Los Angeles is paying the price
for mayor’s focus on real estate
By Joel Kotkin*

15 May 2008: Ever since his election in 2005, Los Angeles Mayor Antonio Villaraigosa has been portrayed as a politician with a future that possibly included the governorship. As soon as he entered office, he launched an impressive succession of ‘bold’ initiatives — among them, to make the Los Angeles Police Department a 10,000-cop force, to ‘green’ the port of Los Angeles, to improve the academic scores of some of LA Unified's worst-performing schools. Until the real estate bubble burst, he oversaw a building boom downtown and elsewhere, casting himself as a visionary re-creating LA as a model of ‘elegant density’.

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But when it came to that part of the city's economy not connected to real estate, Villaraigosa might be compared to Emperor Nero. As the city has continued to lose thousands of middle-class jobs in aerospace, manufacturing and high-end business services since 2005, Villaraigosa has basically stood by and fiddled. From February 2007 to February 2008, the county suffered the biggest percentage of job losses, some 0.7 per cent, of the 10 largest metropolitan areas in the country, according to the US Bureau of Labor Statistics' most recent report.

The combination of the housing meltdown and steady job losses in non-real estate sectors means that Los Angeles is now surpassed only by a handful of the bigger Rust Belt economic basket cases, like Detroit, for the title of worst big-city economy in the nation.

To be sure, the falloff in jobs cannot be solely laid at the feet of City Hall because there have been declines in other parts of Southern California. But the trend reveals the shortcomings of Villaraigosa's near-exclusive focus on real estate-related speculative growth and relative inattention to sectors more critical to the city's long-term economic growth.

The problem is that, as property values and real estate-related employment, most notably in the construction and mortgage sectors, have cratered, there is little, save for the tourism industry, to take up the economic slack. That fact has come home to roost in recent weeks as Villaraigosa searches for revenue to shore up the city's out-of-balance budget. And, unfortunately, the pain may be around for a while because once the current wave of building, which was financed before today's credit crunch. ends, there is little prospect of a pickup in construction in the immediate future.

All this makes the erosion of jobs outside real estate even more troubling. Since 2006, employment in LA County has dropped by about two per cent in the manufacturing, financial services, retail and information sectors, the latter of which includes the entertainment industry. Meanwhile, business expansions in the county in 2007 fell 22.5 per cent, according to an April report from the Los Angeles County Economic Development Corp., a non-profit organization.

Apparently, Villaraigosa didn't see the economic downturn coming; he has already conceded that he didn't recognize how precarious the revenues from the real estate boom might be. Had he known last August what he knows now, the mayor has said, he would not have approved big raises for city workers.

City Planning Director Gail Goldberg was amazed to find that Los Angeles, unlike her former hometown of San Diego, still had no city department dedicated to economic development. Nor is there any single person in city government recognized as in charge of boosting local commerce.

Los Angeles could certainly use such a department. The most recent Kosmont-Rose Institute "Cost of Doing Business Survey" reported that Los Angeles remains the second-most-expensive city for businesses, behind Santa Monica, in the county and third most in the state, behind San Francisco and Santa Monica. Any hope of reform in terms of tax or regulatory relief, suggests Larry Kosmont, the report's author, is unlikely because of the city's fiscal crisis.

Ironically, among the biggest economic losers during the Villaraigosa administration may be working-class Latinos, who constitute a key element of his constituency. Traditionally, Latinos have relied on manufacturing for jobs, but, countywide, these jobs have declined 15 per cent since 2002.

Many of the employment losses have been concentrated in automotive, aerospace and heavy industry. In contrast, the garment industry, now the largest industrial employer in the city, has largely defied the slow erosion of jobs in the city. But that may be about to change.

Uri Harkham, president of Jonathan Martin, a clothing manufacturer, has cut his workforce from 600 to 120 during the last few years. He blames City Hall for the cutback because it has not protected the area from immigration crackdowns and has not supported worker-training programs. Worse still, he says, had been the speculative pressures of developers seeking to build residential units in the garment district, which have driven up rents for manufacturers and wholesalers.

Harkham, who has worked in the fashion industry for 35 years, believes that if this situation continues, the once-thriving garment district will eventually lose its primacy as the center of the West Coast rag trade.

But it's more than the garment industry that needs attention from City Hall. The city's small-business sector, which remains the best hope for LA's economic recovery, remains burdened by what many entrepreneurs claim is an onerous regulatory regime that favors the well-connected and big financial interests. "It's extremely difficult to do business in Los Angeles," Eastside retail developer Jose de Jesus Legaspi said. "The regulations are difficult to manage. ... Everyone has to kiss the rings of the [City Hall politicians]."

Yet despite the problems, businesspeople like Legaspi and Metchek believe that Los Angeles can find a way to restart its economy after the real estate bubble. After all, the city and region still possess many of the assets — concentrations of design genius in entertainment and fashion, a pool of skilled industrial workers and strong ties to the rapidly growing Pacific Rim economies, which drove recovery in the mid- and late-1990s.

And there remains the considerable energy of the city's immigrant community, which constitutes roughly half of LA's total workforce, according to a recent study by the Migration Policy Institute. Between 1997 and 2007, according to statistics compiled by Praxis Strategy Group, a consulting firm, the number of Latino- and Asian-owned businesses grew far more rapidly — nearly 40 per cent among Latinos and more than 22 per cent among Asians, compared with 15 per cent overall — than those of other ethnic groups. Today, foreign-born Angelenos are twice as likely to be self-employed than their native-born counterparts.

Los Angeles needs to tap the entrepreneurial spirit of these immigrants to grow economically. But that means scaling back its infatuation with high-profile real estate development in favor of the mundane business of enhancing employment opportunities through training workers, reducing regulatory burdens and fostering more cooperation among our still-diverse industrial base. That's not a politically sexy choice for the mayor, but it remains the best way to restore LA's tarnished status as a city of opportunity.

*An internationally-recognized authority on global, economic, political and social trends, Joel Kotkin is the author of the critically acclaimed book, THE CITY: A GLOBAL HISTORY. Currently, he is writing a book on the American future for Spring 2009 publication by Penguin Publishing, which will look at how the nation will evolve in the next four decades. Kotkin is Presidential Fellow in Urban Futures at Chapman University in Orange, California.  A highly respected speaker and futurist, he consults for many leading economic development organizations, private companies, regions and cities. Joel is also a Senior Fellow with the New America Foundation in Washington, DC; a Senior Fellow with the Center for an Urban Future in New York City; and a Senior Consultant with the Praxis Strategy Group in Fargo, North Dakota. (www.joelkotkin.com/index.htm)