The body builder, the technopreneurs, and the home builders

In the November 2nd TIME Magazine cover story:

"Whenever we have a problem, everyone makes a big drama — 'Oh, my God, it's the end. California is over,'" Governor Arnold Schwarzenegger told me. "It's all bogus." Schwarzenegger likes spin and drama too — he's issued warnings about a "financial Armageddon" — and he literally blew smoke in my eyes while we spoke. But his belief in the anything-is-possible dream of California is more than spin; he is, after all, its ultimate embodiment.

Yes, Arnold is the embodiment of California - an aging actor whose image is everything and substance is not very deep. In the case of California's economy, we do have a problem and the promise of California I knew in 1960 is over.

The article focuses on the promise of the future seen in the past of the technology entrepreneurs and venture capitalists - the technopreneurs - without any real analysis of either the past or the future that they represent to the vast number of Californian's who work for a living.

Californian's already know that most of those nifty high-paying technology jobs created between 1985 and 2005 have gone to people making half or less located in other countries and other states. But they keep hearing that the green revolution partly funded by the Obama stimulus bill will be the source of California's magical economy engine.

No one is explaining the truth about that, of course. A good example that has been in the news is Irvine, California's Fisker Automotive. Uh, who? Yes, you need to know who they are.

In January CEO Henrik Fisker announced at the Detroit auto show it would begin production of it's electric Karma in 2010. In June Fisker accepted the 2009 Production Preview Concept of the Year during a ceremony at the Automotive Hall of Fame in Dearborn, Michigan So what is Fisker? From it's web site:

Fisker Automotive is a green American premium sports car company with a mission to create a range of beautiful environmentally friendly cars that make environmental sense without compromise.

The concept was created between two independent companies who clearly wanted to make a difference in not only the automotive industry, but to the environment as well. Fisker Coachbuild, LLC and Quantum Technologies announced this joint venture partnership in September 2007. Fisker Coachbuild will provide exclusive design services for Fisker Automotive while Quantum Technologies (QTWW - a publicly traded company) will provide the latest technological advancements. Each car will feature cutting-edge plug-in hybrid penned as Q DRIVE exclusively for all Fisker Automotive vehicles.

A new segment is being created within the auto industry where people can really use their power of choice. They can choose to be environmentally friendly with their car purchase without compromising on the style and luxury that they are used to. We believe in less compromise and more efficiency.

Fisker Automotive strives to be a serious environmental alternative to other premium performance luxury cars on the road today. Fisker Automotive will be the first company in the world to have this type of a car on the road - a beautiful fast car that makes environmental sense.

Initial production is anticipated to be 15,000 vehicles annually with pricing to start at $87,900.

That's great! A California automobile manufacturer will begin production of its car in 2010. In Finland.

Well, they did have a problem. According to the company, the Karma has been designed and engineered in the U.S. with the majority (65% by cost) of its parts sourced from American suppliers. But they searched for a U.S. plant to assemble the Karma and found none that were willing and able to build the 15,000 of these advanced vehicles per year Fisker required. So they had to turn to Finland's Valmet Automotive, one of the most respected contract auto builders in the world.

But never fear. Fisker intends that the next generation Karma will be built entirely in the U.S. The fledgling American-maker of "green" autos was recently approved for a conditional loan of $528 million by the Department of Energy (DOE). Fisker's intent is that "the DOE funds will help create or save at least 5,000 U.S. jobs by bringing to market affordable, American-made plug-in hybrid vehicles and save more than 821 million gallons of gasoline (43.2 million barrels of oil) by 2016."

Of the loan funds, $169 million of the loan will be used in Pontiac, Michigan and Irvine, California to complete engineering work with primarily U.S. suppliers and $359 million will help support the planned manufacture of 75,000-100,000 plug-in hybrids per year at a retooled U.S. assembly plant, beginning in 2012. It was announced on October 27 that these California engineered and designed cars will be manufactured in the General Motors' defunct Pontiac Solstice and Saturn Sky roadster facility in Wilmington, Delaware.

According to earlier reports in the San Francisco Chronicle and the Wilmington News Journal, the plant is a good fit as its maximum capacity is about 250,000 cars a year. Since Fisker plans to export half its vehicles, the proximity of the plant to the Port of Wilmington is an advantage. And, of course, there is a pool of skilled auto workers.

One thing for certain, the cars won't be manufactured in California despite the closing of the GM/Toyota joint plant in Fremont as the plant is "way too big" according to Fisker.

Fisker is typical of California startups. It is financed by Silicon Valley venture capital firms, including Kleiner Perkins Caufield & Byers of Google fame, and which has Al Gore as a partner. The outlook that comes with the money is to focus on the quality of an idea. They know that experience can be purchased in the market place. In order to gain venture capital financing, Fisker and their startup competitor Tesla Motors had to produce a solid business plan that makes money "really quick" to use Henrik Fisker's own words.

Delaware Gov. Jack Markell has had staff working to locate an automaker for the Wilmington plant. Early in October Alan Levin, director of the Delaware Economic Development Office, was reportedly going to meet with United Auto Workers representatives to smooth the way.

California Governor Arnold Schwarzenegger, on the other hand, is in the deep end of water negotiations with the Legislature when he isn't complaining about federal judges undoing the budget deal. Arnold and the Legislature's leaders intend to solve the State's water problem with a multibillion-dollar water bond. That's just what California needs - our leaders creating more debt while standing back letting jobs go elsewhere.

The most fundamental truth facing Californian's who work for a living is that venture capitalists, technology and biotech gurus, Hollywood producers (aka "stars") and other pseudo-liberals who attended all those Obama fundraisers would not have been called liberals or progressives in 1900 or 1935. They either cannot or will not think in terms of employing Californians and Arnold is unable to think outside that box.

Sure, technopreneurs do invent stuff. But in the end, they find the cheapest labor to use to produce the product or service. During the initial process of development, the ventures do employ highly qualified, highly paid engineers, biochemists, and technicians, plus a few accountants, attorneys, and office assistant types. Then the ongoing production work disappears off into the reaches of the globe. Sometimes it takes awhile, but even Intel now produces most of its products elsewhere.

What we know is that the income disparity between professionals and managers and low-income service, construction, and farmworkers in California has doubled. Between 1993 to 2007, the share of the total income of the top 1 percent of earners went from 13.8 percent to 25.2 percent.

Technopreneurs are not going to significantly grow the economy for the average working stiff in California.

The reality for the California worker can be seen in the housing unit construction numbers that even a body-building actor should be able to understand. In February 2009 the California Building Industry Association (CBIA) offered:

The Association is forecasting just 63,400 units will be produced in 2009, a 3 percent decrease from the record-low 65,380 units produced in 2008. In comparison, the low point of the homebuilding recession in the early 1990s was 84,656 units in 1993, while the worst year during the recession of the early 1980s was 85,656 in 1982. To meet the need for new housing generated by population growth, the state estimates builders should produce about 220,000 new homes and apartments annually.

On October 26th the CBIA continued to move further away from Arnold's cheerleading pyramid in its monthly news release by revising its housing unit construction forecast for 2009 to just 37,700 total units, the lowest on record and half its February projection. The following graph would tell TIME Magazine and Arnold almost everything they need to know about California's economy:



The residential unit construction sector and the internet sector offer an opportunity for comparison of employment effects.

Since the fall of 2000 employment in the internet sector in California fell 46.7% which sounds like an employment disaster. But as a comparison, employment in residential construction in California dropped 38.5% from July 2006 to July 2009. But difference is in impact. The number of jobs lost in residential construction in the past three years is 3.6 times the number of jobs lost in the internet sector in nine years.

While neither sector is creating jobs for California, the fact is that employment in the internet sector was never greater than 33% of employment in residential construction and today represents about 20%.

If the Gubernator or TIME got the stars of technology and Hollywood out of their eyes, they would be aware of the statistics about California that came out in October. On October 9th, the Sacramento Bee reported:

California exports were down sharply for the 10th straight month in August from the same period a year ago, according to the University of California Center Sacramento.

...State import numbers were likewise dismal....

The following day the State Controller issued this news release:

State Controller John Chiang today released his monthly report covering California’s cash balance, receipts and disbursements in September. For the first three months of the fiscal year, total General Fund revenue was nearly $1.1 billion below the recently amended 2009-10 Budget Act estimates.

“Revenues more than $1 billion under estimates and recent adverse court rulings are dealing a major blow to a budget that is barely 10-weeks old,” said Controller Chiang. “While there are encouraging signs that California’s economy is preparing for a comeback, the recession continues to drag State revenues down. I urge lawmakers and the Governor to prepare for more difficult decisions ahead.”

On October 16th the LA Times reported:

Employers cut 39,300 workers from their payrolls last month, according to figures released this morning by the state Employment Development Department. That's nearly six times the number of jobs the state now says were lost in August, led by cuts in construction and government.

A separate survey of joblessness showed that California's unemployment rate was 12.2% in September, down from a revised 12.3% in August. The unemployment rate in September 2008 was 7.8%.

The lower unemployment rate as compared to August was clarified in an article in the San Francisco Chronicle on the same day:

But Stephen Levy, with the Center for the Continuing Study of the California Economy, said one of the biggest reasons for September's 12.2 percent rate is that many people quit looking for work and dropped out of the labor force.

However, the unemployment rate is not the important number. At the end of September California had 1.2 million fewer jobs then it did in November 2007. During the same period it is likely that an additional 385,000 persons entered the California workforce, which means we're in the hole 1.6 million and counting.

If anyone does the math anticipating public policy and technological development, they would discover it is highly unlikely that California will have as many people employed in 2015 as it did in 2007 and that may be true for 2020. What could be true for 2020 is that California will have a huge number of "permanently discouraged" workers, people for whom there is no chance for long-term employment at wages rising to the level of "middle class."

Apparently, economists are struggling with how to make this the accepted norm. According to one article:

Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.

This restructuring -- in what former Federal Reserve Chairman Paul Volcker calls “the Great Recession” -- is causing some economists to reconsider what might be the “natural” rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as “full” employment.

So, at the end of October, using Fisker as an example, one can say that for Finland and the State of Delaware, our California technopreneurs and venture capitalists have been "an unparalleled engine of innovation" (using the words of TIME Magazine) potentially bringing new employment to many tens of folks here in the Golden State of 1.6 million unemployed people and new employment to thousands elsewhere.

That's OK, according to economists.

What's the purpose of an "economy"

In an October 12, 2009, article in Reuters, we are told:

The worst U.S. recession since the Great Depression has ended....

"The great recession is over," NABE [National Association for Business Economics] President-Elect Lynn Reaser said.

"The vast majority of business economists believe that the recession has ended, but that the economic recovery is likely to be more moderate than those typically experienced following steep declines."

At Dictionary.com we learn that we can describe an economy as "the management of the resources of a community, country, etc., esp. with a view to its productivity."

That is consistent with what the NABE folks think. From that article:

The NABE survey, conducted in September, predicted real GDP growth expanding at an annual pace of 2.9 percent over the second half of this year. Output for all of 2009 is expected to contract 2.5 percent and next year, rebound 2.6 percent.

On the other hand the folks at Wikipedia offer a different definition: "an economy is the ways in which people use their environment to meet their material needs."

The difference between these two descriptions is informative. One is about people meeting their material needs. The other could be about computers and robots using resources to increase something called "productivity."

This first view is what economists measure without regard to what is being produced. It could be food for people. But it could be robots that produce more robots designed to produce robots. The benefits of productivity are quantified only in the sense that electronic numbers representing value transfer between the producer and the entity receiving the product. In an obvious sense today, everything that the economists measure are really the results of computers exchanging data.

So we apparently are about to see the end of The Great Recession because "productivity" is rising, according to the data.

About that second definition, the one that says an economy is about people meeting their material needs. Unemployment is still rising and jobs are still being lost. So while productivity may very well rise, it appears it's not accomplishing much towards meeting people's material needs.

Well, that's not exactly true. It's increasing the material wealth for substantially fewer Americans than it did three years ago. And it appears it is likely to continue in that direction, an increasing productivity that benefits fewer and fewer Americans.

I suppose at some point the first definition economy could consist of millions of robots serving the needs and desires of fewer than 10,000 people. Maybe even fewer than one person.

But if productivity is rising, "economists" apparently would see the economy as "healthy."

It should make one wonder, though. Are the "economists" who are quoted in news stories and "journalists" who write those stories people, or are they simply computers regurgitating data created by other computers? It's hard to imagine a human being accepting, much less announcing, information that describes an economy as in a "jobless recovery." But apparently it's all a matter of your definition and what you think the purpose of an economy is.

We don't seem to have a common definition for "an economy." Those who think it is all about productivity apparently don't see an economy as purely a description of activity engaged in to feed, clothe, house, entertain, or transport me and mine or you and yours. Instead it is purely a description of numbers exchanged between computers.

So if 10,000 Americans out of 300,000,000 are sufficiently involved in creating those numbers and the numbers are increasing to the benefit of those 10,000 then by definition the economy is fine. If the remaining 290,000,000 die from starvation and exposure it will keep some of the remaining 10,000 busy as morticians. That will show up as increased productivity indicating that the economy is growing.

Of course, that example would be rejected as unreasonable and ludicrous. So let's look at real examples occurring in real time now in what economists and journalists are describing as a "growing" economy.

This month the Mortgage Bankers Association is holding a convention in San Diego. What are their "people" saying? According to a report:

The Mortgage Bankers Assn. said Tuesday that it expected home foreclosures in the U.S. to continue to rise before leveling off late next year. The reason: Job losses have replaced adjustable subprime loans as the main cause of defaults.

Jay Brinkmann, the group's chief economist, predicted that unemployment would rise through next summer, causing delinquencies to rise. And because of the loss of income, it will be increasingly difficult to keep troubled borrowers in their homes by modifying their loans, he said.

As a result, the foreclosure rate is expected to increase "through the latter part of next year," Brinkmann said in San Diego at the trade group's annual convention. "And even when it starts to come down, it's going to come down very slowly."

We know that more folks are going to be thrown out of their homes. No, they probably won't die. Yes, families will break up as a result. But hey, productivity is going up. In fact, some economist will soon note that the vacancy rate of apartments is getting too low, spurring construction of more apartments. So people losing their homes to foreclosure actually could be reported as an increase in productivity within a few months.

Under the economists' definition of "an economy" it's purpose is being achieved.

Let's take a look at another foreclosure situation recently reported.

More California hotels are being pushed into foreclosure as tourists and businesses alike scale back their travel plans and owners are unable to pay their mortgages.

Statewide, more than 300 hotels were in foreclosure or default on their loans as of Sept. 30 -- a nearly fivefold increase since the start of the year, according to an industry report released Tuesday.

..."I have never seen so many lenders contemplating mothballing properties," said Jim Butler, a hotel lawyer and chairman of the global hospitality group for Jeffer, Mangels, Butler & Marmaro. "It can and it will get worse for the hotel industry."

The reality of this report is found in the probable multiplier effect of these property closures.

First, as each "property" closes it means a loss of jobs - service jobs. You remember "service jobs." Those are the jobs that were created in the past several decades to replace the loss of manufacturing jobs. "Service jobs" were the jobs economists and politicians pointed to as part of our growing employment and productivity.

Second, in addition to lost jobs, as each "property" closes state and local governments will see a reduction in related tax revenue which already declined in 2008. In the immediate term, the loss in sales tax and "occupancy tax or hotel tax" revenue will be significant to many tourist and convention destination cities and counties. That will result in more job losses. But in the longer term, properties will be devalued resulting some long term loss in property tax revenue.

This situation is not limited to California and the projection that it will get worse is very clear. Smith Travel Research is the primary source of hospitality industry projects which are being reported as follows:

Occupancy is projected to slide again in 2010 by 0.6% to 55.1%, while ADR (average daily rate) is forecast to decline 3.4% to $93.16, and RevPAR (revenue per available room) is expected fall 4% to $51.29.

That's on top of the STR's projections for 2009: an increase in supply of 3% and a drop of 5.5% in demand. STR's forecast projects 2009 hotel occupancy to be down 8.4% to 55.4%, ADR to decline 9.7% to $96.43, and RevPAR to end with a 17.1% decrease to $53.43.

Lower occupancy rates and lower room rates mean it will be a buyers' market for those properties in foreclosure well into 2012, if any buyers can be found.

The point is that the loss of these jobs in the next few months are not going to be offset by recent "less bad" sales and profit reports by Intel which closed two American plants this year - its 200mm wafer facility in Hillsboro, Oregon and the D2 plant in Santa Clara, California. Not-so-bad profits at Intel are not going to materially help laid-off, newly-homeless American Intel former employees meet their "needs," though a very few other Americans will show increasing asset values on their month-to-month balance sheets.

If because of how it is defined, a nation's economy can be healthy even though the increased productivity benefits only a few citizens, then that definition, "the management of the resources of a community, country, etc., esp. with a view to its productivity," is a problem.

To this writer, the definition should read "the management of the resources of a community, country, etc., with the goal to meet the material needs of, and increase the material wealth of, all the people residing therein."

Using my definition The Great Recession in the United States appears to have only just begun. And depending on which definition guides public policy, The Great Recession in the United States may extend for more than a decade.

Californians and their government: the deer in the headlights

Californians and their government look like deer staring into the headlights of an oncoming tractor-trailer rig traveling at 70 mph - we just keep staring at the economy unable to move.

This past Saturday, the California Legislature adjourned. In recent months, much of the press focus was on the struggle with the State General Fund budget for the fiscal year running from July 2009 through June 2010. Basically, the best the Legislature and Governor could do was defer solving most of the deficit problem for a few months.

In the meantime, the Legislature and the Governor spent an incredible amount of time failing to address the looming water shortage, energy conservation policy, and a host of other issues, failing because of the fundamental structural weaknesses imposed by the voters on government in this state.

This is the first year of a two year legislative session. The usual plan is for the legislators to go home to prepare for the second year beginning in January. But the Governor has used his powers to call "extraordinary sessions" on education and the state's tax system, while legislative leaders have asked him to call a session on the water problem.

It's hard to imagine what could be accomplished in these sessions. More than 20 bills that required two-thirds approval were blocked by Republicans in the session just ended because the Democrats lack the votes for "two-thirds" bills. And the only way a water bill will get through will be to include new dams that, correctly, Republicans argue are needed to make the system work, but are heatedly opposed by the state's strong environmental community.

In a weird twist, the United Farm Workers and other unions are already organizing funds to oppose a still non-existent water bond proposal which would require voter approval if it were approved in the Legislature. As usual, the water interests are wrangling over the size of their pieces of a non-existent pie. And the Democrats want to divide the water bond proposal into two, requiring a vote next year and in two years because the numbers are so high.

Finally, in case there were people not locked into ideological positions on this issue, Fox News' Sean Hannity is doing a special on this Thursday - see Water Crisis Bringing Sean Hannity to Valley - which undoubtedly will throw a skunk into the room sending the parties running in different directions.

Meanwhile, back to the budget problems. Governor Schwarzenegger is putting all his legacy eggs into a basket called the Commission on the 21st Century Economy which has proposals to tinker with the State's tax structure (see my August post on this tinkering).

The Governor and the Legislature had great expectations that the Commission would design a new tax structure for an economy that is service based and not get bogged down in the ideological wars that are preventing any solution to any serious problem. Of course, any solution the Commission proposes will by its nature require at least one two-third's vote bill and voter approval of at least one referendum measure, both highly improbable achievements.

So how did the Commission do? From the Sacramento Bee:

The tax commission concluded its final meeting Monday at UC Berkeley and did not take a formal vote, instead opting to pass around a formal document later this week and offer each commissioner the opportunity to sign it for submission by Sunday.

At least three panelists have expressed public opposition to principal parts of the package, while labor and business groups have assailed the plan.

Oh good. The couldn't even agree enough to take a vote. That's an outstanding place for the Legislature to begin a special session.

Meanwhile, The Great California Slump economy continues, the current State General Fund budget continues to be in deficit at a rate of about $1 billion a month, the State Unemployment Fund continues to borrow from the federal government, the two State retirement systems lost billions that must be replenished sometime in the future, the State "borrowed" from schools and local government huge sums to be repaid sometime in the future, and everyone wants to talk about doing some grandiose scheme related to water and energy.

In May I warned:

The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse....

...California's Great Recession likely will begin "in earnest" in July 2009. And unfortunately for the Obama Administration and the world, what was the world's 8th largest economy will drag everyone else down with it.

In June I warned about probable future job losses:

The reality is that in May, the state government and local governments hadn't even begun serious layoffs. Those will appear in July-September statistics. School layoffs may start to show up in June, but we won't really know how many cumulative job losses there were in the education sector until September. And the health sector job losses will likely not show up until September-November.

The impact on the private sector may not be felt until after September, but my opinion is that it will be of major significance to the national economy.

In July, I wrote:

Virtually no responsible economist thinks California's economy will hit bottom before the middle of 2010 or begin to recover before the middle of 2011. It's difficult to imagine where in California's economy the State will find revenue from sales, income, corporate, and property taxes, and employer unemployment insurance to cover its costs for fiscal year 2010-11.

and I wrote:

Exactly how the State government itself has calculated that over the next 12 months this won't result in major sales and income tax revenue reductions well beyond the May estimates is a puzzle in itself. But when it does, there will be more gnashing of teeth in the halls of the State Capitol.

Economists now are using their crystal balls statistical formulas which confirm my fears of last spring and the press is reporting this as news, but with the usual spin variations. It's almost funny how these forecasts are reported.

The University of Pacific's Business Forecasting Center issued a news release headed Recovery in California Lags Behind the U.S.. The Sacramento Business Journal offered this headline on the news release: UOP: California economy will 'feel like a recession' for another year. But the Sacramento Bee offered two contrasting headline takes, Recession nearly over, UOP says and California's jobs picture will be grim for years, two forecasts say.

If you work for a living, the last headline more accurately reflects the UOP report. It also reflects the numbers in the UCLA Anderson Forecast news release is headed "UCLA Anderson Forecast: Economy Healing But Not Out of Hospital Yet" with a subheading of "California Budget Crisis Will Impact State's Ability to Recover From Recession". The Los Angeles Times headed it's story Southern California's vital signs are improving.

So why is "grim" used in the one Bee story? The devil is in the details. Let's begin with the concept of "recovery" as it is being applied to The Great Recession and The Great California Slump.

Economists do not apply the term "recovery" to a situation where there is job growth in isolation. For instance, if all other indicators show no continuing economic growth but the government hired 6 million unemployed people at near-minimum-wage next month, most economic models would not see that as "recovery." It would register once as a single reduction in the unemployed without much growth in retail sales.

If California's current rice production and Toyota's American car production both increased by 10% using employees working overtime rather than new hires, and both outputs were to show up as increased exports to other countries instead of domestic retail sales, and both resulted in importing more parts to manufacture cars and to repair harvesting equipment, that all would be a part of a statistical sign of a recovery. It wouldn't put anyone to work and that is irrelevant to the models.

To put it simply, if for the next 5 years the U.S. averaged net job losses at a rate of around 10,000 a month but other economic activity increased the GDP 1.5% a year, then economists would say we were in a slow recovery. A level of "net job losses" at 10,000 a month could easily become "acceptable" in economic models and among bankers, brokers, and executives of international corporations because the GDP increase would grow profits for them.

For most of us economically unsophisticated folk, a "recovery" is not seen until the unemployed in our communities, states and nation go back to work. This requires a sufficient net job increase to employ everyone who wants a job, right now a growing labor pool.

Right now the magic number nationally to just keep pace with the increasing work force and put to work 0.1% of those currently unemployed is about 150,000 net new jobs a month. At that rate, it would take 83 years to catch up from the declines of The Great Recession. That would not be a "recovery" in my opinion, I don't care how well the banks and corporations are doing.

In my view, for a recovery the U.S. will need to be creating at least 350,000 net new jobs a month, which would represent getting everyone back to work within 10 years. California would need to create 45,000 net new jobs a month to be in such a recovery.

As it stands, in the past week the nation experienced 407,869 initial claims for unemployment benefits last week according to the Department of Labor. In the corresponding period in 2006 the number was 264,251 initial claims. It is clear that we are still losing jobs at a significant rate.

So what do the expert economists forecast for California? How do the forecasts relate to my discussion in previous posts that it will be 2013 before we see anything like a recovery, as I define the word.

