Economy took state on wild ride

In 2000, California's unemployment rate was 4.9 percent. Venture capital funding hit $41 billion. Jobs and income were rising after a five-year spurt during which California outpaced the nation in virtually every major economic measure.

In 2009, the state's unemployment rate will average 11.7 percent. The state has lost more than 1 million jobs in the latest recession. Venture capital funding plummeted in the first half of 2009. The state and nation have seen losses in the value of homes and retirement savings. Fear and caution abound in the land. Both the state and nation will end the decade with fewer jobs than existed 10 years ago.

What happened between 2000 and 2009? On the positive side, innovation and entrepreneurship continued. This decade brought us the iPhone and social networking. California companies such as Apple, Cisco, Facebook, Google, Intel, LinkedIn and Oracle brought innovation and cost savings in our daily lives around the use of computing power and access to information. Creative Californians designed cars, energy-efficient buildings, clothes and entertainment products to enrich our lives.

But even before the recession hit, many families were seeing their real incomes decline as earnings did not keep pace with inflation. The income gains of this decade were not broadly shared. This was true throughout the nation as well as in California.

In the middle of the decade, exuberance and loose lending practices brought a housing bubble that could not be sustained. The crash in housing prices was the first sign of the massive borrowing throughout the economy that led to financial sector collapse and the recession. California had a relatively high exposure to the housing bubble collapse, and the loss of nearly 500,000 jobs related to construction is the price we are still paying.

Venture capital funding rebounded after the dot-com bust. Funding hit a respectable $14 billion in 2008 up from a low of $8 billion in 2003. California firms received 50 percent of U.S. venture capital funding in 2008, up from 41 percent in 2000. And despite the dip in 2009 funding, longer-term prospects look good for venture capital funding.

But the dot-com bust had another negative impact that carries over to today and represents a major threat to future prosperity.

The dot-com bubble created a surge in state government revenue in the late 1990s and 2000. Legislators from both political parties treated this revenue surge as if it would continue and enacted a series of tax cuts and spending increases. When the bubble burst, state government faced a structural deficit — a gap between normal revenues and spending that existed throughout the entire decade and has been made much worse by the recession. Even in good years the state budget was balanced mainly with borrowing and short-term fixes.

The perpetual budget struggles hobbled our ability to invest and plan for the future. The gridlock diminished trust in government and California's reputation throughout the world.

What will the future bring? California faces enormous opportunities and challenges. What the future brings depends on whether we can reach a consensus about the challenges and address them in a way that allows the economic opportunities to actually bring job and income gains.

Prospects are brightening that job gains will begin early in 2010. Three positive factors make the beginning of economic recovery likely. Economic growth in China and other trading partners will help California. Economic growth in the rest of the world will lead to growth in trade and tourism. And California benefits from investment flowing from people and businesses throughout the world.

Federal stimulus dollars for infrastructure and California bond-funded projects will bring an increase in actual construction early next year. This will provide a boost to construction markets while the housing market continues to heal.

California is doing well in the competition for federal innovation grants while venture capital funding is on the increase again in California as the nation searches for innovation in energy, health care and other areas. The national agenda for infrastructure, energy, science and health technology funding will find welcome partners in California's companies and universities.

California has the opportunity to be a leader in the green revolution - by showing how to make buildings more energy efficient, designing more efficient transmission lines, developing a better battery, reducing the cost of solar power, being a pioneer in technologies to reduce greenhouse gas emissions and a hundred other possibilities.

California's challenges are well known. We are slowly addressing an infrastructure deficit created through three decades of neglect. Even with slower growth, California will add close to 5 million residents in the next 10 years. We struggle to address issues of K-12 education and an expected surge in college enrollment while still trying to address water, energy and environmental challenges.

Demographic change means that most job openings in the next 10 years will come from replacing retiring baby boomers. Most new workers will be born in California - the children and grandchildren of immigrants, which increases the importance of success in educating our increasingly homegrown work force.

Before we reach solutions, we need to have conversations.

Everyone knows about the budget conversation we keep postponing — the conversation about what mixture of changes in spending and taxation are right to both plan for the future and balance the budget for real. I support some of the process changes proposed by groups like California Forward and Repair California but fear that process changes alone will not bring the needed consensus for California to move forward.

For me, the real conversation we need to have is the about the role of public policy in creating a competitive foundation to attract private investment for these great opportunities facing the state. We are stuck between two competing visions of competitiveness - one that says the most important factors are tax rates and regulatory policy and one that says we compete for families as well as entrepreneurs, and that great schools, great infrastructure and great communities are competitive priorities for both families and businesses.

My view is that in the competition for talent and innovation, California must offer great places to live and work and raise families.

My hope for 2010 is that these conversations do occur and that Californians can rally around public policies that lay a foundation for converting the state's economic opportunities to success.

Levy is director of the Center for Continuing Study of the California Economy in Palo Alto.