Friday, March 24, 2006

Bay Area economy thriving

Article Last Updated: 3/24/2006 06:39 AM

Report: Bay Area economy thriving
Region's productivity vulnerable to talent loss

Inside Bay Area

The Bay Area's economy is stronger now than during the peak of the dot-com boom, yet the region might lose its competitive edge if some of its most highly skilled workers flee the region for more affordable places, according to an economic report released today.
Bay Area businesses rely heavily on the productivity of their work force to overcome the highest cost of doing business in the nation, yet this talent base is slipping away, according to an economic profile issued jointly by the Bay Area Economic Forum, the Bay Area Council, and the Association of Bay Area Governments.

The region remains one of the most productive marketplaces in the world, but output has fallen in recent years while other economic hubs lured away the best workers. According to the report, also prepared with help from McKinsey & Co., Boston has eclipsed the Bay Area as the world's most productive region.

To stay competitive, the Bay Area needs affordable housing, better schools and less traffic, business advocates said. Without urgent changes, the valuable talent base will continue to flee the region, thereby weakening the economy.

"Bay Area employers are in the center of one the world's most dominant and rapidly growing economic hubs," said Jim Wunderman, president of the Bay Area Council. "That said, economic conditions change extremely rapidly. Forces that many would argue are in our control are at this very moment rapidly eroding our economic advantage."

Bay Area business leaders are supporting a fractured legislative effort to pump more money into the state's roads, levees, ports and other infrastructure, which they say will help ensure California's economic future. So far, Sacramento has failed to reach an agreement on infrastructure investment.

Wunderman said workers need housing assistance to buy a home here as costs approach $600,000 or more in many cities. The K-12 education system simply needs more money to turn out students capable of taking the reins of California's economy.

"These problems weren't created overnight and won't be solved overnight, but we have to act now," Wunderman said. "It takes a combination of investment and reform, and we need to get down to business with that."

The report, "The Innovation Economy: Protecting the Economic Advantage," was a mixed bag for the Bay Area, describing it as an unusually adaptable environment that should have no trouble overcoming the kind of problems that could sink a lesser economy.

Indeed, the Bay Area's economy has attracted more than its share of major U.S. companies, even during the severe recession in the Silicon Valley after the dot-com crash.

In 1994, 20 of the largest 500 companies in the country were headquartered here. Today, 26 are, and only New York City has more.

Still, the report warned, salaries have not kept pace with the cost-of-living increases, schools are not adequate and residents spend almost twice as much of their budgets on housing as the rest of the nation.

Despite looming challenges, the Bay Area's economy has grown faster than the U.S. economy since the end of the recession in 2002. Also, the region's total production in 2004 was $17 billion higher than in 2000 at the peak of the tech boom, the report said.

At the same time, progress in other areas chipped away at the Bay Area's dominance in such areas as computer technology and life sciences, two critical pieces to the region's emerging knowledge-based economy.

For instance, the average Boston worker now produces $54,000 worth of goods and services each year, compared with the average Bay Area worker's $51,000. Both easily exceed the U.S. average of $40,000.

Sean Randolph, president of the Bay Area Economic Forum, said a high production level is necessary to stay competitive because of other costs — environmental regulations and robust salaries, for instance — that make the Bay Area the most expensive place in the United States to run a company.

"In the past we've been able to say, 'Yes, we're expensive but our productivity is so high that it pays to be here,'" Randolph said. "But now that advantage has been pared down a lot. It's still a nice advantage, but it's declined steadily in recent years. It's going the wrong way."

Randolph said he has confidence that lawmakers will find a way to agree, at least on something as obvious as the need to unclog the freeways.

"I have to believe our leaders in Sacramento will eventually agree on something as basic as infrastructure investment," he said.

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