Thursday, December 31, 2009

Celebrate the New Year now - 2010 will be worse in California

Get tipsy on California sparkling wine (aka erroneously as champagne which is produced exclusively within the Champagne region of France) and wish California a Happy New Year with glowing optimism.

When you sober up you'll be entering a sobering new year, 2010. It will be the Year of the Tiger in the Chinese Calendar, but in the California Calendar it appears it is going to be symbolized as the Year of the Missing Sea Lions.

The Missing Sea Lions are a good symbol of 2010 in California. They symbolize the 2+ million missing jobs that will plague California for the next decade.1

The signs indicate the next dip in the double-dip is approaching. The fallout from the commercial real estate market collapse is about to be felt in the financial sector, particularly in California. Daily Finance summarized the situation:
Reports that commercial real estate (CRE) is suffering from a double whammy of soaring vacancies and declining valuations have been making news recently with sobering regularity. DailyFinance addressed the risks that CRE meltdowns pose to banks in early December. And in a stunning confirmation, just weeks later Morgan Stanley announced it was "walking away" from five San Francisco office towers, giving them back to the lenders. These accounts address the impacts on real estate investors, banks and hard-hit locales such as Southern California. But a bigger, often-overlooked, risk is the potential for CRE to remain a drag on the U.S. economy for years to come, or its potential to trigger a slide back into recession -- the so-called double dip that many fear.

Four primary factors are behind the tumble in CRE prices -- and they're eerily similar to those that powered the residential housing boom and bust:
  • Overbuilding in marginal locales that lacked adequate jobs and services to support massive new commercial construction (malls, hotels, business parks, resorts, etc.)
  • Excessive valuations fueled by low interest rates and easy credit
  • Highly leveraged bets on future appreciation
  • A banking sector that's extremely vulnerable to write-downs and losses from foreclosures
How much have prices tumbled? According to Moody's/REAL Commercial Property Price Index, CRE prices have plummeted 41% from the peak in 2007. Or in many cases, even more. For example, a hotel in Hawaii that sold for $250 million with a $230 million mortgage a few years ago is now only worth about half that amount.
Companies small and large that service other businesses are now in the process of learning they are holding worthless receivables or their customers' phones are disconnected. Trucking, for example, is an industry that is just now showing significant signs of distress.

This past week Arrow Trucking shut down operations stranding about 900 of its drivers across the U.S. and Canada after the company canceled its fuel credit cards. It sent two short text messages to the drivers telling them to turn in their trucks to the nearest dealer and offering a bus ticket to get home. According to the Tulsa World
Arrow failed to pay employees, failed to reimburse their expenses, failed to forward medical insurance premiums to insurers for the three to four weeks leading up to the shutdown, and failed to make pension and 401(k) contributions.

Also this past week, the nation's largest U.S. trucking firm handling less-than-truckload shipments under other names like Reddaway, New Penn, Holland, YRC, YRC Reimer, YRC Glen Moore, and YRC Logistics barely avoided bankruptcy according to Reuters.

Over the next quarter we're going to see just how shallow The Great Recovery really is. The President, armed with the best economic research available, has already admitted we will have a double-dip recession which he and Congress are trying to mitigate.

I wish the President well, but the actions of the federal government beginning in 2008 have slowed the inevitable arrival of the double-dip second crash effect in the financial markets only. In the real world where people work for a living, labor statistics keep reporting net job losses for each month.

The second dip will create its own ripples. Sometime in the next few months2 it will become apparent to everyone that the nation's largest State, California, is truly. essentially, and totally a bankrupt operation, that all it can do from its General Fund is (1) pay it's debt payments, (2) fund the programs partially subsidized by the federal government if in some cases the administration waives maintenance of effort rules and (3) maybe sustain minimum levels of public schools, public health, and public safety services.

Courts have already taken over supervision of some some of the State's operations, but the lack of legal methods for states to file for an orderly bankruptcy will create further problems. According to a throrough Bloomberg report on California published Christmas Eve:

California Governor Arnold Schwarzenegger, anticipating a $21 billion state budget deficit, plans to ask President Barack Obama to ease mandates and minimums on social programs to save as much as $8 billion.

