Coping With The Big Squeeze: A High-Tech Exodus Looms as Growth Chokes State

By Jock O'Connell and James R. King*

This is the authors' text of an article that appeared in the Forum section of the Sacramento Bee on Sunday, January 30, 2000.

California's economy has been expanding at an astonishing pace in recent years, with the rate of job creation continuing to exceed growth in the workforce, not to mention the expectations of nearly all economists. That's the good news. The bad news is that California -- a state with historically one of the nation's poorest business retention records, ranking 49th in one recent national survey -- is also poised to see a sharp rise in the number of companies opting to relocate and/or expand their operations elsewhere.

The news gets worse. Unlike previous waves of out-of-state business migration, which generally saw the departure of struggling companies drawn from the mature industries of the Old Economy, this time around the exodus of businesses is apt to feature many of the most highly successful companies of the ascendent New Economy.

The reason for this is not difficult to fathom. Simply put, California is in danger of gagging on its own prosperity.

According to the Palo Alto based Center for Continuing Study of the California Economy (CCSCE), the state's ten largest concentrations of households, income and spending and the state's ten wealthiest counties in 2010 will be either in or on the fringes of four regions: the San Francisco Bay Area, Los Angeles, San Diego and Sacramento. Most of the state's fastest growing counties like El Dorado, Placer, Riverside, San Benito, San Bernardino and Solano are near existing job concentrations. "The quality of life for most Californians will be determined by how these large regions handle the growth pressures," warns Stephen Levy, the CCSCE's chief economist.

Yet, with the only temporary exception of Sacramento, these regions are already cursed with impossible traffic congestion, inadequate supplies of affordable housing, and a diminishing inventory of commercial real estate. Further economic activity will only send the cost-of-living and the quality of life in these areas in opposite directions -- long before massive new public works projects will have any material impact in remedying deficiencies in transportation, housing, and overall infrastructure.

LA is suffering an acute shortage of industrial property, especially for manufacturing and logistics uses. Land-use priorities have favored retail establishments. As a consequence, according to the Los Angeles County Economic Development Corporation, many potential manufacturing sites are being consumed by ‘big-box' retail. In a report issued last September, the LAEDC projected the need for industrial space in LA County at nearly 22 million square feet per year, but pointed out that the current completion rate is less than half that. The report concluded: "We risk losing our high-growth manufacturers if we can't meet their expansion needs."

LA also has a critical shortage of affordable housing as a result of high construction costs and a general scarcity of land. Developers are building only about 5,000 apartments a year in Los Angeles County, compared with tens of thousands per year in the 1970s and 1980s, according to the Construction Industry Research Board.

Then there's the traffic. LA County has what is commonly regarded as the worst traffic congestion problem in the nation. Transportation California, an organization allied with the Washington-based Road Information Program, issued a study last fall estimating that 77% of travel in the Los Angeles region occurs under congested conditions, which CalTrans defines as movement at speeds of 35 mph or less.

The situation is not appreciable different in the Bay Area, where business groups have been fretting for years about the region's ability to attract and retain workers. But the situation is now reaching a crisis point, according to Keith Kennedy, chief executive officer of Watkins-Johnson, a major high-tech manufacturer. ``We're able to entice workers for three to four years, but employees are leaving when they become most productive. We're training people for other areas like Austin, Colorado and Seattle' where housing costs are lower and the quality of life is better."

Santa Clara County is building one house for every three jobs being created. In neighboring Contra Costa and Alameda County, the ratio one house for every 2.25 new jobs. Overall, Silicon Valley faces a shortage of 100,000 homes by 2010, according to a new study released by the Silicon Valley Manufacturing Group.

With supply so limited and stock-option wealth exploding, housing prices have been soaring. Not surprisingly, less than 30 percent of households in the Bay Area can afford a home compared to more than 50 percent of all households nationwide. One dispiriting outcome: San Francisco's ultra chic restaurants are reportedly finding it difficult to attract top-flight chefs.

Gary Fazzino, mayor of Palo Alto and a government affairs executive for Hewlett-Packard Co., concludes that there may be only so much growth the Bay Area can take: "This area has a limited carrying capacity.''

Throughout the state's major metropolitan areas, the inescapable consequence is that the fast-growing New Economy firms most in need of more physical space and more skilled workers will literally be squeezed out of their current locations and, quite possibly, out of California entirely.

