Spurred by the recall, California's industrial demise is everywhere declared, but never seriously examined. The state's economy is said to be in a "nosedive." Everyone is leaving for someplace else. Pundits speculate that Sacramento politicians are trying to force a federal bailout by deliberately making things as bad as possible.

None of this is true. Despite a well-deserved reputation for tax and regulatory excess, most of California is far outperforming the U.S. economy. The state's real problem is that its two largest urban centers, Los Angeles County and the Bay Area, are increasingly unable to sustain job growth and create opportunities for all but the most privileged citizens. Its biggest challenge is figuring out how to cure, or at least contain, their political and economic pathologies before they inhibit the remarkable expansion of the rest of the state.

Since the end of the defense-sector downturn in late 1993, California's nonfarm employment rose by a solid 20%, better than the 17% increase for the nation as a whole. The state even outperformed the more celebrated Oregon, Washington and Virginia economies. From 2000, when the most recent recession began, the state lost about 1.8% of its workforce, compared with a 2% loss for the U.S. as a whole.

In the aggregate, California has done better than the national economy. But these figures conceal more troubling trends.

California has over 14 million jobs, nearly twice as many as Texas (9.4 million jobs), New York (8.4 million) and Florida (7.2 million). Distinct regions make up its mammoth economy. One is comprised of the urban and media centers of Los Angeles County and San Francisco and San Jose, which collectively have 5.8 million jobs. The other consists of the southern, inland and northern counties that form the rest of California and have 8.6 million workers.

If separately admitted to the Union, these two areas would be the sixth and second largest states in the country. Each exhibits strikingly different economic characters (see chart A).

Chart A

Total Nonfarm Employment June 2003 (in 1000s)

California (All areas)---14,491

Texas---9,465

Fast-Growing California (excl. LA, SF, San Jose)---8,633

New York---8,427

Florida---7,285

Illinois---5,866

Slow-Growth California (LA, SF and San Jose---5,859

Pennsylvania---5,662

Ohio---5,416

Michigan---4,456

New Jersey---4,030

Georgia---3,929

North Carolina---3,854

Virginia---3,517

Massachusetts---3,225

The L.A. County-Bay Area portion of California ranks among the weakest of America's regional economies. Between 1993 and 2003, even with the dot-com bubble and the movie industry's glitter, Los Angeles, San Francisco and San Jose could only muster a woeful 7-9% employment increase, just half the national rate. Worse still, driven by staggering 12-18% job losses in the Bay Area, they shed nearly 7% of their workforce since 2000, far worse than the national rate.

The rest of California, however, has been on a tear. From 1993, employment in places like Riverside-San Bernardino, San Diego and Orange counties, and the Central Valley, collectively rose by over 30%. That's better than Texas and Georgia, and nearly the same as Florida, states often cited for their vibrant, business-friendly economies (see chart B).

Chart B

Percent Nonfarm Employment Growth 1993-2003

Riverside---47.7%

Sacramento---34.7%

San Diego---30.6%

Vallejo-Fairfield-Napa---29.2%

Santa Rosa-Petaluma---29.2%

Orange County---26.2%

Bakersfield---22.0%

Ventura---22.5%

Fresno---21.9%

Stockton---21.8%

Oakland---19.9%

Salinas-Seaside-Monterey---19.4%

Modesto---18.7%

Santa Barbara-Santa Maria-Lompoc---16.4%

USA---17.7%

San Jose---9.0%

L.A. County---8.8%

San Francisco---7.2%

Since 2000, moreover, no part of the nation has held up better. California's fast-growth regional employment expanded by nearly 2% while jobs contracted almost everywhere else (see chart C).

Chart C

Percent Nonfarm Employment Growth 2002-2003

Riverside San Bernardino---6.4%

Vallejo-Fairfield-Napa---4.9%

Fresno---4.8%

Modesto---4.2%

Stockton---3.7%

Bakersfield---3.7%

Sacramento---3.3%

San Diego---1.6%

Salinas-Seaside-Monterey---0.7%

Orange County---(-0.4%)

Santa Barbara-Santa Maria-Lompoc---(-1.4%)

Ventura---(-1.8%)

Oakland---(-2.0%)

Santa Rosa-Petaluma---(-2.4%)

USA---(-1.9%)

L.A. County---(-2.6%)

San Francisco---(-11.9%)

San Jose---(-17.6%)

It is simply inaccurate to claim that California is in a tailspin. Other states are hurting the country's economy to a much greater degree. Workers compensation costs and irresponsible public spending are unquestionably significant economic negatives. Yet, they didn't prevent most of California's major industrial areas from outperforming the nation throughout the last decade.

But the state does face serious political challenges. The most significant is the conflict between its politically dominant slow-growth economy and its faster growing communities. Not unlike the nation as a whole, California has fragmented into two very different political and economic societies.

The slow-growth community most resembles the chronically stagnant Northeast. Its economy is dominated by a handful of high-end financial, entertainment or technology related occupations and public employees unions. A cadre of low skill, immigrant and transitory student workers fills out the labor force. California's slow-growth regions are decidedly liberal and voted overwhelmingly for Democratic candidates in the 2000 presidential and 2002 gubernatorial elections. Stability, interest group appeasement and sustainability are their dominant political concerns.

In contrast, the fast growing areas of the state are like the southeastern and southwestern portions of the country. They absorb the middle and working class business growth and housing demand that can't be met in slow-growth population centers. Social advancement and opportunity tend to motivate their politics. California's fast growth areas, which account for nearly 60% of the state's voting population, voted for Republican presidential and gubernatorial candidates in both the 2000 and 2002 elections.

California's future depends on striking the right balance between the fast growing economy and the elite-dominated slow-growth communities. The clash between these two cultures, and the different perceptions of government spending, taxation, regulation and development they foster, explains California's sense of crisis despite many positive economic fundamentals.