The Great Recession and Its Aftermath: Putting a Number on California’s Lost Economic Potential

Anyone who’s ever played “Chutes and Ladders” knows what happens when you land on the wrong square — a fast ride down a long slide that wipes out much of your progress and puts your goal further out of reach. In many ways, that’s an apt metaphor for the California economy, which — due to the Great Recession — careened down a steep slope near the end of the last decade, eventually hit bottom, and began a relatively steady recovery that continues today, albeit at a frustratingly slow pace for the many Californians who are still hurting in the aftermath of the economic downturn.

What if California hadn’t landed on the “wrong square” and hit a steep downward slide back in 2008? What might the California economy — and the state’s revenue picture — look like today? We can address these questions by looking at earlier projections from the Legislative Analyst’s Office (LAO), which annually publishes a multiyear fiscal outlook. The LAO’s November 2007 outlook was the last edition prior to the economic free fall of late 2008 and early 2009. As such, the 2007 forecast provides a useful “yardstick” against which to measure how far the California economy has fallen short of its pre-recession potential.

Based on the LAO’s assumptions, total personal income — a proxy for the California economy — was projected to steadily rise from $1.575 trillion in 2007 to $2.165 trillion in 2013, as shown in the chart below. Instead, as a result of the Great Recession, personal income actually dropped by almost $100 billion from 2008 to 2009 — a decline of nearly 6 percent in a single year. While personal income has risen each year since 2009, these increases have not been large enough for the state to “catch up” to its pre-recession trajectory. As a result, California personal income now estimated for the current year — $1.802 trillion — is $363 billion below the 2013 level that had been assumed in the LAO’s 2007 forecast.

This gap between what is and what might have been goes a long way toward explaining why California continues to face such a challenging fiscal environment despite the passage of two tax measures, Propositions 30 and 39, on the statewide ballot last year. The $363 billion in unrealized personal income — that is, California’s lost economic potential in 2013 — could have generated roughly $27 billion in state revenues this year, based on revenues comprising 7.5 percent of the California economy, which is the 40-year average. With those additional revenues, total state revenues (General Fund plus special funds) would have exceeded $160 billion. This is substantially higher than the $134 billion in revenues estimated by the Governor for the current fiscal year — an estimate that includes the new revenues from Propositions 30 and 39.

In short, the total personal income gap caused by the economic downturn has led to a revenue gap this year of well over $20 billion — dollars that are not available to support investments in education, child care for working families, health care, and a range of other public systems and services that promote economic growth and broadly shared prosperity.

— Scott Graves