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Winter 1997
   
San Diego: A City for the New Millennium
Joel Kotkin
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The 1996 Republican National Convention didn’t do much for Bob Dole’s hapless candidacy, but it sure gave the host city of San Diego a welcome boost. Long overshadowed by nearby Los Angeles, San Diego stepped forward into the limelight as a model for today’s urban America—a prosperous, confident big city, perfectly adapted to the new information-age economy.

It’s not just luck that made San Diego’s success, though the city has some notable advantages, including its paradisal California location, a steady supply of skilled technical workers drawn in by the presence of the navy’s Pacific fleet, and the intellectual capital generated by navy contractors and by the University of California at San Diego. No less important, the city has benefited from what it fortunately does not have: no vast municipal welfare state, no entrenched urban underclass, no powerful municipal employee unions to skew spending priorities, and no industrial union tradition to make its labor force rigid.

But the main cause of San Diego’s ascent is a pro-business, small-government political culture, coupled with a political leadership determined to translate those principles into policy. San Diego has chosen its course. Upon the formidable scientific infrastructure that grew up there, the city has imposed only a bare minimum of competitiveness-sapping taxes, fees, and regulations. It has tried to create a livable environment for educated, middle-class citizens. The result: an economy of small, dynamic, high-tech firms that have created jobs and prosperity at an astonishing rate—giving a glimpse of the successful city of the future that those who guide our other major cities cannot afford to ignore.

You can see how much San Diego’s success is a product of policy, not of luck, by looking at how the city’s leaders rescued the local economy from its devastating recession of the early nineties. With huge federal cutbacks in defense spending, scores of aerospace and weapons contractors left town or just folded. Others, like Raytheon and Rohr Industries, made massive layoffs. General Dynamics, the city’s leading private employer in 1990, with 17,000 workers, has only 2,000 today, and even these jobs are on the way out. Pentagon austerity also deprived the city of ten of its 75 home-ported navy vessels, with some 17,000 sailors.

Finance suffered too. During the savings and loan crisis of the early nineties, three huge San Diego–based thrifts—Great American Bank, HomeFed Savings and Loan, and Imperial Savings—went under, while a merger swallowed up the leading homegrown commercial bank, San Diego Trust and Savings. In all, 4,000 more jobs vanished. Today, the largest locally based bank in this, the nation’s sixth largest city, is tiny Grossmont Bank, with a mere $473 million in assets.

San Diego’s economy shrank three years in a row, hitting its nadir in 1993 with a 7.7 percent unemployment rate. Overall, the city lost 60,000 jobs, fully one-tenth of its total employment. Retail and home sales plummeted. Even today, with the city on the rebound, per-capita income has just begun to approach its 1989 level in real terms, while home construction, once a driving force in the local economy, is still inching along at roughly one-third of its pre-recession pace.

In 1992, in the midst of this economic disaster, the voters of San Diego turned city hall over to Oklahoma-born Susan Golding, 51, a diminutive, raven-haired divorced mother of two, who dresses in power suits and speaks with the quick self-assurance of a corporate CEO. “We had businesses leaving town, and both blue- and white-collar workers were being laid off in droves,” she recalls of her early days in office. “I felt we had to send a message.”

So she drastically reduced the government-imposed costs of doing business in San Diego, costs she believed made the recession worse. During her first four years, she cut basic business taxes by nearly three-quarters. Mindful of the job-creating potential of start-up companies, she cut even deeper into the levies on businesses with 12 or fewer employees. Golding also took an ax to the city’s water and sewer fees, which especially burdened high-tech firms like Hewlett-Packard and Qualcomm. Once among the highest in the nation, these fees shrank by more than half across the board and by two-thirds for manufacturers. Now San Diego’s combined taxes and fees are lower than those of any other major city in the nation. According to Vertex, a Pennsylvania-based consulting firm, a mid-sized service company moving to San Diego can expect to fork out around $80,000 to local government, $11,000 less than in next-best Houston. A similar company would pay $224,000 in Los Angeles, $280,000 in Chicago, and—get this—a whopping $683,000 in New York, which tops the list for its exactions on business.

Golding also eliminated over 40 business-dampening regulations, dealing with everything from the fire code to signage. As for the regulations that remain, the city now assigns each business a case manager to help cut the red tape of compliance. Since 1991 the time it takes to get business permits has dropped by more than half. And Golding streamlined city government itself, cutting nearly 18 percent of all non-public safety jobs. Today San Diego has one of the lowest ratios of public employees per capita in the nation, fully a third less than Los Angeles and a fifth the number of New York City. San Diego also boasts the 49th lowest debt per capita of the nation’s 50 largest cities—again, the mirror image of New York, the nation’s urban debt champion. Little wonder that in March 1996 San Diego’s electorate gave Mayor Golding a second term with an astonishing 78 percent of the vote.

