Facing the hidden economic problem of California's recovery
September 25, 2019 by Mark Pisano, USC Price School
California is in the midst of the longest economic recovery in economic history, 10 years of increased growth and counting. At last report California led the way with 26 percent of national job growth this past year. Unemployment levels for California and the nation were at all-time lows. Yet we are faced with social and economic impacts, again with California leading the way with statistics with which we have become all too familiar: record number of homelessness, decline in housing production and other indicators of economic stress, including a re-emergence of government and household, and student loan debt, and a continual portrayal of a declining middle class. So what gives and why the mixed messages?
The state's demographics continue to change with two thirds of the growth in population comes from those over 65 living longer, and our population growth in California in 2018 was the lowest in recent history. If there is lower working age population growth, by such a large amount, you would expect lower unemployment. So, our economic miracle of low unemployment is likely to be caused not by a robust economy but this historic demographic trend. Add to this the low labor force participation, simply stated, many people not looking for work, and we have something wrong with our recovery.
The Hollowing Out of Middle-income Jobs
The simple reason is the economy is not working for everyone. Those in the digital economy are doing exceedingly well, with California leading the nation and the world. Other sectors, particularly those associated with manual skills and low service sector, are not. One need only look at the income of the jobs that were created in California during the period of the longest recovery in our history, 2007 to today. Since the recovery began over sixty percent of all the jobs created in the state of California earned $18 hour and less ($32,000 and less). From the middle-income job range (up to $30 hour or $68,000 per year), the state has actually lost more than 240,000 jobs. Forty percent of the jobs created in the state made over $30 per hour or over $68,000 per year. There has been a hollowing out of middle-income jobs and the preponderance of jobs is lower income.
Even more surprising, when compared to the rest of the U.S., the record is flipped, with over 60 percent of all jobs in the nation earning over $68,000 and 40 percent earned lower than $32,000. The hollowing out of the middle-income job performance was similar with the nation losing almost a million middle-income jobs. When you then add the higher cost of living in California to the picture it becomes clear that living in the state is difficult for most of the residents.
What are the implications of this picture for the 2019 Fresno Economic Summit? The hidden problem is the economic base of the state. This observation can also be made for the rest of country as well. The fundamental question we are facing is why that is so.
Medium Incomes vs. Median Cost Housing
It is clear that we created an income picture or economic base that does not work for everyone. The reason this is such a critical question is that this hidden problem is at the root of our political and social dysfunction, namely the evisceration of our middle class. One of the implications of this impact is of the worsening housing and homeless issue in which income is the critical determinate. To purchase homes and even to rent, the buyer or renter will need to qualify for a loan or show income for a rental payment. Living units are considered market goods with the principles of supply and demand applying. If incomes or subsidies are not sufficient, the private sector will not build them. Building permits issued during 2007-2017 averaged 83,700 per year. Since building permits include subsidize units, the total amount build is about equal to the number of wage earners, 76,600 on average per year, making more than $68,000 per year and our subsidized units per year.
If our goal is to double or triple this number, then incomes of middle income and lower income will need to increase. Moreover, housing affordability including homelessness is only one of the major challenges facing our dwindling middle class and our increasing lower income populations. If this income problem is not corrected, both the housing and homeless issues will worsen.
Focusing On The Working Age Population and Skills
What is our strategy to deal with this hidden erosion of our economic capacity? Is there some root cause? Part of the answer is in the historic demographic transformation, the age change in our population: more growth in older income individuals who make less, consume less and pay less taxes coupled with slower growth of working age population who make more, consume more and pay more taxes is having a significant cumulative impact on our economy. The amounts are staggering.
The key policy is to recognize that no working age person is disposable. A new focus on the declining labor force participation rate could target those left behind: imprisoned, handicapped — both physical and mental — and those who drop out due to drugs and other causes, including the homeless. Working longer than historical working age, taking note of what Germany did this past decade — 85 percent of new workers were over 65 years of age. Historically we have dealt with working age population needs through immigration policies. The Governor, legislators and other political leaders throughout the state have initiated policies that would continue this practice. Suffice to say there is a long-term economic policy need to make a strategic immigration policy work. For good economic reasons, California is leading the nation.
Finally, and most importantly we need to look at the economic base of our regions and develop policies that reflect the job development needs of both rural and urban regions. Have we aimed our policies too exclusively on the digital sectors in our economy and not paid sufficient attention to the sectors that use manual skills are the primary driver? Our educational policies are now just beginning to work on developing these skills. Lifelong focus on these skills early in the educational system and continuing this development throughout careers is greatly assisting German and French workers and helping to sustain their advanced manufacturing sectors and reduce income inequities.
A related strategy of focusing on infrastructure and regional growth policies to support both advanced manufacturing and advanced logistics is greatly needed and almost totally missing from our regional and the state economic development policies. Our private sector is moving in this direction, but our public policy is not keeping up. An example of an urban transformational employment growth model headed by the Infrastructure Funding Alliance, a partner with California Forward, will advance the equivalence of an infill strategy for the manual skill portion of our economic base. The objective is to form an Enhanced Infrastructure Financing District that will implement the strategy in the San Pedro Ports. Underlying this strategy is the development of zero emission strategy for goods movement as the driving force behind an advanced logistics’ and manufacturing new reality.
In conclusion, we will not be successful in carrying out our housing and homelessness objectives — let alone other desperately needed services like health care, education, day care and others — until we bring all of our population into the economic opportunities of California. Changing our economic base will require all the partnerships involved in the California Economic Summit to rise to the challenge.
Mark Pisano is a Professor of the Practice of Public Administration at the University of Southern California Sol Price School of Public Policy.