♪♪ Scott: By now, many of us expected our lives to be back to normal and the recovery to be in full swing.

Sacramento Business Review Chief Economist Sanjay Varshney joins us today to share his insights on Sacramento's economic future.

Sanjay, where are we on the road to economic recovery?

Sanjay: Scott, we actually have come back, um, very nicely from the major decline we saw in 2020.

Uh, in the second quarter, our economy, uh, pretty much shrank, uh, close to about 34, 35%.

And at that time, uh, a lot of people were fearing that the world is going to come to an end.

Uh, the great news is that the world did not come to an end and, we actually saw a very sharp recovery in the third quarter, almost 33%.

And we closed out the year in Q4 with a positive 4% GDP growth rate.

So, all in all, I think that recovery can be, uh, described as being a very sharp V-shape recovery.

Although some would probably disagree with the V-shape because, uh, with the pandemic there've been winners and losers, so it was more of more like a K-shape recovery.

Scott: Well, w-well, we'll get to that in just a second, but before we move to that, I got to ask you the question, if we're rebounding, uh, so well, why does it feel so bad?

Sanjay: It feels so bad because I think first, we really had no, uh, no way to expect, um, what was going to happen because this was a first experience in our lifetime with a major pandemic.

Uh, and so parallels will be drawn with what happened in the Great Depression era.

And then if you put on the television or if you're reading any of the news, uh, it has been overwhelmingly, uh, negative, uh, because I think the fears of the virus, uh, you know, one day, uh, you... you feel like you're making some progress and another day you feel like no, you're taking two steps backwards.

And we have seen, for example, even our own economy in Sacramento and in California being shut down at least two or three times, uh, since the whole thing began in March of last year.

So, I think I don't blame people for almost feeling like things are still not great.

But in reality, if you peel back the onion, you are going to find that the economic data is showing that to a large extent, our economy has come back.

Uh, and of course, uh, in Sacramento, our dynamics are a little different from, for example, what you see in Las Vegas, what you see in some other metropolitan areas and... and we have benefited.

Scott: Right.

So... so let's go back to your point about the V-shape rebound that the Trump administration predicted and what some economists have called a K -shaped recovery, where those at the top of the economic chain, knowledge workers, uh, and the universe of people who are able to... to shelter in place and... and work, uh, remotely, have experienced one type of recovery.

And others, mainly the service workers that so many of us depend upon, uh, for just the normal goings on of life have not recovered.

And so, help us interpret the difference between the view on those who take the V-shaped perspective and those who take the K-shaped perspective.

Sanjay: So just to throw a little perspective on this, Scott, going back, uh, to the early part of 2020.

If you asked us, and we made this bold pronouncement that there was no recession on the radar anywhere for 2020 or 2021, because the data was so strong, we were enjoying the best employment, uh, of our lifetime.

Um, uh, we s- we were seeing record low unemployment rates in the last 75 years at 3.5%.

In Sacramento, our unemployment rate dipped below 3%.

And that's a big deal, because in Sacramento we have always been a little concerned about whether or not our economy is diversified enough to basically allow enough people who live here to have jobs, good jobs, good paying jobs.

So, the economy was doing great.

And then it came to a grinding halt, not because of fundamentals, not because the economy changed-— because I've never seen, for example, the U.S. economy ever crash into a recession.

Usually, there are warning signs, you get at least six months to 12 months preparation time.

In this case, we actually crashed into a recession overnight.

And some people would like to argue that this was a man-made recession because this was a government-mandated shutdown.

And so, the recession was really not an ordinary true recession.

It was just basically a forced shutdown of the economy.

Now, the early part of that shutdown, right, um, like I said, our expectations were all over the board.

You know, initially I think, uh, the expectation was that if you could just stay closed for 15 days, um, you would find that, uh, we would basically flatten the curve and we will be okay.

You know, schools will reopen again, and people will be back in the offices again, and we will go on with our lives as usual.

The 15 days became a month, a month became two months, two months became almost an eternity because we are still shut down in many cases, because with the purple tier, for example, where we are right now for most of the counties in the greater Sacramento region, um, we are still not able to reopen the way we should, or we could.

So, when you talk about the K-shape recovery, I think the way I describe it, at least from my perspective, is that technology has had a huge role to play how we adapted to the new reality.

And what I might have expected to happen -, let's say with technology over the next five to 10 years in terms of the innovation, in terms of how that technology plays through the economy and how basically the consumer changes their habits, um, you know, to using the new technology to their advantage - I think all of that compressed in less than a few weeks to a few months-— Scott: Actually, I- w- I...

I want to ask you about that because one of the big questions that many of us have is how can we have such record stock performance at this moment?

And at least one analyst that I recently heard from said much the same that you did, which is that we have compressed the timeframe of technology adaptation on the part of consumers and business.

