Friday, January 28, 2011

The economy, President Obama, Governor Brown, the disconnects, and the Democratic Party failure

Right now a malaise is affecting the American and California economies. The two leaders - President Barack Obama and Governor Jerry Brown - appear to be completely disconnected from economic reality and from each other, though they are both Democrats.

Of course, we all know the biggest problem is employment.

I don't always trust the statistics about employment, but over a period longer than a year they generally describe reality with accuracy. What the statistics show over the long term - 25 years - can be seen in this graph of employment in California (as with all graphs here, you can click on it to see a large version):

What the graph shows is that employment in California has crashed and appears to be headed further downward.

A second shorter term graph confirms that trend.

There are those, of course, who would suggest that is a California problem, not a national one. In fact, President Obama just told us in his State of the Union Address that there were "more than one million private sector jobs created last year."

The only problem I have with that statement is that it is totally misleading. We aren't told how many private sector jobs were eliminated last year and there is no mention of the public sector.

Two sources of employment data are available from the government. One presented in the press monthly is data from a population and employer survey. The other, presented weekly in the press involves data from the 50 state offices that handle unemployment claims.

Both sources provide employment data. The survey data extrapolates from it's information a number that purportedly represents about how many people are working. The state unemployment data also includes the number of jobs being reported for purposes of taxes and unemployment and disability insurance. Here's a chart showing and averaging the numbers from both sources to determine the probable the changes in employment in recent calendar quarters:

During no calendar quarter since June 2008 did the number of people working in California or the nation increase according to the official federal government numbers. In fact, at no time did we see less than a significant loss in jobs. Nor is there an indication that this will turn around soon.

 A basic disconnect exists in our economy. It's simple. Large corporation profits have soared for two years, as has top executive pay which is linked to profits. This has produced gains in the stock market which benefits everyone with investments, but mostly those who have large investments in stocks. Bonuses on Wall Street are rising. In the meantime, Americans continue to lose jobs, the median wage adjusted for inflation is barely rising, and the value of the only large asset owned by most Americans, their homes, is still dropping.

As I noted in a previous post, this is not a new situation. Consider this graph that represents the truth for wage earners:

For each dollar of dividends and interest earned, the wages and benefits paid to workers have dropped from nearly $10 to around $4.

Consider this chart:

What this chart shows is that after WWII the Gross Domestic Product after adjusting for inflation and population growth grew 186% but the benefits were distributed as follows:
  • Investor income three times the actual economic growth rate;
  • Worker-income 20% less than the economic growth rate
  • Small business owner income 80% less than the economic growth rate; and
  • Landlord (both residential and commercial) income ...well... it appears to have been a roller-coaster ride that ends at a point 50% less than the economic growth rate.
It's hard to confront this pattern that became noticeable in the early 1960's from a political point of view. Regardless of their faults and weaknesses, I used to associate my political orientation with elected officials from the Democratic Party.

It was "the first half of the 20th Century" California Democratic Party of U.S. Senators James D. Phelan, William Gibbs McAdoo, Clair Engle, and Pierre Salinger, and of Governors Culbert Olson and Edmund G. "Pat" Brown. (Yep, that's all the California Governor's I'm willing to be associated with except the Progressive Party's Hiram Johnson). And it was "the first half of the 20th Century" National Democratic Party of Presidents Wilson, Roosevelt, and Truman.

These politicians weren't perfect. But the National Republican Party hasn't had room for my point of view since they threw out Teddy Roosevelt and Hiram Johnson. The Democratic Party in the first half of the 20th Century was the party advocating for the Californian who depended on a wage for a living.

Today? Well, during the past month we have heard from the Party's national leader and from the Party's state leader.

According to President Obama in his State of the Union Address, the problem for our economic future is the American worker is just not competitive enough. According to the President we need to better educate our young people. To be competitive they need to finish high school and college. According to Obama "America has fallen to ninth in the proportion of young people with a college degree."

My first reaction was that this is a gross disconnect from the failure of our economy to benefit working people. But, first let's turn to Governor Jerry Brown on this subject of college education and the big disconnect.

California produces about one-seventh of America's college graduates. We have the largest public university system in the nation, one that exceeds most nations in the world. (We also have a lower percentage of our population that are college graduates, but that's another story.) The point for Obama to understand is that for the nation to increase its number and its percentage of college graduates, there will have to be a surge in enrollment in the California system.

In 2007-08 from the State General Fund California we spent $3.3 billion on the University of California system.

Governor Brown is proposing to spend $2.5 billion in 2011-12 or 24% less.

In 2007-08 from the State General Fund California we spent $3.0 billion on the state's other colleges and universities.

Governor Brown is proposing to spend $2.3 billion in 2011-12 or 21% less.

In 2007-08 from the State General Fund California spent $6.4 billion on it community college system.

Governor Brown is proposing to spend $5.8 billion or 9% less, but only if the voters approve a temporary tax increase extension can we maintain that level.