This success rests on more than just Golding’s considerable administrative talents. As the mayor herself is the first to admit, “it helps to have a conservative political culture.” She doesn’t mean this in any narrowly partisan sense: because of the city’s nonpartisan political system, she herself has no declared party affiliation, and while San Diego County is predominantly Republican, the city itself is evenly divided between Republicans and Democrats. But in San Diego, she says, “even the Democrats are not far-left liberals. People here have less tolerance for government spending, and there’s real pressure for efficiency in government. It’s hard to get away with what happens in other cities.”

Part of the reason is that unions have never found San Diego hospitable. In the early decades of the century, the city was famed for its hostility to the labor movement, a sentiment that sometimes spilled over into ugly anti-union vigilantism (many a Wobbly was ridden out of town on a rail). Moreover, San Diego didn’t have much industry to unionize until well into the sixties, its economy relying instead on tourism, retirees, and the free-spending sailors of its huge navy base. “Unions have never had any real influence here,” says Jerry Munroe, a politically influential lawyer with strong ties to the local biomedical industry. “Things go pretty much the way business and homeowners want it.”

That means that San Diego has no entrenched municipal employee unions with the political might to shape municipal priorities. Government itself, therefore, was not just one more special interest, protecting its perquisites and procedures and clamoring for increased business fees to make up for recession-battered tax revenues. As a result, Mayor Golding and her city council didn’t have to keep looking over their shoulders to make sure their own troops weren’t turning against them as they made their economy-boosting reforms. City hall could give full attention to the needs of high-tech industry groups like the Software Council or the American Electronics Association, as well as to San Diego’s newly invigorated chamber of commerce, which, with nearly 4,000 member companies, is now the largest such group in the nation. “Entrepreneurs really had an opportunity to assert leadership like never before,” says Ann Ryder Randolph, managing director of BioCom, a biotechnology industry group.

San Diego has rebounded from the collapse of its once-dominant companies largely by unleashing the energy of these high-tech entrepreneurs. Their efforts put seven companies from the city and its immediate suburbs on Inc. magazine’s 1995 list of the fastest-growing private companies—compared to three for New York, with six times the population. That year, too, according to Technology Transfer magazine, the city was home to three of the nation’s 15 fastest-growing information-technology firms. “The way to get Fortune 500 companies here,” says Gary Clow, president of Stac Electronics, “is to attract fast-growing start-ups and hope that some of them take off. The Intels and Microsofts are still to be made in San Diego.” Though large corporations, including Pacific Bell, Nokia, and the Japanese electronics giant Matsushita, have also added new jobs and contributed to San Diego’s recovery, they aren’t setting the pace.

The city has become a top incubator for science-related businesses capable of such phenomenal growth. Computer companies like Stac, which specializes in networking and storage technologies, have led the way. Since 1991 San Diego has added roughly 8,000 jobs in software engineering alone, most of them in smaller companies, bringing the city’s total computer-related employment to 45,000. The telecommunications industry has also grown at a blistering clip, from 30 firms a decade ago to more than 70 today. In the past five years, these companies have created some 10,000 jobs, with a 40 percent jump in 1995 alone. Qualcomm, a world leader in cellular technology, is the largest of these and the fastest-growing employer in the region, adding some 200 employees a month in 1996. Biotechnology has been another jobs machine, generating some 5,000 positions since 1991. With over 100 biotech firms, San Diego trails only New England and the San Francisco Bay Area in the industry, well ahead of greater New York, with 86 such companies, and the Los Angeles/Orange County area, with 71.

Growing Mexican demand for the products that these companies make has fueled an export boom in San Diego, whose volume of international trade has surged from $10 billion in 1992 to over $15 billion in 1995. Business with Baja California, the thriving Mexican industrial region just across the border, has accounted for much of this increase. Trucks flow south with silicon chips, software, and machine tools, and make the return trip laden with assembled computers and televisions, as well as fresh fish and finished garments. With 40,000 transnational commuters every day, the San Diego–Tijuana corridor is the busiest, wealthiest portion of the 2,000-mile U.S.-Mexican border.

These science-related industries have sprung up from well-fertilized ground. Because of San Diego’s history as a navy town and center for naval research and development, thousands of military technicians and engineers, both active and retired, continue to call it home, amounting to a vast and persistent contribution by the federal government to the city’s intellectual capital.

