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By Steve Levy

Is the 'California Dream' over?

Uploaded: Mar 27, 2009

In recent weeks there have been a series of articles in the national press about the California economy with the common theme that the "California Dream" is over.

There is no dispute that the California economy is in the midst of this deepening national recession and that families in California, as elsewhere, are suffering the consequences.

But the question of whether the "California Dream" is over asks about our future prospects -- and both data and analysis suggest that the common answer is wrong.

The short-term situation

California continues to participate in the deepening national recession. Job losses accelerated in February and the state's unemployment rate at 10.5 percent has reached the high levels last seen in 1982 and 1983. Job losses are expected to continue for at least six months even if federal economic-recovery efforts are successful.

The human toll on families is increasing in every state. This is truly a national recession, unlike in the 1990s when California was the hardest hit. Deep job losses and increasing unemployment are everywhere. Earlier this week Oregon announced job losses comparable to California's in percentage terms and an unemployment rate of 10.8 percent.

The pattern of job losses tells the story of a deep cyclical recession driven by California's deep housing downturn and the plunge in consumer and business spending across the nation. The hardest hit states are those with the biggest housing bubbles -- such as Florida, Nevada, Arizona and California -- and states with big manufacturing sectors such as Michigan, North Carolina and Ohio.

California's job losses are almost entirely related to construction and finance (the housing decline) and retail trade and manufacturing (the decline in consumer spending across the nation and the sharp drop in world trade).

Longer term: Can we do better in average job growth?

During this decade California has become an average-job-growth state. During the aftermath the state trailed the nation in job growth, followed by years when California outpaced the nation in the middle of this decade. Now with the state's greater exposure to the housing and foreign-trade downturns, job growth again temporarily trails the nation.

The high unemployment rates reflect both sharp job losses and a rapid rise in the labor force. California added more than 350,000 workers at a time when job levels were declining. If California had experienced average labor-force growth, the state's unemployment rate would be closer to 9.5 percent, still very high but not much above the rate in most large states.

The longer-term outlook obviously depends on the success of national policies to boost employment and stabilize the housing and banking sectors.

When the recession ends, the California economy has strengths in terms of where the national and world economies are headed. That will not help residents in this year but it does paint a different picture than the national-press articles about California "losing its mojo."

It is helpful to remember that during this decade California has reached record levels in terms of our share of national venture capital funding -- just when the application of science and technology are once again on the national agenda.

Applying technology and creativity to national and global challenges will be an even more important part of our economic future with the science-based agenda of the new administration. Areas such as alternative energy and medical records technology will be added to the continuing growth in Internet-related activities, along with the application of creativity in entertainment, design and social networking.

And unless the world economy collapses, California will benefit from the return and long-term growth in trade, tourism and technology.

Will the Dream survive?

The "California Dream" has been threatened not by our pattern of industries but by housing prices that made living in California unaffordable for most families, and by longstanding political gridlock over key budget and policy choices.

One "silver lining" out of the sharp downturn in housing prices is that many California markets are now affordable. Demand for housing at low "foreclosure prices" is surprisingly strong. The growing out-migration of residents to other states coincided not with a bad economy (California outperformed the nation in 2006, 2007 and early 2008) but with the highest housing prices relative to the nation in history.

It remains to be seen whether Californians can forge a political consensus about state policies to achieve a long-term budget balance while investing wisely to make California an attractive place to live and work. This will determine whether the California Dream can remain alive.