And what it's done is, is that the growth from those sectors that might've happened over five years has all been compressed into a 12- to 14-month timeframe and has along with... with other supports, like the Fed and other, uh, helped sort of lift the, uh, the performance of the markets.

Do you have any reaction to that?

Sanjay: Absolutely.

So, I think there are two different dimensions, and those two dimensions intersect.

So, let me just quickly go through those two dimensions for you as to why, uh, in my opinion, the stock market continues to do extremely well.

And, um, and... and you can see, for example, uh, much of the enthusiasm and the optimism in certain segments of the economy remain intact.

So wh - the pandemic clearly has created, uh, a group of winners and also a group of losers in the process.

Um, but for no fault of theirs, there are some workers who simply could not adapt because their business was so dependent upon the customer interface and the customer walking through their door.

So, for example, if you are a restaurant owner, you depend on the customer to show up, even if you try and do take-outs and do some other forms of adaptation, um, it's still hard to make- hard... hard to break even because your business model cannot adapt that quickly to be able to overcome those obstacles.

So, a third of our economy got hit pretty hard.

And... and there's no surprise the leisure, hospitality, you know, the cruise lines, the airlines, the restaurants, the cinema theaters, uh, anything to do with the opera and, you know, Broadway shows all of that stuff basically got impacted very negatively, immediately.

But then on the flip side, there are many that used adaptation with the technology to quickly reposition themselves.

And if you could do that, you came out okay because technology, like, for example, we are on a Zoom call right now.

And having never used Zoom before the pandemic hit, right now you can clearly see schools, colleges, universities, uh, workplaces, there are so many people who are trying to use Zoom to basically get the job done.

So, if you look at, for example, a breed of winners, these are the large tech companies, mostly, that have been able to use scale to their advantage.

And you can see the Amazon, uh, all Amazon's of the world.

You can see Apple, Google, you can see Netflix, for example, because more people are now staying home and watching movies being streamed in their... in their homes, right.

DocuSign, uh, sh- uh, other e -commerce companies like Etsy, Shopify, um, mo- companies related to the cloud and security.

So, for example, CrowdStrike, um, you know, Okta, I can go on and on about how, um, many of these winners happened to be directly or indirectly related to the technology sector.

And they came out to be the winners big time because when people move online and people actually moved, um, their habits to consuming, you know, using technology, uh, they were the winners.

So that's the first dimension.

Scott: And well, as wonderful as that is Sanjay, at the same time recently we had on leadership from the local food banks and we've had, uh, you know, folks on the show who serve the homeless.

Sanjay: Yeah.

Scott: And right now, the... the pressure on the agencies that serve the least among us are unprecedented.

And so, you know what happens despite all the good times that are happening at the top of the market, tell us what you see in the future for the working people that, uh, are watching us right now and what they should be thinking about.

Sanjay: It's a great question, Scott, that brings me to the second dimension I mentioned earlier, which is the top 10% of the population in the United States-— I'm talking about the top 10% in terms of wealth.

They own 90% of the wealth and the... and the stock market investments in this country.

The bottom 50% does not own anything.

They basically account for less than 1% of the wealth and they account for less than 1% of the investments in the stock market.

In the stock market, what we have seen in the last one year is five companies- the ones I just mentioned, like the Amazon, uh, Apple, Netflix, Google, Facebook- they account now for almost 30% of the total valuation of the S&P 500 Index.

Plus, 10 years ago, there were more than 10,000 publicly traded companies.

Today there are fewer than 3,600.

So, when you talk about why the market is going up and why we have so much optimism in spite of the food banks being challenged, and the bottom half of the country is still going through a lot of challenges in all kinds of ways, it'’s because the buying power and the earning power belong to the 70% that stayed employed and stayed uninterrupted by the pandemic.

A third of our economy got affected.

We understand that.

But the other two-thirds actually did not get affected much.

Because if you look at the white -collared workers, and you look at the technology industry workers, and you look at even the university professors, you look at any of those segments, they were all allowed to stay home, work from home, get a paycheck.

And in many cases, they have more buying power because, uh, unlike other years when they would spend a big portion of their savings on travel and hospitality and go out and spend money on... on... on... on having a good time for the families, they couldn't spend that money last year.

So, we have a lot of money coming in, not from the bottom half, but from the top half and especially the top 10%, I would say.

Scott: So, all that being said, does that indicate that we're- we live in a world of two economies or is it merely revealing that we've always lived in a world with two economies?

Sanjay: I think it's revealing, um, more, um, that we have always lived in a world of two economies.

And I think that, um, gap has been widening.

Uh, we all acknowledge that because you can see that debate has been going on for the last decade now as to how the haves and the have-nots, that... that... that the... the... the... the, uh, the differences between the two classes has widened to a lot- to a... to a big extent.

Now, the question is, um, have we seen something unique happen in this pandemic, um, related to that topic?