Both forecasters indicate that they believe statewide unemployment will remain at near current levels for two years. The UOP forecast indicates a peak of 12.6% official unemployment next spring, while the UCLA forecast indicates a peak of 12.2% this winter. Since the current rate is 11.9% and we are still losing at least 20,000 jobs a month in California, it's not hard to imagine it will be beyond the summer of 2012 before we see a consistent net job creation level at 45,000+.

Which brings us back to the Legislature and the Governor. Their problem is that because of the economy the State is running a deficit which will become visibly huge when they attempt to tackle the 2010-11 budget.

Never mind that. First they want to reach agreement on issuing some water bonds. Why? And apparently the Legislature even first wants to lock the unemployed masses into buying expensive green energy made in California in the relatively near future. Again, why?

I hope I don't hear the answer that we can't ignore other problems just because the State budget is hopelessly out of balance. If we Californians don't first solve the state and local government budget problem for 2010-11, 2011-12, and 2012-13, we might as well ignore all the other problems.

If the Legislature can't figure it out, they need only step outside the Capitol Building and walk a few blogs over to the County of Sacramento administrative offices for a chat. This week, according to the Sacramento Bee, last Friday the Board of Supervisors and the County Executive's Office thought they were ready to adopt a budget. On Monday they learned that based on a final analysis of the last quarter revenues show sales tax down 27% instead of the 14% originally anticipated and a corresponding decrease in "Proposition 172 Public Safety Augmentation Fund" which comes from a statewide half-cent sales tax rate.

Statewide the counties are adjusting day-to-day (see stories on Tulare County and Orange County) while the City Council of Los Angeles plans to vote at the end of the month on a budget that would eliminate hundreds of jobs and impose more unpaid furlough days.

The University of California Regents, meeting this week, indicated they feel they must approve a 32% hike in student fees, an increase that will not even begin to backfill the budget shortfall projected for 2010-11.

On the other hand, the Legislature and the Governor have no plans to reexamine the budget before January despite the fact that the revenue projections in the current budget are too high. It is clear that personal income tax, sales tax, and property tax revenues will not significantly increase for four years. It is clear that a significant percentage of whatever corporate income increases occur must be diverted to the Unemployment Fund, not to other corporate taxes.

So why not fight over selling some water bonds and fight over where we will buy the already reduced amount of energy we're using that we can't afford.

Right now Californians and their government look like deer staring into the headlights of an oncoming tractor-trailer rig traveling at 70 mph.

Withdraw from Afghanistan & adopt a "guns and no butter" war policy

Even Herman Göring, hardly a international affairs policy genius, knew a clear truth about a nation using war as a policy when he said, "Guns will make us powerful; butter will only make us fat."

As America struggles with a poorly-understood continuing decline of its economy and tries to find a path for an affordable health care system that serves all, it is ironic that we find ourselves with a self-confident, well-educated Democratic President who chooses to follow a losing economic and defense strategy begun by his predecessor, a self-confident, well-educated Republican President.

This strategy was demonstrated to be a loser by another Democratic President, Lyndon Johnson, who was surrounded by well-meaning, well-educated advisers left over from a self-confident, well-educated predecessor. The Johnson Administration's Vietnam policies proved that "guns and butter" cannot work when America commits to a protracted "limited" war with unclear goals in a distant location such as the one in Afghanistan.

To begin with, it is clearly asking too much of the troops on the ground to accept a commitment that says "we'll give you what you need within the context of making economic choices between domestic and war goals." In Afghanistan we now pursue a "limited" war with eerie parallels to Vietnam:

• American soldiers seek to engage an elusive enemy in difficult terrain.
• The enemy hides in plain sight in the villages.
• The enemy has sanctuary across an international border.
• The population has successfully challenged an occupying army in the recent past and has a long history of defeating foreign armies.
• Casualties among the civilian population fuels resentment creating more enemies.
• Corruption pervades the national government America backs in a country that has no experience in complex democracy and in which the population adheres to a strong ideology.

Unlike Iraq which many erroneously tried to compare to the Vietnam quagmire, Afghanistan has no modern history of a stable Western-style economic and social structure. Unlike for Iraq, the the "best and brightest" in the Obama Administration seem to have no clear objective with a planned withdrawal strategy for Afghanistan.

While we put our troops in harms way, we seem to think we can maintain an unrestricted consumer economy supported by debt, both government and private. When will we learn that war doesn't work that way? When will America learn?

If American troops are going to war for more than 30 days, a declaration of war from Congress is the necessary and only appropriate legal step. When such a declaration is made, we agree to the obligation that every citizen to sacrifice. We are saying "draft everyone's kids and send them off to kill and be killed." We are saying "do whatever needs to be done to win at whatever risk to our well-being is involved." We are saying "we'll quite buying iPhones and new clothes and new cars" as we have to put all our economic resources into supporting the war effort. We are saying all this because we believe a war necessary to defend our nation from danger.

Instead, we have repeatedly engaged in "limited" wars. This means that we don't debate whether what we are doing is necessary to defend our nation. This means we don't do what we need to do to win and leave, setting up restrictive engagement rules that get our troops killed. This means that we send someone else's kids to war while we continue to consume the expensive butter that does only make us fat.

Did we have a military goal in Afghanistan? Capturing or killing Osama bin Laden is not a proper military goal, its childish vengeance. Wars are between nations. Disrupting al-Qaeda through military action taken against the Afghan government was a proper military goal. We did that in the first few months. Turning Afghanistan into a Western democracy also is not a proper military goal.

We've been at this in Afghanistan now for eight years, long after we deposed the Taliban government and disrupted al-Qaeda there. All we've done by staying is to make Pakistan more dangerous. All we needed to do was make a statement that warned all other nations that harboring terrorists came with high risks.

Pundits and bloggers on the right and the left are starting to create a noticeable noise about this war. They're correct to do so. Let's take a major step in solving our deficit problem by declaring victory in Afghanistan and systematically removing our troops from harms way there. And let's don't wait until we have years of "peace now" demonstrations in our streets and accumulate much more debt to fight this war to attempt to achieve losing goals.

Finally, let's stop getting ourselves into protracted "limited wars" thinking we can maintain a "guns and butter" economy at home. If in the future we think a war is necessary, let's send the entire nation to war, achieve a defined military objective, and return to peacetime.

Let's overhaul California's bankrupt government, not tinker with it more

According to one definition of "govern" it means "to have predominating influence." For the next three years, the "predominating influence" in government in this State will be its evident financial bankruptcy.

In the meantime, we have "Government tinkerers" who sit outside the halls of government and examine the details of what isn't working. They then propose lengthy and detailed "reform initiatives" supposedly designed to make things better.

The verb "to tinker" means "to busy oneself with a thing without useful results." That's what these tinkerers do.

Rather than dealing with the core political structure issues, the tinkerers' work product is always an attempt to deal with the symptoms of a perceived problem. They never seek to cure the disease that is killing California government - initiatives.

The source of the disease is easy to identify. It's the voters. When members of the Legislature who regularly run for office fail to respond as desired, the voters have every right to vote them out of office. Except they didn't and don't vote them out of office.

By the 1960's, the voters were so unhappy with their elected representatives who weren't responding to their concerns that they began to approve confusing and poorly written initiatives offered by well-funded groups, some sincere attempts to solve a problem others masked attempts to gain benefits for a few or to turn ideology into State policy.

Instead of having the discipline to use the ballot box to elect representatives who would deal with problems, Californians so desired to avoid responsibility for their votes that they even approved an initiative placing limits on the of number terms one could be elected to each house of the Legislature in order to prevent themselves from voting for an undesirable incumbent.

Term limits have not solved any problems, an outcome an informed person could have predicted. It did strengthen the Governor's Office, so much so that a few years ago Californians had to recall their Governor for screwing things up.

Many voters want to believe a complex society can be easily governed with what appear to be simple answers. But the only simple answer is to vote out the incumbent legislators when the Legislature is not doing what is needed. The simple voter won't do that. That has permitted the initiative process to become easily manipulated by interest groups with money. The disease that is killing California is a failure of a critical organ to function properly - the voters.

This fall while the tinkerers are developing more initiatives, they will have to compete for headlines against a formidable group calling for a Constitutional Convention. Let's look at some of the players in this competition.

The Commission on the 21st Century Economy

Naturally, we must begin with the tinkerers appointed by State officials. Though it was created in October 2008, Governor Schwarzenegger on March 27, 2009, issued an Executive Order assigning the Commission on the 21st Century Economy to accomplish the lofty single purpose goal of recommending to the Governor and Legislature a new tax structure for the 21st Century.

The problem is that the Commission. with its 7 members appointed by the Republican Governor and 8 members appointed by the Democratic legislative leaders, failed to meet its July 31 deadline reportedly because it has suffered from the ideological split that stalls policy development in American government generally and in California government particularly.

The Governor, being more like his constituency than someone who's been in politics and government for a significant length of time, became impatient and insisted that the panel submit its report by September 20 when he would call for a Special Session of the Legislature to deal with the fiscal crisis. Jon Coupal, President of the Howard Jarvis Taxpayers Association, has from the beginning expressed fear and trepidation about the Commission. But even amidst all his alarms he says:

"The commission will report its findings in September and the governor has already called for a special session of the Legislature to consider and act on its findings. This is probably a mistake as it would be better to see the report first.

"Calling a special session sets up the expectation for action when, in all likelihood, there will be no agreement on the commission's recommendations."

He's right, of course, since Coupal and his group are always a very effective part of the problem not the solution. He knows that the members of the Commission at best will only agree on proposals that tinker with the status quo and the members of the Legislature will probably disagree with even that.

California Forward

In the middle of all the normal official bickering and name-calling that goes on in California politics arose an organization called California Forward. It's a group that has some smart people with credibility in its leadership. They have submitted a letter to the Legislature and the Governor outlining 11 proposals, divided into three broad areas of Constitutional tinkering, all theoretically designed to help make State and local government work better.

They have essentially said if the Legislature can't get behind their proposals, they'll use the initiative process to get their tinkering into law. Their proposals are tinkering and deserve serious review so that we understand the proposals "tinkering." Remember, the verb "to tinker" means "to busy oneself with a thing without useful results."

The first subject they propose to fix by tinkering with the details is entitled "Responsible Budgets on Time." This implies that the legislators who the voters voted into office pass irresponsible budgets late, which is of course, true.

The voters passed a Constitutional provision requiring a two-thirds vote in each house of the State Legislature for a budget to be adopted. Who wouldn't know other than California voters that if the minority opposition has one-third plus one or more of the votes in either house, the temptation to exercise the only group power the minority has would be too great not to abuse.

So how have the California Forward group of tinkerers dealt with the budget adoption process issue? Let's take a look.

1. Pay-as-you-go. Require that new programs identify a funding source for any new spending they require.

Who could find fault with the idea of requiring the Legislature to find funding sources for new spending. That way the spending over the years will be funded. Yep, really simple. Let's take an example any simpleton can understand. Let's start up a program to maintain our roads at the quality level they were maintained in the 1950's and 1960's. Let's identify a funding source. How about a 10¢ gas increase? There! Wasn't that was simple.

No one wants simple solutions confused by thinking. For instance, a thinking person would realize that by 2025 it may be possible that 50% of the vehicles on the road are electric and that someone then might ask: "Why the heck are Californians not maintaining the roads at the level of the 1950's and 1960's? They aren't even doing it at the level of 2006." The thinking person might anticipate the answer: "Gas tax revenues have dropped 70% and the voters won't authorize a 40% tax on electricity to fund road maintenance."

You can take every simple tinkerers solution to a budget problem, add more complex long term thinking, and you will discover why the simple solution never works.

"Pay-as-you-go" is a tinkerers solution. The right solution would be to adopt the new or expanded program and allow future Legislatures to adopt by majority vote whatever taxes it would take to pay for the program if it is still needed. That way you won't have to tinker in 2025 to undo the damage done by tinkerers in 2010.

2. Base Budgets on Results. Require the Governor and lawmakers to set clear goals for programs, measure their results and effectiveness when making budget decisions, monitor performance to improve efficiency, and consider eliminating outdated and duplicative programs.

This is a "really good idea" that has been in vogue at least three times in the past 50 years within the halls of government, particularly at the federal level, using different buzzwords in one form or another. But there is one basic flaw in the idea. The process emphasizes effectiveness in achieving results without questioning the policy achieved.

For example, Performance Budgeting linked with a Planning, Programming, and Budgeting System (PPBS) is a perfectly engineered rational approach to a goal such as developing a fighter aircraft for the Air Force that Congress has authorized.

Successfully achieving the results - purchasing a high performance fighter aircraft that meets all goals - is not irrational within the concept of Performance Budgeting linked to PPBS. The policy decision regarding whether to develop the fighter aircraft at all was made in an irrational environment.

The fact that members of Congress are invested in keeping jobs in their states has nothing to do with the performance of the aircraft or the effectiveness of the budgeting process. Members of Congress want to get reelected by bringing and keeping jobs in their districts. The irrational environment is the voting constituency that sees the fighter aircraft policy decision in the context of the jobs, not in the context of defense needs. Those pesky irrational voters again.

If results were all that were needed, in the early 1900's the Legislature could have started an effective ongoing jobs program by each year buying large quantities of buggy made in California. We'd still have a significant buggy whip industry producing large quantities of quality buggy whips worth every taxpayer dollar. Measuring the results of a budget supporting a stupid policy doesn't in any way solve the problem of stupid policy decisions.

Remember. The verb "to tinker" means "to busy oneself with a thing without useful results." That thing can be results oriented budgeting.

3. Two-year budget. Require the Governor and Legislature to craft two-year budgets with midcourse correction authority, and provide long-term revenue forecasts and capital investment plans.

In the abstract, this sounds like good policy. But why two years? What is the real difference between that and what is happening now? The economy is so unpredictable that one cannot adequately project what will happen six months from now. In fact, in February 2009 the Legislature and the Governor approved a 15-month budget, but to make it work they had to submit complex measures to the voters reflecting compromises between ideological differences within the state. The voters vetoed that compromise budget by turning down all but one of the measures - predictably the one that cut legislator's pay.

4. One-Time Use of One-Time Revenues. Reduce future budget shortfalls by prohibiting the use of unexpected spikes in revenues to increase spending on programs that continue year after year.

What exactly is an "unexpected spike?" And does "to increase spending" on continuing programs mean covering an increase in the cost of programs? When the cost of gasoline "spikes," gas tax revenue "spikes" along with it. But the cost of fuel and materials used in the maintenance and construction of roads also spikes almost proportionately. Do we cut back the miles of highway maintained when gas tax revenues spike? That is just plain weird.

I'm sure someone could tinker with the language of the proposal so it would be less weird.

5. Reduce the Budget Vote Requirement. Reduce the likelihood of budget stalemates by changing the legislative vote requirement for state budget approval to a simple majority (to be adopted in conjunction with the plan’s other fiscal reforms, and while retaining the two-thirds majority vote requirement for tax increases).

Here's a case of "the devil is in the details." The proposal has two parts. First, we shift to a majority vote in the Legislature for budget approval. But then we retain the two-thirds-vote-in-each-house requirement for approval of any increases in taxes. This really is a California tinkerers' solution. Let the majority approve spending. Let the minority veto revenue increases to cover it.

But heck, as long as are just tinkering, addressing half the problem is fine and we Californian's have a love affair with our government spending money it doesn't have.

6. Provide Certainty Regarding Passage of Fees. Clarify the circumstances in which the Legislature and the Governor can impose fees without a two-thirds majority vote to those areas with a clear and justifiable nexus to the service provided.

This is really just to assure that a two-thirds vote in each house is required for approval of any fee increases that cannot dollar-for-dollar be tied to future spending. See 5 above.

The tinkerers in California Forward also have proposals to solve the problems of local government within the State. They head it "Government that’s Closer to the People." Here's a review of the three proposals.

1. Protect Local Revenue. Give communities more control over community-related services and prevent the state from siphoning off local revenue by giving local governments legal ownership of specific funds for community services.

Prior to Proposition 13, local government had control over property tax revenue. Each county, each city, and each special district, all governed by voter-selected representatives, had control over property taxes. In fact, the State had no role in allocating property tax revenues.

If the voters hadn't approved Proposition 13, local government still would have legal ownership of specific funds for community services. Of course, the California Forward letter offers no details. What funds are we talking about - property taxes? What does "more control" mean? Are we going to return to local government the power to set tax property rates?

2. Remove Barriers to Local Government Coordination. Encourage community-level governments to coordinate, consolidate districts when this makes sense, and give county governments authority to redistribute local property taxes to improve efficiency, improve services and deliver better results.

This is an interesting two-parter that demonstrates the arrogance or ignorance of the members of California Forward, I'm not sure which.

The first part is "encourage community-level governments to coordinate, consolidate districts when this makes sense." Ok. But within every county in California is a Local Agency Formation Commission (LAFCO) formed to do exactly this under the Cortese-Knox-Hertzberg Local Government Reorganization Act of 2000 (Sections 56000 et seq. of the Government Code).

The Act, which was a derived from the the Knox-Nisbet Act of 1963 which created LAFCO's in each county, was combined with some other laws in 1985, and was subsequently updated and expanded into the Act of 2000.

In other words, these tinkerers are unhappy with the way the voters' elected representatives in the Legislature and on the 58 LAFCO's have tinkered with this apparently simple problem for 46 years. The California Forward folks have some significant insights that would solve the whole "inefficient district" problem, insight which they want to submit to the voters.

The second part shows even more ignorance about California local government. The proposal is to give "county governments authority to redistribute local property taxes to improve efficiency, improve services and deliver better results." Counties are an administrative arm of the State. Though they are authorized to provide some local services based on local policy many political scientists argue that California counties aren't even local governments.

And counties throughout the State are starved for revenue to provide even the most basic of locally controlled services because of the demands of State mandates. Suddenly, your County Supervisor and his peers are going to be authorized to redistribute property tax revenue between the County, the cities, and special districts? How does that represent creating "Government that’s Closer to the People?"

Cities and special districts have locally elected city councils and locally elected boards of directors who are "closer to the people." The proposal would take from them control over what little revenue they have. The county is, in the end, obligated to spend most of its tax money on state mandated services many of which (welfare, for instance) are subject to federal requirements. I can hardly wait to hear how giving counties access to the money formerly controlled by cities and special districts is likely to bring government closer to the people.

3. Foster and Fund Long-Term Regional Collaboration. Allow cities, counties and school officials who craft long-term flexible plans to address community needs, to seek majority vote approval to provide funds to pay for them, while retaining the vote thresholds established under Proposition 218.

I don't even know what this means other than it appears to suggest that local taxes could be approved by less than a two-thirds vote required by Proposition 13 for special taxes if done through some regional collaboration. I guess the California Forward members think the voters made a mistake 30 years ago when they approved a two-thirds vote requirement for special taxes?

Let's move on to California Forward's next big area of insight - "Constituent Access and Accountability."

Apparently they have decided that the 80 Assembly members each representing about 460,000 people and the 40 Senate member each representing about 920,000 people aren't sufficiently accessible and accountable.

To put these legislative constituency numbers into perspective, the entire State of Wyoming has about 530,000 people which is only 15% larger than a California Assembly member's constituency. The Governor of the State of Alaska has a constituency of about 650,000 which is 30% smaller than the constituency of a California State Senator.

One might conclude, as I have, that California is too big to be a single state. But the tinkerers of California Forward have two proposals that would solve that problem.

1. Term Limit Reform. Reducing the total time newly-elected state legislators are allowed to serve from 14 years to 12 years, regardless of whether the time is spent in the Assembly or Senate.

The existing term limits approved by the voters in 1990 are among the most limited in the nation - six years in the Assembly and eight years in the Senate. The proposal would allow someone to serve in either house for 12 years, which is longer than the current provisions, or to serve in both houses for a total of 12 years which is shorter than the current provisions.

The only problem I see with this proposed tinkering (other than it won't solve any of the State's difficulties) is that it appears that an identical proposal was rejected by the voters in February 2008.

2. Constituent Access and Accountability. Requiring legislators to spend part of every year in their district, in consultation with constituents and local leaders.

It sounds like the proposal is to send the legislators home to mingle with their 920,000 (or 460,000) constituents for a defined period of time somehow forcing them to do what, exactly?

They all do go home now. They are politicians. They are always running for office. And because of that they are always seeking campaign funds from "local leaders," which is a euphemism for leaders of special interests in the legislator's district.

In fact, an Assembly member, if he or she were half-time as another group is proposing, could theoretically spend 15 minutes with about 4,000 "non-local-leader" constituents over the six months taken off. That's 0.4% of his or her constituency. And that's assuming "local leaders" don't get more than 30 minutes.

Achieving Consensus

After reading these recommendations, I wondered what was going on in the California Forward discussions. Then I read the end of the letter. It says: "We are eager to share with you the results of our efforts, the best thinking of many Californians, and the many options we explored in achieving consensus on this package."

Got it! The California Forward members also could not agree on any significant reform without running into the ideological divides that split California. So their best thinking, around which they could achieve consensus, are solutions that tinker with the Constitution a bit. They like the Legislature and other broad-based groups have run into the truth that California as one state can't be governed except in the most fumbling ways because of the size of, the divisions among, and the irresponsible selfishness of its citizenry.

In 2013 when (1) The Great California Slump ends and the economy starts to recover, (2) legislative districts are redrawn by an independent agency, and (3) legislators will be chosen in a process that includes open primaries (assuming the open primary measure is approved by the voters in 2010) then California State Government may appear less desperate. But the state will not really be governed more effectively. And more tinkering between now and then won't help.

There are really only two ways to make California "more governable": (1) adopt a completely new constitution limited to government structure with a bill of rights or (2) divide California into three states each with its own new constitution.

repaircalifornia.org

California's Constitution has been called the perfect example of what a constitution ought not to be. It is the third longest in the world. Tinkerer's initiatives have made it the basis for California's "ungovernability."

Jim Wunderman, head of the Bay Area Council, a year ago called for a complete overhaul of State Government in an op-ed piece in the San Francisco Chronicle. That has evolved into repaircalifornia.org sponsored by the Council which proposes a Constitutional Convention to write a new constitution for the State. The idea has gained momentum with endorsements by most every major newspaper in California, including the L.A. Times which calls it "The Devil We Don't Know." If you enter the words "California constitutional convention" in a Google News search you can find hundreds of articles.

As every student of history knows, calling for a Constitutional Convention has significant risks, particularly in a society ideologically and ethnically divided. To "achieve consensus" on a system that works requires giving up on the economic and social interests of each group. If we do this, my recommendation is that at the beginning and end of that new Constitution the statement that "The voters get the government they deserve."

Three Californias

Another way to make California "more governable" is to divide the state into three states, more or less as proposed at http://3cals.phrelin.com/ which, though an unlikely option, makes the most sense if we are going to start over. California is clearly three states geographically, politically, and economically.


Whatever choice we Californians pick, the "reorganization" of the now bankrupt California won't accomplish much until the economy begins to recover 2013. When personal income and property values are depressed, no reform proposal will fix the unavailability of money.

It would be better if during the time between now and 2013 everyone stopped the tinkering. We have time to write a new Constitution free of goofy policy details and restoring representative goverment. We even have time to divide our state into three states.

How "Cash for Clunkers" could hide the imminent state budget disaster

California State Controller John Chiang Monday afternoon issued his monthly Statement of General Fund Receipts and Disbursements for July 2009. This Statement did not get much press today though, perhaps because it contained confusing and misleading information.

Despite some cautionary statements, Chiang couldn't help but comment:

While the State’s General Fund Revenue came in below last July, there are signs that California’s economy is feeling for the bottom.

Yeah right. California's most carefully conservative state official finally read the memo - "regardless of the numbers, give it an optimistic spin." Yes, the revenue numbers were higher then previous months compared to the prior year. But....

Chiang, who has been hypercritical of the budget process, carefully points out that as of April the legislature had raised the sales tax rate from 7.25% to 8.25% which is a 14% increase. He also notes that the last week in July was the great "Cash for Clunkers" sales marathon. What he didn't explain is that if you adjust for typical monthly changes, for the rate increase, and for the possibility that extra cars were sold in time to be reported, the sales tax revenue increase was in line with May and June declines between years.

