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L.A. Had a Great Year Economically, But There Are Signs of Trouble Ahead

DURING the dark days of the recession, economist David Friedman was among the few who saw hope for the battered Southern California economy. In his landmark study, "The New Economy Project," he laid out a scenario in which Los Angeles, with its prodigious economic and social assets, would be able to work its way out of its deep downturn.

Today, few dispute that L.A. has recovered. Local media that could not print enough doom and gloom a few years back now can't seem to restrain their enthusiasm for the booming "Tech Coast." Even the national media, including a front-page article in last week's Wall Street Journal, could signal a new trend among the media herd.

Yet this sudden burst of optimism now has Friedman worried. Looking, as always, at the numbers and trends, he sees a more nuanced and somewhat less rosy picture. Since 1993, he finds that L.A.'s overall job growth has not kept pace with the national average, and the vaunted high-tech industry, even factoring out the aerospace collapse, has been growing at a less robust rate than the national average.

Declines in 'legacy' industries

Like others, Friedman is encouraged by the energy shown recently by the region's dot-com economy, which has re-energized the real estate market, particularly on the Westside, and even stirred hopes for downtown. Yet at the same time he worries about secular declines in several key "legacy" industries -- most notably garments, basic manufacturing and entertainment, where he calculates that overall job losses have reached the 10,000 mark over the past year.

"As a region, we have an enormous legacy of skills and capabilities," suggests the MIT-trained economist, who makes his real living as a lawyer. "We have, an incredible panoply of assets, but we are not growing the way we used to, particularly in high-tech."

In a sense, Friedman catches a dilemma unique to L.A. in the new economy. With the exception of the Bay Area, it is the only mega-city that enjoys a share of high-tech well above the national average (10 percent of the workforce compared to less than 6 percent nationally). That percentage is more than twice as large as the share enjoyed by such rivals as New York.

Yet despite the current Internet-led boom, Los Angeles has seen somewhat slower growth than New York and trails even further the high-tech expansion in more dynamic economies; such as the Bay Area, Seattle and Dallas. Whether the recent expansion of Venture capital in the region -- and the accompanying hype -- will turn this around remains to be seen, because the actual sturdiness of the dot-com economy, and its role as job and wealth generator, has yet to be established.

Friedman's real concern is that Los Angeles -- in its desperation to catch onto the digital bandwagon -- may be forgetting that the past has bequeathed us an economy far more diversified than that of most big cities. Our economy is far less service-dominated than in Boston, San Francisco, or New York -- in the latter city, 90 percent of net job growth has been in services, compared with 65 percent for L.A. At the same time, recent growth is not nearly as high-tech-dependent as greater Washington, San Jose, Austin or Seattle.

These numbers suggest to Friedman that a single-minded fixation on high-tech and associated high-end services could prove dangerous to L.A.'s future. It's true that "boutique" cities such as San Francisco, Boston and even New York (basically meaning Manhattan) have proven successful in reinventing themselves as "hip," post-industrial centers. Yet growth generally has been unbalanced, overwhelmingly oriented to white, yuppie, educated workers, with the largely minority working class being shunted to the fringes.

'Nebulous middle ground'

More vibrant economies like Phoenix and Houston may offer less "fashionability," but they also enjoy far better business climates. These cities do much of what Los Angeles does -- churn out a vast array of products and services -- but at a fraction of the hassle of doing things here.

Ultimately, Friedman fears, Los Angeles could end up falling into a nebulous middle ground -- not favored by the yuppie financial-service and media elites, but not particularly welcoming to entrepreneurial "animal spirits." He is particularly concerned with the renewed vigor of the local environmentalist ultras, who seem determined to stop any future growth in the still robust manufacturing sector, including within the still hard pressed inner city.

"The place still has the diversity of a Houston or Dallas, but we are losing our capitalist ethic," Friedman suggests. "We have great legacy of producing things but we don't value it. I am troubled that our elites have sort of given up on the essentials."

In the next decade, Friedman sees the danger that Los Angeles' economy will mimic New York's in terms of a devastated industrial sector and an economy that provides relatively few blue-collar opportunities, most important for the region's burgeoning Latino population. Even in entertainment, Friedman notes, we are losing "below the line" jobs -- usually high-paid union positions available to working-class people. This loss of middle and lower-level jobs can also be seen in other "legacy" industries like aerospace and garments.

These concerns are not now receiving much attention from our suddenly dot-com-obsessed media. But when the inevitable digital shakeout occurs we may rue the day that we lost our interest in maintaining the region's unique: economic legacy.

Joel Kotkin is a senior fellow with the Pepperdine Institute for Public. Policy and a research fellowat the Reason Public Policy Institute.