Consider the case of one Silicon Valley company, a world leader in the field of motion control devices. It must relocate because it cannot find clerical workers -- essential but generally lower paid -- who can afford to live within a reasonable commute of the firm's Mountain View plant. Fortunately, the firm (whose name cannot be disclosed pending its relocation) has been persuaded to move to the Sacramento area.

California is not always so lucky, though. "Once firms start considering a relocation move, they tend to get caught up in the lure of the inducements being offered by other states," says Greg Whitney, vice president for business development at the LAEDC.

Larger California companies with existing facilties in other states or countries have a different option in dealing with California's congestion. They commonly undertake business expansion by assigning new projects to their out-of-state plants. For example, Nasco Aviation handles as much work as it can at its Wichita, Kansas, plant rather than at its Gardena facility because of the high costs of doing business in Los Angeles County, according to the firm's president Phillip Friedman.

So what's to be done to prevent a hemorrhage of high-paying jobs and advanced technology? One answer that is rapidly gaining favor in political circles would encourage fast-growing firms to expand into some of the state's less congested rural areas or into its economically disadvantaged urban neighborhoods. Keep the headquarters and vital R&D work in Sunnyvale or in West LA but, where feasible, relocate much of the rest of the company's operations to places like the San Joaquin Valley or even to "brownfield" sites within the state's distressed urban cores.

At first blush, this seems an eminently sensible solution to the challenge of retaining business in the Golden State. Even better, it's an approach that would also foster a more equitable distribution of opportunity and income among the state's diverse regions.

Nothing, however, is quite so complicated as an elegant solution. There are significant obstacles that would thwart the implementation of a strategy intended to channel industrial expansion into new areas -- not the least of which is that it asks traditional adversaries to collaborate in earnest.

From its origins, the business of economic development has long been intensely competitive, pitting neighbor against neighbor, region against region, and state against state. Attempts by officials of one city to entice a firm to move from another community are commonly regarded as poaching, a practice some local officials have sought to outlaw.

Changing circumstances are demanding that public officials and economic development professionals throughout California -- at the state as well as the regional and local levels -- learn to restrain old rivalries in favor of devising more cooperative strategies for ensuring prosperity for every corner of the state. As the California Economic Strategy Panel notes in a recent draft report: "Traditional political, organizational, and institutional forms and approaches are out of alignment with the new economy."

Incentives from the state are likely to be indispensable in helping local authorities avoid the failures of regional policymaking that are now forcing workers in Silicon Valley to find distant homes in the San Joaquin Valley. So long as public opinion resists the establishment of effective regional governments to cope with problems that spill across historical boundaries, the means must be found for persuading local leaders to work much more cooperatively than has been their custom in the past.

One of the more evident ways of doing so is through the judicious allotment of infrastructure development funds — smart investments of the sort advocated by Treasurer Phil Angelides. Recognizing that infrastructure investments are key determinants of future growth patterns, Angelides argued last June that "any state capital financing outlay financing process must include a strong regional planning component, with state infrastructure investments made in accordance with and in support of credible regional plans."

There is no way around it. State government must assume a more active role in plotting a comprehensive economic development strategy for California. The heart of that strategy should be a clear, long-term commitment to take exceptional measures to achieve a more equitable distribution of economic opportunity and personal income throughout all of California.

The guts of that strategy has to be a more astute set of measures that provide local and regional officials with greater incentives to collaborate across jurisdictional lines. Merely praying for a burst of enlightened self-interest to foster a new sense of collective responsibility is unlikely to produce the desired outcomes.

Fortunately, there are signs that a growing number of local economic development officials have been taking a less combative approach to the prospect of greater regional cooperation in recent years. That's progress.

But any strategy aimed at redirecting commerce into some of California's less-developed regions also encounters important practical barriers. First, the physical infrastructure needed to accommodate new industry is frequently lacking. Second, similarly absent is a workforce equipped with the skills the New Economy demands.

Substantial new investments will be needed if the foundation for sustained economic growth is to be laid in regions like the San Joaquin Valley or the North Coast or distressed urban neighborhoods. By happy coincidence, the times seem unusually hospitable to those who fund these needs. Unprecedented prosperity has yielded large budget surpluses, considerable portions of which are available for investing in the state's future economic vitality. The climate for expanded investment in the state's economic infrastructure is more favorable now than it has been in more than a decade. The case for ‘smart' infrastructure projects has been advanced at the highest political levels in the state.

