The Price of a Virus Lockdown: Economic ‘Free Fall’ in California

California’s strengths — as a hub for commerce, tourism and education in the Pacific Rim — have become liabilities in the pandemic.

By Tim Arango and Thomas Fuller

Published May 26, 2020, Updated May 28, 2020

LOS ANGELES — Locked down in their homes, the four former California governors clicked into a Zoom call and one after another described how they dealt with the crises that had defined their time in office. For Pete Wilson, it was the 1994 Northridge earthquake. Gray Davis evoked the electricity disaster that drove him out in a recall election, and Arnold Schwarzenegger and Jerry Brown lamented the Great Recession.

But the former governors agreed that nothing they confronted was as dire or will be more consequential than what the current occupant of the office, Gov. Gavin Newsom, now faces.

The economic collapse resulting from the coronavirus pandemic“dwarfs any problem the four of us had,†Mr. Davis recalled saying at the meeting, which took place late last month and was convened by Mr. Newsom.

“There’s no playbook,†he said. “There’s no precedent.â€

California was the first state to shut down to counter the coronavirus and has avoided the staggeringly high infection and death rates suffered in the Northeast. But the debilitating financial costs are mounting every day. California has an estimated unemployment rate above 20 percent, according to Mr. Newsom — far higher than the 14.7 percent national rate and similar to the estimated rate for New York State, where the virus has hit the hardest.

In Los Angeles, with movie productions shut down, theme parks padlocked and hotels empty, things are even worse: The jobless rate has reached 24 percent, roughly equal to the peak unemployment of the Great Depression, in 1933.

“Economic free fall,†is how Tom Steyer, the former presidential candidate, described it. He is heading the state’s economic recovery task force, a group of business leaders, labor activists, economists and former governors who have begun meeting to plot a way out.

California faces a daunting budget deficit of $54 billion, which could force painful cuts to schools, social programs, health care and road building. And the state was the first to borrow from the federal government to finance its $13 billion in unemployment claims.

California has a hugely diversified economy, and many of the industries that have made it so strong are also the ones getting hit the hardest. By many measures California, which has the nation’s largest tourism industry, public university system, entertainment industry and port system and produces far more food than any other state, stands to lose more in the coronavirus-induced recession than anywhere else.

In a matter of weeks, the number of unemployed Californians, around 5 million, has more than doubled the number of the jobless at the peak of the Great Recession.

A large number of those losing their jobs were already among the most vulnerable, including service workers earning minimum wage and truck drivers who serve the ports of Los Angeles and Long Beach, where trade volume is down substantially. For many, unemployment checks have been arriving, stanching the bleeding temporarily. But thousands of undocumented Californians are unable to collect unemployment because of their immigration status, although the state has offered some aid.

“A number of people who were hit by this were barely recovering from the last recession, barely making it,†said Ann O’Leary, chief of staff to Mr. Newsom.

Mr. Steyer points to the technology sector as one of the most resilient industries in the state and a source of future strength, but adds tech growth might not be enough to offset the sharp declines in all these other areas of California’s economy.

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With a gross domestic product larger than 25 states combined, California’s pace of recovery has stark implications for America’s future. After 2008, California helped lead the nation in economic growth and job creation, powered by Silicon Valley, which remains relatively resilient. But this time the pain is being shared across a much broader area of the economy, including rotted strawberries in fields along the Pacific Coast, the empty wine-tasting rooms of Napa Valley and the deserted campuses of the nation’s largest public university system.

With the state mandated by law to balance its budget, experts and officials are urging the federal government to step in and shore up the state’s finances with an immense bailout, a matter subject to partisan bickering across the nation, including in Washington, where many Republican lawmakers are opposed to it.

“I’d say this will be the most serious economic dislocation that America has faced,†said Mr. Brown, who left office with billions in the state’s rainy day fund. “The response should be a Rooseveltian intervention and effort to mobilize the economy the best way we can.â€

Others on the state’s economic recovery task force include the former Disney chief executive Bob Iger; the Apple chief Tim Cook; Janet L. Yellen, the former head of the Federal Reserve; and Priscilla Chan, a founder of the Chan Zuckerberg Initiative, the philanthropic organization she runs with her husband, the Facebook co-founder Mark Zuckerberg.

As the debate on reopening is increasingly shaped by the country’s partisan divide, many conservative states are moving more quickly to restart their economies and many liberal states, like California, are taking more precautions. According to location data compiled by Google, Californians have more strictly abided by stay-at-home orders than people in other states, with fewer visits to retail stores and pharmacies.

[When is California reopening? Here’s what you need to know.]

