For several months now, I’ve been writing about the 2% economy, the current sluggish state of growth in the U.S., one that I expect to hold for some time. But a weekend spent in southern California, in both Orange County and neighboring San Bernardino, has me thinking about how the American economy isn’t really a 2% economy, but bifurcated one in which some areas are booming, and others are stagnating.
Here in the O.C., things look pretty good. In Dana Point, where I am attending a conference held by TIME’s sister publication, Fortune, the unemployment rate is 5.7%, more than two percentage points below the national average. Hollywood, Silicon Valley, and finance money keep real estate prices relatively high. Warren Buffett has a house in the area, as does George Clooney. There was no shortage of people paying $37 bucks for what looked like about three bites of Hawaiian moonfish in the dining room of the St. Regis last night.
San Bernardino, an hour or two away depending on traffic, may as well be a different country. Indeed, the Del Rosa neighborhood, one of the hardest hit in the housing crisis, looks like a developing one. Groups of young men and children hang out in front of a corner bodega. Among the small, mostly shabby bungalows that make up the housing stock, a few homeowners are making an effort, keeping the grass freshly cut or adorning their porches with an assortment of potted plants. It’s a losing battle, however, because on nearly every block is an abandoned home, left vacant after a foreclosure, or simply abandoned by an owner. Many are painted with gang graffiti, and used as drug dens. In one of these sad places, I saw a slew of dirty mattresses, empty liquor bottles and strewn trash.
The homes that actually had tenants living in them (I couldn’t find any owners) were guarded by pit bulls or large fences. One renter, Myrna Lopez, an assistant in the county office of public health, said she’d moved to the neighborhood because of the low rent — $1095.00 for a four-bedroom, two-bath house — which housed her large extended family more comfortably than the apartment they’d been living in a few towns away. But someone had been shot recently across the street, and she worried about letting her grandchildren play in the fenced-in yard unattended. “My husband is unemployed, so he looks after them all the time,” she said.
I came to San Bernardino because I’m intrigued by the proposal of county CEO Greg Devereaux that the county should use eminent domain to seize and restructure underwater mortgages. It’s a controversial proposal, and one born out of desperation. Four years on from the financial crisis, half of all mortgages in the county are still underwater and the foreclosure rate is 3.5 times the national average. Unemployment is over 12%. Devereaux has put together a group of local authorities to consider whether the county should work with an outside financial group to buy back the properties from private investors at current market value — which would be a fraction of what the investors paid, given that the median home price is about half what it was during the boom — and then restructure the loans at much lower rates. This would give homeowners some breathing room and, hopefully, stabilize the housing market and get the local economy back on track. “It’s the first idea I’ve seen that has enough size and scope to really shift the housing market,” says Devereaux. “It’s not about moral rightness. It’s about our economy. Things are very, very bad here.”
Needless to say, the banks and mortgage firms that would have to take the haircut are furious. And it’s not hard to see why: If you can’t count on a contract being respected, they might argue, a new and very large risk factor is introduced into the lending system. If the rule of law doesn’t hold, then what separates the U.S. from developing nations in which property rights are ever changing, and political risk is high?
Sadly, San Bernardino already seems like a poor country — and one without the clear growth potential of many global emerging markets. Before the crash, housing made up 25% of the economy. Now that it’s gone, there’s little to take its place. During the two-hour drive from the coast, I saw numerous roadside advertisements for personal credit counseling, mega-churches, and mobile home outlets. The haze of the housing boom made people think that a desert city with little economic diversity, a poor educational system, and a low tax base could become the next prosperous, O.C. bedroom community. Instead, it seems like a place where if you get off track, you might become dehydrated and die.
Whatever its future, San Bernardino will be going it alone. The federal government is getting out of the housing business. Poor California finances mean that the state is pushing more financial responsibility for things like education, infrastructure, and prisons onto local governments. “Local government is definitely going to have to do more with less,” says Devereaux. “But the truth is, we’re also going to be doing less with less.” Even if the city decides to pursue eminent domain restructuring — and is allowed do to so legally — it’s future growth is far from clear. While large swaths of coastal California may prosper, the Inland Empire will likely be economically traumatized for years to come. As I recently wrote in TIME magazine, all economics is becoming local. And for some communities, the 2% economy may actually be aspirational.