The key variable, as always, is the willingness of state leaders to aim adequate funds at the problem and pull the financing trigger. Ever since the master-builder days of Earl Warren and Pat Brown, California's governors have grown accustomed to preaching public penury — even while they celebrate the Golden State's stature as an economic powerhouse larger than all but a handful of nations. For his part, Gov. Davis has been reluctant to allocate surplus budget funds to anything but one-time infrastructure projects. In the San Joaquin Valley, however, future economic prosperity is apt to need more than a few quick fixes.

Then there are the politics of distribution. State officials will be sorely tempted to pour a disproportionate share of the funds available for infrastructure investments into those densely-populated areas that have been already overwhelmed by commercial development and population growth. After all, that's where millions of voters live and work.

There is no question that substantial remedial investments are necessary if these regions are to cope with the consequences of having so poorly managed past growth. But this should not excuse the continued neglect of California's poorer regions. If anything, the elevation of the state's less intensely developed regions should be regarded as a test case -- perhaps California's last, best chance to do economic development right.

What, precisely, to do will be the subject of intensive debate. Expanding transportation facilities linking the northern San Joaquin Valley to Silicon Valley and the Bay Area are valuable measures. Widening Hwy. 99 along its entire length would be another.

So, too, would be new programs aimed at enhancing the education and training of those most endanger of being economically disenfranchised by the New Economy. State and local officials might also consider supporting the establishment of satellite work facilities in the San Joaquin Valley to which employees of high-tech Bay Area firms might report for work at least a couple of days a week. Private sector employers could share the cost of such offices. Eventually, these offices could serve as the seeds for industrial expansion into the San Joaquin Valley, thus eliminating the need for long-distance commuting altogether for many workers.

To supplement existing infrastructure development funds, state and local officials may wish to look more assiduously to foreign sources for the new funds needed to help finance economic development projects. We tend to forget that much of America's original infrastructure — from the Erie Canal to the transcontinental railroads — were financed largely by European investors. Furthermore, by regarding capital as a fungible commodity, we fail to appreciate the value of aggressively promoting opportunities for lucrative investments in California's less developed regions in the huge money management centers of Europe and the Far East. By cultivating sources of foreign investment, the State's foreign trade offices in cities like Tokyo, Hong Kong and especially London (where money managers control over $4.1 trillion in investment funds) could leave a more indelible mark on California's economic landscape than by merely schlepping for companies that may or may not have their hearts in exporting.

In the final analysis, though, meeting the goal of more equitable economic growth begins with a new attitude toward economic development both at the local and regional levels and in state government. Practices that appear to have worked in the past are seldom of much help in negotiating a very different future.

As California's economy becomes further integrated into global production and distribution networks, state and local economic development officials have no choice but to evolve new strategies for business expansion and attraction. Ultimately, this will require California to marshal all of its assets and resources — not just those currently located in Los Angeles and the Bay Area.

Whatever specific policies are adopted, there must also be a commitment to patience. The disjuncture between the political world and the real world is nowhere more apparent than when it comes to time frames. Elected officials understandably want to see measurable progress within election cycles because, implicitly at least, that's what voters also expect.

The problem, of course, is that progress in dealing with monumental challenges generally occurs very slowly and is sometimes accompanied by setbacks. Overcoming the widespread poverty of the Central Valley will not come within the terms of those now holding office. It will, for example, take another generation or two before the new UC Merced campus will begin to have a significant impact on the San Joaquin Valley economy.

Still, if an economic development strategy is managed well, California can be known not merely as an avatar of the New Economy but also as a state celebrated for the way in which it ensured an equitable distribution of the fruits of economic progress among its various regions. Handled poorly, it could bring business flight and a nightmarish downward spiral in the quality of life for large numbers of Californians. It's this generation's choice to make.

*At the time this article was published, James R. King was president of Applied Development Economics, a consulting firm with offices in Sacramento and Berkeley, California. He died in 2004.

Jock O'Connell is the president of The ClarkStreet Group, multinational business consultants. His email address is:

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