And the answer is I think the winners have become stronger and the losers actually have lost out more.

Scott: I...

I want to ask you about another phenomenon, uh, um, of recent.

And that is what has been the impact on the markets of the small retail investor in these platforms like Robinhood in terms of their contribution to the market returns that we're seeing right now?

Sanjay: It's a great question, Scott.

So, um, it... it is a very, very relevant topic right now because it intertwines with other social justice issues, other social challenges that we've had in this country for a long time, but never really came to the surface.

So, technology has been a huge, uh, factor in leveling the... the playing field for a lot of folks in this country, including employment.

So, you know, a lot of people are able to find employment, even though it might be remote employment because they don't have to be in their own backyards.

So, with Robinhood, what happened last week, it's a great example of how, in a way, we heard about it, we knew a little bit about it, but we never really saw it play out the way it played out last week where a lot of peoples continued to be very suspicious of the U.S. system.

Uh, people continue to be very suspicious of the way wealth, uh, evolves.

And many people argue that, I think the system is rigged in favor of the rich and the elite, and the rich and the elite are basically intertwined, uh, with the political class and all of them basically are enjoying a huge amount of, uh, wealth at the expense of everybody else when the little person, or little, uh, guy, as they call it, has been forgotten.

And so last week was the first time we saw, for example, that by the Robinhood'’s of the world changing the rules of the game midstream really hurt the little guy.

And it was done at the time when one could easily argue that this has been a game that has always been played by the hedge fund managers in their own favor, and the first time the little guy was winning, they quickly shut the little guy off.

Scott: They... they changed the rules.

I- you know, I- w- I wanna, uh, go a little bit deeper, uh, into the Business Review.

In your Human Capital Trends, uh, section, uh, you state that in spite of increased awareness on racial justice and diversity issues nationally, the upcoming year shows that local Sacramento organizations plan to maintain their current levels of diversity and inclusion efforts compared with prior years.

How should we read that finding and, uh, what that identifies, uh, in terms of how, uh, the goings on of 2020 actually affected the think- the business thinking of our region when racial justice and... and coming up with solutions that so many companies, uh, said that they subscribed to, at least nationally -— within our region it came in as an issue that was number 13 out of 14 or second to last.

Sanjay: Um, you know, uh, Scott, that is a very, very, uh, defining, uh, point that you picked up from, uh, our... our survey and the... and the commentary that we put out in the 2021, uh, forecast.

Uh, and I think the way I would describe it is that Sacramento has been evolving.

And I think our economy as much as we think is a very mature, large metropolitan, cosmopolitan, uh, environment, the reality might not be that accurate, uh, because I think we have exploded population-wise.

But to a large extent, you know, we have been the beneficiary, for example, of people moving in here from the Bay Area, because it was a zero-sum game.

So, it was not by the way people really thought about Sacramento as a destination that they want to move to because of some other attributes that made Sacramento so wonderful.

We have really been playing musical chairs.

So, we have been the beneficiary short-term of a lot of movement that comes from the Bay Area or from the very expensive, uh, coastal areas, uh, because we are inland and, you know, we are much more affordable compared to those areas.

But in general, our economy, our employers, uh, and our, uh, businesses probably haven't done enough or are probably still pressured or challenged in ways that make California unattractive for... for businesses to... to stay and want to do business here.

And Sacramento, uh, businesses clearly, you know, in a... in a pandemic environment have put that priority as number 13, like you said.

Um, that... that is not even on the radar for many of the businesses because they're just trying to stay alive, number one.

Uh, number two, they have a huge skills gap.

You can see that.

Uh, there's a reason why I think, um, in Sacramento sometimes, uh, you know, some people argue that we don't have enough human capital or enough intellectual capital, uh, to basically fill the voids needed to make our economy much more vibrant or much more... much richer compared to where we are.

Um, and all of that gets intertwined somewhere.

Scott: Well, one of the things that you point out in the review is that one out of four jobs, I believe is the statistic, within the region have some relationship to government and that government had acted as kind of a... a protector in some ways from the economy falling, as far as it might have, despite how bad... at least at certain times it's been since the pandemic started.

But on the other hand, what are the... what are the consequences in terms of, uh, evidencing that the innovation and the skills attraction that we need in order to build the economy that so many people talk about, given the over-weighted presence of state government as a economic driver?

Sanjay: Um, so Scott, this is something that we have been writing about for the last 15 years now, uh, as part of our review, uh, that we do for the... for the region.

Um, you know, question comes in, do we learn lessons, our lessons from our past experiences, for example.

Uh, and the answer is, um, it looks like, at least on the surface, that we are fairly dismissive, uh, of those lessons, the moment basically we come back to a more normal kind of routine.

So, in 2008, 2009, um, we actually, uh, recognized this challenge tremendously that, hey, by the way, can we really be... uh, can we afford to be a government town?

