The Breakdown | Explaining Southern California's economy

Why Southern California's housing crash could lead to an entrepreneurship boom

The Economist's Ryan Avent has a Kindle Single out, titled "The Gated City." Reuters ran a short except last week, which included this:

If you can believe it, Silicon Valley’s main metropolitan centers were losing residents to other parts of the country during the Dot Com boom…The reason...was housing costs. From 1997 to 2000, average earnings in the Silicon Valley area increased by nearly 40%. But from 1997 through the end of 2000, home prices in San Francisco nearly doubled, according to the Case-Shiller index of home prices. As fast as compensation was rising, it wasn’t keeping up with housing costs. And so even as the demand for skilled workers in Silicon Valley soared, residents trickled away to other locations. That made for a too-tight labor market, and that, in turn, squeezed out entrepreneurs....And what did that mean for the American economy? The workers that moved elsewhere didn’t give up working. They found employment in other metropolitan areas, many of which developed thriving tech sectors. Those sectors weren’t fallow fields for new firm creation….But what the economics of metropolitan geography tell us is that many small collections of firms will often be less productive and less innovative than fewer, larger firm clusters. The forces that repelled workers from Silicon Valley, which was the intellectual heart of the country’s tech industry, reduced the potential economic impact of the tech boom. And in a not unimportant side effect, it reduced national productivity and total compensation in the economy.

Avent makes a great point: Even though something looks outstanding from the outside, factors could be limiting its potential. In retrospect, we marvel at how Silicon Valley contributed to the New Economy during the late-1990s boom — but it could have been even better!

Silicon Valley is still an expensive place to live. In Northern California, the median house price is almost $400,000. In Southern California, however, it's less than $250,000. You can look around SoCal and see economic armageddon — or you can consider our economic, educational, and lifestyle advantages, which are comparable to NoCal, and see plenty of untapped opportunity. 

NoCal has world-class universities. So does SoCal. NoCal has a dominant international industry (tech). So does SoCal (entertainment). NoCal has an elegant bridge that crosses a fog-draped bay. So does…oh, wait — we don't have one of those. But we do have Disneyland!

And we do have LOTS of fairly cheap housing, to go along with an enviable climate and an unemployment rate — 12.4 percent in Los Angeles Country — that should provide abundant incentives to create a business-friendly environment. For a decades now, SoCal has watched as NoCal has leveraged tech to dominate the California economic story. But the housing crisis may have handed us a way to catch up. With plenty of relatively cheap places for the entrepreneurs of the future to live, we may be able to get more out of the next upturn than NoCal did from the Dot Com boom.

But this is the thing: SoCal needs to move past the entertainment business and recover some of the business dynamic of its past, when the region was home to the aerospace and defense industries. In short, we need to either develop a startup tech scene of our own (we're making progress in some areas and slowly getting over the collapse of LA-based MySpace) or nurture an up-and-coming sector, like biotech, Green energy, innovative new military contracting, or perhaps even infrastructure development.

We built the houses — way too many of them — so now we just need to provide the incentives for the workers to come.

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Photo: Kevork Djansezian/Getty Images