He just had to place the July bump in sales tax revenue in some context by saying "any encouraging signs in the economy were virtually nonexistent six months ago" without adding "and July sales tax revenue number is also not an encouraging sign."

Chiang also noted that personal income tax revenue came in 11.5% lower than in July 2008. He didn't mention the increase in the personal income tax rates this year regarding which a caution appeared in the San Jose Mercury News Sunday:

Johanna Sweaney Salt, a certified public accountant with Kaufman, Schmid, Gray & Salt LLP in Claremont, recommends...workers who do not want to be stuck with an unexpected tax bill next year or one that is higher than anticipated should make sure their employers are withholding enough on their state income taxes. That's because the 0.25 percent personal income tax hike went into effect in the second quarter of 2009 but applies retroactively to January.

In other words, people have increased their withholding and quarterly estimates which is showing up in the 11.5% lower personal income tax revenue. So that revenue is also not an encouraging sign.

And even Chiang won't comment on Corporate Tax revenue changes because of the 20% underpayment penalty that went into effect last October. Corporations are probably overpaying their monthly and quarterly payments.

Chiang office indicated that it has not been able to compare the actual revenue to the revised budget approved just two weeks ago. In fact, his office is struggling with these numbers to determine if it can quit issuing IOU's (Registered Warrents) in payment of the State's bills. One thing is for certain, these numbers are going to be hard to use to project what will happen by October when I expect The Great California Slump to hit another "rough patch."

The real danger lies in the fact that the revised unbalanced General Fund budget may not get the attention it needs until the damage to the State is horrendous. Simply because the "Cash for Clunkers" program resulted in a General Fund revenue bubble for July, members of the Legislature may be further encouraged to ignore the problem "elephant in the room."

Another gloomy job forecast for the Great California Slump

We Californians can expect that the state will have lost a significant number jobs during the period of July-September 2009, according to the latest analysis of Chapman University's Anderson Center for Economic Research. According to the Orange, California, university's press release issued today:

The third quarter’s California Index of Leading Employment Indicator is virtually unchanged from the second quarter reading of 73.4. This suggests that the pace of job losses in the third quarter should remain at about the same rate as the second quarter. This marks the fifth consecutive quarter that the index remained below 100 and an index value below 100 signals negative payroll job growth. The primary factors causing the index to hit a low reading of 72.1 are a sharp drop in California’s residential and nonresidential construction spending and continued decline in real GDP and export growth.

This forecast can be put in the pile of gloomy job loss forecasts including the UOP long term forecast reported below.

The MARE policy: what economic recovery?

The Obama Administration's financial gurus are continuing the huge gamble with our future - what I call a Maintain the Appearance of a Recovering Economy (MARE) policy, which has two elements:

• A "talk about it enough and they will come around" philosophy designed to reinvigorate the American consumer economy with the optimism that a recovery is underway.
  
• The "trickle into" theory of economics involving the short-term use of government debt (instead of private debt) to infuse money into select businesses and the banking industry hoping the money will trickle into the rest of the economy.

According to the press the economy is nearing recovery. Most economic pundits experts appear to believe that what's important in the economy is how upper level employees of banks and brokerage firms are doing. At least that is the core of the current economic optimism as presented in the media.

And as that optimism is repeated, stock prices rise which immediately benefits (1) individual corporate executives and large shareholders (mostly over 50 years of age) and (2) a greatly reduced number of retirees and baby boomers over 60 still holding stocks as part of their retirement investments. (That's "the old gray" MARE benefit.)

What's this policy doing for ordinary people with children under 22 who are going to school? At some point, after all, the economy is not about banks or brokerage firms or any corporation or business. It should be about people having money, money to spend on food and money to pay their bills.

Right now it appears that the "trickle into" MARE policy has trickled in enough money so upper level and mid-level employees still employed by banks and brokerage firms may be reasonably assured of an income, perhaps huge incomes in the firms that received the most federal bailout money directly, or indirectly from AIG.

Swell. Now about the remaining 300,000,000 Americans, many of whom are in families that have greatly reduced or no income, including those who worked for brokerage firms and banks who were laid off in 2007-2008....

One in six Americans are unemployed or underemployed. Here in California are being told that in terms of jobs we "will have lost more jobs - over 1 million - than any other state in the union" and that we should "be prepared for the long haul" as the employment will not be recovering at least until 2013. But we'll not be alone as many states will be waiting until "after 2015."

What will happen in the meantime? A pretty good indication is being reported:

About 1 in 10 Californians with a home loan is now in default, and there's growing evidence that the mortgage meltdown is spreading to commercial real estate.

The home mortgage delinquency rate -- the percentage of borrowers who have missed several payments and are in the first stage of foreclosure -- climbed in June to 9.5% in California and 9.9% in Los Angeles County....

The staggering number of home mortgage defaults probably will lead to large numbers of foreclosures through at least this year, housing experts say.

Oh. The millions unemployed won't be making payments on their mortgages, or on other loans and credit cards. And they won't be buying much which results in delinquent lease payments from retail stores to mall building owners, causing delinquent payments on commercial mortgages....

But we keep reading that things are getting better. Certain economic indicators tell folks that in some parts of the country the economy is stabilizing. After all the housing sector showed a significant gain in the number "newly-built home" sales and the third straight monthly increase in the sales of previously owned homes. Oh sure sales are still near all-time lows, but things are improving.

Or maybe the jump is simply short term because buyers are taking advantage of federally subsidized record-low interest rates, the new temporary tax credit for first-time home buyers, and the close-out-sale-prices in areas hit hard by foreclosures.

After all there is a glut of existing "inventory" in most urban areas and "newly-built homes" doesn't necessarily refer to homes the construction crews finished last week. The term "newly-built homes" means homes that have not been occupied since construction was completed.

There are thousands of "newly-built homes" across the country that no construction worker has been in during the last six months. And there are thousands of construction workers in the home building industry unemployed or underemployed who won't be seeing their economic recovery any time soon.

How is the government stimulus program working out for the ordinary family? It being reported that IHS Global Insight, one of the more reliable economic forecasters, still expects infrastructure spending to decline 4.3% in 2009, to decline 1.6% in 2010, then increase 2.4% in 2011 when both state government tax receipts increase slightly and the federal $120 billion stimulus package becomes fully implemented.

Statistics like this can be misleading. If one makes the big (and incorrect) assumption that the 2008 infrastructure spending level was not below a desirable level, with the one time stimulus 2011 infrastructure spending will still be 3.6% below 2008.

Therefore employment in infrastructure construction in 2011 will still be significantly below 2008 levels. In other words, without continued borrowing by the federal government to expand state and local government infrastructure spending over the next three years, it will be nearly impossible to see the employment levels in infrastructure construction industry recover to 2008 levels until at least 2014.

The "Great Recovery" headlines are misleading unless you accept that an increase in Gross Domestic Product is great without jobs - a "Jobless Recovery," Federal Reserve Chairman Ben Bernanke is calling it. A jobless recovery means that the difference in economic well-being between economic classes will increase further. If workers continue to be unemployed or underemployed, they aren't sharing in the "recovery" so it isn't a recovery for the middle class and poor.

Sure, it helps the grinning car salesman whose commission income past year has been a disaster to have the so called "Clunkers" subsidy program, which quite literally is a transfer of money from the grandkids mostly to corporate interests. After all, the bloated inventory of new cars on dealers lots around the nation was reduced by 250,000 in one week by people applying for the $1 billion in borrowed federal money. Unless you work for or own a car dealership, it's no big deal. Comments from those in the auto industry still are pessimistic:

"There's nothing here to support a major change in the forecast," said Gary Dilts, senior vice president of global automotive at J.D. Power & Associates.

Dilts, whose former employer, Chrysler Group L.L.C., went through bankruptcy this year along with General Motors Co., does not expect vehicle sales to even flirt with the 17-million-a-year level they had reached four times since 2000. He is holding firm to a forecast of 10 million for this year.

In other words, it isn't going to alter the recovery for former auto workers and laid-off workers in related industries. It was money given to auto dealers, perhaps shared with employees and perhaps resulting in new car orders, hopefully benefiting US. Government owned Chrysler and GM or at least American-owned Ford.

AutoNation is the largest U.S. dealership chain by sales operating 264 dealerships in 15 states and sold more than 3,000 new cars in the week. AutoNation's President and Chief Operating Officer Mike Maroone commented in the company's recent earnings call:

Our observations are that the majority of our ‘Cash for Clunkers’ volume is incremental, a larger percentage of the trade ins are domestic, and on the sales side the majority are imports. In aggregate credit scores for our ‘Cash for Clunker’ customers are better than normal and the program has not negatively impacted our used vehicle business.

So the customers are mostly people not in financial difficulty who are trading domestic clunkers for new imports. The company's Chairman and CEO Michael J. Jackson said:

"It's been a huge success. "I think there has been a psychological effect and gotten consumers to start buying cars again."

It's an interesting take, and it illustrates what's really going on.

Ignoring the paperwork snafu's and the fact that the first billion is theoretically gone (Congress is trying to provide a couple more billion), what is happening is that dealers will now have to decide how many of the cars to replace with new ones. The options before dealers are to reduce their debt (they borrow to "floor" their inventory) or gamble that after the pent-up demand flushed out by the subsidy program is gone, they'll find customers with the money to buy cars.

Since 2007, an estimated 5 million overdue car buyers are waiting to find out if the value of their home will recover, if their 401(k) or kid's college fund will regain some of the losses that occured over the past two years, and/or if they will have a job next year. It's hard to believe that many are saying because of high auto sales in July 2009 could signal a bottom to the worst sales slump since 1976. If you want to buy a car, it's hard to ignore a $4,500 government gift. But this is hardly a good example for creating a responsible economy:

So even though it was the last day at his job as a production controller for a West Columbia, S.C., manufacturer Mr. Dunn took his severance check, his 1989 pickup with about 300,000 miles and headed to Dodgeland.

With the help of the rebate and cash from his savings, he bought a red, 2009 Dodge Caliber. "The economy is picking up," he said Friday. "It seems like it is anyway."

This is the worst example of the MARE effect. Even though Mr. Dunn lost his job, with an optimistic outlook he took his severance check and some savings to buy a new car. And if he doesn't have job two years from now, then what?

Within that question is the more critical one. A brief job retention effect will occur at car dealerships through the fall of this year, but not new hiring. Auto financing banks and auto dealership inventory financing sources generally have been bailed out - banking again. But even if dealers do order some new cars, manufacturers cannot sustain plant operations without continued retail growth.

As noted in the previous post, over the next four months 137,000 Californians will run out of unemployment benefits, with 62,000 losing them next month. Nationwide, the National Employment Law Project estimates that that 540,000 Americans will exhaust their unemployment insurance benefits by the end of September, and a whopping 1.5 million will run out of coverage by the end of the year.

Congress is likely to extend their benefits for a second time, by borrowing from the beneficiaries' grandchildren of course. This is the safety net that hopefully keeps the beneficiary families from having to live in their cars. These benefits don't produce anything nor help morale. These benefits won't turn the beneficiaries into conspicuous consumers. These benefits won't turn the beneficiaries into believers in the "recovery."

Nor should anyone forget that after the stock market hit bottom mid-November 1929 there was 48 percent bear market rally that peaked mid-April 30 1930 followed by the real crash that bottomed out mid-June 1932 after which no beginning of a real sustained similarly steep long term bull market appeared until May 1953. No one should think that the recent bear market is based on a "recovery."

A "recovery," meaning the end of the Great Recession and the end of the Great California Slump, can be declared when employed workers numbers exceed mid-2007 numbers increased by the percentage increase in the workforce and unemployment rates fall below 6%. The MARE policy of talking optimistically about a recovery doesn't make it so. Borrowing from our grandchildren to infuse money into banking and select businesses in the short term won't result in enough money trickling into the economy to create a significant increase in jobs.

It's the ordinary people's economic lives that have to improve for a shared recovery. That won't happen by borrowing from our grandchildren unless the money is spent by government hiring enough ordinary people directly to create enough of a multiplier effect within the economy to create confidence at the retail level so that businesses will create new jobs for ordinary people.

It's the ordinary people's economy that counts.

As the economy improves?

As I watch talking heads explaining hopeful signs in the economy, I'm glad the economy is doing well for bankers and brokers. As today's news reports that job losses climb more than the idiots economists expected, KPIX (CBS 5) ran a story on the fact that over the next four months 137,000 Californians will run out of unemployment benefits, with 62,000 losing them next month. (View the story here.)

This had to be happening nationwide, so I did a Google News search on "unemployment benefits run out" and came up with 135 results in the past month. I can't imagine this story on the WRAL (Raleigh-Durham-Fayetteville, N.C.) web site in 2007:

Durham, N.C. — More than 460,000 people in the state received unemployment benefits in the past month, according to the Employment Security Commission of N.C. But what happens when those benefits run out?

...Turning to the local social services office may be a good place to start.

“You can come and apply for any of the services we provide. Work First is the program that helps folks with cash assistance and will help you do your job search,” said Sharon Hirsch, a spokeswoman with the Durham County Department of Social Services.

Yes folks, welfare is available unless you're in California where Arnold and the Republicans are trying to shut down the "overly generous" back to work program.

Pot and Movies: Wouldn't Cheech and Chong be pleased

As Mendocino County's experiment with embossed zip ties for legal medical marijuana plants seems to be proving effective even raising some revenue, Oakland marijuana legalization advocates have taken the first step towards a broader legalization.

The pro-legalization Richard Lee, president of Oaksterdam University has filed a proposed ballot measure with the California attorney general's office. It would allow persons over the age of 21 to possess up to an ounce and homeowners could grow marijuana for personal use on garden plots up to 25 square feet.

This comes fresh on the heels of an overwhelming favorable vote in Oakland Wednesday on a 1.8% gross receipts tax on sales in permitted medical marijuana dispensaries within the City. This should raise about $300,000 a year for the City's tight budget.

Medical marijuana sales generate about $18 million a year in state sales tax. The cash-strapped status of the State of California has caused serious discussion about further legalization and taxation of what is considered the North Coast's largest (in value) agricultural crop. It is expected that the Assembly later this year will take up a bill that would further legalize and tax marijuana.

Perhaps this approach should be considered at the national level in order to aid Mexico in the fight against the drug cartels by reducing their income. According to a recent article in the San Francisco Chronicle headlined Mexican growers having big pot year in state:

Mexican drug traffickers have expanded their marijuana-growing operations in California parks as state and local governments have tightened spending and slashed jobs and services.

Law enforcement officials say the traffickers, taking advantage of the fact that there are fewer sheriff's deputies and rangers monitoring parks, are cultivating more pot than ever before. This year's multibillion-dollar crop is on pace to be the largest in history, said state officials.

In the meantime, efforts to reduce the outward flow of jobs in Hollywood are apparently producing some dividends. According to a Los Angeles Times article headlined 25 film, TV productions among first to get California tax credits:

The state is awarding $67.5 million in tax credits for the 25 productions. Amy Lemisch, director of the CFC, said those movies and TV shows will spend $347 million on below-the-line employees. Lemisch said she was confident the vast majority of that money would otherwise not have been spent in California.

"Based on my talking to these producers for some quite some time before they even applied, I'm confident most of these would not have shot here without the incentives," she said.

As previously noted here a very large number of jobs in California in and related to movie and TV production. California's share of movie production dropped from 66% in 2003 to 31% in 2008.

Stimulating growth in an old California industry and acknowledging the growth in a newer California industry are two ways to grow tax revenue. Pot and movies - wouldn't Cheech and Chong be pleased.

Figures don't lie, but the media sure do mislead

The home builder stocks jumped today. Why? Because of these headlines:

• New Home Sales Surge 11 Percent in June
• Home sales rise as housing market tries a comeback
• Shares of Home-Building Cos Spike On US New-Home Sales Data

I don't get it. Who's cheering up the headlines? Somebody is and it wasn't the Census Bureau. Their news release simply says:

Quote:

Sales of new one-family houses in June 2009 were at a seasonally adjusted annual rate of 384,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.0 percent above the revised May rate of 346,000, but is 21.3 percent below the June 2008 estimate of 488,000.

The Wall Street Journal had one article with a more cautious observation, but perhaps too cautious:

Quote:

Many investors celebrated Monday after June's "surge" in U.S. new-home sales. Alas, it was largely wishful thinking. True, the Census Bureau reported sales up 11% from May. That's a big number, at first glance justifying Monday's 4.5% leap in the Dow Jones U.S. Home Construction Index. But it fails a close inspection. First, home sales quite often jump in June, the height of the spring selling season. When trying to gauge the strength of home sales, then, it makes more sense to compare them to the same month a year ago. That comparison is less kind -- sales were down 21.3% from June of 2008. Seasonally unadjusted data show a total of 36,000 new homes were sold last month, the lowest June total since 1982, notes Richard Moody, chief economist at Forward Capital.

My question is: Do most casual investors just read the headlines and think things are looking up? I guess if you glance at the Washington Post headline you'd really think new home sales "surged" in June as opposed to down 21% over a year ago.

If you did your homework, you'd know that the May 2009 sales of new one-family houses was down 32.8% from May 2008. So the June news is good. But not good enough to run out and buy shares in a home builder. Maybe next month or August if the trend continues.

The Great California Slump is upon us and we won't admit it

In May I posted:

The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse.

Now that the California Legislature has adopted an out-of-balance "balanced" budget for the State General Fund, it's time to wrap up the ongoing discussion of The California Great Slump and make room to comment on other issues. This post summarizes the situation as it stands now and as described in detail in the 17 posts since May.

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When I wrote in May that California's Great Recession likely will begin "in earnest" in July 2009, I hadn't really thought about a proper name for it.

The term regularly used in describing the current American economy, "The Great Recession," was formalized by Nancy Gibbs of TIME magazine though it had been used in other recessions, most recently in 1989-91 and 1999-2001.

It's a terrific "euphemism," which means "the substitution of a mild, indirect, or vague expression for one thought to be offensive, harsh, or blunt." The term "The Great Recession" has the feel of thinking that pervades the Wall Street of the Ivy League Baby Boomers and Gen X'ers, regardless of individual family background. It is that group that in economics the term "bubble" should be applied, applied to their view of the world.

The problem with relying on "The Great Recession" to describe what's going on in California can be framed in terms of job loss. According to economists, the U..S. as a whole was in a recession at the end of 2007. But California lost "only" 294,185 jobs or 1.71% of its jobs in all of 2008. According to the U. S. Department of Labor, California lost 483,367 jobs or 2.87% of its jobs in the first six months of 2009, which is an annualized rate of job loss of 5.7%. So while in 2008 Californian's may have been experiencing some impact of The Great Recession, the worlds 8th largest economy hadn't crashed.

As I thought about what would best describe what's begun here, the best term I could find is "slump," the first definition of which is "to drop or fall heavily; collapse." The Great California Slump has an appropriate sound. And The Great California Slump began in 2009.

When Americans think about a truly depressed economy today, they think of Detroit. Thus one could see considerable irony in the fact that while the California Legislature struggled with adopting a "balanced" 2009-10 budget in July, the news media were reporting that Toyota has decided to liquidate its interest in the Fremont, California manufacturing plant that it jointly operated with General Motors, the last such plant in California.

The plant had employed about 4,600 workers making Toyota Corollas and Tacomas and Pontiac Vibes. Last month when it was learned that GM would be abandoning its interest in the plant to Motors Liquidation Co., the East Bay Economic Development Alliance said the plant closure could impact 30,000 jobs indirectly related to the factory.

Assuming Toyota asks Motors Liquidation Co. to liquidate the plant, the jobs directly and indirectly lost would appear in the job loss statistics in the second half of this year and perhaps the first half of next year. Remember this, as it is important to understand the timing of job losses with The Great California Slump.

For instance, few of the 7,000 new layoffs announced in May and July by the Governor, and now incorporated in the "balanced" State budget, won't occur before September 15 and definitely won't appear in the job loss statistics until the last quarter of this year. The state's layoff procedure takes 120 days from when a worker is notified of a possible layoff.

Most of the layoffs of school employees necessitated by this round of state budget cuts, teachers and other staff, will show up in the jobs loss statistics over the next four months. The local government jobs lost did begin this spring, but many more will also be seen in the next four months.

The State's two university systems this July joined the other State employees taking unpaid furlough days each month for the foreseeable future. Most of the 300,000 employees will be taking three furlough days, representing a 15% reduction in gross pay.

While this $1.5 billion loss of pay hurts the employees and their families, in terms of the impact on the private sector, it is comparable to laying off another 45,000 state employees as this is money that won't be spent on clothing or iPhones or paid in State income and sales taxes. Without this money, the retail sector will lay off additional employees whose job loss will be reflected in the statistics in the remainder of this calendar year and the first half of next year.

Which brings us back to the out-of-balance State General Fund Budget. The May estimate was that the State's General Fund Budget was out of balance by $26.3 billion based upon projected revenues. On July 12 State Controller John Chiang issued a news release reporting that the May estimate for June revenues was $1.14 billion too high because personal income taxes were $987 million below (-18%) and sales taxes were $154 million (-5.8%) below the May estimate.

Nonetheless, on July 24, the Legislature adopted and sent to the Governor a budget based on the May estimates. We'll find out in the second week of August just how badly the July revenues fall short of the May estimates. Maybe they won't.

It's my opinion that instead of $26.3 billion budget gap, the gap was at least $34 billion. However, the National Conference of State Legislatures latest report on the status of budget problems across the nation singles out California as having a cumulative General Fund gap of a "whopping $38.9 billion or 35 percent of the general fund budget." Choose the size of your problem - $8 billion or $12 billion. Let's just agree that it's likely that the revenues shown in the adopted budget will be about $10 billion short by June.

When the U.S. Department of Labor reported that for June "the largest over-the-month decrease in the level of employment occurred in California (-66,500)," it was dutifully reported in the Los Angeles Times with some additional pieces of information.

"'Even more worrisome," said Esmael Adibi, an economist at Chapman University, 'is that the rate of decline in jobs is not slowing. Total nonfarm employment fell 5.1% from last year, dropping at a quicker pace than in previous months. Total nonfarm employment fell 4.8% in May from the previous year."

"...There are signs that Californians are increasingly frustrated with the state's economy,' Adibi said. He noted that the state's labor force lost 46,200 jobs last month, indicating that some people have stopped looking for jobs entirely.

We know that in May California manufactured exports were down 28% while agricultural and other non-manufactured exports were down by 23.3%. Year-to-date exports were down by 31% in five months. Imports coming through California's ports in May were down 31.7%.
Both these indicator statistics lag behind the rest of the economy. They are based on orders placed months ago. It is likely that these numbers will continue to drop well beyond when the national economy hits bottom.

The Los Angeles Times reported recently that according to the "Employment Development Department, jobs in movie and television production were down 13,800 in May compared with a year earlier." The article also reported that "California's share of U.S. feature film production dropped to 31% in 2008 from 66% in 2003, according to the California Film Commission. That largely reflects a falloff in the Los Angeles area, where feature filming activity in 2008 was nearly half what it was at its peak in 1996."

Ignoring the recent University of Colorado study warning that population growth in the West along with climate changes and poor management of resources could threaten long-term water supplies for Southern California, the drought within California has already impacted Central Valley agriculture.

Much like in The Great Depression where the nation saw a drought (the Dust Bowl) impact its economy, California's agriculture economy is struggling. In many areas of the San Joaquin valley the unemployment rate is above 30%. It is estimated that job losses due to drought will be in the range of 30,000 this year.

Reportedly California's regional banks, which on the surface appeared to sidestep the national banking near-collapse, are showing signs of significant stress. Further, a second round of home foreclosures has begun.

Newspapers around the state have begun reporting the net assessed value drop information from various County Assessor offices, in some areas as high as 26%. Most local government agencies have anticipated this in their budgets for 2009-2010. But property tax payments during November and December may be significantly lower than previous years.

Some property tax payments will not be made in this fiscal year due to foreclosures or simple lack of money. Many who paid in full each December will take the option of paying half with the remainder to be paid in April. Some will choose to not pay anything in December hoping to be able to afford to pay the whole amount by April. Yes, these will be shown as "receivables" on our governments' books, but the State has a cash flow problem.

These accumulating facts represent the reality that the Legislature and Governor, and the schools and local governments, and the employees of governments and schools, and the taxpayers all seem to be ignoring.