California relies heavily on travel, especially air travel, to power its economy.

Last year 83 million people arrived in the state on flights to participate in conventions, conduct business and spend money on tourism, far more than Florida, Texas and New York, the next three states that rely heavily on air travel, according to the U.S. Bureau of Transportation Statistics.

Ms. Yellen’s personal circumstances are emblematic of how the California economy could lose revenue. She and her husband, who are holed up in their Washington home, were planning to head to Northern California for the summer but have decided to stay put.

“I’m really not sure that we want to get on a plane,†Ms. Yellen said.

Eight out of 10 overnight visitors to San Francisco and five out of 10 in Los Angeles arrived by air. Last year, California made $145 billion from tourism, more than any other state.

“Everyone is holding on, holding their breath,†said Linsey Gallagher, the president of Visit Napa Valley, a tourist association in wine country. On a recent weekday, Ms. Gallagher gave the latest tally: Of 5,500 hotel rooms in Napa, only 328 were occupied, mostly by medical personnel and families isolating from infected relatives.

Amelia Morán Ceja, the founder of Ceja Vineyards in Napa Valley, says 40 percent of her revenue disappeared with the closure of her tasting room. Yes, some locked-down customers have been consuming more wine but overall spending on California wines is down 25 percent this year, according to Jon Moramarco, a wine market analyst.

“This is not sustainable for anyone in the wine industry,†Ms. Ceja said. She is helping coordinate guidelines for wine tasting to resume, including having customers wear face masks, spacing tables far apart and offering tastings by reservation only.

The swift decimation of the nation’s largest tourism industry has consequences far beyond the 600,000 travel industry employees who have lost their jobs in the state. Taxes related to travel are a key source of revenue for California cities, amounting to $12 billion last year.

“I don’t see California having a full recovery until the tourism and hospitality industry is able to come back online,†said Caroline Beteta, the president of the state’s tourism bureau.

As a measure of the breadth of the crisis, industries as disparate as oil and strawberries are also being threatened. California Resources Corp, an oil and gas producer and a major employer in Kern County, north of Los Angeles, warned this month that it risked going out of business if it could not restructure its billions of dollars’ worth of debt.

The strawberry industry, which employs 55,000 people, is an example of how crucial federal assistance has been to California. In April, tens of millions of pounds of strawberries were left to rot in fields, according to Rick Tomlinson, president of the California Strawberry Commission. The federal government then agreed to buy $35 million worth of frozen strawberries for distribution in food banks as well as nearly $500 million for a variety of fresh fruits and vegetables including strawberries and other California crops.

The ports system in the state, the largest in the nation and the primary gateway for goods from Asia, has also contributed to the economic pain.

Volumes of shipments are down some 15 percent, compared with a year ago, and the shutdown of the economy has rippled through the system: Ships filled with jet fuel bound for Los Angeles’s empty airports sit anchored off the coast; warehouses throughout the region are overstuffed with clothing as retailers across America have cut orders, while exports of manufactured goods like computers have fallen; and truck drivers and dock workers have seen their hours cut drastically.

California’s economic success over the past decade stems in part from the state’s position as the country’s gateway to the Pacific Rim, harnessing the dynamism of Asia through trade into Long Beach, Los Angeles and Oakland as well as an influx of technology workers and students, a competitive advantage blunted by the virus.

Adrian Ma, a student at the University of California, Riverside, left for his home in Hong Kong in mid-April, when the number of new cases were rising sharply in California.

“I definitely would not come back to the U.S. right now,†Mr. Ma said. “I am currently in the safest place on earth, why would I want to go back to a high-risk place like America?â€

Along with other educational centers like New York and Massachusetts, California stands to lose billions of dollars in revenue if foreign students do not return. Last year, California had more international students than any other state, around 160,000, and their contribution to the state’s economy amounted to $7 billion, according to the State Department.

All of these factors will make recovery difficult for the state, but the big question that will determine how long the recession lasts is whether employers quickly hire back workers once the virus recedes. Across California there is a growing sense that the pandemic will reshape the state’s economy, with long-lasting pain.

“The world has just fundamentally shifted,†said Rick J. Caruso, a real estate developer in Los Angeles, who sits on Mr. Newsom’s task force. “Consumer habits, how we live our lives — there will be fundamental shifts.â€

He believes it will be a long time before employment levels bounce back, adding, “I think businesses are going to hire back far fewer people than they let go.â€

Tim Arango reported from Los Angeles, and Thomas Fuller from Moraga, Calif. Jesse McKinley contributed reporting from Albany, N.Y., and Vivian Lin from San Francisco.