A California Economy for Everyone: Newsom Business Chief Lenny Mendonca Addresses LAEDC

Lenny Mendonca: I could not be more thrilled to be here at LAEDC, a place that helps people achieve the dream that they came to California for. LAEDC is a role model for regional cross-sector collaboration that focuses on ensuring that the region works for all. These are challenges in front of us that we need to tackle. 

I’m here to explain the framing and perspective that I bring as our new Governor’s chief economic and business advisor, and how I think about these challenges and what we might be able to do about them.

About a year ago, I wrote with Dr. Laura Tyson—professor at UC Berkeley’s Haas School of Business and chair of President Clinton’s Council of Economic Advisers—about some circumstances that may sound familiar. 

Markets are soaring and wealth is growing, but most of the gains flow to people at the top. Technology is transforming daily life, but it is also fostering deep anxiety about the loss of jobs and entire occupations. Cities are thriving as magnets for the wealthy and ambitious, but rural America often feels left behind and resentful. Hostility toward immigrants has become intense and sometimes violent. Disillusion with government is high, and many citizens are convinced that wealthy interests are hijacking democracy. Amid all the dysfunction, plutocrats are stepping up as philanthropists to underwrite social reform.

Does that sound like today? Well, that is exactly what was going on more than a century ago, when the first Progressive movement started. At that time, people were struggling with the question of how to adapt to a different economy. We have to do that again now.

I like to think that, while history can sometimes repeat itself, it’s not destiny. I am a realistic optimist about our situation today. I think there’s an opportunity for Los Angeles, which sees many of these issues before the rest of the state—and for the state, which sees these issues before the rest of the country—to lead this charge. Rather than assuming that the environment we’re facing is destiny, we can lead the way to a much more prosperous and exciting economy that works for all. 

As the Governor’s chief economic and business advisor, I think about all of this. Here’s the punch line, for me: Everything LAEDC is trying to do—whatever we can do to multiply that by 10 and make it 10 times faster, that’s what we want to do. Our fundamental objective, from an economic standpoint, is to ensure that the California economy works for everyone.

Many of us, including me, were born in this state as children of immigrants. My grandfather came to a Central California dairy farm as a whaler from the Azores. My mother’s family came to Central California during the Dust Bowl, escaping the challenges of Nebraska. I was privileged to go through the public education system in the state of California and pursue an exciting and robust career. That’s the kind of opportunity that we all want to have. Wherever you came from, whatever you’re doing—if you’re in California, you ought to have the opportunity to be part of the California dream. 

There are several things this administration is doing to make that happen. The first may not sound exciting, but it’s important. Our state has a volatile budget, and is subject to economic volatility more generally. We need to make sure that the California state budget is resilient through the next cycle and that we’re not spending above our means—so that when the next downturn comes, we don’t have to do the sorts of things that we had to do in the past, like dramatically pulling back on some of our most important investments in the future.

That means doing things like expanding the rainy day fund well beyond what was envisioned originally; paying down our obligations; and making strategic investments that set the standard for what we’re trying to do moving forward—in things like housing, infrastructure, and early childhood education. It means refocusing on access to post-secondary education opportunities and other policies the state can use to ensure that people who are working have a pathway to greater opportunity, such as a dramatic expansion of the Earned Income Tax Credit. We need to recognize that we have resources now but we may not have them forever, and we want to use them strategically.

The second thing we’re trying to do is focus on sustainable economic growth in a way that is more inclusive. One of the most important challenges facing the state of California—which is acute in both Los Angeles and Northern California—is that it costs too much to live here. We need to dramatically increase our housing supply to ensure that the job creation happening here is matched with housing creation, so we can give people a place to live that they can afford.

You’ve seen the Governor announce what may seem like a massively unrealistic objective of 3.5 million new homes over the next decade. I am excited about working for a governor who doesn’t set low goals and exceed them, but sets extraordinarily high ambitions and challenges people to get from here to there. If we’re not just going to sit around and talk for the next decade about how it costs too much—if we’re actually going to do something about it—then we have to focus on housing production.

