Friday, July 17, 2009

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.

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