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California: A 'permanently smaller' economy?

July 10, 2009 |  8:30 am

Not that anyone in California should need more sobering-up about the state's economic outlook, but the scenario painted by blogger Gregor Macdonald, who describes himself as a veteran oil analyst and energy investor, is particularly stark.

In a summary of his piece titled "The Scholarship of Collapse," he writes:

"Without the two industries that characterized post-war growth in the U.S., housing and automobiles (and the financial industry that squatted on top of these) it’s hard to see how California -- and the U.S. by extension -- does not become a permanently smaller economy.

"I now foresee zero net physical infrastructure or housing growth in California for at least another 5 years. If housing units go up somewhere in California, they’ll be bulldozed someplace else. If new roads or highways are erected, they’ll be discontinued or dismantled somewhere else. Without California, there will be no sustainable U.S. GDP growth."

I’m not convinced that the U.S. can’t grow without growth in California. Texans probably had similar thoughts when their mini-Depression began in the mid-1980s, with the collapse of oil prices and real estate values. But obviously the long workout ahead for California will weigh on U.S. growth.

In a broader view, Macdonald sees California as emblematic of the tipping point faced by the U.S. economy overall:

"The United States, just like California, now sits astride massive, gargantuan post-war infrastructure that was built with cheap energy and leveraged with cheap energy, for over 50 years. . . . To make matters worse, the federal government is in the midst of one of the largest policy mistakes in U.S. history as it has chosen to make enormous new investments in car companies, cars, biofuels, roads, and highways to the exclusion of public transport. This is a classic, textbook example of the sunk cost effect in decision making and is a hallmark of the collapsed societies of antiquity."

-- Tom Petruno