That being said, California is the fifth largest economy in the world, and Los Angeles alone would be larger than almost any other state. There is nothing average about California, and policies that attempt to average across the state of California are going to be wrong for everyone. I am a believer in more local activity, and then we can aggregate it as necessary to help enable things. Do not expect broad, statewide economic strategies from our administration; expect regional strategies that also connect regions with one another. 

The Governor and I spend a lot of time talking about what he calls the “forgotten California,” which is similar to what other people derisively call “flyover states.” There’s a drive-through or fly-through part of California as well, but it is the heartland of the state: the center of the state, the Inland Empire, the far east, the far north, and also parts of the coast that are not getting the kind of attention they should to make sure that they’re economically successful. 

We have a massively innovative and job-creating portion of the economy that is fantastic, but if we focus only on that and not on ensuring that the rest of California has opportunity, then shame on us. We have to ensure that all of California is successful, and that means we have to pay attention to the “forgotten California” as well.

The Governor has also talked a lot about the future of work. I am not a pessimist about the future of work. California has an innovation economy, and we need to continue to innovate and create jobs. But we also need to ensure that our people are prepared for what those jobs are going to look like. That includes the industry clusters that have high-growth potential, but we also are going to have an enormous need for in-person service jobs—not just in retail and hospitality, where automation and productivity are coming, but in homecare services, helping our aging population, and delivering high-quality pre-K support and education. We have to ensure that those jobs are high-quality jobs and have a pathway. We spend a lot of time thinking about how to create high-quality new jobs in new sectors and new growth opportunities, as well as ensuring that service and in-person jobs are productive, high-paying, and deliver what we need.

The Governor and Lieutenant Governor recently made a major announcement that California is going to stand up a much more aggressive international presence. They are uniquely qualified, in that our Lieutenant Governor Eleni Kounalakis is a former U.S. ambassador, to play a role in developing a more outward-facing, globally relevant presence for California. 

We are collaborating to ensure that California—particularly the sectors and job centers like Los Angeles that are deeply dependent on global connections—remains globally connected. That’s more important than ever now, when much of the world seems to be going in the opposite direction, but it would be important whether that were true or not. California needs to play a role in this—not in the things that are prescribed to the federal government, but in the things that a state can do. 

We need to ensure that the great global connectivity we have here can be used in a way that benefits all of California, as well as our partners around the world, whether in trade, investment, people flows, or intellectual property. California is an incredibly attractive and valuable brand around the world, so we need to ensure that California is outward-facing in a strategic way.

Audience Question: Growing research suggests that California’s housing affordability challenge is less about supply, but about income inequality, and thus the Governor’s diagnosis and suggested legislative solutions may not be well targeted. Additionally, you’ve emphasized the need for economic solutions to be bottoms-up, but yet re: housing policy, the Governor’s housing construction legislative agenda favors a top-down, statewide approach.

My question: Opportunity Zones- What is your role and the role of the state in opening up markets for private investment in underserved areas through Opportunity Zone investment?

Lenny Mendonca: I teach a class on U.S. inequality at Stanford Graduate School of Business, and I have studied these issues deeply. There is a very important underlying issue of economic mobility, and California needs to focus on it. I completely agree that the issue is about incomes and the opportunity to move up the economic ladder to be able to afford to live here. But it also costs too damn much to live in California, and so it is also a supply problem.

I recently attended a national event hosted by Mayor Eric Garcetti and the Accelerator for America about Opportunity Zones around the country. Investors, public officials, philanthropists, and entrepreneurs were there talking about the potential of Opportunity Zones, and we had a very visible California presence there; both the Governor and I spoke.

California is a big believer in Opportunity Zones as one tool for economic development. It is not a panacea. But combined with other things, like Enhanced Infrastructure Financing District, and by aligning our other economic development and regulatory incentives, there is an opportunity to catalyze a large amount of capital that is sitting on the sidelines waiting to be reinvested.

We are going to align California’s capital gains tax structure with the federal tax structure for Opportunity Zone investments that are aligned with California’s social priorities. That includes affordable housing, the green and clean economy, and high-quality job creation. We’ll use all these activities as a tool to ensure that that investment is done in a way that yields attractive financial returns, but also helps promote an inclusive economy, not one that makes the problem worse. We’re very excited about this.