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Causes of Economic Downturn in California

It is said that when things are going well throughout the nation, they are even better in California and worst when faced with a national economic recession (Gerston and Christensen 20). In the current downturn, California had lost more than 100,000 jobs in 2007 and its unemployment rate was 8.2 percent Statewide—the highest in 14 years (Walker 1). Through the first three quarters of 2008, 189,000 California homes were lost to foreclosure resulting in a net loss of over $1 trillion in housing wealth.

The bad news continued into 2009 when for “the fifth straight month, California led the nation in net job losses, with 63,700 jobs disappearing in April 2009” (Aversa 2). California’s Governor Arnold Schwarzenegger has a $21.3 billion budget deficit which will force him to lay off thousands of state employees and billions of dollars would have to be cut from the state budget (Aversa 10). However, the current woes of California have not been caused by the present incumbent governor. This essay explains the deeper causes responsible for the economic downturn in California.

Since the days of the Californian Gold Rush, the state has always been the barometer for well being or lack thereof for the entire country. The Californian dream truly epitomizes the American Dream. It was in California that Americans of all creed or color could literally ‘make’ themselves. California accounts for 25 percent of technology exports of the US. Within California, technology exports account for nearly 52 percent of its overall exports.

The state accounts for a vibrant housing industry that had seen the best as well as worst of times. A number of government policies have had a deleterious effect on California’s economy. After the end of the Cold war, the federal government’s decision to downsize aerospace and military industries in Southern California (Myers 72) contributed to the state’s economic woes as it put thousands of blue collar workers out of work. Not only did this move result in direct job losses but also affected the tertiary sector that supported those industries.

California suffered maximum job losses during the dotcom bust of the 1990s. A similar situation exists today. But the current recessionary trends were visible as far back as 2001 when technology exports from California declined by 17 percent (Gerston and Christensen 20).

Technology is a high paying, high risk sector. Its vibrancy supports other sectors of the economy also. A booming technology sector gave rise to seven figure salaries of the ‘techhies’ who in turn stimulated the housing industry as well as the white goods sector. Profits by these sectors also gave employment to thousands of blue collar workers. Thus a collapse of the IT industry had a domino effect on the entire financial viability of the economy that then reverberated throughout the nation.

Mismanaged state budgets have too been the perennial woe of California. The dotcom bust of the 1990s gave a huge budget deficit. The recessionary indicators of the early 2000 were masked by a misreading of tax payments by the industries which gave a false feeling of growth when actually, the deficit was building. This led the Davis administration in 2000 to increase public spending little realizing that a perfect storm was gathering around the corner.

By 2002 more than 660,000 children were signed up for health care that cost the state of California $ 500 million (Gerston and Christensen 22). New federal rules required the state to revamp its prison facilities that again cost 25 percent of additional funds. This was also a politically motivated move as prison guards were being kept happy for their votes by the Davis administration. By 2003, the Davis administration had declared a budget deficit of $ 34.6 billion.

Added to the mismanagement of the government budget was the surge in oil prices. Rampant speculation in the global oil markets led by the NYMEX saw oil prices heading northwards adding to the state’s ballooning energy bill. Nature too played its role, when a prolonged drought in the North West dried up Hydroelectricity as a result, bill for oil fired energy went up considerably (Schrag 160). Unscrupulous industry players like the notorious ENRON, due to a failure of federal oversight manipulated electricity infrastructure to further increase the electricity rates on the spot markets adding to the state deficit. As personal income of Californians declined, so did the revenues from personal income tax. Thus, an already overspent treasury was rendered even barer by a combination of circumstances.

Thus the mismanagement and corruption of the Davis administration as well as external factors resulted in a huge budget deficit that was inherited by the present incumbent Arnold Schwarzenegger who despite his best efforts has not been able to control the deficit. Part of the problem has been the wasteful and extravagant public spending programs initiated by the Davis administration when the state actually had no money to spend.

Trying to sound upbeat as was possible, UCLA Anderson in its economic forecast nevertheless had stated that “The forecast is for a very weak California economy in 2008. The “double-whammy” of construction and financial activities job loss will continue to drag at the economy” (UCLA Anderson 12).

When the housing bubble burst all over America, California had already slid into a recessionary mode not seen since the Great Depression of 1929. Without doubt , unparalleled greed of Wall Street honchos who sold exotic loans packaged as derivatives to all and sundry has been more than responsible for the present economic downturn. It has been the failure of even government backed entities like Freddie Mac and Fannie Mae whose indiscriminate cheap loans at almost nil interest without checking the antecedents of its customers has been more than responsible for the entire mess.

But none of the states have been hit as badly as has been California because of its service industry dominated economy. Oil too has played a major role in the current recession. According to Professor Hamilton whenever global oil prices have spurted, recession has followed (2) and the oil price hike over the years 2007-2008 have in a large way contributed to the present recession.

In conclusion it can be reiterated that the current economic recession in California has a number of causes. The closure of defense and aerospace industry after the Cold War caused severe losses not only in the primary sector but also the tertiary sector. The wasteful programs initiated by the Davis administration resulted in billions of dollars deficit from which the state has not been able to recover. The dotcom bust of the 1990s added to the woes.

High oil prices coupled with unscrupulous manipulation by private players further accentuated the economic worries. A drought in the North West leading to a drop in hydroelectricity capacity further added to the state’s energy bill. Finally, the overwhelming greed of Wall Street executives in selling toxic loans and looking for quick money drove the final nail in the coffin of the state’s treasury chest. California will now take a long time to recover from its present downturn.

Works Cited

Aversa, Jeannine. “Job losses up in 44 states as recession drags on.” 2009. Washington Post online. Web.

Gerston, Larry N and Terry Christensen. Recall! NY: M.E. Sharpe, 2004.

Hamilton, James D. “The Economic Consequences of Rising Oil Prices.” 2009. The Washington Post online. Web.

Myers, Dowell. Immigrants and boomers: forging a new social contract for the future of America. NY: Russell Sage Foundation, 2007.

Schrag, Peter. California: America’s High-Stakes Experiment. Berkeley: University of California Press, 2008.

UCLA Anderson. “Economy situation doesn’t meet definition of ‘true’ recession.” 2008. Web.

Walker, Barbara. “The Realities Of Recession in California.” 2008. Web.


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