The Republican governor plans to seek the relief, according to a California official who asked not to be identified because details haven’t been resolved. Instead of seeking one-time stimulus money or a bailout, the most-populous U.S. state wants the federal government to reduce mandates and waive rules stipulating expenditures on programs such as indigent health care, the official said.
Of course, we Californian's aren't alone with our troubles. The Bloomberg article notes that 35 states and Puerto Rico have deficit problems. But California has the most intractable political problems.

In the meantime, we continue to read in December about the reality of The Great California Slump in newspaper articles:

At the present time, everyone in power says we are facing a $21 billion State General Fund deficit to be covered in the 2010-11 fiscal year. I believe they are $10 billion low, but in the spirit of Everett Dirksen "a billion here, a billion there...." It really doesn't matter as there is nothing that can be done about it given the split in the Legislature where a two-thirds vote is required to do anything meaningful.

So, enjoy the New Year's celebration now.


1 Before dismissing the idea that California is missing 2+ million jobs, let me explain. In November 2007 California had 17,209,617 people working according to the U.S. Department of Labor. In November 2009 California had 16,084,298 people working or 1,125,319 fewer jobs.

In addition, to maintain its economic growth at minimal levels California had to create about 210,000 net new jobs per year or about 420,000 more jobs since November 2007. That puts California in the hole as of November 2009 about 1.54 million jobs and counting. By this time next year California will be in the hole at least 2 million jobs that it will not recover in the next decade.

How can I be so sure those 2 million jobs can't be recovered in a decade? The math is simple. The first 210,000 net new jobs created each year don't count as they are the jobs needed to maintain minimal economic growth levels. We need to create 410,000 net new jobs each year to achieve full job recovery by the end of 2019. That's an average of 34,000 net new jobs a month. Indeed, we have done that for limited periods. But that is an average number that won't happen 120 months in a row.

The one thing that might save us is a population loss. If we lost 3 million job seekers, things would actually be better though State revenues would still be down.

2 The Governor will outline the nature of his request for help in his January 6 State of the State address and we'll see just how bad he thinks things are in his budget to be delivered January 8.

Sunday, December 13, 2009

California in 2010 - Democrats in trouble

The East Coast Ivy League Obama Administration isn't paying attention. The result could be trouble in California in 2010.

First-time voters and young people were the edge-voters that gave Obama an edge. In California, these young people are going to community college instead of the University of California or a California State University. They know the reason is not The Gubernator, but the liberal wing of the California Democratic Party that put the State on the road to bankruptcy during Governor Grey Davis' term.

And they know that the Obama Administration made a deliberate and considered choice to not bail out California and its state universities while bailing out a bunch of East Coast bankers who graduated from the Eastern Ivy League schools with the President and his wife. And they are now pushing community college as a solution to something.

Senator Barbara Boxer better hope these young people don't turn out in 2010 in large numbers similar to 2008. Community college is not the new home for liberal thinking, it's the new home for desperate job seekers.

And Jerry Brown - Governor Moonbeam. And now Candidate Vulnerable. From Wikipedia with footnotes:

Voters passed Proposition 13 during Brown's tenure as governor, and Brown has been criticized for not offering tax relief to homeowners and thereby paving the way for the success of the proposition. Wrote Harold Meyerson in the Washington Post, "As incomes and property values rose, Sacramento's tax revenue soared—but the parsimonious Democratic governor, Jerry Brown, neither spent those funds nor rebated them. With the state sitting on a $5 billion surplus, frustrated Californians grumped to the polls and passed Proposition 13, which rolled back and then froze property taxes—effectively destroying the funding base of local governments and school districts, which thereafter depended largely on Sacramento for their revenue. Ranked fifth among the states in per-pupil spending during the 1950s and '60s, California sank to Mississippi-like levels—the mid-40s—by the 1990s.