Naturally enough, the first high-tech ventures to prosper in San Diego were defense-related. Aerospace companies flocked to the city in the early sixties, setting up campus-like research and development facilities in the rolling, chaparral-covered hills. And the military’s need for better satellite communication inspired Irwin Jacobs and Andrew Viterbi, then professors at the new University of California at San Diego, to launch Linkabit, the city’s pioneering telecommunications company, in 1968.

It is UCSD, however, that has proven to be the real elixir for San Diego’s high-tech growth. Built in the early sixties on bluffs overlooking the Pacific in the suburb of La Jolla, the campus brought to San Diego a distinctively Californian, technology-driven model of higher education. California’s educators had long ago decided that the state’s vast stretches of arid, undeveloped land and its distance from the markets and labor of the nation’s population centers called for a practical bent in how it trained its young people. “In order to meet the challenge of these handicaps,” observed Cal Tech president Robert Millikan in 1948, California “must of necessity use more resourcefulness, more intelligence, more scientific and engineering brains than she would otherwise be called upon to use.”

UCSD extended an already formidable constellation of top-flight universities with connections to industry. In the north, the University of California at Berkeley and Stanford were already giving rise to what would become Silicon Valley. In the south, Cal Tech, the University of California at Los Angeles, and the University of Southern California were laying the foundation for industries like aerospace and the video imaging technology widely used in movies and electronic publishing. Then as now, California boasted an unrivaled infrastructure for bringing together technology brainpower and venture capital.

In its three-decade history, UCSD has shot to the top of key technology fields. It ranks among the top ten departments nationally in mechanical, biomedical, and aerospace engineering, as well as in biochemistry, molecular biology, genetics, and neuroscience. Manifold profit-making spin-offs have resulted. Medical researcher Howard Birndorf, for instance, came to UCSD from Stanford in the mid-seventies to do work on cancer. His first commercial success came from using the monoclonal antibodies that were the basis of his research to develop several important diagnostic tools. Since then he has become a serial entrepreneur, founding six different biotechnology firms, including Nanogen, which he currently heads. “Here the scientists keep in touch with the CEOs and product-development types,” says Anne Ryder Randolph of BioCom. Often enough, as with Birndorf, they are the same people.

San Diego holds onto this critical mass of know-how with a quality of life for the educated middle class that few other cities can match. As Stac Electronics’s Clow puts it: “This is a wonderful place to live. It’s like waking up in paradise.”

San Diego’s Edenic qualities go well beyond its fabled weather, beaches, and sailing, or even the fact that its world-famous zoo and Sea World are a ten-minute drive from downtown. In addition, housing is relatively cheap, with the price of a starter home at about $160,000. “Engineers are stay-at-home people who like to live in houses,” observes Clow, “so these prices really help us with recruits.” Like everywhere else in post–Proposition 13 California, property taxes are under control.

But San Diego is also a real city, with a dash of urban excitement. It has conjured up a sparkling downtown where none had really existed before. A mere $200 million in public investment in the 1,500-acre district since the mid-seventies has sparked more than $2 billion of private investment, to build 3,500 housing units in gleaming new towers and restored oceanfront warehouses, 3,600 hotel rooms, and 4 million square feet of office space. Today nearly 20 percent of the 75,000 people who work in downtown also live there, which helps to explain why San Diego has so small a wage gap between city and suburb: San Diego’s city dwellers earn 94 percent of what its suburbanites do.

For the more style-conscious, San Diego has achieved even more urban éclat in its historic Gaslamp District, a low-rise area east of the city’s glass-and-steel downtown skyline. Once populated by drunks, homeless people, and sailors who couldn’t make it to the more extensive fleshpots of nearby Tijuana, “it was a pit,” recalls Sandy Goodkin, a nationally known real estate analyst based in San Diego. Today its early-twentieth-century brick buildings bustle till late at night with fashionable restaurants, cantinas, and cabarets. In the long-deserted warehouses of its back streets, artists and self-employed entrepreneurs now occupy funky loft space, making it feel a bit like a sun- lit mini-version of New York’s TriBeCa.

The sheer density of the city’s high-tech firms has an allure for highly trained workers. It makes job security less of a worry, and it ensures that the high-tech workplace culture, with its informality, flexible hours, lack of hierarchy, and tolerance for idiosyncrasy, is the local norm. Just as continual interchange with other clever financiers makes New York’s investment bankers smarter, this concentration of high-tech professionals creates a genuine scientific and technical ferment.