In terms of all expenditures for higher education in California, the Brown budget proposal would spend $2.139 billion or 15.4% less in 2011-12 than was spent from the General Fund in 2007-08, but it will be even less if the voters don't approve a temporary tax increase extension.

In the end, these cuts will result in fewer students attending college in California. Unless, of course, the Obama Administration is going to step up and provide the state with that $2.139 billion. We all know that's unlikely. In fact, Obama has pledged an austerity program freezing domestic spending for five years. Federal support for colleges and universities most certainly will be cut. In fact, with stimulus money running out, federal support of education generally will be less in future years. (And California is not the only state struggling with this.)

In other words, there is a major disconnect between reality and President Obama's higher education goal, caused in part by a lack of bold leadership from Governor Brown.

But there's another disconnect that is ironically odd for reasonably well educated political leaders.

In his State of the Union Address, Obama offered some "conventional wisdom" about our economy leading to his education premise (emphasis added):
Thirty years ago, we couldn't know that something called the Internet would lead to an economic revolution. What we can do -- what America does better than anyone else -- is spark the creativity and imagination of our people. We're the nation that put cars in driveways and computers in offices; the nation of Edison and the Wright brothers; of Google and Facebook. In America, innovation doesn't just change our lives. It is how we make our living.

Our free enterprise system is what drives innovation. But because it's not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need. That's what planted the seeds for the Internet. That's what helped make possible things like computer chips and GPS. Just think of all the good jobs -- from manufacturing to retail -- that have come from these breakthroughs.

...Maintaining our leadership in research and technology is crucial to America's success. But if we want to win the future -- if we want innovation to produce jobs in America and not overseas -- then we also have to win the race to educate our kids.
Well, not exactly. In fact it's hard to sustain a case demonstrating a positive relationship between technological innovation and gains for the American worker. In California, one can make a case to the contrary. Consider this graph (again, you can click on the graph for a larger version):

The San Francisco Bay Area and the San Jose Area include major technological centers including Silicon Valley, many established genetic research and development businesses, and many "green" technology centers. Employment, the number of jobs, in this area according to the federal government is the same today as it was in 1990.

We can only examine anecdotally what this means.

We know that American manufacturing employment in the computer industry is actually lower than it was immediately prior to beginning of assembly of the first PC, the MITS Altair 2800, in 1975. We know that about 1.5 million workers - factory employees, engineers, and managers - work in computer manufacturing in Asia.

Let's take Intel headquartered in Santa Clara, for instance. Intel was founded in 1968.  By the end of the 1990s, Intel was one of the largest and most successful businesses in the world. But Intel's employment in the Silicon Valley area has been cut drastically. It shut it's last Silicon Valley manufacturing plant in 2009. How did the corporation do in 2010? From its web site:
Full-Year Results
  • Revenue $43.6 billion, up $8.5 billion, 24 percent year-over-year
  • Gross margin of 66 percent, up 10 percentage points year-over-year
  • Operating income $15.9 billion, up $10.2 billion, 179 percent year-over-year
  • Net income $11.7 billion, up $7.3 billion, 167 percent year-over-year
  • EPS $2.05, up $1.28, 166 percent year-over-year
The company's net income in 1990 was $650 million according to its annual report. If one adjusts that number for the Bay Area consumer price index, it is the equivalent of $1.12 billion. So the corporation's net income in 2010 dollars has grown over 10 times in the 20 years.

If you were Patrick Gelsinger, an executive who left Intel in 2009 and who in August 2009 exercised his stock options for slightly more than 100,000 shares, you would have received $78,744 in dividends since you left and the value of the shares would have risen about $300,000 since you exercised your option.

If you worked in the Intel Silicon Valley manufacturing plant that was closed in 2009 and were well paid, you may have collected the maximum unemployment benefits spread out over 26 weeks of  $23,400 funded by a loan to the State from the federal government. The State needed the loan because Intel like other employers didn't pay enough contributions to the Unemployment Insurance Fund.

If need be, federal taxpayers will borrow up to another $65,700 to keep you and your family afloat over another 73 weeks. Hopefully you have a spouse who's working, as $3,900 a month in unemployment wouldn't cover payments on a modest house purchased in the region anytime after 2000.

Last fall, Intel Chief Executive Officer Paul Otellini at a meeting of the Council on Foreign Relations said the government should offer U.S.-based and foreign companies tax incentives, or tax holidays that would last five to 10 years, to encourage the construction of new factories or the expansion of existing ones. Otellini understands this kind of incentive.

In the last 20 years the taxpayers in New Mexico, Arizona, and Oregon have helped finance the company's growth. Starting in 1993 in New Mexico Intel built a $1 billion chip plant in a suburb of Albuquerque called Rio Rancho. Local officials provided about $455 million in property tax abatements and sales tax exemptions for equipment purchases.