Surely I'm not the only older registered Democrat who remembers that Proposition 13 passed at the end of Governor Moonbeam's first term - that he, in fact, is the public official most responsible for march toward the ultimate collapse of our State Government.

In mid-2010 the State will be in a severe budget crisis for which the Democrats in the State Legislature will have no solutions. Jobs will scarce. Those most dependent on State aid will be feeling abandoned by the Democrats. The working poor will be feeling abandoned by the Democrats. Students are already feeling abandoned by the Democrats. State and local government employees will be feeling abandoned by the Democrats. Teachers will be feeling abandoned by the Democrats.

Yes, the wealthy liberals - in itself an oxymoron - in places like Marin and Silicon Valley will still be attending those fund-raisers with Barbara and Barack.

But what Barbara and Barack need to do is send CIA Director Leon Panetta back to California to take stock of his home State. It's in deep trouble and so are the Democrats. They are going to have trouble keeping a majority in the U.S. Senate, much less the 60 votes they need.

Saturday, December 5, 2009

Impaired Vision

On Saturday, December 5, 2009, I stopped at my favorite optical store to pick up my sunglasses that I dropped off to have new lenses put in. They were moving in a bunch of cabinets and cases which I learned came from their other store located in a city in another county. They had closed that store. It was fallout from the state budget cuts as the population in that county is poorer than in ours. So I did a bit of research and came up with a story in the San Jose Mercury News which explained:

California's budget fiasco this year resulted in the elimination of optometry and optical services for adults 21 years and older, though there are exceptions for residents of nursing homes. As a result, those who least can afford health care coverage are no longer covered for low-vision evaluations and aids, leaving them at greater risk for injuries, accidents and depression.

And so the State saves money. And the store lays off employees. And the State loses income tax revenue and has to borrow money from the federal government to pay unemployment benefits to the employees because the State already spent all the unemployment insurance money it had collected from the store as an employer.

On May 26 I wrote here that California was experiencing an economic collapse later than the rest of the nation, a collapse I termed "The Great California Slump." I indicated that the collapse would begin in earnest in July.

I warned in August that some of the minimal "trickle down stimulus programs" could hide the imminent state budget disaster. I have repeatedly explained why the California economy will not recover during the next five or more years even if the national economy does make some recovery.

The fact is that the U.S. Department of Labor/California Employment Development Department statistics not seasonally adjusted raw data indicate that the California economy has lost 1,104,681 jobs since November 2007. If you add the net number of new jobs that needed to be added during the same period, we are down 1.5 million jobs in two years.

In my opinion California will be down 3.25 million jobs by November 2014 even though during that from 2011-2014 about 415,000 net jobs will be created.

As I warned in July, by late 2010 Californians will know that the State is in financial trouble. I didn't use any adjectives in the previous sentence to describe the "financial trouble" because any adjective used would cause readers to discount the true depth of the trouble. So let's turn to the Sacramento Bee's Dan Walters who last Sunday expressed the following:

Just how deeply in debt are our state and local governments?

The answer: No one knows for certain, since debt is scattered through myriad agencies in many forms, but well over a half-trillion dollars is a fair estimate.

...The state's "general obligation debt"...currently stands at $59 billion, and there are an additional $50-plus billion in general obligation bonds that have not yet been sold. The biggest chunks of debt, however, are the unfunded obligations for pensions and health care of retired public employees.

...A reasonable estimate of today's unfunded liability is $200-plus billion. A state commission, meanwhile, says the state-local liability for retiree health care is about $100 billion.

...Local government general obligation debt...appears to be roughly the same as the state's, perhaps $50 billion, plus several billion dollars in debt incurred by local redevelopment agencies.

There are tens of billions in specialized state debt, such as veteran home loan bonds, "securitization" of tobacco lawsuit proceeds, and budget deficit bonds.

The interest that must be paid on all that state and local debt is probably an additional $100 billion, so we're already talking about well over $500 billion.

