Tuesday, February 22, 2011

Lies big and small: Why California will fail to fix Brown 1.0's mess

Jerry Brown had one chance to fix the mess he left us with the last time he was Governor. That opportunity occurred during the initial presentation of a 2011-12 proposed budget.

California needed him to debunk the lies, lead us with the truth, and feed us some unwelcome medicine. But he hasn't.

The difficulty is Brown himself and the one truth about his history in California - he's responsible for the mess we are in.

It was time for the Governor to:
  • Not pretend (a) that California's economy will recover in less than a decade and (b) that it will be a recovery that will fix State financial problems.
  • Not propose to delay dealing with the core problem of California government finance for five years.
  • Not suggest that because there is some money to shift to other uses that it is a good idea to take an ax to some programs that need some fixing with intelligent use of a scalpel.
  • Not pretend that the deficit can be meaningfully reduced by reducing the number of cell phones in state agencies - PR that appeals to people who think that cuts like that are significant perpetuates a lie and should just be done without all the spin.
  • Acknowledge that state pension fund abuses are problems but clearly explain they don't worsen our financial crisis in any significant way (yes, have both pension funds do emergency actuarial recalculations to bring the payment requirements for 2011-12 in line with the fact that they've recovered from the crash).
  • Quit proposing to "enable" local government by taking their money and dumping on them state programs; if we need to change how we do things, let's consider that over two years, not two months.
  • Quit fearing the voters, tell them the truth and give them a real solution - fix the flaws in Proposition 13, a tax policy travesty that happened on Brown's last watch; if they turn it down then make the cuts.
No reason exists to believe Brown will do any of these things, but someone has to write down in one place an explanation of what is wrong with the course of action being proposed.

Three big lies stand in Brown's way of doing what needs to be done.

Big Lie #1 - Economic Recovery

This is the biggest of the lies. It seems to be the lie perpetuated by all politicians, many "respected" think tanks, and much of the press. They tell us that California's economy will recover.

No it won't, not by any definition of "recover" that we would like. It is a lie that is made up of a series of small lies.

Small Lie 1.1 - The jobs will come back. We are just in the beginning of The Great California Slump. The reality is that by sometime in 2012 our economy, the 8th largest in the world, will stabilize having permanently lost well over one million jobs since the fall of 2007. In fact, we have the same number of jobs we had at the beginning of the decade.

The jobs are permanently lost. California is not going to experience a job creation phase that will exceed what we think of as normal. Sometime soon, probably not until 2012, we will see an economy that will create enough permanent jobs to more or less keep pace with the growth in the workforce as it has which we can see in this graph (click on the graph to see a larger version):

California has no miracle job creation engine. Perhaps someone thought we did in the late 1970's but by 1982 we saw that job growth matched workforce growth. Perhaps someone thought we did in the mid-to-late 1980's, but by 1992 again we saw that job growth matched workforce growth. Perhaps someone thought we did from the mid-1990's all the way to 2007.

But this time it is different. Unlike the last two times, we've ended up a million or two jobs in the hole. If we start a new three decade chart in 2010, what we will discover is that we are creating enough jobs to keep pace with the workforce, just the way it has been and will be:

Not that there is inherently anything wrong with an economy that produces enough new jobs to employ the new members of our workforce. It just is not going to replace the 1+ million jobs lost at the beginning of The Great California Slump. And that leaves us without the income tax and sales tax that those jobs put into the economy. And that leaves us with an extra million workers chronically unemployed.

Small Lie 1.2 - Technology will save us. Don't be confused by the "economic recovery big-lie corollary." 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 (click on the graph to see a larger version):

This "M-curve" is typical for employment changes associated with new technology. Jumps in employment are followed by a drop, followed by another spike, followed by a drop. There are things we know about this from experience in the latter quarter of the 20th Century and the first decade of the 21st Century.

One of those things we know is that being in the center of technology innovation does not give the Bay Area and San Jose a permanent increase in jobs, it just keeps employment steady.

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. These things are facts. They shouldn't surprise us. It is disturbing that political leaders lie about it.

About Intel. This week it was announced that President Obama will appoint Intel CEO Paul Otellini to join GE's CEO Jeffry Immelt on the Council on Jobs and Competitiveness.

