by Gary H. London

It is my contention that the San Diego economy will economically recover faster and stronger than most other regions in the U.S., once the recovery cycle establishes a foothold. The basis of my thinking is that certain economic circumstances set this region apart.

The San Diego region embodies almost the very definition of economic diversification. While there is no single dominant economic “cluster,” that isn’t necessarily a bad thing. When the opposite was true, back in the 1980s when this region was economically dominated by General Dynamics (which at its peak employed roughly 40,000 people) and a handful of other aerospace and military-oriented firms, their demise eventually caused an economic debacle.

However, a retooling of our economy ensued in the 1990s.

That retooling has resulted in what we have today – lots of significant, albeit smaller economic clusters, which do not necessarily cycle the same or are impacted by the same economic externalities. In other words, when the computer industry was down and out in 2001, the impact was barely felt outside of that sector.

Diversification is healthy because it tends to be a balancing factor. Today, our region thrives on the prosperity of the three techs – biotech/pharma, communications and computer equipment – which together employ roughly 110,000 people.

But there are also an awful lot of people who make their living in a myriad of other sectors, including the military, which, according to the 2010 San Diego Military Committee’s 2010 Military Impact Study, employs over 136,000 civilian and uniform personnel, and is responsible as the “multiplier” for another 191,000 indirect jobs in the form of contractors and support services.

According to the Bureau of Labor Statistics, the tourism industry employs 153,000 people in hotels, restaurants, and local attractions including the San Diego Convention Center, San Diego Zoo, and SeaWorld San Diego. When the expense and risk of international travel weakened the travel sector after 9/11, in a short time our local travel industry mostly held its own because of the shift of these trips to domestic locations, San Diego being a prime recipient.

The Unsung Hero

The region’s small businesses, however, may truly be the unsung economic hero of this region. Using data provided by San Diego-based Inside Prospects, I estimate that there are over 67,900 businesses operating in every sector of our regional economy; 97 percent of which have 100 or fewer employees.

I was reminded of the importance of small business when reading an item in a recent column by Tom Blair in the Union Tribune. In his column, Blair referenced a survey taken 21 years ago and reported in the then still existent San Diego edition of the Los Angeles Times. The survey was the 25 highest paid executives in San Diego. As Blair noted, just three of the top companies of 25 years ago – Cubic, WD-40 and SDG&E – are still operating in San Diego today.

This dramatic change of top San Diego area companies in a mere 21 year period reflects the dynamic nature of our local business community. Essentially the theory of “creative destruction” that economic theorist Joseph Schumpeter expressed 68 years ago to explain the dynamics of a capitalist, free market system is alive and well in San Diego.

Signature Economic Trademark

In fact, our ability to destruct and rapidly rebuild as a regional economy, starting with small companies that grow into larger companies, is our signature economic trademark!

Most of these companies identified in the survey of two decades ago are no longer operating here because most were swallowed up by larger companies seeking opportunities with their purchase.

In his book “The Rational Optimist,” Matt Ridley writes, “The pharmaceutical industry, having tried again and again to instill a sense of radical thinking into its research departments, has largely given up the idea and now simply buys small firms that have developed big ideas. The history of the computer industry is littered with examples of big opportunities missed by dominant players which thereby find themselves challenged by fast growing new arrivals – Digital Equipment, Apple, and Microsoft. Even Google will suffer this fate. The great innovators are usually outsiders.”

True to this observation, San Diego has been a hotbed of innovation, whether it is medicine, software, a device or service platform, the new list of the top 25 companies looks nothing like the old list.

Few other regions in this nation – in fact, few other nations on this globe – can make the same claim. Today’s innovative startup is tomorrow’s takeover target. Once an idea seems sound, another player with lots of capital coupled with the ability to bring the idea to the market in the form of a product, swallows up the smaller company.

There has been a lot written about communities having the “right ingredients” for this process to play out. No doubt, among those ingredients is the very reputation of this region as a good place to live and as an ideal place to connect and interact with others with good ideas.

The Real Estate Angle

Since I am mostly a real estate and land-use guy, here is that angle: real estate is nothing more than a “box” within which people live, work, recreate and shop. Real estate prospers – and great fortunes can be made – when these activities grow and fill the spaces driving up both the demand and prices for this space.

When I suggest – as I often do – that the real estate market will come back, my reasons ultimately have to come down to two factors: that the space that now exists will eventually be filled, albeit perhaps in new and different ways; and that scarcity will ensue.

On this latter point I have no doubt: There is such a limited supply of properties in San Diego County on which to build, that once demand returns there is inevitably going to be a bid-up in pricing. This is our reality regardless of whether the discussion is about the City of San Diego, the unincorporated County, or the other 17 smaller cities which populate our region.

We have created such a brutal process to eliminate land availability for development and redevelopment that, if it weren’t for the ability of most of the economic sectors to make it part of the way in their growth in this region (because clearly most don’t make it all of the way to manufacturing and “big firm” stabilization), this onerous nature of land use restriction would truly be destructive to our economy.

But it’s not! The fact that our economic future is bright is owed to our special circumstances as an economically dynamic, creative, diversified, and altogether suitable entrepreneurial feeding ground. It is not owed to our miserable land use policies, fractured jurisdictions and absence of community foresight.

Sometimes you just get lucky. Even as a region.