First the good news: Unlike the last recession, Southern California is doing much better than most of the rest of the nation. Since 1995, the region had enjoyed one of the hottest economies in the world. The recession has slowed its sizzling growth, but once booming places like Silicon Valley, San Francisco, Portland, Phoenix and Atlanta are in far worse shape.

A recession "pain index" I recently compiled shows just how different the world is today from the early 1990s, when greater Los Angeles was perceived to be in terminal decline. The index measures both an area's current annual employment growth rate and how that rate compares with annual average growth over the last few years. Places where employment is contracting after previous years of growth score the worst because their economies are deteriorating at a rapid pace.

The data shows that areas with the most diversified growth over the last decade--Florida, Texas and Southern California--are least affected by the recession. Many, like Orange County, Dallas and Miami, are even expanding (see Table 1 in Januar 14, 2002 issue).

Those that bought into the fantasy of a high-tech and Starbucks economy--the Bay Area, Denver or Austin, for example--are in dramatic decline. So are those areas that stylized themselves as low-cost business-flight havens like Atlanta or Phoenix, or those which are wedded to single sectors like auto production in Detroit.

In short, balanced, diversified economic growth pays off. Immigrant-rich economies that stimulated food processing and service employment, or finance and manufacturing, have more industrial and fiscal vitality in the long run.

The Bad News

Now the bad news: Since late 1998, the California economy has stealthily abandoned the beneficial economic development pattern that brought prosperity to so many of its communities. Quietly, with almost no media awareness, its resource intensive sectors like manufacturing or agriculture went into a tailspin. Industries like financial services that depend on reasonably priced urban amenities also slowed. After first stagnating at the height of the recovery, these sectors collapsed as the national economy contracted.

From 1995 to 1998, manufacturing alone accounted for more than 11 percent of the state's new jobs, an astonishing achievement considering that the rest of the nation was producing virtually no new industrial employment (see Table 2). High paying finance related and wholesale trade jobs accounted for another 13 percent of new employment. Less than 18 percent of California's new jobs were in government and retail, tertiary sectors that depend on wealth creation elsewhere in the economy.

During the next three years, the state generated about the same number of total new jobs as in the previous period, but the composition of its economy markedly changed for the worse (see Table 3). Manufacturing didn't grow at all from 1998, and then it shed more than 67,000 jobs. Financial service employment collapsed as rents soared in growth constrained urban areas. During 1998-2001, public sector employment accounted for a whopping 20 percent of all new employment, more than double the national average. Nearly 40 percent of the state's new jobs, in fact, were in government and retail. Just one percent was generated by manufacturing, financial services and wholesale sectors.

Even as economic diversity was proving its value, California moved in exactly the wrong direction. Instead of maintaining a broad-spectrum economy, it became markedly more reliant on service, public sector and retail employment. Not surprisingly, public budgets nosedived as government added tens of thousands of workers while the rest of the economy stagnated. And middle and working class employment options contracted in favor of a handful of white-collar elites and the service workers who feed and clean for them.

Why did our state's development take such a wrong turn? The reasons are complicated, but among the most important is that by the late 1990s many of California's most influential constituencies simply lost their appetite for growth. Up until then, the state was animated by the memory of the last recession. As the recovery gained steam, it sparked a broad-based expansion. But it also fed the discontent of its most privileged classes.

While California's highly motivated, upwardly mobile workforce, especially its immigrant communities, eagerly embraced growth, many of the state's most influential, successful and largely urban elites became increasingly obsessed with traffic, secondhand smoke and buying designer coffee. The short-lived stock market windfall, which seemed to offer limitless wealth without work, only deepened this divide. State and local governments happily piled up record surpluses and basked in complacency.

Shambles, Scandalous Neglect

In such a climate, none of California's most significant long-term challenges were seriously addressed. Statewide water policy remains a shambles. Housing and educational development for working and middle class families was scandalously neglected. The state's short-lived, badly bungled "energy crisis" made a laughingstock of its leadership. Urban development was truncated by incomprehensibly complicated regulatory constraints even as demand for new office space soared.

By the late 1990s, sectors that depend on water, electricity and fiscal stability, like farming and manufacturing, were already in retreat. Finance and other urban enterprises sensitive to rental availability and cost fled to other locales. All of these trends were obscured by mammoth state and local government hiring increases and such widely publicized service sector boomlets like the ephemeral dot-com craze. The recession, however, is stripping bare such illusions of vitality.

It may well be that the stock market will rally and consumer confidence rise in the coming year. These would, of course, be welcome developments. Yet, I fear that California cannot escape dealing with its unfinished business no matter how pronounced such trends may become. Chronic resource supply problems and regulatory and fiscal uncertainties have choked off the once promising economic patterns of the mid-1990s. We now produce more bureaucrats and convenience store clerks than machinists, financial analysts, filmmakers, farmers or engineers.

If much of the state's economy continues to shrink while a few favored sectors and government expand, the results will not be pretty. Class and regional conflicts that already infect our politics, threaten our resource supplies and unsettle business conditions will become more severe. And public budget uncertainties, which inevitably lead to higher taxes, can only make things worse. California could well suffer from an anemic, unbalanced, politically contentious economy for some time to come.

The bad news is that the state muffed its chance to make headway at a time when it could best afford to do so. The good news is that it can reverse course. With appropriate leadership focused on resolving the most pressing uncertainties clouding the state's future, we can rekindle--and sustain--the balanced growth of the mid-1990s. And in the end, that's the only way we will foster opportunities for all of the myriad communities that comprise our remarkably diverse society.