And these folks also seem to be ignoring the facts that:

• half of the "solutions" for closing the General Fund budget gap were one time fixes and short of some miracle revenue increase by July 1, 2010, the budget will be out of balance $30+ billion,
• the Unemployment Insurance Fund will likely have borrowed at least $23 billion by the time repayment requirements kick in September 2010, and
• the two State employee retirement systems have each lost $50± billion in the past year, the approximate net worth of Bill Gates, and there's no way state and local agencies can absorb contribution increases in the next few years sufficient to replace the losses.

California can recover but not rapidly. Even the legendary Silicon Valley has nothing to offer but hope for the longer term. The Sacramento Bee described that situation recently:

In the Silicon Valley region, unemployment tops 11 percent and investment capital has all but dried up. Here, unemployed tech professionals are showing up in droves at Bay Area mixers – and signing on en masse on career networking sites – to volunteer labor and expertise in exchange for equity shares in Silicon Valley startups that have no money to pay them....

With a half-million Internet, computer, biotech and financial services workers, the pool of jobless talent here is so deep that Jobnob scheduled separate college-themed "happy hours" for tech professionals from Stanford, Harvard and Berkeley alone.

Virtually no responsible economist thinks California's economy will hit bottom before the middle of 2010 or begin to recover before the middle of 2011. It's difficult to imagine where in California's economy the State will find revenue from sales, income, corporate, and property taxes, and employer unemployment insurance to cover its costs for fiscal year 2010-11.

The Legislature will have to find a way to deal with 2010-11, which won't be easy because to balance the 2009-10 budget, they ordered that June 30, 2010 paychecks for State employees be dated July 1, 2010 "saving" a billion or two in 2009-10. Further reductions in State and local government employment and/or substantial increases in tax and unemployment insurance rates beginning in the middle of 2010 would further worsen the economy.

California's credit rating has already dropped below that of the most sound private corporation. While the Governor, State Treasurer and State Controller plan on the State borrowing enough money through Revenue Anticipation Notes to pay its bills and in October cash in the IOU's already issued to vendors, local governments, and others, someone must have a gnawing in the back of their mind that Wall Street might not think California is credit-worthy.

One of the bills to implement the budget contained provisions "allowing", or "requiring" depending on your point of view, the State Compensation Insurance Fund and the State Lottery to "invest in" state debt, much like the federal government first borrows from its own Social Security fund. One has to wonder if in March or April CalPERS and CalSTRS will be required to "invest in" or "bail out" the State government.

The Great California Slump indeed will be "slumping" in earnest for many months to come. Once known for its economic opportunities, for its schools and higher education system, and for its commitment to the social compact, California is slumping into the ashes, the ashes from wildfires and the ashes from Californian's burning through their wealth.

The Great California Slump

The term regularly used in describing the current American economy, "The Great Recession," was formalized by Nancy Gibbs of TIME magazine. It's a terrific "euphemism," which means "the substitution of a mild, indirect, or vague expression for one thought to be offensive, harsh, or blunt." It has the feel of thinking that pervades the Wall Street of the American Baby Boomers and Gen X'ers.¹

When I wrote in May that California's Great Recession likely will begin "in earnest" in July 2009, I hadn't really thought about a proper name for it. But as I thought about what would best describe what's begun here, the best term I could find is "slump," the first definition of which is "to drop or fall heavily; collapse."

The Great California Slump has an appropriate sound. According to the chart available from the U. S. Department of Labor, California lost 483,367 jobs or 2.87% of its jobs in the first six months of 2009, which is an annualized rate of job loss of 5.7%. Though according to economists, the U..S. as a whole was in a recession at the end of 2007, California lost "only" 294,185 jobs or 1.71% of its jobs in all of 2008. So while it may have been experiencing some impact of The Great Recession, The Great California Slump began in January 2009 and continues.²

Presently the Legislature's staff labors to assemble and the members ponder the 31 bills needed to adopt a $10±-billion-out-of-balance "balanced budget" (some of the bills are posted here for downloading and the Floor Report of the 2009-10 State Budget was made available late tonight).

While they were doing that, The Los Angeles Times and the Associated Press are reporting that this morning a Japanese news agency learned that Toyota has decided to liquidate its interest in the Fremont, California manufacturing plant that it jointly operated with General Motors. The plant had employed about 4,600 workers making Toyota Corollas and Tacomas and Pontiac Vibes. Last month when it was learned that GM would be leaving its interest in the plant with Motors Liquidation Co., the East Bay Economic Development Alliance said its closure could impact 30,000 jobs indirectly related to the factory.

Assuming Toyota asks Motors Liquidation Co. to sell the plant, the jobs directly and indirectly lost would appear in the job loss statistics in the second half of this year and perhaps the first half of next year.

Few of the 7,000 new layoffs announced in May and last week by the Governor, and now incorporated the State budget proposal, won't occur before September 15 and definitely won't appear in the job loss statistics until the last quarter of this year as the state's layoff procedure takes 120 days from when a worker is notified of a possible layoff. (Some positions may register earlier as jobs lost as a few hundred of these employees have transferred to other departments and some jobs were vacant when the announcement was made.)

Most of the layoffs of school employees necessitated by this round of state budget cuts, teachers and other staff, will show up in the jobs lost statistics over the next four months. The local government jobs lost did begin this spring, but more will also be seen in the next four months.

It appears that with the two state university systems, at least 300,000 state employees are going to continue to take three unpaid furlough days a month for the foreseeable future. While the loss of 15% of gross pay hurts the employees and their families, it also means that $1.5 billion will not be put into the state's economy through spending and taxes. In terms of the impact on the private sector, it is comparable to laying off another 45,000 state employees as this is money that won't be spent on clothing or iPhones. As each "furlough friday" goes by, some $4,000,000 is not spent by furloughed state employees. Without this money, the retail sector will lay off additional employees whose job loss will be reflected in the statistics in future months.

Exactly how the State government itself has calculated that over the next 12 months this won't result in major sales and income tax revenue reductions well beyond the May estimates is a puzzle in itself. But when it does, there will be more gnashing of teeth in the halls of the State Capitol. Although....

Break out the fireworks! Tomorrow California may become ever more like a nation on its own. One of the bills to implement the budget "allows" or "requires", depending on your point of view, the State Compensation Insurance Fund and the State Lottery to "invest in" state debt, much like the federal government first borrows from its own Social Security fund. One has to wonder if next year CalPERS and CalSTRS will be required to "invest in" or "bail out" the State government.

The Great California Slump indeed will be "slumping" in earnest for a number of months to come.

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¹That several recessions, most recently in 1989-91 and 1999-2001, were termed by some as "The Great Recession" is more indicative of a total unawareness of what it takes for an economic slump to become "great," than of what is going on. What's going on now viewed with any sense of history is a "depression" preceded by a "panic."
²A "slump" in economics is considered "any mild recession" so it seems reasonable to couple the term with "Great" to indicate that it is a significant, major slump.

"The best we can do" budget - more details

First, the big news. Five important Californian's have agreed on a compromised compromise budget for the fiscal year July 2009 - June 2010 that closes the estimated (in May) $26.3 billion gap between revenues and expenditures - the Governor plus the four leaders of the Senate and Assembly Democrats and Republicans.

On the other hand, while the Governor's "vote" is his alone, the other four have to sell the budget to enough of their peers in each house to get it passed. They are going to have to sell it as "the best we can do" because every major interest group is going to bleed some.

I called it a "compromised" compromise budget, that is because it isn't balanced for 2009-10 and doesn't even begin to deal with the reality of the 2010-11 deficit, as less than half of the changes constitute sustainable spending cuts. Thus while these leaders have reached a "compromise", meaning "a settlement of differences by mutual concessions," the settlement is "compromised" meaning the settlement is "impaired, unable to function" because the budget is known to be out of balance.

Let's face it. It is an interim budget. If adopted it could permit State Controller John Chiang to stop issuing Registered Warrants (or IOU's as they are called by the press) in payment of obligations to vendors, local governments, and even employees (expense reimbursements) in lieu of actual money. It could further permit Chiang to actually redeem the several billion dollars in Registered Warrants he has already issued.

But this will only work if "Wall Street" accepts the budget as a basis for buying State revenue anticipation notes. "Wall Street" will have to be willing to ignore the truth. The difference between the agreed budgeted expenditures and what are now expected revenues is at least $10 billion. For instead of a $26.3 billion gap, as I indicated last Friday the budget was likely is out of balance by at least $34 billion and as I indicated yesterday the National Conference of State Legislatures reports that the deficit is actually $38.9 billion and growing.

If there is any truth to these numbers, by sometime between December and March, State Controller Chiang again will be issuing Registered Warrants.

A clearer picture is forming of what's in the compromise.

Schools. New cuts total $6 billion for K-14 on top of the $1.5 billion cut in 2007-08 and an added retroactive $1.6 billion cut for 2008-09. A total repayment of $9.8 billion has been promised at some future date when the economy rebounds, perhaps beginning in 2012. Higher education budget cuts total $3 billion. The deal allows school districts to reduce the school year by five days.

School districts are attempting to find out what this means in terms of detailed numbers. The Los Angeles Times reported today regarding the Los Angeles Unified School District, the nation's second largest school system of 688,000 students:

Pollard-Terry said the school system of 688,000 students thought it had made sufficient — and painful — cuts to get through the next school year. But some conflicting media reports have put the size of the education reductions at levels that could require another round of tough budgeting decisions, she said. And getting a clear answer from officials in Sacramento has been difficult.

Budget actions in L.A. Unified have slashed about $1.29 billion starting with the 2008-09 school year, which ended June 30. On that date, the district laid off about 2,000 teachers; it has since been trying to determine which non-teachers to lay off and how many. The district's general fund, before the wave of cuts, was about $5.9 billion.

The district also is engaged in intense negotiations with its teachers union over compensation concessions that would, if successful, result in hiring back some laid-off teachers. District officials also have talked of placing a parcel tax on the ballot to fund ongoing operations. Until now, the district has asked voters only to approve school-construction bonds, which have to be reserved for building, repairing and upgrading school facilities.

The district’s budget plan, which includes many future reductions, was supposed to take the district through June 2012.

The State's two university systems already have staff, including professors, on mandatory furlough schedules. The California State University system has stopped taking new student applications for mid-year enrollment. Fees and tuition have already been increased.

While the smaller of the state's two major teachers unions, the California Federation of Teachers is urging legislators to vote against the compromise, the 340,000 member California Teachers Association President David Sanchez is supporting the compromise according to the LA Times:

Sanchez and his union had been particularly concerned about an earlier proposal by Gov. Arnold Schwarzenegger to suspend Proposition 98, which guarantees base levels of funding for education. And he was relieved that the budget deal includes a payback of some lost revenue to education.

The settlement “protects the state’s minimum school funding law and restores much needed funds to education once the economy improves,” Sanchez said. “California educators are calling on both houses of the Legislature and the governor to quickly approve the budget plan.”

Local Government. The actual impact on cities, counties and special districts is probably in the neighborhood of $4.7 billion. About $1 billion in gas tax revenues, $1.9 billion in municipal funds (mostly from counties), and at least $1.7 billion in redevelopment agency money will be shifted. It appears that some may be "borrowed" as indicated in yesterday's post, but the details are fuzzy. Discussions apparently included certain exemptions from the shift for small cities and counties.

The shifting of redevelopment tax increment funds could be extended into future years.

According to the San Francisco Chronicle, Paul McIntosh, executive director of the California State Association of Counties, said the plan to take money from counties would be devastating and called it "one of the largest takes of local government monies ever in the state." The LA Times reporteds that the Los Angeles County Board of Supervisors today voted to sue the state.

The Times also reported that the City of Los Angeles likely will join statewide lawsuits to block the taking of redevelopment and gat tax funds. Chris McKenzie, Executive Director of the League of California Cities called the budget proposal a "Ponzi Scheme" and stated: "We have assured state officials we will see them in court the day after a budget is signed if it contains illegal provisions." Judith Mitchell, Mayor of Rolling Hills Estates and President of the League stated:

While some at the state level will try to pass this proposed state budget off as a major breakthrough, city leaders know it only passes the buck and the problem to the future. As an elected official who took an oath to protect and defend the state constitution, I am embarrassed that any state officials would propose a blatantly unconstitutional budget that promises to fail within weeks of its adoption.

Lawsuits would, of course, put the $4.7 billion in doubt. It is unclear if that would affect the State's ability to issue Revenue Anticipation Notes.

Health and Welfare. Dealing the health and welfare programs was a difficult task. The primary problem was not to take action that would result in the loss of federal funds. Still, the budget agreement offers $850 million in cuts to In-Home Supportive Services, CalWorks, and Healthy Families which means many seniors and children will lose access to health care while the safety net for families in a major recession would become out of reach for many.

That part of the budget deal is confusing and odd, and has future elements. For instance, apparently there was an agreement to look at a proposal to centralize enrollment possibly using a private contractor even though other states have experienced higher costs and operational problems. Republican leaders are assuring their members that increased sanctions to enforce welfare recipients into work will take effect in July 2011 including more interviews as well as benefit reductions. And In-Home Supportive Services providers and recipients would be fingerprinted to facilitate new background checks, though the deal would exempt amputees with no hands from the fingerprint requirement.

Apparently $1.3 billion is to be saved in the Medi-Cal system.

Prison System. Supposedly $1.2 million will be cut from prison system spending, but no information on how that will be accomplished. Law enforcement groups say that could only be accomplished by allowing the early release of up to 20,000 prisoners. But reports indicate that would not be part of the deal.

Gimmicks. About $1.2 billion will come from changing the date on the June 2010 payroll checks to July 1.

While taxes are not increasing, withholding will go up 10% beginning January 2010 as will quarterly estimates. This will not generate any new tax revenue, but result in some increase in collections from January through June. However, lower than normal revenues in 2010-11 will make up for it when those who didn't opt out receive a large refund in April 2011. It is unclear how much revenue will be shifted into 2009-10 as one can opt out of the increased withholding and income tax revenue has already dropped faster than projected in May.

The deal includes the sale and leaseback of 17 state office buildings and the Orange County Fairgrounds, but did not allow the sale of CalExpo or San Quentin Prison as proposed by the Governor.

An effort would be made to sell of part of the State Compensation Insurance Fund which would supposedly generate $1 billion. But complications with that idea may delay that a year.

State Employee Furloughs. The Governor has already ordered many employees to take three unpaid furlough days per month, reducing their salaries by about 15% and saving $1.3 billion. The budget deal effectively institutionalizes that practice which likely will be carried in to 2011-12.

Other Items. Only a few state parks will be closed rather than the 220 the Governor indicated in May. And those will be offered to local and federal governments and others to keep them open.

The High School Exit Exam will not be suspended except for special education students.

The Integrated Waste Management Board will be eliminated saving six figure paychecks to political appointees but staff would operate as elements of other departments.

The Board of Geologists and Geophysicists would be eliminated.

HIV/AIDS programs would lose some, but not all, funding.

The Bureau of Narcotics Enforcement task forces are cut as are National Guard educational benefits.

Then there is the Santa Barbara coast oil lease mentioned yesterday. Apparently it will bring in $100 million. No mention is made of an oil separation tax.

"But what about" items

As pointed out in previous posts, the State's Unemployment Insurance Fund will be billions in debt by the time repayment has to be made beginning in September 2010.

And then there's this article in today's Los Angeles Times:

The California Public Employees' Retirement System, the largest in the nation, today posted a preliminary drop of $56.2 billion for the fiscal year ended June 30. The second-ranked fund, the State Teachers' Retirement System, reported a preliminary loss of $43.4 billion.

...The tremendous drop in value is expected to have a direct effect on the amount of money that the state and about 2,000 local governments and school districts must contribute in coming years to pay for pensions and healthcare for 1.6 million government workers, retirees and their families.

As income from the pension investments fall, the governments would have to make up the difference to meet the state's pension obligations.

This isn't a "smoke and mirrors" budget proposal. It is a "put on the blinders and vote" proposal for the Legislature.

Fading Into the Ashes

Once known for its economic opportunities, for its schools and higher education system, and for its commitment to the social compact, California is fading into the ashes, the ashes from wildfires and the ashes from Californian's burning through their wealth.

However, most are choosing to ignore this California, "the other shoe" in the economy. According to news reports this morning, things are looking up in the economy because the Conference Board issued a news release that the Leading Economic Indicators "increased for the third consecutive month in June" even though the same news release notes that "the strengths among the leading indicators have remained balanced with the weaknesses in recent months."

If the upcoming significant downturn in California's economy isn't important, then optimism is justified. But California was the source of 13% of the nation's GDP. It is reasonable to project that between May 2008 - May 2009 the nation's GDP could lose 2.3% in California alone.

At this point, the significant segment of the economy will be State and local government. Everyone seems to be aware of that in the abstract, but fail to relate to the consequences of the major retrenchment facing the state.

Despite the fact that it is likely they will have to "find" at least another $10 billion for the General Fund between now and next July, the Legislature and the Governor are reported to be close to a revised July 2009-June 2010 budget using a several of one time "fixes" for California's $26 billion General Fund deficit, a deficit number which we already know could be 50% too small (see A billion more.... below).

As proposed, the "balanced budget" involves taking more than $4 billion from cities, counties and special districts. In order to avoid being sued over whatever contrivance is dreamed up, a promise of future repayment is in the proposal which everyone knows can't occur for at least three to four fiscal years, if ever. Reports indicate that "local governments are seeking language that assures the state will place a priority in 2013 when it repays them the money, so that they can obtain loans from Wall Street to cover that loss." This is needed because as it was discussed previously local governments were behind schools for repayment.

So it appears that the Legislature and the Governor do not expect to be able to begin repayment before 2013-2014. And, of course, this revenue shift may also be needed for 2010-11.

Which raises the interesting question about school funding. Under the Constitution, the State owes schools $1.5 billion for 2007-08 budget cuts. Apparently the compromise proposal will be to pay schools an extra $9.5 billion in future years to repay cuts made in 2007-08, 2008-09, and 2009-10. This is being discussed in the context that things will not be quite as bad in 2010-11 as they are today.

As proposed, the "balanced budget" involves increasing income tax withholding schedules by 10 percent to shift money from 2010-11 to 2009-10, as well as delaying state worker paychecks next June 30 to July 1. That cannot be repeated next year, so that extra "income" will not be available to balance the 2010-11 budget.

The "balanced budget" will also involve a one-time 15% reduction in California's motor vehicle fleet including a used vehicle sale. Somehow this is going to represent a gain of $24.1 million this year. Presumably that will mean the State will not buy at least some replacement vehicles this year which will reduce the income to auto dealers. In any case, this will result in a reduction in activity that would have occurred in the private sector car market.

The governor also wants executive authority to sell office buildings that the state would lease back. That would, of course, represent a one time revenue source and a long-term increase in expenses.

The budget proposal effectively institutionalizes the Governor's "temporary" three day unpaid furlough plan for state employees, which saves 15% in salary and wage costs on some positions or about $1.3 billion. The report is that the Governor would "reduce the number of furlough days if the economy improves and the state takes in more revenues." Since the Legislature and Governor know that the earliest they will be able to repay the "borrowed" local government money will be in 2013-14, it is likely that these "temporary" furloughs will be in effect for at least three years.

This is all in the context of a huge deficit in the Unemployment Insurance Fund financed by loans from the federal government that must be paid back, and with interest accumulating, beginning in September 2010 from employer unemployment insurance contributions that must also cover current current claims and build a reserve for the future. That is, of course, essentially impossible as layoffs in both the public and private sector continue.

What is the State going to do once employment starts to rebound? Tripling unemployment insurance costs for employers would be the only way to handle this burden which would, of course, result in fewer employees working which would result in reduced unemployment insurance payments. In the past few years it was known that the rates collected were too low, but no one wanted to make it more expensive for employers while the economy was booming.

In the meantime, health and welfare programs are going to be hit with some significant reductions, though at this time it is unclear how large.

The Healthy Familes program that provides health care coverage for children whose families make too much to qualify for Medi-Cal, but not enough to pay for private health insurance began placing new applicants on a waiting list even as more families fall into that class when one wage earner in the family loses both a job and health insurance. Given the current economy, reports indicate that up to 400,000 children might not be able to be covered.

Also part of the proposed budget is to cut prison costs. This could include early release of prisoners. The numbers involved are still being negotiated.

And then there are the odd proposals.

One is an oil lease off the Santa Barbara Coast. It is being presented as a revenue source. But in reality, it is part of a negotiation to get Republican votes for a 9.9% oil severance tax which could generate billions along with the lease revenue. Environmentalists are livid, of course.

Another odd item on the table is whether to eliminate the state's high school exit exam. It's indicative of how deep the cuts reach into the policies of the state in ways that may surprise people.

Finally, it is clear that all of this effort likely will not balance the budget. It was noted here Friday that "one can easily project that the State General Fund as now configured for fiscal year 2009-10 likely is out of balance by at least $34 billion." However, the National Conference of State Legislatures latest report on the status of budget problems across the nation singles out California.

California deserves special mention because of the sheer size of its gap (in FY 2009 as well) and the moving target that it presents. California's initial budget gap for FY 2010 was $24.8 billion. That gap, along with a $14.8 billion gap for FY 2009, was resolved in a February 2009 budget agreement—except that it wasn't. The resolution included five ballot measures, representing about $5.8 billion of the fix, that failed to get voter support in a May special election. Adding the $5.8 billion unresolved figure to the amount of the gap that was closed ($18.9 billion), plus the newest gap ($14.2 billion) that officials expect because of declining revenues, California's cumulative FY 2010 gap explodes to a whopping $38.9 billion or 35 percent of the general fund budget.

The Governor and the Legislature are trying to close a $26 billion deficit. That appears to be about $10 billion short. The Sacramento Bee reported today:

State Controller John Chiang won't stop issuing IOUs until he is confident the budget plan provides California with sufficient cash, said his spokeswoman, Hallye Jordan.

What that means is unclear. Adopting a budget theoretically would give the State the ability to issue revenue anticipation notes which would provide Chiang with cash. He would be able to redeem the IOU's (Registered Warrants) when they come due in October. And he can pay bills, for how long nobody knows.

Wildfire season is underway now. Maybe it won't be as bad as the past few years or as expensive.

Will California become the Weimar Republic of The Great Recession?

As expected, in a news release today, the U.S. Department of Labor reported that for June "the largest over-the-month decrease in the level of employment occurred in California (-66,500)." As noted here in May:

In October 2006 when things had recovered from the "dot com bubble" burst, California had 857,500 folks on it's unemployment rolls. In March 2009, the Employment Development Department reported 2,091,800 unemployed.

At the end of the second quarter of 2009 that unemployment number is now 2,146,200 which adds an additional 2.6% to the monthly Unemployment Fund deficit.

In it's article on the drop in employment, the Los Angeles Times reported:

Even more worrisome, said Esmael Adibi, an economist at Chapman University, is that the rate of decline in jobs is not slowing. Total nonfarm employment fell 5.1% from last year, dropping at a quicker pace than in previous months. Total nonfarm employment fell 4.8% in May from the previous year.

...There are signs that Californians are increasingly frustrated with the state's economy, Adibi said. He noted that the state's labor force lost 46,200 jobs last month, indicating that some people have stopped looking for jobs entirely.

In two articles yesterday headlined Report sees big dive in health coverage in California and Fear strikes jobless who lose health benefits, the Sacramento Bee delves into the statistics and reality of one of the more significant side affects of the growth of unemployment. The first article says:

This year alone, more than 330,000 people are expected to lose coverage in California, according to Families USA, a Washington, D.C.-based health care advocacy group.

...From 1999 to 2008, the average cost of health insurance premiums has more than doubled, from $5,791 to $12,680, according to the Kaiser Family Foundation.

The second notes:

"More than getting laid off, health care creates the most panic," said Maureen White, a Sacramento management consultant who recently found herself having to learn and navigate the health-benefits system. "The No. 1 thing people worry about is health care."

With a record number of layoffs during the first five months of the year – and an unemployment rate that's now at 11.5 percent – many Californians are deep in worry, trying to figure out how to keep themselves and their families covered.

The second article also discusses ARRA – the American Recovery and Reinvestment Act, the part of the stimulus package which pays for 65 percent of COBRA premiums for nine months for people who've lost their jobs from Sept. 1, 2008, through the end of this year. This means that for those who lose their jobs this month, the ARRA program will help only until April.

