Coming Up - California's Second Lost Decade of the Century

Is The Great California Slump so systemic that it will become regarded as the two years leading to California's Second Lost Decade?

At one time it was difficult to imagine the Golden State in a situation where economic expansion would remain flat for ten years, barely keeping pace with inflation and population growth. But measured in terms of employment - people with jobs - the numbers in 2010 are roughly the same as in 2000-2001 whether you look at the federal survey data or the actual employment reported to the State Employment Development Department. From an economic growth standpoint, the period from 2001 through 2010 was California's First Lost Decade of the 21st Century.

Right now it is difficult to project a recovery scenario in the next 10 years - 2011 to 2020 -where the California economy not only recovers the 1.2 million jobs lost since November 2007 but adds 2.5 million additional jobs to employ the expected growth in the workforce.

That would require adding 30,000 new jobs a month. That's never happened. In the best years of the last decade, 2005 and 2006, we produced 20,000 new jobs a month and much of that was the result of an asset valuation bubble.

All indications are that The Great California Slump is ensconced deeply into the fabric of the economy. And example is bankruptcy filings:

The year 2005 is a record year because Congress changed the rules effective 2006 - anyone who might need to file for bankruptcy filed that year. While nationally, bankruptcy filings climbed last year, in California the skyrocketed exceeding 2005 by 25%. That is partly because the asset valuation bubble affected Californians more significantly than other parts of the nation.

While people recover from bankruptcy, frequently their confidence doesn't recover, particularly when it was in conjunction with the loss of a home due to foreclosure all due to extended unemployment.

Complicating the situation, Congress is allowing the "safety net" to slip Also, a State budget proposal for the 2010-11 fiscal year that began July 1 is not before either house of the State Legislature. The Gubernator wants some state employees paid minimum wage (those whose unions have not accepted his last-best-final offer for wages and benefits) until a budget has been adopted, a move he thinks will put pressure on the Legislature.

No real incentive exists for legislators to adopt a budget before Election Day November 2. If the State Government continues on without any of drastic measures such as minimum wage, with just a little juggling of expenditures the State may not even have to issue IOU's before then. And there is nothing positive a legislator running for reelection can derive from voting for a balanced budget this year.

In the meantime, local governments and schools continue to reduce staffing and expenditures. That loss of cash flowing into the state's economy will slowly offset any economic gains that might occur. Once the new Legislature and new Governor take a hard look after November, they will be forced to make substantial cuts in "safety net" programs and education, or increase taxes substantially, or some combination of both. That also slowly will offset any economic gains that might occur.

Just as that is occurring, the recent housing sales slump will tamp down any gains in asset value recently made by homeowners and cause employment in construction to remain depressed.

The irony is that after Proposition 13 passed had Jerry and Willie Brown and their successors maintained, the "obscene surplus" (as described by Howard Jarvis) within the State coffers, when a slump like 2008-09 hit, the State could have maintained the safety net and stimulated the economy instead of becoming a drag on it.

But then again, if the Bush Administration had kept in place policies that reduced the deficit then the federal government could have been more effective in 2008-09 also.

Of course, there would not have been enough money flowing in California's private sector economy to support the dot-com bubble and the home mortgage bubble. The former, however, did contribute to some modest economic growth. (Moving retail sales from your local stores to eBay and Amazon contributed nothing real, but other elements have established long-term positive trends.) The home mortgage bubble was a simple ponzi scheme where people were enticed to "buy in cheap" for a return on investment that was never possible.

Without some "asset value bubble" between now and 2020, significant employment growth will not be possible. But any "bubble" growth will be artificial and likely collapse back to near-2000 levels - meaning California will have a Second Lost Decade.