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.