efforts amounted to “shotgun economic development,” a reaction to events rather than a comprehensive strategy for targeting industries. Unemployment was 6.7% when Schwarzenegger took office; it’s 12.3% now.

Whitman says she would eliminate taxes on manufacturing equipment and capital gains, increase the research and development tax credit for businesses and cut red tape. Schwarzenegger has tackled these areas, with mixed success.

But the problem is cyclical, not structural, economists said.

Whitman “talks as if the California economy is shriveling up and blowing away in the wind. That’s not true,” said Christopher Thornberg, a founder of Beacon Economics in Los Angeles.

He and other experts point to the same positive indicator: More than half of the venture capital invested in U.S. companies in the second quarter of this year poured into California, the most since the third quarter of 2008, when the national economy collapsed.

Although Whitman acknowledges that fact on the stump, she cites the state’s poor rankings in national surveys of business climates to convey the message that California is losing its competitive edge. This year, Chief Executive magazine named California the worst state in the country for business, saying it was on its way to becoming the “Venezuela of North America.”

Some economists say the rankings she cites, by focusing on taxes and regulation, take a narrow view of the business climate.

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