Then there are the off-the-books debts incurred to paper over years of state budget deficits, such as speeding up tax collections that will have to be refunded later, postponing periodic payments to schools, making promises to schools about levels of future financing, borrowing money from special funds and taking local government funds that must be repaid later.

The state's unemployment insurance fund, meanwhile, is about $7 billion in the red, and that deficit is expected to more than double in the next year and quadruple by the end of 2011. The state has been borrowing from the federal government, but sooner or later it will have to repay the feds, probably by taxing employers.

Conservatively, then, California is probably more than $600 billion in debt.

Conservatively, then, the taxpayers of California are on the hook for about $48 billion a year in principle and interest payments on debt. Yes, some of this is from special revenues like gas tax or from local government revenues. But one needs to put the number "$48 billion" into perspective. The sum of $48 billion is not much less than the $56 billion the State collected in Corporate and Personal Income Tax in the 2008-2009 fiscal year. It is somewhat more than all the State and Local Sales Tax Revenue collected in the 2007-2008 fiscal year - $31 billion.

Any way you look at it, we taxpayers have a big debt payment compared to what we pay in taxes.

But that isn't even the problem. Los Angeles Times Columnist George Skelton described the upcoming budget battle as "dreadful:
Here's how nonpartisan Legislative Analyst Mac Taylor gently put it last week in calculating the latest general fund deficit: "Addressing this large shortfall will require painful choices, on top of the difficult choices the Legislature made earlier this year."

But, he added, "It is unlikely that the Legislature can address all of the state's massive, ongoing budget problems with permanent, ongoing solutions in the next year."

I don't have to be so diplomatic. I'll just say that there's no way these people can produce an honest budget that forces Sacramento "to live within its means," as Gov. Arnold Schwarzenegger persistently preaches, while consistently being one of the first to sin
.

"Dreadful" is an interesting word choice. Dan Walters used the more colorful term "bloody" because the battle lines between tax increases and spending cuts are forming:

We don't know whether the ever-flexible Schwarzenegger will stick with his no-more-taxes mantra or, as he has done before, reverse himself. However, February's temporary tax increases have already stirred a backlash, and hitting taxpayers again in the midst of this record-deep recession would be politically almost impossible.

...They've scraped the bottom of the gimmick barrel, voters are livid and new taxes are functionally off the table. This will be one of the bloodiest skirmishes the Capitol has ever seen – with the only option being that the most populous state in the nation default on its debts.


What's facing the Legislature is the lack of viable gimmicks. Debt payments and further school financing cuts are off the table, the latter because the state accepted federal stimulus funds requiring continued State spending plus the State owes $1 billion more for this year.

Even some of the gimmicks used this year were predictably unusable. Courts have blocked reductions in home care for the disabled, ordered $1.4 billion above the budget in spending on prisons, and said the State can't divert $800 million in gas tax funds to the General Fund. The courts have also overturned the furlough program for thousands of State employees.

Yes, the situation is going to be dreadful and bloody. But they really have no idea how bad it will be. We actually won't know the worst of it until May 2010. From December through April, we will find out just how much the extra income tax withholding and estimated payments plus the obvious corporate tax overpayments will become refunds. In that period, we will also find out, as I noted last July the total of property tax payments that "will not be made in this fiscal year due to foreclosures or simple lack of money."

And for the tax year July 2010 - June 2011, the drop in assessed value will have continued in many parts of California, meaning that there will be less money from that source for schools which will mean that other General Fund monies spent in 2009-2010 on other programs will be diverted to schools. And it will mean that cities, counties and special districts will have less money to spend on public safety, parks, etc.

Oh. And more people like the employees of the optical store will be laid off. One thing for certain. "Those who least can afford health care coverage" likely will not be "covered for low-vision evaluations and aids" before 2017, if ever, "leaving them at greater risk for injuries, accidents and depression."

Tuesday, October 27, 2009

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.

Wednesday, October 7, 2009

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.

Thursday, September 17, 2009

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.

Wednesday, September 9, 2009

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.

Wednesday, August 19, 2009

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.