California's Golden Touch

The world's ninth largest economy has a few growing pains

Californians this week vote on Proposition 9, the proposal to halve the state's personal income tax. Its chief sponsor is Howard Jarvis, the pugnacious architect of the 1978 Proposition 13, which cut property taxes by an average of 56% and set off a series of tax reductions around the country. Though its passage is by no means assured, Proposition 9 is another bold thrust in California's tax revolution. Since 1978, the state has indexed personal tax rates to inflation, put a lid on budget increases and abolished the business inventory tax. Moreover, Governor Jerry Brown has handed taxpayers $695 million in special tax credits. California's treasury has survived all these shocks in large part because of a hearty surplus fed by a vigorous economy that has become a modern cornucopia. TIME Correspondent Michael Moritz reports: California has the world's ninth largest economy--a gross product of $30 billion, bigger than Australia's, Canada's or Brazil's. Its 22.9 million residents' personal income will increase some 12% this year, compared with 10% for the nation as a whole. And they earn their living from such diverse enterprises, ranging from pistachio nuts to microchips, that the economy seems capable of adapting to almost any new trend or demand. Says Bank of America President A.W. Clausen: "The California economy is a different story altogether from that of the rest of the country. At the worst, we won't slip into a recession."

But, like the earthquake tremors that have shaken the state during the past week, California's economy is experiencing some shocks. Unemployment is at 7.1%, about the same as the rest of the nation; inflation is a horrendous 17.3%, and there are pressing doubts about the supply of water, energy and housing.

California is the nation's most important agricultural state. Working only 3% of all U.S. farms, its farmers last year reaped $12 billion, 10% of the nation's agricultural receipts. Meat and dairy cattle are the biggest farm commodities, but dramatic changes are taking place among the state's 250 other agricultural products. Last year was the second in a row when farmers made bigger profits from fruits and nuts than from staples, such as vegetables, wheat, rice and cotton. Increasingly, farmers are finding that the crops best suited for export provide the biggest profits. The almond harvest, for instance, has grown 4 1/2 times since 1969.

A critical debate is now raging over the water that irrigates 9 million acres of the state's farm land. Agriculture soaks up 85% of California's water supply. But much of the water comes down the Colorado River through Arizona and Colorado, and farmers there are demanding a bigger share. Intense lobbying in Congress by white-water rafters and others has delayed for more than a year full use of the $341 million New Melones Dam near Modesto; other environmentalists are stalling plans for a 43-mile canal that would supply more water for the arid south.

While nature's gifts keep California's agriculture in bloom, the state's aerospace industry has faced problems. California's contractors took more than a decade to recover fully from the industry's last depression when the Apollo space program wound down, and Lockheed and McDonnell Douglas are still facing stiff head winds in the commercial jet market. But the state has maintained its 20% share of all defense contracts. Aerospace firms have such a choking backlog of orders that even an immediate decision to speed up defense spending would not result in any surge in new jobs until 1983.

The state throbs with military aerospace construction. At Douglas Aircraft's plant in Long Beach, the KC-10 tanker cargo plane is rolling out, and at Lockheed's Sunnyvale facility new ballistic missiles for Trident submarines are being built. The first of 18 advanced maritime patrol aircraft worth $700 million was delivered by Lockheed to the Canadian government last week.

The light electronics companies clustered in Santa Clara County's famed Silicon Valley flourish along with the aerospace industry. But after flashing into the age of microprocessors during the past decade, the microchip industry is drawing up its wagons, wondering if it can withstand an onslaught from the Orient. Warns Hewlett-Packard President John Young: "The Japanese are learning how the game is played and how it's scored."

For the moment, however, Silicon Valley has more close-to-home problems, like attracting young computer geniuses who will pay California housing prices. The median price of a home in the Santa Clara Valley is now $97,500, and the chronic shortage of houses statewide has been worsened by the recent slump in construction and home loans. Laments California Builder Nathan Shapell: "New single-family homes will be for those selected by God."

The electronics industry is equally jittery over the energy supply. Governor Brown has led a virtual moratorium on nuclear power plants. A host of technological problems has also blocked development of the 3.2 billion bbl. of heavy oil beneath the San Joaquin Valley. As a result, some companies are rapidly expanding into neighboring states, where land and labor are cheaper and energy supplies more predictable. Says Gordon Moore, chairman of the microchip front runner Intel: "Next year we'll have more employees in Oregon than in California."

Despite the problems of controlling its growth, California's economic outlook is as bright as the smile of a Rose Bowl queen. By decade's end the population will grow to 26 million. The Golden State is also expected to provide 3 million, or 15%, of the nation's new jobs during the '80s. In sum, California-style tax revolts, together with all that sunshine, provide a good climate for economic growth.

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