Kari Moran
May 26, 2009
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KPCC's business analyst Mark Lacter looks at the impact the state budget crisis is having on the broader economy and the state's employment rolls.

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Kari Moran: We talk about the latest business stories with Mark Lacter. Mark, good morning.

Mark Lacter: Kari.

Moran: Based on what you just heard, what impact is California's $24 billion deficit having, if any, on the broader economy?

Lacter: Well, you know, Kari, even Sacramento can only do so much to muck up the California economy. Of course, this is a very tough place to do business. It's a heavily regulated state, corporate taxes are high, it is highly litigious – a lot of negatives.

But that's really been true going back 30, even 40 years – well before we had a budget crisis – and, you know, if things were all bad all the time, there wouldn't be anyone left doing business here.

Moran: Well, how is the state's business climate?

Lacter: What the naysayers don't mention are all the reasons that business owners put up with the hassles. Last year, after J.P. Morgan Chase bought out Washington Mutual, it made sure to keep all the retail branches in California. You know, up until then, Chase had a very small presence in the state and realized this would be a great opportunity for them to establish a beachhead.

Another example is Kohl's – that's the big department store chain based in the Midwest, decided a few years ago to expand heavily in California. This state happens to have a massive consumer market – and when the economy is in good shape, people spend lots of money.

Moran: Well Governor Schwarzenegger is proposing deep cuts to education and other programs in order to close the state's deficit. Won't the state's fiscal troubles eventually catch up to the broader economy, Mark?

Lacter: Yeah, there's gonna be some fallout. But just remember that business owners don't make decisions on whether to stay or go based on how they feel about the governor or about the state legislature. They make decisions based on their ability to make money.

Actually, if you go back to previous recessions, the number of businesses that wound up leaving was really quite small. Look, you still have some of the world's great universities, the nation's two biggest ports are here, the centers of technology and entertainment. None of that is going away – at least for the time being, so we'll see.

Moran: Now Mark, turning to jobs. Has the state's budget crisis had a big impact on the California employment rolls?

Lacter: Not so far. This is kind of interesting. Actually, L.A. County had 400 more state government jobs in April than a year earlier – and the numbers have not changed very much going back to last year.

The governor earlier this month proposed laying off 5,000 state government workers – that may sound like a lot, but it only amounts a few percentage points of the total workforce, and it's way less than what some major corporations have been cutting during the recession.

Moran: So how does that compare to a typical year?

Lacter: Well, the state will typically lose about 5,000 people, that same number, just due to attrition – stuff like retirement, or illness, what-have-you. So it's not a very big number – and it really gives you an idea of how hard it is to cut jobs in state government.

Moran: Why is that?

Lacter: You know, part of it is because many of them are union and civil service positions – and state officials have to abide by contractual provisions. It's a little like the challenges faced by GM and Chrysler in working with the United Auto Workers.

But in a way, it's more complicated because of the nature of state government. This is not like some manufacturing company that can shut down a factory because business is slow.

The state of California is not a business – it's relied upon to provide a batch of services, no matter what the economy happens to be doing. So if your driver's license is up for renewal, the DMV can't say, sorry, we'll catch up with you when the recession is over. So many people may talk about major layoffs, but it's really tough to make them happen.

Moran: Thanks very much, Mark.

Lacter: Thanks, Kari.

Moran: Mark Lacter is a contributing writer for Los Angeles Magazine and writes a business blog at LAObserved.com.