Economic effect of 2007 San Diego wildfires

"We have to rethink the speed of growth"

— When asked, "How's your wife?" the late comedian Henny Youngman used to crack, "Compared to what?" The local economy is like that these days. If someone asks, "How is the San Diego economy going to do?" you have to reply, "What's your frame of reference? This year, next year, or the long run?" The fires will whack the economy the rest of this year and well into next year, then probably boost it later in 2008 as insurance and federal monies pour in and reconstruction gets under way in earnest. But San Diego faces long-term questions: Can we still say we have a perfect climate when we are a semidesert with rocky and steep terrain, getting even dryer with global warming, and periodically suffering stiff Santa Ana winds that whip up infernos? Can we expect more frequent and damaging fires the way New Orleans and Florida face more frequent and terrifying hurricanes? What can we do about a declining water supply? Given the fire-proneness and coming water shortage, should we curtail residential construction? With real estate developers controlling the politicians, bureaucrats, and mainstream media, is that possible to do? Must we raise taxes to pay for adequate fire protection, as well as replenish the plundered pension plan and rebuild the aged infrastructure? Will San Diegans stand for increased taxes?

Let's consider the big picture first. "The development community is salivating, but San Diegans must realize these fires may be here to stay," says Murtaza Baxamusa of the Center on Policy Initiatives. "It is important for us to reevaluate the way in which we grow. We have to rethink the speed of growth and also the quality of growth. Are we providing the services that residents need?"

Baxamusa believes that developers are not funding the infrastructure that they should be required to provide. "In the current general plan, the developers are not asked to do as much" as governments require to stabilize finances and keep up with necessary infrastructure improvement. "The City addresses this in a meek manner," he says. Whether or not the City has to raise taxes, "We have to negotiate better deals on new projects. Real estate developers are not doing their part."

Kelly Cunningham, economist for the San Diego Institute for Policy Research, looks at the long-term woes from a different perspective. He points to Proposition 13, the 1978 measure mandating that the property tax on a parcel be limited to 1 percent of assessed valuation, which can go up only 2 percent a year. "We put the burden of taxes on new housing because of Prop 13," says Cunningham. "New housing is really expensive. It's the biggest detriment to regional prosperity. It's not that people can't find a job; it's that they can't afford to live here." The population has barely risen in two years, and jobs are rising less than 1 percent a year.

The war is on. One side wants to shift more burden to builders, who will pass on much or all of it to buyers. The other side says San Diego's pressing problem is that people can't afford homes -- particularly new ones. Some experts tout new homes that are especially constructed to resist fire. But how many families will be able to afford them? People who lost their homes may not get insurance payments sufficient to permit them to build fire-resistant structures.

What, then, about the near term? Before the fires, the San Diego economy was on its way down -- perhaps in or headed for a recession. Alan Gin, economist at the University of San Diego, keeps monthly lead indicators on the local economy. For many months, the trend in building permits, initial claims for unemployment, and consumer mood have been consistently poor, indicating "a big loss of jobs but not a recession -- what I call the San Diego equivalent of a recession," says Gin.

The fire took money out of the economy -- retail sales, productivity, buildings, etc. Cunningham estimates that the damage is $2.1 billion, including $500 million for homes; $200 million for other structures; $400 million for furnishings, cars, clothing, and the like; $893 million in lost business and productivity; and $100 million in overtime for fire and police, as well as materials.

Much of that should eventually come back, with a lag. The money pouring in next year from insurance and governments will help. "It will be a net plus to the construction industry," says James Hamilton, economist at the University of California, San Diego. "But rather than create a boom, that [incoming money] will mitigate the bust that was under way." He says economists look at things in dollars-and-cents terms without looking at "the concept of [societal] welfare. We would have been better off if the old houses were where they were. This was a bad thing to have happened to us." He notes that because of the U.S. mortgage crisis, it's difficult to get jumbo loans for expensive homes, and because of the escalation in San Diego home prices, "many homes require these large mortgages."

Gin points out that six months after the 2003 fires, construction employment picked up, and soon "retail sales were up considerably." In 2003, construction labor was tight; now, because of the slump, there is lots of labor around. However, he cautions, "We will get some bump from reconstruction, but it will be dwarfed by the macroeconomic problems -- the subprime mortgage crisis and foreclosures, for example."

The tourism industry, which last year contributed $7.7 billion to the local economy, should recover from the fires quickly, but because of the national economic slowdown, growth could be only 1 percent next year, says Cunningham.

Peter Reeb of Reeb Development Consulting says new single-family home prices are down 15 to 17 percent from a year ago. That plunge is about as intense as the drop of the early 1990s that resulted from the aerospace collapse. He says builders are offering the same kinds of incentives today as they offered in the early 1990s. The new home market "most likely is going to remain weak, probably at least until mid-2008," when builders will have lowered prices enough to attract buyers, says Reeb. The big problem is "the tightening of lending requirements." The market had started to recover in late 2006 and early 2007, but the subprime mortgage crisis hit, and lenders tightened up. Resale home prices are down less because people don't have to lower prices; most can just stay put for a while. But foreclosures are running 300 percent above a year ago. That's a bad portent.

Employment is barely creeping up. Gin looks for 8000 to 10,000 new jobs next year, about the same as this year and half of last year. Cunningham says 11,000 jobs will be added this year, a gain of only 0.8 percent, with 14,000 or 1.1 percent added next year, mainly from construction. "Just a few years ago, we were adding 30,000 to 50,000 a year," says Cunningham.

Until housing prices began to drop, San Diegans had borrowed against rising home values to make purchases. The most recent statistics, through the third quarter of last year, show San Diego had weaker retail sales than major metro areas. "Adjusted for inflation, retail sales would be negative," says Cunningham, who suspects the trend has continued this year.

Both the City and County are in bad economic shape, dogged by pension and infra-structure problems. Will the City boost taxes? The transient occupancy tax, or hotel tax, is lower in San Diego than in other competing cities. Dare the City and County raise existing taxes and create new ones? "You know how cheap the County is," says Gin. "I don't know that the political will will be there."

Others say that there is plenty of money flowing into government coffers; what needs to be cut are overgenerous pay and benefits for employees and the amount of money flowing to corporate welfare. But employees and corporate mendicants have clout too.

The fires will bring a political conflagration that could be as societally damaging as the fires were physically damaging. As Henny Youngman used to say, "I told my doctor I broke my leg in two places. He told me to quit going to those places."

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