Companies learned to keep key attributes such as work-force and gross-income levels just below legal thresholds that would trigger additional regulatory or reporting requirements, often by spreading work among newly created "independent" entities as their business grew. In some industries it was common to open and close companies on timetables that coincided with the date that state-unemployment-insurance or other government paperwork could be expected to arrive for the first time in the mail.
The ability of those companies to minimize their public profile is unquestionably a big reason why official economic data are now so wildly inaccurate. In California's bellwether entertainment sector, for example, the project found that because state statistics largely ignored nonpayroll contract labor, they undercounted the true employment generated by the industry by an astonishing 260,000 people -- or 66% of the work force.
Complicated new company alliances also fuel the stealth economy because many companies now find themselves in the dual roles of suppliers to key industry players and direct competitors of those customers. Textile companies, for instance, produce fabric for Los Angeles's clothing designers and manufacturers. At the same time they are also forming long-term relationships with some customers by directly investing in a particular clothing line or brand name, or by starting manufacturing operations of their own. Few want this potential conflict of interest to be widely publicized.
To circumvent the stealth economy's defenses, project researchers had to find cooperative industry insiders with a comprehensive understanding of the six focus sectors. Yarn vendors supplying raw materials to regional textile companies or entertainment production coordinators provided researchers with a road map for an industrial terrain that was daily changing the structure of business enterprise.
The Victims Strike Back
Another challenge for the researchers was the ethnic stereotype problem. Like all urban areas, Los Angeles suffers from the near-reflexive belief, nurtured by the media and academics, that ethnic groups are the victims of, rather than participants in, the regional economy.
Although years of repetition had imbued such views with seemingly unchallengeable authority, even a cursory look at the official data suggested otherwise. An RLA survey of Los Angeles's neglected areas -- typically those with the highest ethnic populations -- revealed a concentration of more than 15,000 companies employing 357,000 people, with annual sales of $54 billion, in manufacturing sectors alone. Census data showed that Asians and Latinos, who collectively accounted for virtually all of the region's massive population growth from 1980 through 1990, recorded household-income increases of four to five times the statewide averages and had attained levels of income that were among the highest in the country. Another study showed that an incredible 70% of all businesses in greater Los Angeles were owned by Latinos or Asians.
Plainly, the new economy was doing something other than creating victims, but catching even a glimpse of the real progress being made was a daunting task. Some groups, such as Southeast Asians active in regional electronics and assembly industries, bore suspicion toward government and government-sponsored projects because of experiences they had had in their native countries. Others, weary of patronizing attitudes toward ethnic business, recoiled at what they thought would be yet another "victim" study.
Learning about ethnic business networks therefore required even more circuitous strategies than had other parts of the project. Dimly aware that Chinese computer manufacturers were flourishing in greater Los Angeles, for example, project researchers sought help from a University of California-Berkeley professor with Chinese graduate students who could help the team secure interviews with companies that normally shied from outside contact. Researchers were then able to compile extensive information about the hundreds of Chinese companies and the thousands of employees who make up Los Angeles's "Silicon Valley South."
To learn about the Koreans and Persians who were investing millions in the textile industry, researchers courted similar informants. Inside contacts led researchers to a number of Latino companies owned by entrepreneurs who had started as shop-floor assistants in the oil- machinery business or in tortilla factories. Exploiting what they had learned on the job, they built multimillion-dollar firms exporting high-priced products to Europe, Latin America, and Japan.
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New Economic Growth, Old Political Barriers
The staggering gap between the perceptions that animate official perspectives and the realities they fail to grasp suggests at least three troubling conclusions about the future of the new economy:
1. Old economic tools don't work. If firms in the new economy are constantly redefining their skills, markets, and goals, then surveys, statistics, and policies based on the more static industries of the past are inherently flawed. Understanding today's industries requires ongoing communication between data compilers and the companies they are trying to measure. Public officials in Pennsylvania, Ohio, and Michigan, for example, have incorporated continuous bottom-up industry input into their economic-monitoring efforts, an innovation that many credit with producing far more effective business policies than those in less-enlightened regions.
2. Government-business alienation cripples the new economy. A region's business enterprises flourish today to the extent that they specialize and share information about their skills, form alliances, and expand the boundaries of older industries. But profound mistrust of the government and the existence of "stealth" firms erode the most important foundation of the new economy -- open, collaborative information exchange.
3. Public policies are ineffective. If the economic perspectives that guide how the government spends billions of dollars each year on business "support" -- training schemes, loan programs, technology assistance, tax subsidies, minority set-asides, and the like -- are grossly misleading, it is small wonder that businesses see little of value in government initiatives. Erroneous information about regional economies like Southern California's or the role of ethnic groups and the nature of high-skill, high-wage development virtually guarantees ineffective public policies.
Avoiding such outcomes is why learning to find the new economy is crucial for businesses and public officials. It is only from seeing things as they really are, not as some might wish they could be, that it is possible to create policies that will help new businesses thrive and continue to generate jobs in the future.
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David Friedman is an urban economist, a research fellow at the Massachusetts Institute of Technology Japan Program, and an attorney with Tuttle & Taylor in Los Angeles. He was the director and author of the New Economy Project.
