Comparing the New England and Southern California Regional Recessions

I. INTRODUCTION The recent economic downturn of the early 1990s produced particularly severe regional recessions in New England and Southern California. A deep regional recession began in New England about a year prior to the 1990 national recession. Southern California entered its regional recession at about the same time as the national recession. In both cases, regional employment fell (on a percentage basis) much more steeply than it did on the national level. The two regional recessions share some characteristics. The two economies are approximately the same size, at least in terms of total employment. Prior to the recent recessions, total nonagricultural employment hit a peak of 6.7 million in New England in December 1988 and a peak of 6.3 million in the Greater Los Angeles/Southern California region in December of 1989. (For the purposes of this paper, the term "Southern California" refers to data from Los Angeles County as well as four counties surrounding Los Angeles, including Ventura, Orange, Riverside, and San Bernardino counties. Data for San Diego are not included.) Figure 1 compares the composition of employment in the two regions, as measured at peak (just prior to each regional recession). Note that the main difference in the sectoral composition of employment is in the service and finance sectors. Compared to Southern California, New England had a greater percentage of its workforce in services and a smaller percentage of its employment in the finance, insurance, and real estate sector. Otherwise, the sectoral composition of the two regions is quite similar. In addition to these measurable similarities, the conventional wisdom regarding the cause of each of the regional downturns is similar. Many attribute New England's downturn to declines in durables manufacturing (mainly, the computer industry), combined with an extreme boom-bust cycle in the local real estate market. A collapse of employment in durable goods manufacturing employment also was evident in Southern California. The major cause of this decline was the reduction in national defense spending, which caused large job losses in the region's relatively defense-dependent economy. Southern California also experienced a real estate boom in the late 1980s, followed by a collapse in real estate values in the 1990s. Because of these similarities, can one think of the two regional recessions as similar phenomena? The analysis here explores the question and examines the role of policy in preventing or lessening severe regional economic downturns. II. COMPARISON OF RECENT ECONOMIC PERFORMANCE The recent New England recession lasted about three years, with job losses totaling 654,500 from December 1988 to December 1991. By comparison, Southern California's recession lasted a full year longer, but the corresponding job loss was not as severe. Southern California lost 463,800 jobs between December of 1989 and December of 1993. Since peak employment preceding the business cycle was roughly equal in the two regions (6.7 million for New England and 6.3 million for Southern California), New England lost a much greater percentage of its total employment than did Southern California. Figure 2 illustrates the behavior of employment from peak during each regional recession. New England's recovery (defined in terms of the point in time when employment began to grow rather than shrink) began at about 40 months after peak, whereas Southern California's began at about 50 months after peak. However, since New England had more ground to recover than did Southern California, both regions were roughly at the same proportion of peak employment (about 93 percent) by 60 months after peak. III. IDENTIFYING CAUSES OF THE REGIONAL DOWNTURNS: SHIFT SHARE-ANALYSIS Regional analysis commonly divides the economy's subsectors into two categories: "economic base" industries versus local industries. A region's economic base consists of industries that sell goods and products outside the region. …