Meanwhile, this week in another Bee report:

Gov. Arnold Schwarzenegger is prepared to cut another 2,000 jobs from the general fund, state officials told state employee union and exempt employee association leaders in a conference call this morning. The cuts could be part of a deal that must close the state's $26.3 billion fiscal gap, which widens by $25 million each day lawmakers fail to enact a budget.

An additional article tells us of additional cuts which will impact on the private sector by October:

A committee of University of California regents approved a plan today that will force most of UC's 180,000 employees to take unpaid leave and pay cuts as part of a plan to address cuts in state funding.

We've also learned this week:

Moody's Investors Service downgraded California's general-obligation bond rating to Baa1 from A2, citing the state's ongoing political impasse and its reliance on IOUs to pay bills. It was the second two-notch downgrade this month after Fitch Ratings issued an identical drop last week.

And to add to the general confusion, we have this report:

SecondMarket Inc., which creates markets for hard-to-sell financial instruments, said it is opening an electronic market for California's registered warrants. The state has issued several hundred million so far, and plans to issue a total of $2.8 billion this month, as it struggles with a cash shortage.

The firm says hedge funds and other investors have expressed interest in buying the interest-bearing IOUs.... While it's not clear what price the notes will bear, a search on Craigslist shows that buyers are offering 80 to 95 cents on the dollar. Local governments and private vendors are the main recipients of the IOUs. Taxpayers expecting refunds from the state are also getting the notes.

The "new trickle-down" economics of the Obama Administration and the Democratic Congress consisting of

• federal stimulus money made available for states to hire private contractors for public works projects
• federal stimulus money made available to private companies and contractors for energy programs
• federal TARP money made available to banks to loan to private companies

cannot get workers back to work fast enough to significantly reduce the impact of these current job losses plus the job losses the state budget problems will cause in the next four months. The multiplier effect will kick in this fall resulting in additional job losses in the private sector.

Further, it appears that many are overlooking the "sleeper" here in California. As noted here previously, the State's deficit is really more than $50 billion and the May projections for sales and income tax revenue in the state budget were off for June, the very next month, by 16.3%.

A realistic projection of California's economy (ignoring the overly-optimistic projections for the national economy), one can easily project that the State General Fund as now configured for fiscal year 2009-10 likely is out of balance by at least $34 billion (instead of the $26.3 billion figured discussed in the press) and the Unemployment Insurance Fund will likely have borrowed at least $23 billion by the time repayment requirements kick in September 2010. What's the plan beginning in July 2010?

Virtually no responsible economist thinks California's economy will hit bottom before the middle of 2010 or begin to recover before the middle of 2011. It's difficult to imagine where in California's economy the State will find revenue from sales, income, corporate, and property taxes, and employer unemployment insurance to cover its costs for fiscal year 2010-11. Further reductions in State and local government employment and/or substantial increases in tax and unemployment insurance rates beginning in the middle of 2010 will further worsen the economy. If no alternative exists at that point, what once was the world's 8th largest economy will continue to slide through 2011. It appears that what I said in May is coming true:

California's Great Recession likely will begin "in earnest" in July 2009. And unfortunately for the Obama Administration and the world, what was the world's 8th largest economy will drag everyone else down with it.

California could easily become the Weimar Republic of The Great Recession, the symbol for how everything went wrong for the world's economy.

Leading edge economic indicators

The Sacramento Bee has created an interactive graph/map to represent visually what they call "California's wave of lost jobs" with a brief explanation:

Few California cities have been spared the deep impact of a large layoff during this recession. And it's still getting worse. So far this year, companies are laying off workers twice as fast as they did during the same period of 2008.

As I wrote on May 26, California's Great Recession likely will begin "in earnest" in July 2009. In addition to the warning signs noted here in the previous 13 posts, additional information is available to us both in the form of statistics and anecdotally.

The U.S. Department of Commerce reported that in May the U.S. trade deficit fell because exports gained slightly while imports dropped for the 10th straight month. Unfortunately for California, exports from the state fell dramatically for the 7th straight month, down 25.2% from last year. Manufactured exports were down 28% while agricultural and other non-manufactured exports were down by 23.3%. Year-to-date exports are down by 31% or $13.5 billion in five months. (Data from the Sacramento Bee.)

Adding to those dismal statistics is the drop in imports going through California's ports. Imports in May were down 31.7%.

The problem with both these indicator statistics is that they lag behind the rest of the economy. They are based on orders placed months ago. It is likely that these numbers will continue to drop well beyond when the national economy hits bottom.

This means that California's normally busy ports will remain not-so-busy for some time. In April it was reported that cargo leaving the ports of Los Angeles and Long Beach was off 18 percent and exports from San Francisco International Airport were down 34 percent.

While it is likely that in the long term, the ports will see as much of a recovery as the national economy allows, this will not be true for one of California's most famous "export" businesses - film and television production.

The Los Angeles Times reported recently that according to the "Employment Development Department, jobs in movie and television production were down 13,800 in May compared with a year earlier." In addition to reporting the effects on individuals, the article reported the following:

California's share of U.S. feature film production dropped to 31% in 2008 from 66% in 2003, according to the California Film Commission. That largely reflects a falloff in the Los Angeles area, where feature filming activity in 2008 was nearly half what it was at its peak in 1996.

Television production, which recently has been a more reliable source of jobs in the region, is also declining. A recent survey from Film L.A. Inc. found that 44 of 103 TV pilots this year were shot in such disparate locations as Canada, Illinois, Georgia, New York, Louisiana and New Mexico.

Part of the problem is competition from other states that offer special tax benefits. But the other part of the problem is that because of high living costs, the cost of doing business in California is also high.

It is unlikely that the California film and TV production industry which used to produce exports from this state will rebound from this migration to other states.

These accumulating facts represent the reality that the Legislature and Governor, and the schools and local governments, and the taxpayers all seem to be ignoring.

A billion more....

Personal income taxes in June were $987 million below (-18.0%) estimates in the May Revision, and sales taxes were short by $154 million (-5.8%).

The above item was in a July 10 news release from State Controller John Chiang as his department released the June 2009 Financial Statement for the State of California.

If you were looking for that in the news, you'd have to stumble across this blog item in the Sacramento Bee or this California Briefing short in the Los Angeles Times. Don't try to find it as a news story in these or the other major newspaper or TV news websites as it's a waste of time.

This apparent non-news is that collections of two of California government's primary sources of income - income and sales taxes - ran a $1.14 billion (16.3%) short of the estimates. These are the estimates used in the current discussions of the estimated 2009-10 budget which already was $26.3 billion out of balance. It appears that the deficit just increased by another 4%, until July's figures come in.

On May 26 the following statement was offered here:

While most Californian's don't see the magnitude of the problem, the State and local governments of the world's 8th largest economy will suffer a financial shock over the next 6 months.

Nothing that is about to happen should be a surprise. Everything written here since May 26 is based on information available to anyone. So why was the State's May budget estimate 16% off on income and sales tax revenue? The answer is simple but I'll let someone else explain it. From a July 5 Associated Press article on politicians blaming someone other than themselves for bad estimates:

State forecasts often rely heavily on national models, which also have been wrong, said Wilbur Maki, a professor emeritus in the Department of Applied Economics at the University of Minnesota who served as state economist in the early 1980s. The depth of the recession and its effect on financial institutions and housing markets also have made it difficult to compare to other downturns, he said

"This recession is especially troublesome," Maki said, "so there is very little immediate past experience that would help to make the forecast."

That, of course, is the crux of the problem. The national estimates showing that "The Great Recession" is "showing signs" of a recovery are off by a factor of two years for California. All raw data indicates that there is no room for optimists in the halls of California government but plenty room for panic.

As noted here July 8, the taxpayers of the State of California needs to find a way to avoid a deficit in excess of $50 billion at the end of 2010, not $26.3 billion and that's without considering state pension fund losses. Further, that $50 billion number could easily be 50% low.

The Obama Administration and the world must stop offering the most optimistic forecasts in what economist Maki admitted is an "especially troublesome" recession in which to make forecasts. Among other problems, what was the world's 8th largest economy - California's economy - will drag everyone else down with it because of those forecasts.

Property tax base declines, forecast to continue through 2011

Newspapers around the state have begun reporting the net assessed value drop information from various County Assessor offices.

As previously noted here property tax revenue is going to be a problem statewide, beginning with the net drop in assessed value. Reports so far range from a drop of 26.7% in San Jacinto (in Riverside County which had an overall drop of 10.5%) to a few locations such as commercial hubs like Irwindale (in Los Angeles County which had an overall drop of only a .09%) with an increase of 8.7% mostly due to peculiarities of Proposition 13 rules.

Other reports include Merced County down 13%, Contra Costa County down 7%, Sacramento County down 6.4%, and San Bernadino County down 6.2%. A few places such as Marin and San Francisco Counties will see net increases because home foreclosure rates are relatively low and sales and other transfers that kick in a Proposition 13 reassessment have resulted in substantial increases offsetting reductions in residential value for homes sold in the last few years.

The fact is most local government agencies have anticipated this in their budgets for 2009-2010. Whether the Legislature and the Governor have adequately anticipated this as it affects schools is unclear.

The more significant issue will be how cash flow will be affected. As noted here previously property tax payments during November and December may be significantly lower than previous years. Many of those who in previous years paid their full tax payment for the fiscal year in November will choose to pay half in April 2010. More than few may not pay in November hoping to have enough money in April. Some property tax payments will not be made in this fiscal year at all, particularly those in the midst of the foreclosure process.

Then there is the dismal future. The Walnut Creek, California-based mortgate insurer PMI Group issued its quarterly Economic & Real Estate Trends report this week indicating the two year probabilities of lower house prices through the end of March 2011 in the Metropolitan Statistical Areas. In California, 20 of the 28 MSA's have a 99% or greater chance of lower house prices and only two had less than a 90% chance - the two Bay Area MSA's. But all are considered a high risk area as seen on this map:

It seems unlikely from the projections that the State of California will see any significant property tax recovery before fiscal year 2011-2012 that could help the State with its deficit and its ability to support the education system.

A billion here, a billion there - the $50 billion California deficit

"A billion here, a billion there, and pretty soon you're talking real money."

The above sardonic quote attributed to the late Minority Leader of the U.S. Senate Everett Dirksen could be thrown at the press and politicians here in California.

Everyone keeps repeating the number "$26.3 billion and growing" as the real deficit projection the State government is incurring. That may be the number for the General Fund. But since January the State has been borrowing to pay unemployment benefits. The May projection by the Employment Development Department was that the State of California Unemployment Insurance Fund will have a deficit of $18 billion.

Not to worry. The federal government automatically loans the State the money needed to pay benefits. According to EDD:

As part of the American Recovery and Reinvestment Act (ARRA), interest owed on borrowed funds will be waived for 2009 and 2010. Interest will begin accruing on January 1, 2011 and repayment to the Department of Labor would need to occur no later than September 30, 2011.

Hmmmm. That repayment could be a bit of a problem. You see, the $18 billion deficit was based on April unemployment claim projections. Unfortunately, they didn't have the May information which apparently was a bit of a shock when the unemployment rate jumped to the highest in the history of modern record keeping. And, of course, they didn't have the June information. We don't have the June information for California yet, but the national unemployment rate jumped higher than the economic prognosticators predicted. Presumably, the same will be true for California.

So let's revise the number. It is reasonable to assume that the benefits are going to run about $3 billion higher then the May estimate. It is reasonable to assume that the "employer contributions", a euphemism for what is a payroll tax, are going to run about $1 billion less than the May estimate. In other words, it is reasonable to assume that by the end of 2010 California is going to owe the federal government $22 billion for unemployment benefits.

So, from the taxpayers perspective, we have to find a way to cope with...oh, let's just go with the "a billion here, a billion there" approach...a $50 billion and growing deficit. That's a nice round number Senator Dirkson would appreciate.

Of course, this $50 billion number assumes the economy will somehow not be bad in 2011. And it assumes that the General Fund deficit number includes an accurate estimate of the likely reduction in property tax revenues.

Then there's the pension fund losses since 2007....

California and the Gods Unknown

"After a time of wandering, Joseph came to the long valley called Nuestra Señora, and there he recorded his homestead. Nuestra Señora, the long valley of Our Lady in central California, was green and gold and yellow and blue when Joseph came into it. The level floor was deep in wild oats and canary mustard flowers". - from To A God Unknown by John Steinbeck

In his 1933 novel To A God Unknown, John Steinbeck tells an allogorical tale of the California experience. The protagonist, Joseph, comes to California to create his future. He discovers a place of apparent wealth and promise. And indeed he appears to be achieving all that he dreams. But over time, tragedies strike and a drought undoes his life work.

The story is about the arrogance of Californians who hold the belief that their efforts as humans, individually and collectively, create orderly wealth in a place where natural wealth has always existed in its own order of things.

In the "California Gold Rush" from 1848 to 1853 some 12 million ounces of gold was removed from the streams of "Gold Country" before hydraulic mining was used on ancient gold-bearing gravel beds that were on hillsides and bluffs in the gold fields sending large amounts of gravel and silt, in addition to heavy metals and other pollutants, into streams and rivers. Once the gold was depleted, gravel and silt remained in the areas affected.

Farmers followed the miners to extract another kind of wealth. In the Sacramento Valley and the Sacramento-San Joaquin River Delta reclamation districts were formed to prevent the flooding of farm lands by building an extensive levee system. In the same period, dams with water diversion and canal projects were proposed and subsequently built to move water into the desert areas of the Southern San Joaquin Valley and all of the State south of the Tehachapi Mountains in the California Aqueduct. Water became "Liquid Gold" for Californians as it seemed quite plentiful in the 1950's.

New Californians hadn't read To A God Unknown. Instead they believed that water was an endless resource of wealth for future Californians. Lands that once were orchards in Southern California. the San Francisco Peninsula, and Santa Clara County and farms in the Central Valley became subdivisions of housing for large populations, urban/suburban populations that were now dependent upon that water for human consumption competing with the remaining agricultural interests. This year the Southern San Jaoquin Valley has become the first area in the State to suffer significantly from the continuing drought as reported in a previous post.

But this story doesn't stop with gold and water. A massive highway system was built by government beginning in the 1950's displacing the railroads built under a previous government effort. Other infrastructure was put in place in the 1950's and 1960's to support a growing state population.

Much of this infrastructure was not built to withstand severe earthquakes, despite the experiences with the 1906 San Francisco Earthquake, the 1933 Long Beach Earthquake, and the 1952 Kern County Earthquake.

Few Californians could tell you about the 1952 Kern County Earthquake. It was a 7.3 quake that cracked reinforced-concrete railroad tunnels having walls 46 centimeters thick; it shortened the distance between portals of two tunnels about 2.5 meters and bent the rails into S-shaped curves.

Along with Interstate 5, in the mid-1960's the Edmonston Pumping Plant, the largest pumping facility of the State Water Project, was built near the epicenter of the Kern County Earthquake to lift water almost 2,000 feet up and over the Tehachapi Mountains into Southern California. At peak capacity, the plant pumps almost 2 million gallons a minute through 10 miles of pipeline across the Tehachapi Mountains. (It may never matter that this facility is located where earthquakes have shifted railroad tunnels. In recent years, State officials have discovered that portions of the California Aqueduct are sinking.)

As this infrastructure aged, the taxpayers of California "revolted" in 1978 and have subsequently failed to effectively maintain or replace, much less expand, the dams, levees, canals, highways, and all the other infrastructure, along with failing to support it's once-proud school system. Instead, in a level of human arrogance rarely seen, Californians in the past 30 years have been using the "hydraulic strip mining" approach to live off this artificial and transient wealth structure.

Recently the rest of the nation has learned that California is "the country's fiscally weakest state," a description offered by bond fund managers. Reports of those statements fail to mention California is responsible for 13 percent of the United States gross domestic product and that California contains over 10% of the nation's population. But we do have U.S. Education Secretary Arne Duncan telling an assembly of mayors and school administrators: "Honestly, I think California has lost its way, and I think the long-term consequences of that are very troubling."

As noted in the previous nine posts, California has started a "belated" economic collapse. Unfortunately for the Obama Administration and the world, the collapse of what was the world's 8th largest economy would drag everyone else down with it. I previously described all the early indications. Now some are starting to see what's facing us, though these economic tremors are being reported piecemeal making it difficult to assemble a "big picture" from which to forecast.

Today, it is being reported that California's regional banks, which on the surface appeared to sidestep the national banking near-collapse, are showing signs of significant stress. Further, a second round of home forclosures is expected this summer, according to reports.

Meanwhile, the State has begin issuing Registered Warrants - IOU's - in lieu of money in payment of it's bills. And while this is thought to be temporary until the Legislature and the Governor agree on a budget, in fact it may last longer than expected and when a "balanced" budget is adopted new job losses in both the public and private sector are inevitable, causing further reductions in State and local sales tax revenue and State income tax revenue. This may force another round of Registered Warrants after March 2010.

The Sacramento region reportedly is already feeling the impact of the measures taken to reduce State and local government spending. This will slowly spread out across the state like an economic tsunami. For the State isn't taxing a smaller percentage of the economic activity than it did two years ago, it is just pumping far less money into the economy. That ultimately means less private sector activity because of the multiplier effect.

Recent analysis indicates that even after the continuing job eliminations cease, hiring might not rebound. And as reported in previous posts in the first quarter of 2009 California had the most mass layoffs in the nation, and that since then California's unemployment rate continued to climb to the highest in modern record keeping. Further, even with those new job losses which in May included significant government job losses, the major layoffs that will affect the education and health sector as well as government hadn't yet begun.

Today, in a report on the situation in California's fabled Silicon Valley, we are told the truth of the home foreclosure situation:

Like cinders from a fire, foreclosures and short sales are landing on the mini mansions with double staircases, triple-tiered fountains and four-car garages.

"It's a mess," said Joe Fierro, who built a waterfall that cascades between his front steps.... Fierro looked out across Mountaire Lane to the hulking shell across the street, where his neighbor left behind dying palm trees, children's toys next to the outdoor kitchen....

The foreclosure numbers at The Ranch don't come close to San Jose's foreclosure epicenter — the East Side neighborhood near Story and King roads in the valley below — or in the cookie-cutter developments in the commuter towns from Manteca to Hollister.

But to those used to seeing the Lexus SUVs heading up Yerba Buena Road to The Ranch and other exclusive enclaves, the idea that these privileged people might be having trouble paying their bills is still a bit shocking.

Hidden within reports like this are the hints of further impacts. Major reductions in real estate values are already resulting in downward adjustments in assessed value which will result in reduced property tax revenues for schools and State and local governments. And as I noted in a previous post some property tax payments will not be made in this fiscal year due to these foreclosures . Many who in years past paid in full each December will take the option of paying half with the remainder to be paid in April. Some will choose to not pay anything in December hoping to be able to afford to pay the whole amount by April. We will not know until January what effect this will have on cash flow in California governments and schools.

Nothing in the Bush and Obama Administrations' Democratic Congress approved trickle-down bailout and stimulus efforts will be able to stop this further economic decline. That would have required funding an immediate direct hiring by federal, state and local governments significant numbers of new employees to work in programs to correct deferred maintenance of infrastructure and programs such as education and public health. And even if the Obama Administration and Congress could suddenly shift gears now, it would take six months for the effects of such a program to be felt.

I fear that the Gods Unknown of California are about to exact revenge in the form of a much deeper Great Recession.

California Currency - The "CC"

California officially started issuing "Registered Warrants" July 2, 2009. Some liken this to a situation in 1992-93 when there was a budget "kerfluffle" that at a cursory glance looks like the current State Budget situation. But there is a radical difference. This time around California is effectively issuing its own currency, what I call "California Currency" or "CC".

You might ask what is the difference between now and 1992-93? Well, back then the budget "kerfluffle" was as much of a philosophical disagreement between Governor Pete Wilson and the Legislature over spending policy as it was over a revenue shortfall. And at the time, California didn't have a budget. In fact, initially then State Controller Gray Davis wouldn't issue registered warrants to vendors because the State didn't have a budget.

California has a budget for the 2009-2010 fiscal year that began on July 1. It was adopted by the Legislature and approved by Governor Arnold Schwarzenegger in February. The income projections in that budget clearly won't materialize. So, lacking a revised budget, Arnold is unilaterally preventing some expenditures.

State Controller John Chiang is dealing with the fact that he must meet some expenditures with lawful U.S. currency as constitutionally required or required by federal law. Other obligations he is meeting with Registered Warrants in order to make sure he has enough lawful U.S. currency to get through December when property tax revenue will start to come in.

In other words, instead of using reserves which it doesn't have, California is operating under a budget that requires borrowing in a manner not unlike the federal government. California is just "borrowing" from vendors. local governments, and those it owes tax refunds to by issuing "California Currency."

I call these 2009 Registered Warrants "California Currency" because the situation is different from 1992-93, beginning with the fact that there is a State Budget. It's just unbalanced. It's becoming more unbalanced by $20-$30 million a day. Controller Chiang is hoping that by October the state will be in a position to issued revenue anticipation notes based on a revised adopted balanced budget which will indicate sufficient revenue that banks can anticipate being available for repayment of the notes. But four flaws exist in that plan.

The first flaw is that there may not be any chance of seeing a revised balanced budget. The budget cannot be balanced except by eliminating programs for the poor in the middle of a depression or significantly raising taxes in the middle of a depression. Neither may be an acceptable choice to enough legislators to get a budget adopted. That's why we have no revised balanced budget now.

The second flaw is that if a revised budget were adopted today, it is likely that the revenue projections will turn out to have been substantially too high by March 2010. Sales and income tax revenues are likely to continue to fall at a greater pace than projected. Property tax payments during November and December may be significantly lower than previous years. Some property tax payments will not be made in this fiscal year due to foreclosures . Many who paid in full each December will take the option of paying half with the remainder to be paid in April. Some will choose to not pay anything in December hoping to be able to afford to pay the whole amount by April.

The third flaw is that many temporary borrowing solutions to the revenue and cash flow problems have already been implemented which require repayment in 2009-2010. And many more temporary solutions outside the General Fund are going to require revenue increases in the coming fiscal years. For instance, the unemployment Fund is significantly overdrawn and is being shored up by federal funds that must be repaid from a major increase in employer payroll taxes.

The fourth flaw is that tax revenues will likely decline through 2010 and may not start recovering significantly until 2012.

In my scenario the State of California is doing what the federal government does. It is infusing the State's economy with money that didn't exist until the Registered Warrant was sent out. Since many banks will accept the Warrants and give their customers money, the available money supply will grow - temporarily.

But by September, folks will begin to realize that the state's General Fund shortfall is climbing to 33% of the adopted General Fund expenditure budget. Given the expenditures that by law the State must pay with U.S. currency, someone is bound to speculate that the earliest their could be any U.S. currency in the State's coffers available to cover the Registered Warrants is May 2011.

If and when that realization occurs, those warrants become "California Currency" backed by the full faith and credit of the State of California but not redeemable for U.S. currency any time soon. The "CC" will float against the dollar as a commodity comparable to foreign currencies. Thus a "CC" with a face value of $428.37 earning 3.75% might actually sell as a commodity in January 2010 for $405.39. In such circumstance one could say a one dollar denomination CC is worth US 94.6¢.

Perhaps this deficit spending will keep the State's economy from crashing as much as it would otherwise. That is the theory economists use for justifying federal deficit spending for the Stimulus Package. If successful, it could become routine.

---

I wrote this as satire with a "tongue-in cheek" attitude. I certainly hope that was the right attitude and it is not in some way prophesy.

The latest economic forecast - heavy storms

I had hoped I was wrong when I first wrote at the end of May that "the 'other shoe' is about to drop in our Great Recession. California is hosting a "belated" economic collapse. Of course, no one publicly calls it that because no one wants to see it."

Now, a month later on June 24, the Business Forecasting Center of the University of the Pacific has reported that it does see it. In the "California and Metro Forecast 2009-2013" UOP economists predict:

• California will lose another 200,000 non-farm jobs reaching 1,020,000 jobs statewide over the length of the two year recession
• unemployment will reach 12% by the end of 2009 peaking at 12.3% in 2010
• unemployment will remain in double digits for the next two years through the end of 2011
• San Jose and San Francisco will be the first metro areas to in Northern California to regain their pre-recession employment levels no earlier than the summer of 2012

“The state budget crisis is a dangerous aftershock to...the foreclosure earthquake,” said Jeff Michael, Director of the Business Forecasting Center.

