KPCC's business analyst Mark Lacter explains how the financial situation in Europe could affect us here in California.
Steve Julian: Mark, we've focused a lot of attention on Europe recently - it's a big concern. Is there any more clarity on how California might be affected if the eurozone starts coming apart?
Mark Lacter: Steve, I give you Sam Goldwyn, the great Hollywood philosopher (and movie mogul) who used to say that "Nobody knows anything." He was referring to making movies, but you really could say the same thing about the potential economic fallout from Greece or Spain. I know there's been plenty of speculation, but I'd be careful about assuming the worst (or even assuming the best, for that matter).
Julian: But as of today...?
Lacter: As of today, Europe is not that big a deal for the California economy. The Milken Institute found that only 16 percent of the state's export activity goes to the European Union countries - and that amounts to less than 1.5 percent of California's gross domestic product. Really not much. The state of Utah has almost three times as much exposure because it's a big gold-mining state, and it exports a lot of that gold to Europe. South Carolina is also more vulnerable because of its European auto plants.
Julian: I’d imagine California is more focused in Asia…
Lacter: That’s right. China is, by far, the biggest trading partner for the L.A. area , followed by Japan and South Korea. The first EU country to even show up on the list is Germany, at Number 11. Spain is 36th in export traffic, and Greece was included in the category "all others." So, in terms of straight trade activity, Europe is practically under the radar.
Julian: So that should be comforting.
Lacter: Well, there’s a big “but” to consider, and that’s the world financial system. Some of the big U.S. banks have strong connections with Europe, and if there is some sort of EU disaster, the contagion might spread. Here's another kind of indirect consequence: California's economy has been helped along during the recovery by increased exports to China, Russia, India, and Brazil - and it just so happens that those countries rely on European banks to finance many of their businesses. If that money is not available, it could present a problem. Just remember how growth slowed last year after the terrible Japanese earthquake - and that was a fairly contained event. A financial collapse won't be nearly as straight-forward.
Julian: Movie production is a big California export - is it big enough?
Lacter: Well, not according to the folks who worry about runaway production, which is when movie and TV producers choose other states to shoot their projects – states that usually offer tax incentives. California officials had been concerned about the lost business and established its own tax credit program in 2009, and now the legislature is considering a five-year extension.
Julian: So, is it working?
Lacter: It’s certainly bringing more production to the state. What’s less clear is whether the state is getting more money in tax revenue than it’s giving out in tax credits. The Legislative Analyst's Office last week came out and said it’s not a good deal for California. That counters two earlier studies that said the incentive program had been a net gain.
Julian: With the state budget facing so many cuts, it might not be great timing to extend this program.
Lacter: To put it mildly. And let’s remember that the entertainment industry has been faring a lot better than many other industries in the state. Now, clearly California has lost movie and TV production to other states. But California is not like New Mexico or Florida or even New York - states that are trying to attract business from Hollywood. California already has Hollywood - and Hollywood continues to be the center of show business. So, does the state really need these giveaways? That’s the debate.
Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.