Such advantages have given San Diego an increasingly educated demographic tilt. Between 1970 and 1990, the number of residents with BAs grew from 96,000 to nearly 400,000. Today fully 25 percent of the city’s adults have BAs, well above the 20 percent national average and on a par with Portland and Seattle (but far behind the San Francisco peninsula, with its rate of 33 percent). As for PhDs, San Diego boasts more per capita than any other major U.S. city. Such credentials make a big difference in the region’s paychecks: compared to the national norm, 14 percent more households earn $50,000 to $75,000 a year, and 33 percent more earn over $75,000.

What of the familiar urban problems of poverty and race? San Diego has its share of run-down barrios and ghettos, but its prosperity has reached most of its 1.2 million residents. In 1990 its poverty rate registered 18 percent below the national average. The city’s sizable minority communities—40 percent of San Diegans are non-white—are firmly committed to bourgeois respectability. Blacks, who make up just under 5 percent of the population—compared to roughly 12 percent of the U.S. population and 27 percent of the New York City population—work primarily in the military. Nearly a third of the city’s Latino households own their homes, while San Diego’s surging Asian population already surpasses the city’s high educational norm. As a result, the city lacks the politics of ethnic grievance that has entrenched a costly and divisive ethnic spoils system in so many older big cities.

Even San Diego’s critics concede that the city is exceptional. Author and San Diego Union-Tribune columnist Richard Louv, the closest thing the city has to a liberal gadfly, tells me that San Diego has too often overlooked the interests of the elderly, immigrants, and children in its rush toward economic development. But he is quick to praise what he calls the “San Diego way,” with its stress on private-sector involvement and local initiative. Louv believes that the San Diego model has more to offer today’s troubled cities than the failed, top-down, redistributionist policies of the past. The key: instilling a sense of civic duty in the new entrepreneurial class. “San Diego has such potential in its civic culture,” he insists. “And with no left wing to work against, we really have an opportunity to innovate.”

Louv particularly admires San Diego’s tradition of citizen involvement and voluntarism, which supplies solutions to the city’s problems without overwhelming its treasury. For instance, to supplement San Diego’s small police force, thousands of citizen volunteers relieve officers of routine tasks, doing everything from taking reports on petty thefts to towing cars and taking fingerprints.

To deliver health care to the poor, San Diego has adopted the same trust-the-people, low-cost approach. It relies on clinics run by private and nonprofit institutions, all suffused with what one worker calls “a kind of Peace Corps mentality.” Robert Ross, who runs the county’s health system, believes that agencies like his are far better at overseeing a host of independent providers than at running facilities themselves. “The private sector is simply more cost-effective, more flexible,” he says. And the city’s tradition of voluntarism adds an extra boost: with donations from local merchants, foundation grants, and volunteers from the UCSD medical center and local churches, Dr. Ross estimates that the 21 clinics under him deliver $1.40 worth of health care for every dollar the county pays them, helping to keep per-capita health care costs for the poor at roughly half that of L.A. County.

Nor does San Diego’s insistence on keeping government small make government ineffective. Quite the reverse. Take the city’s 30-mile-long train and trolley system, which extends from Tijuana at the Mexican border well into the northern and eastern suburbs and provides San Diego with a practical public transit system almost unique in Southern California. Begun in 1966 when San Diegans voted to take over an old privately held line, it has grown in stages over the years, with each new extension built on time and under budget. In the early seventies, under then-mayor Pete Wilson, the city was so committed to speedy construction that it refused federal funds, whose accompanying red tape would have added three years to the project. To keep costs down, San Diego has always used existing rights-of-way and proven technologies that can be expanded in modest increments, including off-the-shelf European-built trolleys. The system has allowed relatively high-density urban villages to grow up within San Diego, an urbane contrast to the prevailing Southern California freeway sprawl.

Most New Yorkers—especially those in the political class—receive such reports from the western frontier with a yawn, as just so much California boosterism. But the threat from San Diego and other “millennial” cities, as we might call them—places fully prepared for the next century’s information age, like Seattle, Portland, San Jose, and Raleigh-Durham—is real: they are expanding their economies in a way that New York has not done for decades. It’s hard to dispute Susan Golding when she calls San Diego “the city of the future.” That’s what makes it so vital a lesson for all of urban America, to which the future is inexorably coming, ready or not.

 

 

 
The future belongs to cities like this, where small government makes sure that entrepreneurial, knowledge-based companies can flourish.
City Journal Winter 1997.
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