Intel then built another plant in Chandler, Arizona, receiving $82 million in property tax abatements, sales tax exemptions and corporate income tax credits. In 2005 Intel lobbied the state to change the method it uses to calculate corporate taxes to the single sales factor system. Intel and other companies with property and a payroll, but relatively low sales in the state, use this method to avoid corporate taxes. Intel's products generally are sold to other companies located outside the state, indeed outside the country.

 In 1999 Intel expanded its semiconductor operations in Oregon after the state extended its Strategic Investment Program (SIP), which was adopted in 1993 with Intel in mind. The extension reduced Intel’s property tax bill by an estimated $200 million over 15 years. In 2005 the county extended the property tax break to 2025 offering $579 million in additional savings. Oregon also adopted the single sales factor corporate tax system.

President Obama has spent a lot of time with Silicon Valley corporate chiefs. Despite all evidence to the contrary, he thinks that technology oriented international corporations are going to replace the 7 million jobs lost since 2008 if we'd just educate another 7 million engineers, biologists, and lab technicians using money from some source other than the technology corporations.

Apparently Jerry Brown agrees because his budget message proposes adoption of a mandatory single sales factor apportionment method for multistate and multinational firms which should result in a substantial California tax savings for Intel. This is much more complicated than meets the eye. Given the fact that the other large states have adopted this rule, California may need to also.

But our Governor at least need to acknowledge that we are giving large tax breaks to corporations that sell outside California. This is a less-than-zero-sum game for the American economy causing losses in tax revenues.

So that brings us to the core disconnect. California's budget is in trouble because the large multinational corporations are not reemploying people in the United States despite the fact that profits are soaring, as we can see from Intel. President Obama told us:

...Because it's not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need. That's what planted the seeds for the Internet. That's what helped make possible things like computer chips and GPS. Just think of all the good jobs -- from manufacturing to retail -- that have come from these breakthroughs.
But as we see in the Bay Area and with Intel, the jobs go elsewhere. Large shareholders like Patrick Gelsinger do very well. Regular employees are laid off and depend upon government borrowing to fund their unemployment. Federal and state deficits rise. Corporate CEO's criticize the government for being irresponsible.

The core disconnect is the Democrats (or Progressives like Teddy Roosevelt and Hiram Johnson) who at one time tried to interject balance into situations like this by informing and leading the public, by using government power.

Brown just wants California to fumble through, making poorly thought out changes to our government structure, apparently hoping it will work out well enough to get him through his four year term.

Obama. He focused on competitiveness in his State of the Union. He tells us he's set a goal of doubling our exports by 2014 - "because the more we export, the more jobs we create here at home." That's nice, but it isn't true. The quickest way to increase exports is to reduce the price of our products. The biggest cost is payroll. Reduce that cost through automation and forcing lower wages, and we can double our exports in four years.

Over the longer term we can push the value of the dollar down, by such techniques as having the Federal Reserve buy Treasury Bonds with money that it just created. Create more dollars faster compared to other currencies, and the value of the dollar drops. Gradually, our products become cheaper to buy. And the cost of clothing and iPhones all imported from other countries will go up, reducing what we can buy as we don't produce these products.

Perhaps we should measure our competitiveness on how well American multinational corporations are doing. By that measure, we're an unqualified success. Revenue from operations in China, Brazil, and India are climbing. Profits are growing because labor is cheaper and they've reduced the cost of  or shut down operations in the U.S.  Growing American exports are not the engine for this success. Reducing the American standard of living is the engine for this success.

No one wants an anti-business President or Governor. But the well-being of American giant corporations is not synonymous with the well-being of the American worker. Here is where I have to ask the question again as I have in other posts: "What's the purpose of an economy?"

The answer from a Democrat used to be: "The purpose of the American economy is to increase the number of and improve the quality of American jobs."

Obama did seem to be addressing that issue when, pointing to the past, he said "because it's not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need. That's what planted the seeds...."

But as we've seen, this doesn't create jobs over the long term. There's a clear disconnect. This sounds strangely like corporate spin.

He seemed to be addressing that issue when he said "higher education must be within the reach of every American."

But again there's a disconnect. With regard to higher education he offered this proposal: "I ask Congress to go further, and make permanent our tuition tax credit - worth $10,000 for four years of college." That's $2,500 a year. It won't cover the recent and near future tuition increases in California's public universities put in place to replace State General Fund support.

Nothing he discussed is going to accomplish the goal of getting Americans out of the problematic labor market of the past decade during the next decade. Americans are finding that getting a job is tough. When they get one, it pays considerably less than the one they used to have and/or the job has no permanency and/or its insecure contract work.

We have to reestablish the economic base that supports the middle class. The President simply was unable to address the disconnect between American jobs and American corporate profits which are being channeled to a few. We need money moved from the top down, not in trickles, but in a steady stream.

Unfortunately, unlike in the first half of the 20th Century, no leadership can be found in our political parties with the stomach to deal with that need. And no one at Intel is going to make that happen.

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