And indeed the state budget wrangle continues as, on the same day the UOP report was released, legislators failed to reach a compromise on spending cuts and the State Controller warned that next week he will issue IOUs instead of checks.

Without any solutions on the horizon, the following morning the State Assembly voted 69-0 and 54-0 to pass two stopgap measures to delay until after July 1 (the beginning of the new fiscal year) payments to all levels of the public education system and to cities and counties from gas tax funds for road repair. Further cuts would be made in state school spending in the fiscal year that ends next Tuesday.

A third bill likely to pass redrafts a measure legislators passed earlier this year that would transfer money from regional redevelopment agencies to the state. The earlier bill was ruled unconstitutional in April by Sacramento Superior Court Judge Lloyd Connelly because those property tax monies are required to be spent within the area served by the redevelopment agencies. The new bill would move the money to school districts within those boundaries allowing the state to reduce State General Fund transfers to those schools.

Governor Arnold Schwarzenegger says he will veto those bills because the Legislature needs to solve the big problem.

"Since the first day we began working to solve this $24 billion deficit, I have been clear: the legislature must solve the entire deficit, must make the hard decisions now, and must not ask California taxpayers to foot the bill," the governor said. "The current proposal in the Legislature amounts to nothing more than a piecemeal proposal and a second day of drills and if passed, I will veto it because it doesn't solve the problem."

Senate President Darrell Steinberg, D-Sacramento, countered the governor was making a mistake.

"If the governor wants his legacy to be 'I refused to sign a bill that would have prevented IOUs,' that's his choice," Steinberg said. "I think it's a bad choice."

In the background, however, leaders for the League of California Cities said in a news conference held as the bills were being considered they will sue if the state attempts to steal gas tax funds. The failed budget proposal included a plan to divert $1.7 billion from the local share of gas tax funds over the next two years as well as borrow another $2 billion in local property taxes from local governments to help make ends meet. Local governments have warned that the proposals would devastate jurisdictions already suffering the effects of the recession in the form of lower sales and property tax revenues.

California Economics 101: Ignore the California Manufacturers and Technology Association

According to a report commissioned by the California Manufacturers and Technology Association, California is losing manufacturing jobs faster than comparable states. Assuming you agree with their choice of comparable states, this is the one non-controversial statistic from the report Manufacturing 2.0: A More Prosperous California issued this month by the Milken Institute.

The remainder of the report is designed to support the idea that California is not "business friendly" despite the obvious fact that California has been a home for the technology revolution (Silicon Valley is located here), is considered likely to be the greatest beneficiary from the "Green Technology" emphasis in the Obama stimulus package, and is host to the much of biotech research industry.

Nonetheless, the Los Angeles Times published an article piggybacking on the study - the headline is Losses of factory jobs in California blamed on regulation. The article leads off with the story of a plant in El Monte shut down because compliance with air quality enforcement would cost too much. It then explains that the report talks about problems of too many agencies, frequent changes in labor law by the legislature, etc. Those are all issues worth exploring.

At least the Times article offers opinions contrary to the study:

Not everybody agrees with the report's conclusion. Christopher Thornberg of Beacon Economics said manufacturing output has been as high as ever in the state and that there's no evidence that jobs are going to other states.

"At least up to the last couple of years, the pace of job loss in manufacturing in California was no different than anywhere else," he said, basing his calculations on the state gross domestic product, the value of goods and services made in the state.

California GDP grew last year despite the global financial crisis, said Brian McGowan, the state's deputy secretary for economic development and commerce. And green-energy jobs in the state have grown at a rate 10 times faster than total job growth since 2005. To evaluate a state's business climate, he said, companies should focus on workforce skill, availability of capital and overall quality of life, rather than just on taxes and regulatory costs.

An article in the San Francisco Chronicle headlined California manufacturing jobs cross state lines offers no such counter-opinion. Instead it gives a platform for a spokesperson for the California Manufacturers and Technology Association, the powerful lobbying group that commissioned the report:

"Everyone says the regulatory burden in California is too much," said Gino DiCaro, spokesman for the Manufacturers Association. "Over time, we're dropping off the list of states that companies are willing to consider."

The report is not specifically connected to any bill, but manufacturers ultimately want lawmakers to change state policies that, they say, kill jobs. For instance, DiCaro said, California makes companies pay sales tax on new factory equipment, a practice followed by only two other states: Wyoming and South Carolina.

The report states: "California’s poor performance in this category is largely due to increases in taxes (corporate, individual, unemployment) during the study period." The one thing the report has buried in its tables is the reason why this is true. In fact property taxes in the seven states compared to California are much higher. For every dollar of property tax that California would charge a business,

• Washington would charge $1.66;
• Arizona would charge $1.78;
• Oregon would charge $1.79;
• Minnesota would charge $1.87;
• Kansas would charge $3.07;
• Indiana would charge $3.12;
• Texas would charge a whopping $3.78.

Texas is perhaps the perfect example to compare. In California, the CEO of a corporation would pay an income tax rate of 9.3% on taxable income over $100,000. The CEO's of corporations in Texas pay no state income tax. California's corporation income tax is much higher than Texas. California's sales tax is also higher than Texas. Texas is considered more "business friendly." From a government standpoint, it is also more financially stable as property tax is a more stable sources of tax revenue.

Perhaps there is a lesson to be learned from Texas. Repeal Proposition 13, quadruple property tax revenue, and severely reduce or eliminate state individual and corporate income taxes.

I wouldn't support that but many of the folks who decided to have the Milken Institute study done most likely would.

The one thing Californian's do not need to do in the crashing California economy is panic over technology oriented jobs. Silicon Valley is the best example of the issues surrounding both technology oriented industrial growth creating jobs and the related subsequent job losses of the past few decades.

As we know it, Silicon Valley began to gain shape with a few entrepreneurs and corporations such as IBM in the 1960's. As the innovation expanded, demand for educated and skilled personnel arose. Wages went up to attract more people. Housing development didn't keep pace so housing prices climbed. It became more costly to live in the area. Wages went up again.

School districts and state and local government then had to raise wages so that employees could afford to live there. Because of Proposition 13, increasing real estate prices to did not result in corresponding revenue increases for schools and government. Schools and government scrambled to find revenue becoming "creative" and placing heavier burdens on income related taxes.

Better educated personnel became citizens who didn't like pollution and abusive labor practices. Ironically, they liked restrictive zoning and less development. So they pushed legislators for more regulation and more effective regulation.

Still, the region continued to attract innovating businesses. But chip manufacturing was sent overseas to (1) avoid regulation regarding toxins used in and toxic waste produced by manufacturing processes and (2) take advantage of cheap labor. As the Chronicle story notes, the report indicates that the steepest decline in factory jobs was in high-tech manufacturing which had an average annual wage of $115,000 in 2007.

The manufacturers lobby would like us to believe those jobs left mostly because of taxes and government regulations. Why, then, do I believe that those jobs were moved to other states where labor costs could be reduced by as much as 60% or to other countries where labor costs could be reduced by as much as 90%. This is a debugged version of the Milken Institute report - let's call it "California Economics 101: Ignore the California Manufacturers and Technology Association."

The California economy likely will experience The Great Recession as a depression, as noted in the previous six posts:

• Because the schools, State Government and local governments will make significant layoffs in the coming months;
• Because State Government may soon begin paying bills with IOU's;
• Because of a drought significantly depressing agricultural production and related employment;
• Because people are moving out of the state reducing growth to nearly none;
• Because California abandoned its commitment to educate its children;
• Because many service and retail business can't survive, and none can flourish, in this economic environment; and,
• Because, yes, we haven't found a way to create technology industries and provide them with an adequate supply of affordable labor since it costs too much to live here.

The troubles of our proud and angry dust....

The value of California’s 2007 agricultural exports achieved an all time high of $10.9 billion, an 11 percent increase from the 2006 total. - from a U.C. Davis Agricultural Issues Brief

California farmers constitute an essential part of the state economy. ...farm production is closely linked to many other industries: the production of farm inputs, the processing of food and beverages, the textile industry, transportation and financial services. Including multiplier effects, California farm and closely related processing industries employ 7.3 percent of the state’s private sector labor force and account for 5.6 percent of the state labor income. Every dollar of value added—labor and property income and indirect business taxes—in farming and agricultural related industries generates an additional $1.27 in the state economy. For every 100 jobs in agriculture, including the food industry, there are 94 additional jobs created throughout the state. California agriculture is also large on a global scale. Depending on the method applied to measure the value of agriculture here and elsewhere, California ranks between 5th and 9th in the world, ahead of such countries as Canada, Mexico, Germany and Spain. - from the U.C. Davis publication The Measure of California Agriculture

The facts presented above place in context the reality that much like in The Great Depression where the nation saw a drought (the Dust Bowl) impact its economy, California's agriculture economy is struggling with a drought, a struggle which is likely to continue for several years. From the AP via San Francisco Chronicle:

California Sens. Barbara Boxer and Dianne Feinstein are joining Gov. Arnold Schwarzenegger in calling on the Obama administration to issue a federal disaster declaration for Fresno County.

In a letter to the president Monday, the senators said the county has been hit hard by water shortages from a lack of rainfall and the need to protect endangered species. A disaster declaration would help the region obtain emergency unemployment and other benefits.

In another story, the endangered species issue is put in perspective:

The Director of the State Department of Water Resources, Lester Snow, accompanied the Governor. He says fish are not the primary reason water supplies to growers in Western Fresno County have been reduced.

"About 25 per cent of that difference is related to the fish protection standards and about 75 per cent of that difference is related to the drought." Snow said.

From a Fresno Bee story, we have this:

Los Banos is one of many pockets of the San Joaquin Valley hit by foreclosures and reduced water deliveries, which has led to thousands of acres of fallowed farm fields. The jobless rate throughout much of the valley is in double digits.

Actually, in many of these areas the unemployment rate is above 30%. UC Davis agricultural economist Richard Howitt has reportedly estimated that job losses due to drought will be in the range of 30,000 this year.

The effects from this will not only increase the cost burden on the "safety net" as more families require assistance but also will result in long-term higher food costs across the nation.

"I think California has lost its way...."

In what was the most accurate descriptive statement by any government official of the situation in California during The Great Recession, on May 22 U.S. Education Secretary Arne Duncan stated to an assembly of mayors and school administrators: "Honestly, I think California has lost its way, and I think the long-term consequences of that are very troubling."

California's economy is perched at the edge of the precipice. As noted on May 26:

California's Great Recession likely will begin "in earnest" in July 2009. And unfortunately for the Obama Administration and the world, what was the world's 8th largest economy will drag everyone else down with it.

Education Secretary Duncan was most concerned about California's education system. Once the pride of "The Greatest Generation" most of whom experienced first hand The Great Depression and World War II and who paid sufficient property, sales, and income taxes not only to provide a strong elementary and high school education system for their children, but established the California Master Plan for Higher Education of 1960 based on the underlying principles that:

1. some form of higher education ought to be available to everyone regardless of their economic means;
2. only a person's academic proficiency should determine how far they can go;
3. the competing demands of fostering excellence and guaranteeing educational access for all would be balanced through the combination of the University of California campuses, the California State University system, and the California Community Colleges System;
4. a differentiation of function would be assigned so that each of the three systems would strive for excellence in different areas so as to not waste public resources on duplicate efforts;
5. the top 12.5% (⅛) of graduating high school seniors would be guaranteed a place at one of the University of California campuses, an additional 33% would be able to enter one of the California State University campuses, and the community colleges would accept all applications.

It was the generation which also learned first hand that only through a social compact assuring an adequate economic safety net - part of which in the 21st Century is a strong education system - can a society continually build a strong economy.

Education Secretary Duncan was acknowledging in May that California's public education system, once considered the national model, now ranks near the bottom in both school funding and academic achievement.

Instead of the achieving the dream of 1960, a 2006 study by UCLA's Institute for Democracy, Education and Access discovered that California sends a lower percentage of its seniors to in-state public four-year universities than any state but Mississippi. Only 12% of the California students who entered the class of 2004 as ninth-graders enrolled in one of the state's public four-year universities. And though one might wish to attribute a multitude of reasons for this reality, the study found:

At the heart of the problem, concludes the study, is a failure to invest in education.

California is among the states with the highest per capita personal income in the country -- it ranks 11th -- yet when spending is adjusted for regional cost of living differences, it ranks 43rd in education spending, according to the report.

Duncan also was expressing concern about the immediate future which is endangered by the financial crisis in California State Government, including schools and local government. According to an Associated Press article, as it stands right now:

Under the governor's plan, K-12 schools and community colleges would lose $5.3 billion over the coming year — on top of billions of dollars in recent reductions and payment delays.

The state would spend $7,806 per K-12 student in 2009-10, almost 10 percent less than two years ago, according to the Legislative Analyst's Office.

Federal stimulus funds have prevented deeper cuts to a public school system that educates 6.3 million children, of which about a quarter do not speak English well, and nearly half are considered poor under federal guidelines.

School districts have already issued layoff notices to more than 30,000 teachers and other employees, and they could issue more pink slips this summer, according to the state Department of Education.

Duncan was concerned because California already is scheduled to receive $8 billion in stimulus funding for education over the next two years. That money will go elsewhere if the state fails to maintain funding levels for education.

The problem for the Governor and the Legislature is that the "wasteful spending programs" requiring meaningful General Fund expenditures are exactly the programs which would lose existing federal matching funds. They are also the main programs within the Obama Administration stimulus program directly targeted to aid people suffering the most from The Great Recession, plus education.

Last year California's per-pupil spending on K-12 education, which was ranked a shameful 43rd in 2006, fell to 47th.

The California I once knew, the one that created the world's 8th largest economy, has indeed lost its way and is about to stumble over a cliff. We can't rebuild an economy if we are providing the vast majority of our children a third-world education.

California's Economic Crash - The Statistics Begin

Well, here we go. The initial article today from the Sacramento Bee:

California's unemployment rate climbed to 11.5 percent in May, the highest in modern record-keeping, the U.S. Department of Labor reported Friday.

The loss of another 69,000 jobs comes as a blow to the state....

In an earlier post I noted my fears: "California's Great Recession likely will begin 'in earnest' in July 2009. And unfortunately for the Obama Administration and the world, what was the world's 8th largest economy will drag everyone else down with it." This appears more and more likely particularly the way Arnold and the Legislature are handling conflicts over the collapsing state budget.

The article reports that the largest job declines in the month were in the government sector, down by 14,200 jobs. It also says that every other sector saw losses except education and health services.

The reality is that in May, the state government and local governments hadn't even begun serious layoffs. Those will appear in July-September statistics. School layoffs may start to show up in June, but we won't really know how many cumulative job losses there were in the education sector until September. And the health sector job losses will likely not show up until September-November.

The impact on the private sector may not be felt until after September, but my opinon is that it will be of major significance to the national economy.

I hope I'm wrong.

California - the economy in drag

Deep cuts in state spending in the past two years will translate to the loss of more than 60,000 public-sector jobs by the middle of 2010, a UCLA economist estimated in a report released today.

Senior economist Jerry Nickelsburg said the jobs losses ...will create a substantial drag as California's economy tries to climb out of the recession.

Nickelsburg was quoted in a Sacramento Bee article today. We now know what to call it. California's economy will become the "drag queen" slowing the economic recovery of rest of the world. But the UCLA study supports this writer's statement in an earlier post two weeks ago: "California's Great Recession likely will begin 'in earnest' in July 2009. And unfortunately for the Obama Administration and the world, what was the world's 8th largest economy will drag everyone else down with it."

Nothing is going to change in that state, fiscally, over the next two or three years. I just don't see anything positive coming out of there. It's going to be dead for quite a while.

This comment by Tom Tarabicos, a financial adviser at Wells Fargo Financial Advisors Network in Roswell, Georgia, was quoted in a Reuter's article today when he was asked about California state and municipal bonds.

Much of this is in the context of a Washington Post article reporting that the Obama Administration has refused requests for aid from California officials. From that article:

...Facing gridlock and few options other than severe cuts, California began to look to Washington for help. State Treasurer Bill Lockyer sent a letter to Geithner in mid-May, urging him to consider helping cash-strapped municipalities.

"A fiscal meltdown by California or any other large state or municipality would surely destabilize the U.S., if not worldwide, financial markets," Lockyer wrote. If the state were to default, it could shake bond markets and undermine investor confidence in a still-fragile financial system.

Tom Dresslar, a spokesman for Lockyer, said California will not default on its general obligation debts. But by late July, the state conceivably could run out of money to operate, as revenue continues to deteriorate while costs keep mounting. "The problem is getting worse, certainly not getting better," he said.

As you know from the previous two posts, this writer believes that state officials are too optimistic. And the UCLA report statistics supports this contention, even if in the text the economists still see the national economy bottoming out late this year. According to the report as discussed in the Los Angeles Times:

...Construction jobs, which fell 12% in 2008, are expected to drop more than 15% this year as demand continues to fall for both residential and commercial development.

...The [state budget] cuts don't affect only government jobs. Some of the program reductions will be in healthcare and education, damaging two sectors that haven't yet experienced massive job losses in California during this recession.

The Times article also includes comments from another economist:

Bill Watkins, executive director of California Lutheran University's Center for Economic Research and Forecasting, agreed with the Anderson group that California faces a rougher road than the rest of the nation.

"California's economy is quite a bit weaker than the U.S. economy, and we don't expect to see a recovery any time soon," he said. The state will not come out of recession until the second half of 2011, he predicted.

The Obama Administration's relief program for The Great Recession is a peculiar twist on "trickle down" economics. Instead a 1930's WPA direct employment program or even a 1970's CETA program, they are counting on money that is given directly to corporations for such things as green energy development or indirectly through states and local governments for contractor built infrastructure projects to get people back to work rapidly. It probably will be more effective than tax breaks for the wealthy, but if you understand how things work in the real world, it will be operating at a trickling pace, too slow to prevent California from becoming a serious drag.

The Wrath of Consuming All The Grapes

As a short followup on the previous post, The Other Shoe - California's Belated Economic Collapse, that began with a discussion of The Grapes of Wrath, a certain irony can be found in a Sacramento Bee article today headlined Golden State losing folks as old Dust Bowl beckons. The article reports that Californian's have been moving back to states where their grandparents migrated from during the The Great Depression. But that's not the real followup.

I also mentioned in that previous post that during The Great Depression, state and local government entities including school districts across the nation issued registered warrants (check shaped IOU's) to pay vendors and employees. Hallye Jordan, spokewoman for State Controller John Chiang, is quoted today in the Sacramento Bee as saying "we may have to go straight to registered warrants. That's something that we are looking at daily."

This is within the context of the Governor and the Legislature being unable to "rebalance" the budget for the coming fiscal year which was adopted in February. The article reports:

"This week I sat down with the controller and also with the treasurer," Gov. Arnold Schwarzenegger told a Southern California audience on Friday, "and we all agreed that after June 15, every day of inaction jeopardizes our state's solvency, and our ability to pay schools and teachers, and to keep hospitals and ERs open."

The actual fiscal jeopardy is neither that dire nor that simple, but it's still serious.

The problem with the Bee writer's perspective is that during The Great Depression it became that dire and that simple. During The Great Depression, banks wouldn't honor the warrants as doing so was essentially issuing a loan to the governments involved with no assurance as to when or how the loan would be repaid. Grocery, drug, and other stores and vendors quit accepting them after it became apparent that after a few months they still couldn't redeem them for money.

Many teachers and nurses continued to work as long as they could. In The Great Depression that kept things going for awhile because most people didn't have the debt they have today and most folks could walk to work. Now in The Great Recession that 23 miles to the job will be an impossible situation when the local Chevron quits taking registered warrants.

The Bee writer and most governmental officials including Legislators believe that couldn't happen today. Yes it can.

The Other Shoe - California's Belated Economic Collapse

In Grapes of Wrath, John Steinbeck told a story about how folks migrated to California to find hope within The Great Depression. We are now in what Time Magazine calls "The Great Recession" but California is not going to be a place to find economic hope.

The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse. Of course, no one publicly calls it that because no one wants to see it. But the boring statistics are available.

In the first quarter of 2009, "California had the most mass layoffs with 115,014 workers let go, followed by Michigan with 46,817, Illinois with 41,887 and Texas with a more modest 33,005," according to an article in Forbes. More than Michigan? After all, the same article reported that in Detroit "57 mass layoffs snuffed out 14,781 jobs in the first quarter of 2009." But California had 2.5 times the number of mass layoffs than Michigan.

We could comfort ourselves with the fact that California has 3.6 times the population of Michigan. But thing is, Michigan lost 285,000 reported jobs between April 2008 and April 2009. California lost 543,300 jobs in that same period. Most significantly, California lost 428,400 of those jobs in the first quarter of 2009.

In October 2006 when things had recovered from the "dot com bubble" burst, California had 857,500 folks on it's unemployment rolls. In March 2009, the Employment Development Department reported 2,091,800 unemployed.

By February of 2009, the state Unemployment Insurance Trust Fund ran out of money. According to a Sacramento Bee article published at the end of January, California will "rely on a $1.84 billion federal government loan to pay benefits through March." Of course, that's old news.

The State of California should have filed for bankruptcy in March, not because the Unemployment Insurance Trust Fund is empty, but because the General Fund is overdrawn.

There aren't many old enough to remember when during the depression, along with banks going under, state and local governments including schools started paying vendors and employees with "warrants" which were IOU's based on the hope that someday enough cash would come into the treasuries to cover them.

The State of California is about to start massive layoffs beginning with about 6,000 employees in the next month with the initial largest layoffs in the Department of Corrections (yes, prison guards).

While most Californian's don't see the magnitude of the problem, the State and local governments of the world's 8th largest economy will suffer a financial shock over the next 6 months. I mention local governments, because the State is considering "borrowing" property tax revenues and will be unable to remit sales tax revenues to local governments because the State is again getting low on cash. The State's deficit is now 25% of the State General Fund and rising.

State spending on everything from cars and computers to food and toilet paper is going to have to be cut by a minimum of 15% (although it should be double that number). This is a surprisingly large amount of money that is going to cease to enter the private sector. The ripple effect in the national and world economy will be noticed by the economy's statistics keepers.

It's just the way it is unless Congress decides to intervene to bail out another poorly managed "too-large" economic entity within the American economy in order to reduce the impact on the world's economy. The Los Angeles Times, in discussing the likelihood that private investment in California's economy will dry up, noted:

"We lose competitive advantage by being the state that can't solve its problems," economist Stephen Levy said. "Regardless of what we think the solution is, the fact is we can't find a solution."

The budget crisis threatens to further weaken the state's job market, which lost 63,700 more jobs last month, according to figures released Friday. The state's overall unemployment rate actually fell slightly, to 11% from 11.2%. But new job losses could prolong the vicious cycle in which the California economy is now trapped, with rising joblessness reducing consumer spending and delaying a housing rebound, thus leading to more layoffs.

Business Week called California a "basket case" in an article noting that 47 states face budget gaps. Writer Christopher Palmeri explained:

The California state legislature will now have to consider many more cuts. They'll range from relatively smaller items—a $4 million-a-year poison-control hotline that gets 900 calls a day—to sweeping cuts in health-care spending that will reduce coverage for 2 million poor state residents. "These are folks who may go to the emergency room, but they'll face the bills afterward," says Anthony Wright, executive director of advocacy group Health Access California. "If you're trying to lift yourself out of poverty, that won't help you."

California legislators had already passed $16 billion in spending cuts and $12 billion in fee hikes to tackle the current fiscal year's budget. Schwarzenegger says his own office has been reduced by 27 positions, to 147 people, and remaining staffers are taking a 9% pay cut. State legislators, though, say the governor's decision this week to stop pursuing short-term borrowings came as a surprise to them. Noreen Evans, a Democrat who chairs the budget committee in the State Assembly, says she was against borrowing more money to begin with. She thinks the fix lies in a number of spending cuts and tax increases—everything from putting a sales tax on tickets to sporting events to the $750 million a year that could be gained from taxing oil production in the state. "We should think about taxing oil producers before we cut health care coverage to 200,000 children," she says.

