A New Model

By Ed Rast

Did you know that California’s current 12.2% unemployment rate is the highest it’s been since World War II and that Santa Clara County’s 12% rate of unemployment is the highest among nine counties in the San Francisco Bay Area?

In a column this past weekend in the San Francisco Chronicle, Michael Bernick, former Director of the California Employment Development Department (1999-2004) notes that, “Since 1970 state unemployment has soared near or over double digits several times, and each time the economy came back.”

In times of recession, the key assumption that both state and local governments have relied upon for decades is that there will be an economic recovery in less than a year (recessions in 1990-91 and 2001 both lasted less than 8 months) followed by significant growth in jobs and tax revenue.

Is the model of a brief economic downturn followed by recovery and significant growth a realistic assumption upon which to base our city budget and revenue forecasts? Let’s look at what leading economists at the Federal Reserve Bank of San Francisco and UCLA’s Anderson School are saying...

The current California economic downturn differs from recessions past in at least two major ways:

One is its severity. The 12.2 percent unemployment rate — affecting more than 2.3 million workers — is not the highest it’s been, but it does not cover the roughly 1.3 percent of workers who are discouraged or marginally-attached — more than 200,000 — or the roughly 5.8 percent — over 1 million — workers employed less than full time for economic reasons. Now we’re talking about roughly 19.3 percent of workers affected by the recession.

Second, this recession is across all sectors and occupations, unlike previous recessions that affected a few industries. Construction is biggest loser, down 140,000 jobs and 18.5 percent from last year and over 300,000 jobs since December 2006. Business and professional services, trade, transportation and utilities have also seen dramatic cutbacks. California lost 110.000 retail jobs in auto dealerships, electronics, apparel, real estate, and other areas. Many of these jobs are not coming back because Internet sales more than make up for the loss.

Outsourcing and new technologies are reducing the need for workers. The breakdown of the employer-employee relationship and enormous growth of independent contractors has accelerated changes in the California job market. For months, economists have said that unemployment will remain above 10% and not drop significantly until 2010 or even 2011.

It is difficult to predict employment numbers. When hiring begins again, the job structure will look different because of technology and globalization. Will there be enough jobs in the future of California, Silicon Valley and San Jose? Let’s see what the experts have to say:

Michael Bernick tell us that “A next wave of job creation, fueled by California’s entrepreneurial ethos, must be our hope as we try to survive the current turmoil.

English economist Arthur C. Pigon says, “The latest gloomy forecasts ignore an important lesson of history,” that the “deeper the slump, the zippier the recovery.”

Michael T. Darda, Chief Economist for MKM Partners posits: “The most important determinate of the strength of an economic recovery is the downturn that preceded it.”

The City of San Jose receives about 40% of its revenue from commercial and office activities, and about 20% from retail activities — which use less city services than they pay for in taxes and use less land than homes that use more services than their taxes provide. We have not grown our jobs and tax revenues in proportion to or ahead of our growing population, as most other cities in Santa Clara County have done since the start of the Silicon Valley tech boom, as my previous blogs have clearly shown.

“Doing the same thing the same way and expecting a different result” has long been considered the definition of insanity. As it concerns job creation and growing the City’s tax revenues, this philosophy has allowed San Jose’s quality of life to slip below the levels provided by neighboring cities.

It is very difficult to accurately predict the future, especially the timing of a recovery in an uncertain world, and there are many influences on San Jose’s economy which we cannot control or change. However, we can control many city policies and processes that take longer than necessary, amend the high tax rates and fees that cause businesses to perceive San Jose as “unfriendly,” and improve how we compare to our main competitors: neighboring cities.

San Jose has an opportunity to take advantage of the coming economic recovery and build a strong base of jobs and tax revenue, but only if we change how we deal with nurturing startups, growing companies, and retaining companies.

We need to find out exactly why these businesses choose not to make their homes in San Jose. We must be honest with our residents about the many reasons we have lost thousands of jobs and millions of dollars in tax revenue.

San Jose should be comparing its practices to what other local cities have been more successful at doing. We must make sure that public receives adequate value for the dollars they spend and hat they are involved in budget discussion and decisions rather than just City Administration and a few insiders who, after decades of effort, have not been able to produce the needed jobs and revenue results.