Correction to This Article
This column incorrectly said that Washington Mutual had its headquarters in Southern California. Although the thrift had a significant presence in California, it was based in Seattle.

Steven Pearlstein: California's Wipeout Economy

The ports of Los Angeles and Long Beach are the biggest economic drivers in Southern California, but volume is off and cranes are idle in the slump.
The ports of Los Angeles and Long Beach are the biggest economic drivers in Southern California, but volume is off and cranes are idle in the slump. (By Tim Rue -- Bloomberg News)
  Enlarge Photo    
By Steven Pearlstein
Wednesday, March 25, 2009

LOS ANGELES The sun is shining less brightly these days in sunny Southern California.

The recession hit here earlier and harder than the rest of the country -- the statewide unemployment rate topped 10 percent last month -- and chances are it will linger here longer.

The severe downturn reflects the region's central role in the Bubble Economy.

As the headquarters for Countrywide Financial, Washington Mutual, New Century Financial and IndyMac, along with several of the nation's largest home builders, Southern California is ground zero for the mortgage crisis and the residential real estate bust.

As the capital of conspicuous consumption, its heavy reliance on auto sales, fashion, electronics and entertainment is now out of sync with the country's new frugality.

And as the gateway through which a majority of the country's imports flowed from Asia to American homes and businesses, its ports, warehouses and distribution channels, which once strained to keep up with the volume, now find themselves with large amounts of unused capacity.

More significantly, the receding economic tide has revealed serious structural problems and challenges in key sectors. The music, entertainment and electronic gaming industries are being turned upside down by the Internet. The real estate industry is bumping up against the limits of population growth and exurban sprawl. And state and local governments that have long financed themselves by pushing costs off into the future have finally met their day of reckoning.

"People here used to feel that because of the weather and the lifestyle, we were immune," said Robbin Itkin, a lawyer with a suddenly booming corporate workout and bankruptcy practice at the Los Angeles office of Steptoe & Johnson. "They don't think that now. There is a somberness I've not seen before."

Indeed, the most recent poll by the Field Research found that only about 40 percent of Southern California residents view the state as one of the best places to live. Back in the Beach Boy days, it was more than 70 percent.

I got the most vivid picture of how dramatically things have slowed at the Port of Los Angeles. Two years ago, ships lined up out to the horizon waiting to unload containers; unionized longshoreman routinely worked double shifts; and on any day there was usually work for a thousand or more nonunionized "casual" workers. But on a recent morning, the cranes on many terminals were idle, few if any casual workers were needed, and the few ships moving through the port's channel looked to be only partially loaded.

The ports of Los Angeles and Long Beach are, far and away, the biggest economic drivers in Southern California, directly employing 280,000 workers, indirectly supporting nearly 900,000 jobs in the region and handling $350 billion in goods. But last month volume at the bigger Los Angeles port was off by nearly a third, and executive director Geraldine Knatz said she and her crew were scrambling to preserve their market share. Already the port has cut fees by 10 percent on "intermodal" cargo bound for points north and east and is considering a reduction of 50 percent on new business.

It's not just the economic slowdown Knatz worries about, but also the longer-term prospect of losing business to other western ports with lower labor and environmental costs, or East Coast ports that will become her competition once the Panama Canal is widened to accommodate the biggest cargo ships.

CONTINUED     1        >

© 2009 The Washington Post Company