And can we afford to basically hang a hat on the government jobs because for the first time, uh, in the last decade plus we saw, for example, furloughs and the state and the federal employees getting, uh, you know, uh, laid off and that had a major impact on the Sacramento region.

You know, our economy crashed, uh, and burned compared to other parts of the country because we were so undiversified, and we were so basically government, uh, driven in our... in our- and construction driven.

So those were the two major segments of the economy.

Fast forward, you know, you would have thought that we would have learned a lesson from that, uh... uh, 2008, 2009 crash in during which time, by the way, there was also a mass exodus of people, not just from Sacramento but from California in general, where, you know, if you couldn't feed your family of four, you know, we were reading about U-Hauls and Ryder trucks that were basically, uh, going out of the state in large droves to Idaho and Nevada and Arizona and Texas.

Uh, and we... we... we recognized that challenge at that time.

Uh, w- we said we gotta do something about it.

Uh, and then 10 years later, it almost appears that we did nothing about it because we are back to square one.

And in Sacramento'’s case, uh, you know, we are still, uh under-diversified in our economy.

We still depend heavily on the state jobs and the downside of that, Scott, your question was, what does it do for- during, you know, in the pandemic?

The fact that the government did not lay off a lot of people because the government was very stable, um, was a great thing for Sacramento.

So, we did not get hurt like Las Vegas.

So, we did not get hurt like some other, uh, metropolitan areas, including downtown San Francisco, for example, or downtown New York.

But the... the flip side of the coin is that our state budget is as vulnerable as it used to be in 2008, 2009, where we still depend on the top 1% or 2% of the incomes in this state that accounts for half the general fund in the budget that we have.

And by the way, that top 1% and 2% of the people are leaving the state... Scott: Yeah, Elon Musk of Tesla, Larry Ellison of Oracle, others.

There's a lot of chatter including driving the conversations related to, uh, the embryonic, uh, effort related to recalling the governor about, uh, California's business climate.

Let's bring it back to Sacramento.

How is it that, um, how is it that those issues play out?

And I...

I specifically want to reference one thing that's in your review, which is that you all really highlight the lack of penetration and growth in the artificial intelligence sector as, uh, emblematic of the problems that Sacramento's economy may have in the future.

Can you speak to that quickly?

Sanjay: Absolutely.

You know, Sacramento in fact is a great example of what's going wrong with California in general because people are so caught up in the micro trends, they're not looking at the macro big picture, uh, trends.

Now, if you look at the big picture in Sacramento, it is no surprise that we don't have too many manufacturing jobs because in general California does not have too many manufacturing jobs, because manufacturing has been leaving the state because, uh, the state has been very business unfriendly for manufacturing.

But I think the thing that really stands out for Sacramento is that we were the biggest loser in IT jobs, in information technology.

So, when you talk about artificial intelligence, you talk about the tech sector and these jobs tend to be high paying.

Now, we have not only not attracted any new jobs, we have been losing what we used to have.

So, for example, you look at Hewlett Packard campus in Roseville that has been downsized to really literally nothing.

Uh, Intel has clearly announced that they will not do any more business in Sacramento or- in Folsom, that is, in particular- or in California in general because they have been expanding in Oregon and they've been expanding in Arizona and some other parts of the country.

So, if you look at Sacramento, there are two issues going on, in my opinion.

One is that we are clearly losing, um, the high-paid jobs and replacing them with the low-paid jobs in the service sector.

And we seem to be content because as the population grows, we need more grocery stores, you know, we need more, um, uh, more, uh, dentist offices and we need, uh, you know, more, uh, retail shopping, uh, and banks.

And many of those jobs are all basically, you know, they're part-time, they are basically, uh, the "“gig"” economy jobs as we described them, and they are low paid jobs.

So, when Amazon comes in people celebrate in Sacramento saying, "“Wow, you know, we have Amazon that came in.

"” Then I have to point out to people that, hey, by the way, those are all-minimum wage jobs that Amazon came in with, they didn't really create $100,000 jobs here.

So, there's a big difference when Google pays their employees $260,000 as a median wage, and Amazon pays its employees only $35,000 as a median wage.

So, in Sacramento, we have not only not attracted high-paid jobs, we are losing the high-paid jobs, as the first part.

The second part of there's a skills gap.

There's a huge skills gap between what the industry needs and what we are able to produce using the local intellectual capital in the region.

Scott: And, I think that we are going to have to leave it there, Sanjay.

Uh, for everyone that is joining us, please check out the Business Review.

It's great reading and important information.

And that's our show.

Thanks to our guest and thanks to you for watching Studio Sacramento.

I'm Scott Syphax.

See you next time right here on KVIE.

♪♪ ♪♪ Scott Syphax: All episodes of Studio Sacramento, along with other KVIE programs, are available to watch online at kvie.org/video.