Power of Micro Vs. Macro

Some firms crushed by energy crisis Sam Zuckerman, Chronicle Economics Writer Sunday, April 15, 2001

©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/04/15/BU152654.DTL

When Bernard Marszalek talks about economists who say California's energy crisis is no big deal, you can almost see the smoke rising from his ears.

Marszalek, marketing manager for Inkworks Press, a Berkeley printer, has seen his company's cost of natural gas go up about 60 percent. Now he's facing the prospect of a 40 percent increase in the cost of electricity, which powers Inkworks' two presses. The potential hit: $3,600 a year, no small sum for a business that grosses $2 million annually.

"Economists are people in their ivory towers, looking at figures," said Marszalek. "You talk to individual businesses and they're hurting."

One of the most striking paradoxes of the power crisis has been the vast gulf between the cries of pain of California's business community and the bland reassurances coming from the economics profession.

Businesspeople say rising costs and power disruptions have them on the ropes. "We are absolutely getting hammered," said Mike Betts, co-owner of Betts Spring Co., a San Leandro manufacturer of industrial springs. But economists insist that overall damage to business in the state will be relatively slight.

So, what gives? Are businesspeople overreacting, or are economists out of touch with reality?

In their own separate ways, it seems, they may both be right. What's going on here is a classic illustration of the difference between macro and micro, the big picture and the individual portrait.

"In a large macroeconomy, labor and other costs are more important than energy," said Mary Daly, an economist with the Federal Reserve Bank of San Francisco. "Our economy is going to be affected (by the power crisis), but it is not as large as it might sound when you talk with a manufacturer who uses a lot of electricity."

Daly pointed to the Asian financial crisis of 1997 and 1998, which ended up doing little harm to the U.S. economy as a whole but walloped some sectors of U.S. business. "Apple growers in Washington were devastated" when Japan and other Asian countries cut back fruit imports, she noted.

Ross DeVol, director of regional studies at the Milken Institute in Santa Monica, estimates that the energy crunch will cut the state's economic growth rate between 0.25 and 0.4 percentage points during the next five years, a relatively small amount.

The limited economic damage reflects the fact that California has a higher proportion of white-collar businesses than most states, and they tend to be low energy consumers. "If you're an advertising agency, you probably won't care much about about energy costs," DeVol said.

In California, which produces $1.25 trillion in goods and services annually,

businesses that are big gas and electricity users -- manufacturers, dairy farmers, restaurants and the like -- may not dominate. But there are tens of thousands of them, and they say it's scant comfort to think of the big picture when they're fighting for survival.

"We're focused on small- and mid-size manufacturers," said Leila Mozaffari, vice president of the California Manufacturing Technology Center, a nonprofit consulting firm in Los Angeles. "What we see on a micro level is that the energy crisis is hurting them in a bad way. The smaller companies -- their backs are against the wall."

Take Foote Axle & Forge in Los Angeles. The company, which uses large amounts of energy to forge auto parts, has seen its monthly gas bill go from $8,000 to $23,000. That prompted owner Mike Denton to shut down his second shift earlier this month and fire six workers. Now he's reselling axles made in Asia in place of axles made in his own factory.

"I had to let everybody (on the shift) go. I couldn't afford to run it anymore," he said. "It's now cheaper for me to buy products this company has been making since 1936. If things don't change, this will become a warehouse."

Higher gas and electricity prices are hitting at the same time that big jumps in health insurance and workers' compensation premiums are taking hold, noted Betts. "We've had four strikes against us this year," he said.

Contrast those stories with the conclusion of a recent report from the University of California at Los Angeles. The financial effects of the electricity crunch "will likely have a relatively small impact on the long-run health of the state's economy," wrote economist Christopher Thornberg, a visiting professor at the university's business school.

Thornberg based his conclusion on an estimate that the state government might have to pay as much as $30 billion for electricity and infrastructure. That, he pointed out, is just 2.5 percent of the value of goods and services sold in California annually.

When Thornberg presented his findings at UCLA earlier this month, he was confronted by an angry business representative who accused him of having his head in the sand.

Asked about the incident, the UCLA economist conceded that the energy crunch is hurting some businesses.

"I understand that businessmen are going through a tough time right now, but I wonder how much of that is the power crisis and how much is due to the fact that we are slipping into a recession," Thornberg said in an e-mail. "When sales drop, businesspeople tend to point at the first available target --

in this case, power. They may be losing sight of the forest for the tree."

Thornberg's critics were particularly galled by comments in his report that power blackouts will probably have scant effect on California's productivity. "An hour without power can be viewed as an extended coffee break for most businesses," he wrote.

Mark Roth, president of El Burrito Mexican Food Products in City of Industry near Los Angeles, took vehement exception.

"One of my vendors that makes plastic cups. They were three hours into their workday when their power got cut off," he said. "The plastic in the (extruding) tubes all turned solid," ruining a full day's production.

ANECDOTAL EVIDENCE Of course, not all economists play down the plight of California businesses.

"The business community's voice hasn't been heard," said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. "A lot of smaller businesses are looking into shutting down or laying people off."

Still, Kyser said, he sympathizes with economists who don't yet have the data to support the business point of view: "If you're an academic economist, it's very hard. All the evidence is anecdotal."

California businesspeople aren't inclined to be as understanding. They feel offended and slighted when they hear economists say the state's economy will shrug off the power crunch.

E-mail Sam Zuckerman at szuckerman@sfchronicle.com

-- Martin Thompson (mthom1927@aol.com), April 15, 2001