Some see California's fiscal crisis as an opportunity to address structural problems with the state's government....

That would be true, of course, if Californians were able to switch their fundamental political orientation back to the social compact of the mid-1950's when they attempted to tax themselves sufficiently to provide governmental services and infrastructure for all. But there isn't time to avoid an overall collapse of the economy within the state.

California's economy is too large for the federal government to ignore. But things may already be out of hand. Before California became the state with the most mass layoffs in the third quarter of the 2008-2009 budget year, the Legislature working with the Governor put together a budget that included $15 billion in spending cuts, $12.4 billion in borrowing, and $12.8 billion in tax hikes. But tax revenue continued to drop dramatically, costs for programs like unemployment, MediCal, and health care for children climbed, and the voters overwhelming turned down ballot measures that were needed to balance that budget. Within 48 hours after the May 19 election, State Legislative Analyst Mac Taylor placed the deficit at $24.3 billion and growing.

What we all know is that a realistic take on the 11% unemployment rate reported this month is that it is more likely an 18% unemployment rate because of those who have fallen off the bureaucratic radar with another 7% of workers who became underemployed in the last 18 months.

As the State reduces its purchases of supplies, equipment, and services from the private sector and starts laying off employees whose families stop spending, the multiplier effect will put more private sector workers on the unemployment roles. This will result in reduced sales tax and income tax revenue which will increase the State budget deficit.

Actual cash income from property taxes will drop as people miss their payments. Local government will begin to face cash shortfalls. The problem is that the State has already experienced one cash crunch when it had to delay paying it's bills this fiscal year and will likely experience a similar problem again soon. So the State is not going to solve the problem for local agencies. In fact it will worsen the problem, for that last budget included borrowing $692 million from cities, $960 million from counties and $330 million from special districts which supposed has to be paid back over the next three budget years, beginning in July with the budget year 2009-2010 which is impossible.

As things started getting bad in 2008, the Legislature and the Governor cut school funding by $7.9 billion claiming that the state's education finance formulas the money doesn't require the money to be repaid in future years. School groups such as teacher's unions disagreed arguing that the schools were owed $1.4 billion from the 2007-08 fiscal year. Argue all you want, it is a moot point.

These issues cover current cash flow only which is only part of the picture. The budget proposal for the 2009-2010 fiscal year includes "accelerating" collection of $2.3 billion in personal income and corporate taxes which would have accrued in the following budget year, taxes that are at least 30% overestimated. And there are issues like $48+ billion the State is behind in contributions to cover health and dental benefits for retired state workers, a picture that sounds ominously like GM and Chrysler.

Some said the recession in California got going in earnest in 2008. Not really. It started to ramp up to earnest in November 2008. The real picture looks like this "monthly new unemployment claims" graph:

California's Great Recession likely will begin "in earnest" in July 2009. And unfortunately for the Obama Administration and the world, what was the world's 8th largest economy will drag everyone else down with it.

California will need to reorganize as a bankrupt entity. It would be wise to seriously consider the Three Californias Proposal.

Your Tax Money, The Players You Don't Know and The Inadvertent Outsourcing of Our Auto Industry

While I have been a supporter of the Obama political and social movement, I have concerns about the Obama Administration's handling of the American automobile industry crisis. At his last prime time news conference the President said: "I don't want to run auto companies...."

I don't want him to run them either. But I want him to find a person with a "big picture" view and a significant far-more-than-financial knowledge base to oversee them for him in order to achieve goals that protect North American workers and the American economy in the long term.

Reading about Fiat's U.S. government supported move to own a significant interest in Chrysler and acquire some or all of GM Europe is troubling. GM purchased a 20% stake in Fiat in March 2000 with a much lauded goal to get some mid-size vehicle front drive technology. GM never used the technology and by 2005 it ultimately cost the company $2 billion to get out of the deal. It is clever dealing like this that make one wonder if American car manufacturers shouldn't just be allowed to flounder and die using their own skills (or lack thereof).

Fiat's proposal to create a separate auto division out of it's European brand names (not including Ferrari) as well as GM Europe brands and Chrysler products is disturbing on many levels as the company appears to be looking at Eastern Europe to reduce labor costs.

But what most people aren't aware of is a company like Magna International, self-described on it's web site as follows:

We are the most diversified automotive supplier in the world. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers (OEMs) of cars and light trucks in our three geographic segments - North America, Europe, and Rest of World (primarily Asia, South America and Africa).

Our capabilities include the design, engineering, testing and manufacture of automotive interior systems; seating systems; closure systems; metal body & chassis systems; mirror systems; exterior systems; roof systems; electronic systems; powertrain systems as well as complete vehicle engineering and assembly.

We have 240 manufacturing operations and 86 product development, engineering and sales centres in 25 countries on five continents as of December 2008.

In their own words, Magna is a manufacturing outsource alternative for auto manufacturers that currently services 75+ auto brands including every American brand:

For many years now, automobile manufacturers have increased their outsourcing of components, assemblies, modules and systems. The primary factors driving this outsourcing have been the need by OEMs to reduce costs, minimize the time required to bring a new vehicle to market, capitalize on the technical and engineering expertise of suppliers and minimize capital expenditures. This has increasingly resulted in OEMs outsourcing production of larger assemblies and modules to suppliers including Magna. With our broad and deep capabilities in design, engineering, testing, manufacturing, program management and system integration, we are well positioned to continue to capitalize on the outsourcing trends.

An example is offered in a graphic on Magna's web site:

Now they've formed a significant new partnership with the only U.S. non-government-owned auto manufacturer, Ford:

AURORA, ON, Jan. 11 /PRNewswire-FirstCall/ - Magna International, the world's most diverse auto parts supplier, announced today a vehicle-development partnership with Ford Motor Company to introduce a zero-emission lithium-ion battery electric vehicle (BEV) to be delivered to market in 2011.

The electric vehicle, which Ford announced at this year's North American International Auto Show in Detroit as a key vehicle in their electrification strategy, will be a small car with an expected range of up to 100 miles without using a drop of gasoline and without compromising customer performance expectations. The Ford BEV is expected to offer consumers a familiar driving experience - it will operate similar to a conventional vehicle, but with smoother acceleration, less noise and zero emission.

"This vehicle adds an important piece to Ford's product lineup with a zero-emission vehicle that will be both affordable and meets customers' needs," said Don Walker, co-CEO of Magna International. "In addition, the joint partnership demonstrates valuable OEM/supplier collaboration by sharing in the expertise and investment that the auto industry now requires for new advancements in energy independence and reduced CO(2) emissions."

"Our collaboration with Magna on a Ford BEV is the result of a shared vision of the potential of electrification in transportation," said Derrick Kuzak, Ford's group vice president, Product Development. "This partnership leverages the technical expertise of two global companies to achieve a common goal, delivering a no-compromise, zero- emission, battery powered car for the retail market."

Magna will be responsible for providing critical components that make-up the powertrain and battery modules in the vehicle. In addition, Magna will also play a key role in the engineering required to integrate the electric propulsion system and other new systems into the vehicle architecture.

Simply put, the best we can expect is that at least some of the "critical components that make-up the powertrain and battery modules" will be manufactured in the U.S. and Canada. The company has been acquiring technology as can be seen from these news releases:

AURORA, ONTARIO, Canada, October 23, 2008 – Magna Electronics, an operating unit of Magna International Inc., announced today the acquisition of BluWāv Systems LLC, a developer and supplier of electric and energy-management systems for hybrid electric vehicles, plug-in hybrid vehicles and battery electric vehicles. BluWāv is located in Rochester Hills, Michigan.

BluWāv will enhance Magna Electronics’ position in developing and supplying components and systems to the emerging automotive market for electric and hybrid vehicles.

“BluWāv provides technical leadership in multiple product areas for Magna Electronics as well as our other operating units,” said Carlos Mazzorin, President of Magna Electronics. “In addition, this acquisition will allow Magna to bring innovative electric/hybrid-vehicle systems to market faster, while simultaneously developing the next-generation systems for tomorrow’s hybrid and electric vehicles.”

“As a leader in advanced electric propulsion and energy-management systems, we look forward to joining the Magna family and contributing a competitive edge in advanced systems for hybrid and electric vehicles,” said Kevin Pavlov, President and CEO of BluWāv Systems.

About BluWāv

BluWāv Systems LLC, is based in Rochester Hills MI and is a developer and supplier of electric propulsion and energy management systems for Hybrid Electric Vehicles (HEV), Plug-in Hybrid Electric Vehicles (PHEV), and Battery Electric Vehicles (BEV). BluWāv focuses on incorporating advanced technology into its products in each segment and creating an optimal combination of products to form complete propulsion systems. BluWāv’s products are grouped into three distinct segments that together provide more than 80% of the propulsion system content for an HEV, PHEV, and BEV. BluWāv is truly “changing the way the world moves™”.

SAILAUF, Germany and SENNWALD, Switzerland, March 4th, 2009 – Magna Electronics, an operating unit of Magna International Inc., and BRUSA Elektronik AG, a developer and supplier of high-efficient power electronics and electric motors, announced today a collaboration on electric and hybrid vehicle applications.

This collaboration enhances both companies’ positions in developing and supplying components and systems to the emerging global automotive market for electric and hybrid vehicles.

“With this collaboration, Magna Electronics has another strong partner in the field of electric and hybrid vehicles,” said Matthias Arleth, Vice President Magna Electronics Europe. “In combination with Magna Electronics’ years of experience and know-how in industrialization and production, we remain a trusted partner to manage future serial orders. Within the network of our competence centres we offer system solutions from concept to production.”

"For more than 20 years, BRUSA has been developing key technologies and components for electric vehicles, which now bear a very high degree of maturity,” said Josef Brusa, President of BRUSA Elektronik AG. “Now the time has come to turn these innovative technologies, together with a strong partner, into competitive volume products in order to support the market breakthrough of electric vehicles."

About BRUSA

BRUSA Elektronik AG, is a Swiss Company with actual 50 employees, which develop and manufacture innovative power electronic and drive technology for electrical Vehicles. In focus are the research and development department of the Automotive manufacturer as well as innovative Small Companies and Start Ups in the range of Electrical Vehicle. Long years of experience and high Innovation strength makes it possible to offer customers High-Level-Technology in every case, from the E-Motor over the partial components like Motor-Controller, DCDC-Converter, Charger, etc. till the whole system Vehicle drive. www.brusa.biz

What is of concern is that this Ford partnership with Magna represents the failure of the American auto industry. Why didn't Ford buy BluWāv in 2008? Magna is foreign owned. Engineering, and therefore the licensing revenue, for the very innovations we seek in our auto industry will be paid to a company outside the U.S. And BluWāv not only is an American company under foreign ownership, now on January 9 it announced that "the recently-passed Fiscal Year 2008 Omnibus Appropriations Bill directs $1.2 million to the company to accelerate its research and develop an energy storage system for hydrogen based and hybrid vehicles."

But at least the manufacturing of some of the parts may occur at BluWāv in Michigan and at Magna Powertrain in Troy, Michigan. And we'll still have final assembly done in automated robotic assembly plants here.

Magna is competing against Fiat regarding a possible partnership/acquisition in GM Europe. From Bloomberg:

OAO Sberbank, Russia’s biggest lender, and OAO GAZ, its second-biggest carmaker, are joining Magna International Inc. in a bid for a stake in General Motors Corp.’s Opel unit, a German minister involved in the talks said.

A takeover proposal for Opel from North America’s largest auto-parts supplier is being supplemented by offers from Moscow- based Sberbank and Nizhny Novgorod-based GAZ, Juergen Reinholz, economy minister in the German state of Thuringia, said today in a phone interview, declining to elaborate.

Eastern Europe is hungry for jobs that could result. I understand the need, but is that what the partnerships between Chrysler, GM, the UAW, and the U.S. taxpayers was intended to accomplish?

The problem with the Obama Administration is what the New York Times reported:

The Obama administration decided not to have an independent car czar, as was proposed in a House bill late last year. Instead, the administration chose to use a task force, giving President Obama the ability to be more directly involved in seeking solutions to the auto industry’s problems.

Instead, the Administration is leaning on "one of the most politically connected investment bankers on Wall Street, Steven Rattner," according to the article:

Mr. Rattner, a well-known media banker, is playing a central role as car czar lite, traveling to Detroit to visit plants, meeting with the automakers’ bankers, unions and bondholders, and advising the White House on which companies seem salvageable and how. If he succeeds, he may get a chance at a larger job in the administration.

In my mind, this does not bode well for America.

The critical issue here is not how the taxpayers ought to invest in order to get their money back ASAP. It's how to build an revitalized auto industry within our national boundaries even if we don't get our money back directly for 30 years. Our economy has been demolished by the ownership society "short-term return" attitude in the investment banking industry. Let's don't extend that attitude into the attempt to restructure and rebuild our manufacturing base.

Yes, we don't want the government to own or the President to run an American auto industry. But maybe that is needed in order to, in the long run, have an American auto industry beyond a few accountants keeping records working with a few technicians who run automated robotic assembly lines putting together parts, all designed and manufactured elsewhere.

That's what happened in our clothing industry. Levi Strauss & Co. used to be one of our largest clothing manufacturers. Now it's a warehouse and accounting business keeping track of orders to and shipments from fabric and finished clothing manufacturers in other countries, temporarily (hopefully) warehousing some of the products in the U.S., and shipping and keeping track of sales to retailers. Levi Strauss & Co. manufactures nothing, like too many American businesses.

There is no point in using taxpayer funds to save an auto industry if that is what it will resemble.

Plastic Ties, Weed, and Taxation with Representation

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6/24/2009 update
As is normal for governmental deliberations, it took two months longer than anticipated. But on Tuesday, June 23, 2009, the Mendocino County Board of Supervisors by unanimous vote added the voluntary medical marijuan zip tie fee of $25 per plant to the County's master fee schedule.

Details of the administrative process are still being debated in committee. Fourth District Supervisor Kendall Smith reported the final committee recommendations wouldn't be ready until after the start of the 2009/10 fiscal year. Board Chairman John Pinches indicated that the fee would be reduced for veterans and disabled patients.

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Perhaps embracing the national general discussion on the wasteful War on Drugs, marijuana, and the need for tax revenue, on Monday the Mendocino County Board of Supervisors will take up a "zip tie" proposal at a special meeting.

In Mendocino County the traditional start of the marijuana outdoor growing season begins in April. Mendocino County Sheriff Tom Allman is reprising a program tested in 2007 - medical marijuana zip ties. Allman's office distributed 1,500 test zip ties in 2007 test.

Under the new proposal the zip ties would be sold by the Public Health Department in order to assure compliance with the privacy provisions of the Health Insurance Portability and Accountability Act (HIPAA).

Applicants would be required to present their California Medical Marijuana Card. They will be issued six zip ties unless their doctor recommends more. Allman is proposing that the charge be $25 per tie with a 50% discount for Medicare patients. The ties would be wrapped around the base of the plant and would be imprinted with "Mendocino County MMP" and a serial number.

In an interview with Ukiah Daily Journal reporter Rob Burgess, Allman said: "A zip tie acts like a prescription bottle. Whereas before deputies would spend three hours investigating a marijuana garden, now they'll be able to do that in five minutes. Before legal patients were concerned that, What if I'm gone? Will the cops take my marijuana?' With this they don't have to worry about that. This serial number will speak for them. This is the identification mark for this."

Allman said they would be monitoring for counterfeit ties.

While some see this as a taxation program, in fact the proposal is that half the money collected would go to fund a half-time employee in the Public Health Department and half would go to the County General Fund which does support the Sheriff's Office.

The goal is to begin to create a clearly separate identity for legal growing in order to identify illegal commercial growing.

The commercial growing of marijuana has become an identifiable problem for law enforcement in California's North Coast. In discussions with a member of the cooperative drug enforcement task force of federal, state, and local personnel, this writer learned that in the past few years raids of several large gardens in National Forests and other state and local forest lands have resulted in the arrest of Mexican citizens with apparent ties to the infamous Mexican drug cartel.

In 2000 Mendocino County voters approved Measure G which called for the decriminalization of marijuana when used and cultivated for personal use, making it the first county in the nation to do so. In 2008 County voters approved Measure B which repealed portions of Measure G making local regulations conform to state law implementing the provisions of the statewide voter approved Compassionate Use Act of 1996 (Proposition 215).

Under guidelines issued by the California Attorney General's office, persons who have qualified as patients or primary caregivers may grow no more than six mature or twelve immature plants per patient. Counties and cities are allowed regulations that would permit qualified persons to possess more.

The narrow passage of Measure B was not a rejection of the concept of decriminalization of marijuana. The most significant problem while Measure G was in effect was that gardens within urban and suburban neighborhoods gave off fumes and odor from growing plants.

This writer can speak from personal experience that at certain times during growing season, his yard became unusable because a neighbor's garden gave off fumes so strong that your eyes and sinuses would burn. And the odor is not similar to the not-so-offensive smell of smoking marijuana as it is like living adjacent to a chemical processing plant. This is a land use issue which, if marijuana were legalized, could be regulated by zoning in a manner that all commercial agriculture is regulated.

Given the general discussion around the nation about legalization/taxation of marijuana, it is not a surprise that some outside Mendocino County believe this is an attempt to tax the large annual marijuana crop grown within the County. While the zip tie proposal certainly creates a system of fees that theoretically could expand to a significant revenue producing mechanism much like the "tax stamps" placed on liquor bottles, at this point in time it only applies to medical marijuana growing for patients who live in Mendocino County. No significant revenue is represented by the proposal.

However, one cannot ignore the "winds of change" within the state. The San Francisco Chronicle Political Writer Carla Marinucci recently reported that for the first time the since EMC Research began tracking attitudes about legalization of marijuana a clear majority of voters say marijuana use should be generally legalized with 54% in favor and 39% against.

Prominent conservatives and liberals have long advocated legalization of marijuana as part of a change in the approach to the war on drugs. Even Fox News' weird right-wing talking head Glenn Beck blurted out on February 25: "...Look, I'm a libertarian. You want to legalize marijuana; you want to legalize drugs — that's fine."

But Monday's Mendocino County Supervisors' discussion is much more mundane. It's about procedures and processes to help law enforcement distinguish between lawful medical marijuan plants and illegal plants.

Oh, and it likely will generate enough revenue to fund personnel to administer the rules. As Allman noted: "Three years ago when we first offered this some of the other sheriff's snickered, But now, zip ties are going to be something other counties are going to look at. If this is successful, other counties could view this as a model."

The Mystery of Woodstock 2009 - West Coast

Ok, we have what appears to be a serious proposal for something called "Woodstock reBirth" that would be a 40th Anniversary version of the original. (See post immediately below.) Supposedly it is tied to producer Michael Lang, one of those involved in. and the production face of, the original Woodstock. He has a Wikipedia entry.

Indeed Lang has been talking about a New York and Berlin celebration. But we haven't heard from Lang about Willits.

On the other hand, months ago a well-known Bay Area group - Musicians and Artists for Peace - on their web site indicated they have "formed a coordinating committee to help organize and promote 40th Anniversary Woodstock events in 2009." I received information today that no changes have been made in their plans for a Woodstock 40th Anniversary event in San Francisco's Golden Gate Park on October 25th.

The problem with the person announcing the Willits event in August is that neither he, Roscoe Smith, nor his company, Monsoon Entertainment of Tempe, Arizona, have any web presence. A Roscoe Smith associated with the Navajo Nation, does show up in a Google search narrowed to that region. And a Monsoon Entertainment Magazine is referenced in two items on the web.

Until we hear from Lang, no reason exists to rearrange our August plans here in Willits.

Woodstock 2009 August Event Proposed for Willits, California

A serious plan has emerged to hold one of possibly three 40th Anniversary Woodstock concerts in August in the small Mendocino County town of Willits, California.

According to a Ukiah Daily Journal report, the Mendocino County Board of Supervisors was having a special meeting focused on some development permit issues and a court building proposal when Roscoe Smith, of Monsoon Entertainment in Tempe, Arizona, announced that he represented a group of investors from both Florida and New York who were interested in staging a concert in August in Willits that could draw "around a million" attendees for the 40th anniversary of Woodstock.

Smith indicated he is working with Michael Lang, one of the co-founders of the original Woodstock, who discussed the status of the plans for the 40th Anniversary celebrations with a Billboard Magazine reporter this past week. Lang was in Austin, Texas, as part of a South By Southwest panel discussion entitled WOODSTOCK: Untold Stories.

Michael Lang described his plans for a 40th anniversary Woodstock concert as "all speculative ideas" for now, but he hopes to bring them to reality this summer. Venue ideas discussed were those reported earlier in the year - New York City and Berlin, Germany. Smith told the Daily Journal the event is being planned by original Woodstock co-founder Michael Lang to be simulcast concurrently with the possible sister venues in New York and Berlin. The Willits site is the only one on the Pacific Rim.

Both have indicated that the plan is to have the events be "green." "We want to have as small a carbon imprint as we can and use as many green techniques as we can," Lang indicated. Apparently the theme or title will be "reBirth."

"It's called reBirth because the event promotes sustainability," Smith said. "Each day has a different themed event. Our goal is to preach and educate in this event and people can walk away and make it a rebirth for themselves."

"We started researching this about two and a half years ago," Smith explained. "We looked at three spots in Louisiana, four or five in Texas, a few in Wyoming, Illinois, Missouri befpre settling on Willits. We could do a bigger impact on the community if we were to do one of those areas ... Up here it might bring more innovation. We would like to get any and every service in the community involved. The less amount of corporate sponsorship the better."

The local economy could use a boost and the "green" focus is logical for Willits and Mendocino County, home to a number of innovative "green" industries.

The critical question is: "Can they avoid the disasters of Woodstock 1999?" Lang appears to be acutely aware of this. It is not 1999. The Obama Generation of college-age folks is different. So is the original Woodstock generation, who also would be attracted by the talent being discussed, different from who they were in the '90s and the '60's.

Previous concerts in other areas of the nation in 1994 and 1999 marking the 25th and 30th anniversaries of the original Woodstock had significant security and public utility problems among others. Critics deplored the 1999 use of the Woodstock brand name as that event was labeled crass commercialization. Concert organizers were said to have gouged the kids with grossly overpriced water, beer, and food. Tickets for that event were priced at $150 plus service charges.

According to Lang, the 2009 concerts will be free. Smith said the mistakes of the past, such as price gouging for basic amenities, would stand as lessons for the future of the event.

"94 was a disaster," he said. "With every ticket that we sell we'll send that out we'll send a Nalgene (water) bottle. When people are there they'll be able fill up for free. Water won't cost people."

Smith said security would be alerted to potential problems by trained medical staff who would walk the grounds and alert security when they found out about problems.

"This will be its own event," he indicated. "We're still trying to plan how we want it to go on; if it will be open doors so people can stay in the community. As an option some families might say 'We'll bring somebody in.' They do that in certain events around the country. It gets the community more involved and lets people see what the community offers. They might just say, Hey instead of buying organic carnie food we might want to go out into the town and see what the community offers' and do things like ride the Skunk Train."

"We are trying to make it as little (impact) as possible," he said. "Any kind of offsets we are doing we are trying to balance them out on the other end. Whatever property we choose obviously we're going to have to prepare the site. We're going to have some brush and trees removed, however all those trees will be used on the property. Any rocks we remove will be used for fences. Any trees will be used for walkways. Most of the water being used will be collected from the springs."

Smith said that once the site selection was complete his office would set up a communications base that would be open to the public so that those seeking more information would have a point of contact.

"We're about two to four weeks from finalizing that," he said.

As of Friday no documentation had yet been filed with the County according to Nash Gonzales, Mendocino County Building and Planning Services director. Monday Smith indicated he would be submitting paperwork to the county "by the end of the week".

On Friday Smith told the Ukiah Daily Journal in a phone interview: "We're still working on that and we are planning on having something in by mid-April. The way we look at it we want to do everything right the first time and make sure we cross our t's and dot our i's."

Cindy Lindgren, of Century 21 Realty, accompanied Smith during his presentation on Monday and said on Friday that she would have an announcement on the search for a property by "next week."

