California, After Riding a Boom, Braces for Hard Times
California, After Riding a Boom, Braces for Hard Times
OAKLAND, Calif. — When California shut down its economy in March, it became a model for painful but aggressive action to counter the new coronavirus. The implicit trade-off was that a lot of upfront pain would help slow the spread, allowing the state to reopen sooner and more triumphantly than places that failed to act as decisively.
But the virus had other plans, and now the state’s economy is in retrenchment mode again. For the nation, this means that an important center of its output — a magnet of summer tourism and home to the technology and entertainment industries along with the world’s busiest port operation — is unlikely to regain momentum soon when growth is needed most.
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For the state, it means a progressive agenda predicated on the continuation of good times will be hampered as governments move from expansion to cuts. Voters had mostly been open to paying for expanding services and priorities like affordable housing, but they seem to be turning wary of new taxes.
California has always been a boom-and-bust economy, so while nobody was predicting a global pandemic that would tear through the service sector, the prospect of struggle was not unforeseen. Jerry Brown, the four-term governor, left office in 2018 with a multibillion-dollar state surplus and unemployment headed to a record low. But instead of departing on a triumphant high note, he said after his final budget presentation, “What’s out there is darkness, uncertainty, decline and recession.”
His more upbeat successor, Gov. Gavin Newsom, came in promising to expand health care and tackle the state’s homeless problem. Yet in his inaugural speech, Mr. Newsom warned, “Even in a booming economy, there is a sense that things are not as predictable as they once were.”
Indeed. Unemployment, which was 3.9 percent in February, the lowest on record, shot up to 16.3 percent by May, compared with 13.3 percent nationwide. Container traffic at the Ports of Los Angeles and Long Beach is down about a third from a year ago, while many beaches and attractions like Disneyland were closed on July Fourth and are delaying their reopening plans. Most dispiriting is the sense that even after politicians made tough calls that Californians largely supported, the economy seems no better off.
Andrew Snow was supposed to be ramping up by now. Mr. Snow, who owns the Golden Squirrel, a restaurant and bar in Oakland’s Rockridge neighborhood, cut his staff of 28 people to two after the pandemic hit. But thanks to takeout orders, a new line of business selling groceries and the resumption of outdoor service, he recently brought two back, and was set to bump that figure to six or eight by the July Fourth weekend.
A few weeks ago, those plans seemed sound. Back then, on the sunny Friday afternoon when outdoor dining in Alameda County was allowed to resume, the Golden Squirrel’s patio tables, about eight feet apart, were full of patrons enjoying their first trip out for a drink since shelter-in-place orders took effect. That weekend the surrounding College Avenue retail strip was busy with masked, distanced, Purell-doused dining that to many felt borderline decadent after months of being cooped up.
Now business is slowing again, as California is averaging about 8,000 new cases a day, about triple the level a month ago. Mr. Snow’s plans to bring back workers over the holiday weekend didn’t come to pass, and he has put further hiring on hold.
“People are scared,” he said in an interview. “The math for having more people doesn’t work out anymore.”
Exactly how and how quickly the state should have reopened, and who is to blame for the backslide, are unlikely to ever be resolved. What the result means for the economy is more time in the dark, more need among the poorest citizens and more drain on the taxes required to support them.
The U.C.L.A. Anderson Forecast, which has been prognosticating California’s economic trajectory since 1952, expects that the state and national economies won’t fully recover until “well past 2022.” In the state as in the nation, the worst declines will be in the leisure and hospitality industries, while higher-wage areas like technology will be better off, a dynamic that will make financial inequality worse.
Even if the country avoids a second wave of infections in the fall, and a vaccine is made and distributed relatively quickly, that won’t keep many businesses from failing. Others will shift from investing in new equipment and employees to paying debt and shoring reserves. State and local budgets could take years to recover their pre-coronavirus levels of spending, even with federal help.
“The impacts will disproportionately affect lower-income Californians, while the more rapid growth will be happening in technology and construction, which are higher income,” said Jerry Nickelsburg, director of the U.C.L.A. Anderson Forecast.
The longer the pandemic’s disruption, the more likely it is that some jobs will never come back. For instance, a number of restaurants had already switched to counter service, even for fairly high-end meals, to avoid the need for servers who have a hard time affording housing in big cities. Now virtually every restaurant in California is operating around counter service or delivery, and some may not change back.
Mr. Snow, for example, envisions a restaurant where people order at the bar, eat far from other patrons, then leave with a bag of groceries. The Golden Squirrel would have fewer employees, compensating for a less-full restaurant with expanded takeout orders.
“Some of the changes will make us a better business in the future,” Mr. Snow said. “The challenge is getting to that future.”
The economic outlook is filled with caveats. Typically a forecast is based on past patterns and trends from similar recessions, but in this case there is no clear precedent. That means the outcome could be much more positive than some fear.
“Will there be some damage? Sure,” said Christopher Thornberg, founding partner of Beacon Economics, a consulting firm. “But there’s no reason to think people won’t go back to normal spending once the virus has subsided, at which point we will come out of this like a rocket ship because of all the pent-up demand and massive savings that is being built up.”
Historically, California has been hit hard by national recessions, with the aerospace downturn of the early 1990s, the 2000 dot-com bubble and the Great Recession affecting the state and its finances much harder than the rest of the country.
This time, California’s economic plunge has been more or less in line with the nation, with resilience in tech and other professional jobs helping to balance out the steep losses in areas like trade and tourism. And while the state and its cities are already facing budget troubles, the austere Governor Brown pushed through several forward-looking fiscal measures — including a constitutional amendment for a state rainy-day fund — and Governor Newsom added to the fund last year.
“California is one of the states that more or less learned the lessons of the Great Recession so is in better shape than many other states,” said Lucy Dadayan, a researcher at the Urban Institute who studies state and local budgets.
Even the most optimistic outcome, however, seems almost certain to hamper many of Governor Newsom’s most ambitious plans. Before the pandemic, the November elections were being positioned as a moment to raise taxes further and expand government services.
Several cities, including San Francisco, have tax measures lined up for the ballot (they can still be removed), while state voters face an epic battle over the future of Proposition 13, the 1978 law that capped property taxes statewide. Proposition 15, which has qualified for the November ballot, would repeal the local tax cap for commercial properties like office buildings, generating an estimated $12 billion a year for schools.
A few months ago, these measures were talked about as ways to help pay for expanding things like education and affordable housing by taxing businesses and wealthier taxpayers. Now they are likely to be reframed, at least in part, as a backstop to battered state finances.
There is data to suggest that the state’s relentless housing and homeless problems, combined with fears about the long-term impact of coronavirus, have made voters wary of new taxes. In the March primary, several state and local bond measures were rejected, and exit polls showed voters had “tax fatigue,” according to the Public Policy Institute of California.
While Californians are concerned about declining state revenues, 60 percent oppose tax increases to fund the governor’s most recent budget, according to a recent survey by the Public Policy Institute.
“Taxes are a tough sell in this environment,” said Mark Baldassare, the institute’s chief executive.