Gonzales commented: "It's overwhelming for this county. It would be a very large undertaking. There would have to be an EIR because of the magnitude. We would have to throw everything at this event," he said. "It's not just the planning department; there's law enforcement, environmental health, etc. You're also talking about outside agencies. Caltrans, the city of Willits, Regional Water Quality Control, Highway Patrol. There's lots of state agencies that would have to be involved."

Chris Brown, Mendocino County air pollution control officer, said no one had contacted his office about the event either.

"I would have very serious concerns," he said. "Frankly, it's inconceivable...There's road access, transportation, generators to power musical equipment, vehicles, truck traffic. Everything in terms of air quality is serious. What if there is a wildfire? Then I have a million more people that could be exposed to smoke."

Brown said the number of agencies involved in the planning of such a large-scale event would be prohibitive given the less than five-month window before the slated opening.

"The first thing I would look at is the location," he said. "Is there naturally occurring asbestos? We have that in this county. You can't have an outdoor event on that. Diesel equipment has to meet pretty strict standards. You also have to think about vehicle traffic and campfires from a million people."

Brown said air pollution from traffic congestion on the area's major arteries would be unprecedented for the area.

"That alone on 101 would be a significant concern," he said. "Let's say you have two people a vehicle. That's 500,000 vehicles. To me this event is just not realistic. I may review a plan and have a different opinion, but I don't see how you could get that many people in an area near Willits without having severe impacts...My feeling is there would be significant air quality impacts, and I'm not sure how they would mitigate them. They could be significant and non-mitigatable."

As a locale, compared to Rome, NY, population 35,000±, located in Oneida County, population 240,000±, where Woodstock 1999 was held, Willits population of 5,032 and Mendocino County's population of 90,163 is more akin to the location of the original Woodstock. It's probably an advantage to be more rural, but where advance permitting is involved an April application getting approval before August might be a challenge.

Whether or not this proposal actually comes to fruition, one Willits area resident noted: "We can provide a more relaxing choice than alcohol in order to avoid a riot like in 1999." In 2000, Mendocino County voters approved a measure decriminalizing marijuana when used and cultivated for personal use.

Why Don't We Call It the "Panic of 2008"

While watching the talking heads try to explain why this isn't a "depression" but just a "recession", I was wondering what happened to the word "Panic" which was used to described economic conditions. Wikipedia has entries for:

• Panic of 1819 - pervasive USA economic recession w/ bank failures; culmination of U.S.'s 1st boom-to-bust economic cycle
• Panic of 1825 - pervasive British economic recession in which many British banks failed, & Bank of England nearly failed
• Panic of 1837 - pervasive USA economic recession w/ bank failures; a 5 yr. depression ensued.
• Panic of 1857 - pervasive USA economic recession w/ bank failures
• Panic of 1873 - pervasive USA economic recession w/ bank failures; a 4 yr. depression ensued.
• Panic of 1893 - pervasive USA economic recession w/ bank failures
• Panic of 1901 - limited to crashing of the New York Stock Exchange
• Panic of 1907 - pervasive USA economic recession w/ bank failures

To me, "panic" is a word that completely described the situation. People go through a cycle in modern economic times - (1) fair ordinary returns on investments, (2) greedy extraordinary returns on investments, (3) karmic extraordinary losses on investments exacerbated by panic.

I wonder why we stopped using the word "panic". The entry in Wikipedia for the current situation is entitled "Financial crisis of 2007–2009". It is such a meaningless heading compared to "Panic of 2008".

Meanwhile, the government has to tells us to stop our panicked behavior. If folks thought of it as a "panic" maybe the would get over it sooner.

It's time to privatize marriage!

The provision added to the State Constitution by Proposition 8 was deceptively simple:

SEC. 7.5. Only marriage between a man and a woman is valid or recognized in California.

But it is not at all simple. It is time to make marriage a private affair.

"Marriage" has two complex components, a religious component and a civil law component. To understand the difference between the religious component and the civil component, consider this. A couple could be "married" by the Pope on the steps of the largest Catholic church in the country and the marriage would not be legally valid in any state without a license issued by a government clerk. Yet in many places, a marriage ceremony performed by such a clerk pursuant a license issued by that clerk would be valid anywhere else in this country. The validity of a "marriage" in America is all about a government license and nothing about the beliefs of the couple involved.

It wasn't always this way. Prior to the Civil War, Americans would have been startled at the idea that they would have to get the government’s permission to get married. Our Founding Fathers had no understanding of marriage in that context. Americans must remember that marriage license laws were introduced in America mostly to prevent blacks from marrying whites, in other words to write into law racial discrimination based on beliefs of the sincere American majority.

And so it came about that in our legal federation marriage must be licensed by the government. When two people accept a state marriage license, they authorize the state to define a "contractual agreement" between them. This is the most bizarre legal entanglement ever foisted on a naive population. Most Americans who marry have no idea what is in the terms of the contract they sign. Unlike most contractual agreements people enter into, a majority of the legislature of the state in which the couple reside can rewrite a portion or all of that contract, without the consent of the couple. Further, unlike most contractual agreements, the terms of the contract change the moment the people involved relocate their residence to another state.

It is true that most religions have some form of marriage ceremony and many use terms like "sacrament" or assign a context of "sacred duty" to marriage. Within the religious context marriage historically relates to sexuality and procreation. And the dominant religions in this country adhere to doctrine the precludes gay marriage.

But whatever religious context within which one may consider marriage, "real Americans" know that religious context has no place being incorporated into any law.

The problem isn't just that Proposition 8 precludes gays from getting married. The problem is that entire legal structure related to marriage legalizes discrimination. The crux of the problem is that single persons (including couples who cannot get a marriage license) do not have the same status under the law that a state marriage license grants to those who can get one.

The 14th Amendment to the U.S. Constitution clearly states: "No State shall...deny to any person within its jurisdiction the equal protection of the laws." Proposition 8 clearly denies some persons the equal protection of the law by expanding the discrimination inherent in marriage license laws. We could discuss the concept of "civil unions." But such a conversation is relevant only if you believe in applying the legal doctrine of "separate but equal" whenever "equal protection of the law" is inconvenient for the majority within one American state.

My beliefs and your beliefs about marriage shouldn't be the basis of a legal structure creating different classes of people. Apparently, around 1867 many people who sincerely believed that blacks and whites should not marry instituted marriage license laws. Today marriage license laws exist that prevent gays from marrying because the majority of people sincerely believe gays should not be allowed to marry.

Many do still believe marriage license laws exist to protect children or women. But that is belied by the fact that we do not prohibit parents of children under the age of 18 from getting a divorce. Nor do we require women to marry to conceive children through artificial insemination. The majority of married women today do earn a living, and divorce laws offer little economic protection to either party. We most certainly do not require consenting adults to be married to engage in sexual activity.

It is time for California (and the rest of the nation) to eliminate from its statutes all references to any form of the word "marriage", and to "spouse", "husband", and "wife" or any term equivalent to those terms. The law must be silent on marriage as there is no way that the use of the term could not create a "suspect class" of favored people.

To paraphrase the U.S. Supreme Court: To separate [legally unmarried people] from others of similar age and qualifications solely because of their [marital status] generates a feeling of inferiority as to their status in the community that may affect their hearts and minds in a way unlikely ever to be undone.

It's time to privatize marriage, to make it a private affair between people, not subject to government interference.

Obama's win is not a mandate for liberal social policy - consider California's Prop 8

Based on the 2008 election results in California, Obama's win is in no way a mandate for liberal social policy. Two issues that were on the California ballot were social policy issues:

• Proposition 4 which would have required parental notification before a teen could get an abortion and which was defeated by the voters;
• Proposition 8 which placed in the state constitution a provision effectively banning gay marriage.

In nine counties casting a majority for Obama, voters also approved requiring notification of parents in advance of any teen abortion. In six counties casting a majority for McCain, voters were against the notification measure. These 15 counties seem to indicate a discrepancy between attitudes on social policy and reasons for voting for a presidential candidate. In itself, this would not be surprising. After all, the issues most affecting how people voted for President - the economy and national security - do not indicate attitudes on any single social policy issue.



So how does one explain the differences between the two maps on social issues, Prop 4 Abortion Notification (top right) and Prop 8 Gay Marriage Ban (bottom right)?

First, consider the voting pattern on Proposition 22 passed in 2000 which created a statute defining marriage as between a man and a woman and which the State Supreme Court overturned as violating the state constitution. As you can see from the map bottom left, Prop 22 was defeated in only a few of the most liberal California counties. It was clear from that vote that even in the generally liberal counties the electorate was probably two decades away from supporting gay marriage.

Now, consider the voting pattern on the 2008 measure, Proposition 8. While the measure was defeated in many of the traditionally liberal counties representing a gain for the gay community, in fact Prop 8 passed in Los Angeles County, Imperial County, Solano County, and Sacramento County.

Why did that happen? We have no polling data on these ballot issues at this time. So all one can do is speculate based upon other considerations. Generally the Hispanic and Black communities are thought to be more conservative on the issue of gay marriage due to cultural and religious background. And while the same cultural and religious background might favor anti-abortion laws such as Pro 4, the abortion notification issue is decidedly a women's issue that would tend to cause many somewhat socially conservative women to vote against it while still voting for Prop 8.

Though the high turnout in the Black and Hispanic communities in other states probably got Obama elected, the high turnout in California did nothing towards getting him elected and may have led to Proposition 8 winning.

While Obama's win might generally be considered a good thing in the gay community nationally, in California it likely was a disaster for the efforts of the gay community to gain the right to marriage. In 2000, California voters approved a simple initiative statute stating the marriage would be defined as between a man and a woman. The California Supreme Court ruled that the statute violated the California Constitution. In 2008 the California voters approved an initiative amending the California Constitution to again declare that marriage is between a man and a woman.

Hence, one can conclude that Obama's win does not represent a general voter mandate for liberal social policies.

Stop Local Stations from Becoming "Pay-TV"

Based on the recent news that NBC is to start charging its local affiliates for network shows and that the local stations are planning to charge cable and satellite providers as much as 200% more for carrying their signals, I wrote the following letter to Senator Barbara Boxer who is on the Senate Commerce Committee:

Beginning last November I wrote a series of blogs that nobody read on the radical changes occurring in the TV industry. Basically I pointed out that the local broadcast TV industry in 2008 is exactly where the radio industry was in 1948.

The only difference is that we have such a myriad of federal regulations protecting local TV stations to the detriment of the public that they may not adapt effectively until it's too late and we, the public, have lost any chance at meaningful local TV.

It now appears that their primary attempt to adapt is to collect higher fees (as much as 200% higher) from cable and satellite carriers which will be passed on to us, the viewing public. In effect, they are attempting through a back door to become "pay TV" since fewer than 20% of homes are without cable or satellite services.

And with NBC announcing they will be charging the locals for network programming, it could be said that the networks are also becoming "pay TV" through the back door.

It's time for the Senate Commerce Committee to hold hearings on this attempt to turn broadcast television into "pay TV."

FERC Ponders Allowing Public Input, Environmental Review of Proposal for Electrical Generators in Whale Route

It was one year ago that my article entitled "Limited Time Only - Act now to own your piece of the ocean off the Mendocino Coast" (posted below) was published. This week the alliance of Northern California coast commercial and recreational fishing associations known as Fishermen Interested in Safe Hydrokinetics (FISH) has announced that the Federal Energy Regulatory Commission (FERC) is extending its time to consider the FISH committee request for public participation and environmental analysis in developing federal licensing regulations for nascent wave energy generation projects.

In other words, FERC has to think about whether and how it would allow public participation and environmental analysis before issuing permits allowing PG&E and Chevron to place electrical generators and a grid in the Gray Whale Migration Route. More than 200 hydrokinetic projects have been proposed across the United States as a solution to environmental issues. Two wave energy projects are currently proposed for the coast off Mendocino County and one in Humboldt County, in one of the most flourishng marine areas on the West Coast. Seven are off the Oregon coast, including Lincoln County

Offshore from Mendocino County PG&E's proposal covers 68 square miles. Chevron's proposal is for a premilinary study. If implemented the proposals would require significant exclusion zones and would be located along the Gray Whale migration route. (See map above)

The City and County of San Francisco filed an initial statement in opposition to FERC even processing these applications because of lack of staff . In it's statement, the San Francisco argued:

While specifically not referring to this application, San Francisco believes the risk of sparking a 'gold rush' by ill prepared applicants with ill-conceived projects is too high and the drain on Commission resources in reviewing such applications would be too great.

But the process has moved on.

As in all such complex regulatory processes, before the potentially effected public could wrap its collective head around the meaning of the proposals, FERC established rules regarding the process which essentially precluded public involvement in the process. As one writer noted:

This pejorative May 21, 2008 FERC ruling rejects requests of FISH, Fort Bragg, Mendocino County and local stakeholders’ to rehear their right to participate in this wave energy development project. It is noted since onset of the Mendocino wave energy agenda, FERC and PG&E continue to swiftly move toward their goals while intentionally blocking all local, public participation. As wave energy development projects on the U.S. coasts progress, Americans are discovering that FERC’s convoluted wave energy licensing process is ill-defined, biased and discriminates against public participation.

As I noted in my article a year ago,

If you...want to get in on the action, you'd better hurry as FERC is likely to fast track these applications to approval before 2009 when a new President takes office.

What the County of Mendocino, the City of Fort Bragg, the Recreational Fishing Alliance, and Lincoln County, Oregon discovered is that FERC really didn't plan to hear from them. So they've joined the FISH Committee’s request for a rehearing of FERC's policies. According to a report by Recreational Fishing Alliance West Coast Region Director:

Potential negative impacts on marine life from wave buoys include electromagnetic pollution and interference with migratory finfish, whale entanglements and altering the bottom structure of the seabeds. Turbine devices submerged in rivers, bays and estuaries could entrain juvenile fish.

"We take this issue very seriously and, if necessary, intend to vigorously pursue our legal options," said John Innes, board member of the North Coast Fishing Association. "We are not opposed to renewable energy, we only want to make sure we know what the impacts will be to fish and other marine life before we sign off on these projects. Considering that wave energy is in its infancy, it is extremely important to have proper controls and regulations in place to prevent non-recoverable detrimental effects on our ocean environment."

If you are concerned, its better late then never to get involved.

Limited Time Only - Act now to own your piece of the ocean off the Mendocino Coast

Yes, folks, act now! Your friends at the Federal Energy Regulatory Commission (FERC) will give you piece of the Pacific Ocean. All you have to do is file an application to reserve your piece of the ocean. Chevron and PG&E have filed applications creating potential rights that constitute a claim over the ocean surface, similar to staking a mining claim. If they "mine" these "claims," the necessary structures would occupy the surface to the exclusion of others, including whales.

The California Energy Commission web site has some information on wave energy leading one to believe that this State Commission might be involved. http://www.energy.ca.gov/development/oceanenergy/ But Bob Aldrich of the California Energy Commission's Media and Public Communications Office stated: "We do not have any “experts” to speak of on wave energy at the Commission. I wrote the page, which was created based on information from a number of places." He also reflected a naive view: "You may also need Coastal Commission approval for such a wave energy device.

In fact, the filings are with the Federal Energy Regulatory Commission, the people who allowed California to be ripped off by energy companies a few years ago. Thus the claims are likely to be outside the regulatory scope of State of California agencies such as the Coastal Commission. Legal challenges would inevitably end up in the Bush Supreme Court which has already established its sympathies against state regulation.

PG&E is seeking to have two 40-megawatt wave farms up and running off the state's north coasts within a few years, according to documents it has filed with the Federal Energy Regulatory Commission, or FERC.

The Mendocino County wave farm will be located off Fort Bragg in open ocean a half mile to 4.5 miles offshore. A 68-square-mile area will be assessed. PG&E essentially will turn the zone into a wave-energy testing ground, spending up to $3 million to try out various technologies from up to four manufacturers. "A number of different device concepts are being pursued by independent device manufacturers, and there is no industry consensus at this time on the optimal energy conversion technology," PG&E execs wrote in an application for a preliminary permit for the project. "The initial ... devices to be used will be selected from device manufacturers who have sufficiently mature technologies available for deployment."

On July 2, Chevron California Renewable Energy, Inc. filed a preliminary permit application with the FERC. The Town of Mendocino would be dead center in the claim area, although wave energy plants are not normally visible from shore. It would avoid the Van Damme State Marine Area. The large study area is framed in order to locate a smaller project area. That larger area is a rectangle that runs from three miles offshore to less than a mile from shore, from Point Cabrillo to a spot halfway between the mouth of Little River and Albion.

Like PG&E, Chevron plans to evaluate alternative designs and locations of wave energy conversion devices.

"These devices would be combined in arrays for demonstration scale or commercial scale power production," Chevron said in a July 5 letter to local government agencies.

Wave energy technology is moving from the idea stage to the practical at breakneck speed.

Chevron's proposal is nearly identical to PG&E's, including a competition among manufacturers and technologies, which could make the Mendocino Coast the world's leading spot for wave energy research, at least as the world stands now. Wave energy plants proposed all over the world generally come with a single technology.

PG&E is in preliminary discussions with Ocean Power Technologies of New Jersey, the U.K's Ocean Power Delivery and Ireland's Finavera Renewables. While wave energy technologies vary, they essentially involve a device that floats on the ocean's surface and that harnesses the power produced by the surf to drive a turbine that generates greenhouse gas-free electricity. PG&E will deploy multiple wave-energy devices in an array moored to the ocean's floor and connected to the shore by a transmission cable.

Chevron, however, has picked a company and a technology to start with The Pelamis which resembles a chain of bobbing giant redwood trees or wriggling giant sea serpents. Waves jostle the links between Pelamis sections, pushing hydraulic rams to provide the energy. http://www.oceanpd.com/Anims/pelamis_V4.html

Chevron estimates the power range from a tiny 2 megawatts to 60 megawatts, about twice as much as needed to power the entire coast. The PG&E plan hopes for 40 megawatts.

Chevron is making substantial investments in alternative energy. Although the Chevron company has California in its name, all the mailing addresses are in Houston, Texas.

Chevron would connect the power via undersea cable to an unnamed PG&E substation. Chevron promises public meetings and "extensive public process."

On August 14, 2006, Roger Bedard, Ocean Energy Leader, Electric Power Research Institute (EPRI), gave a presentation to the Fort Bragg City Council about the benefits of wave energy which, according to minutes of the meeting, included the following points:

• Wave energy is clean with no pollution or emission of greenhouse gases.
• It is a sustainable and renewable source with high power density and creates working class jobs.
• This new technology, with proper maintenance, will be one of the most benign energy-producing
technologies around.
• He described three of the dozens of different types wave energy devices made today.
• Fort Bragg is considered a possible site for wave energy because it has the infrastructure: an
outflow pipe from the former mill site with an easement; a PG&E substation nearby on Walnut
Street; and a harbor with machine shops and docks that could possibly provide device deployment.
• Other fishing communities have formed a port liaison project where engineers and scientists get
together with fishermen and crabbers and come up with a solution for the greater good.
• National Oceanic & Atmospheric Administration (NOAA) reimburses fishermen for their time spent
on the project.
• Hal LaFlash, Director Renewable Energy Policy & Planning, PG&E, stated that PG&E is working
toward 20% renewable energy by 2010.

The minutes of that meeting show some signs of discussion:

The following was noted in response to question from the public:
• The effect of tsunamis is very small as the devices are located about three miles offshore.
• The Coast Guard, which must approve installation of the plant, has rules about beacons,
transponders and lights. Wave machines are also indicated on their charts.
• Wave energy devices are modular and installed in small increments. If there are no unforeseen
effects, another modular can be installed.
• Typically waves that reach the shore are reduced by 10%.
• Ocean Beach was not a viable site because it would have been very costly to upgrade power from
the west side of San Francisco to the east.
• Three California communities – Morro Bay, Eureka, and Fort Bragg will be considered as potential
sites September 20, by PG&E, the California Energy Commission, and the Public Energy
Commission.
• It costs $100 million to $150 million to build a plant which employs about 30 people full time.
Independent developers invest in wave energy plants.
• Government subsidizes the first plants to get the market going. Production tax credits are offered.
• There is no history on how long units last because the technology is so new; however, they are
designed to last 20 years.
• The mooring is similar to mooring a ship with anchors, clump weights, and cables.
• LaFlash added that PG&E has an open solicitation for renewable energy.
• The on-shore facility might be at PG&E’s Walnut Street site depending on voltage.

The following was noted by Council during discussion of this item:
• Councilmember Melo suggested that research be done on the Fort Bragg Local Coastal Plan, in
particular Environmentally Sensitive Habitat Area restrictions. The easement for the wastewater
treatment plant goes out 600’. He believes that outfall was blasted into the bedrock, not buried in
sediments. He stated that he supports finding out more about this.
• Councilmember Hammerstrom said that he appreciates the depths of answers from Bedard and the
fact that he also admits when he does not know the answer. He asked if the site could be relocated
from time to time to distribute its effects. Bedard replied that it could be done, but there would be
cost impacts. It would have to be a really good reason to move it.

The President and CEO EPRI is Steven R. Specker, a PhD in nuclear engineering, whose primary work background was with General Electric's nuclear power division. The company's Strategic Vision is described on its web site as follows:

The Electricity Technology Roadmap initiative began in 1997. Although spearheaded by EPRI, over 200 organizations contributed to the framing of this vision and the development of an initial report in 1999. It was organized around five Destinations that are critical milestones on the path toward achieving a sustainable global energy economy by 2050. The five Destinations are:

(1) Strengthening the Power Delivery Infrastructure
(2) Enabling the Digital Society
(3) Boosting Economic Productivity and Prosperity
(4) Resolving the Energy/Environment Conflict
(5) Managing the Global Sustainability Challenge

One of its related reports is entitled Limiting Challenges Report #12: Ecological Asset Management which in its Preface contains the following paragraphs:

Eco-asset management harnesses market forces to preserve, enhance, restore, and create the natural capital life itself depends upon. In this report, eco-asset management is described within the context of the societal objectives defined by the Electricity Technology Roadmap, a collaborative exploration of the future of the global electricity enterprise. Eco-asset management is characterized as a market-based approach with promise for maximizing the productivity of natural resources to promote economic vitality, protect environmental and public health, improve the human condition, and accelerate global progress toward a sustainable future.

For companies in the energy, agriculture, mining, timber, real estate, land management, and other resource-based sectors, eco-asset management oilers significant opportunities for increasing revenues, reducing compliance costs, eliminating liabilities, and managing risks. Improving environmental quality, protecting public health, and demonstrating corporate citizenship represent additional—and substantial—benefits. For government agencies and other stakeholders, market-based approaches promise solutions for achieving environmental goals more efficiently and at lower cost, as well as for addressing complex challenges such as climate change, water shortages, and biodiversity loss.

The Institution of Engineering and Technology, a British research organization, noted the following about wave energy in a "fact file" publication entitled Environmental Effects of Electricity Generation: Renewable Sources:

Wave Energy

There are, basically, two types of wave energy device. The first utilises the essentially up and down movement of the sea’s surface and is usually located well away from a shore-line where the average power of some 50kW per metre of wave front. The other type utilises the action of the waves on the sea-shore. Clearly, which of these devices is used has a considerable effect on the type of environmental impact of wave technology.

Off-shore devices have received the most attention in the UK and will therefore be considered first. As wave energy devices extract energy from motion, the water surface behind the device is essentially calm. There is, therefore, a reduction in the sea’s action on the seashore, and hence an effect on its ecology. How effective this change is depends on how far offshore the device is moored and how long it is. The devices themselves could be a navigation hazard, particularly if they broke their anchors. Seals and predatory sea birds may also be attracted to the devices. Although the actual method of energy extraction, the conversion of this energy into electricity, and its subsequent transmission to population centres have not been agreed, it is already clear that the cabling ashore and the siting of transmission facilities, in what would generally be areas of high scenic value, would cause the greatest environmental concern about potential wave energy exploitation. The impact of transmission facilities is, in fact, common to many types of renewable energy sources.

What hasn't been discussed is that the Mendocino County proposals would place electrical generation and transmission facilities electromagnetic fields in or near the Pacific Coast whale migration routes. It would likely take a decade after full installation to know the real effects.

Are we really ready to do this? If you are and want to get in on the action, you'd better hurry as FERC is likely to fast track these applications to approval before 2009 when a new President takes office.

Originally published July 27, 2007 and republished August 1, 2007.