President Obama has spent a lot of time with Silicon Valley corporate chiefs. This week he spent more time with them. In fact, the LA Times reported:
Obama's visit was, however, also a reminder that the political stereotypes that California conveys are not just divided between movie star-rich Southern California and the hippie-liberal north. Silicon Valley has its own connotation, of magical inventions spawned in garages or college dorms, of American enterprise.

It was that spirit that Obama sought as his own last week, even if largely out of view. He landed Thursday night, but only his arrival and his departure Friday morning from San Francisco were public events.
Despite all the factual evidence to the contrary, based on what he says and based on the policies he has allowed to be implemented or continued during his administration, Obama appears to believe that technology oriented international corporations are going to replace the 7 million jobs lost nationwide since 2008, if only we'd just educate another 7 million engineers, biologists, and lab technicians using money from the working poor, or at least any source other than the technology corporations like Intel.

Intel, headquartered in Santa Clara 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. Gee whiz. Could it be having severe financial problems?

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 by a factor of 10 in 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 by a factor of 5 during the past 20 years.

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 which determines their tax due based on sales within the state. Intel's products generally are sold to other companies located outside the state, indeed outside the country. Intel and other companies with property and a payroll, but relatively low sales in the state, use this method to avoid corporate taxes even though the mere presence of the plant creates demands for government services such as schools.

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.

It should be noted that according to "news" stories during Obama's visit Otellini "announced" construction of a new plant in Arizona and explansion of the Oregon plant which will employ 4,000.

When asked by an Arizona newspaper, Intel lobbyist Jason Bagley responded that "the plans for a new computer chip manufacturing plant have been in the works for some time now" and that the plant is "the result of the ongoing necessity to upgrade the technology" pointing out that "most high-tech products like these have a marketable life of only 18 to 24 months before they need to be replaced - and a new facility has to be built."

Buried in their somewhere is the fact that an existing plant will be closed somewhere.

The article really was about a new tax policy approved by the Arizona Legislature championed by Governor Jan Brewer. According to the report that "tax-cut plan being phased in will result in companies like Intel likely paying no corporate income taxes at all to the state." That works well with "the fact that Intel has its manufacturing facilities in a foreign trade zone, providing a permanent 75 percent reduction in property taxes from what it otherwise would have to pay."

The big economic question is: "Has Jerry Brown embraced the Intel view with the same enthusiasm President Obama does?" Brown's 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. But 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 just to compete.

Our Governor (and our President who apparently learned nothing during his stint in the Illinois Legislature) 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.

And as a nation we're doing this while states in trouble like California are proposing to institute either "co-pays" or service limits on medical care for children who are Medicaid patients.

Apparently that's ok, because people in the same income groups as Otellini, Gelsinger, and Obama's new Chief of Staff William Daley (who received $8.7 million in salary and stock and cash bonuses in 2010 and the first week of 2011 while working at JPMorgan Chase & Co.) won't have to pungle up an additional 3% of their taxable income in federal taxes in 2011. They earned their money after all

Other Examples - Green Job Failures. In May of last year, President Obama visited Fremont, California, in a trip similar to his visit to Intel. He showcased a visit to solar panel manufacturer Solyndra noting that "companies like Solyndra are leading the way toward a brighter and more prosperous future."

Let us hope there are some companies like Solyndra that are doing so. Solyndra is not.

Having raised more than $1 billion in venture capital and receiving a $535 million loan guarantee from the Department of Energy, Solyndra has replaced its CEO, shut down its older factory, and abandoned its plans to hire 1,000 new workers. The reasons are quite complicated and you can read the details in this article.

To say that no one in the Obama Administration has the foggiest notion about the problems of nascent green technology would be kind. Let's just say that Governor Moonbeam earned that name in his last go around as Governor for a reason, the same reason President Avatar offers us dreams of a "Pandora-like" Earth where we "Na'vi-like" enlightened humans live in harmony with nature. And so Obama ended up at failing Solyndra telling us our economy will rebound because of this industry. (If nothing else, it is clear that no one in the Obama Administration does any advance research work before he goes on a trip.)

Solyndra is not the only example, or even the best known example, of how green technology is already a failure for our economy. Another "Blue State", Massachusetts, saw Evergreen Solar close its plant in Devens, lay off 800 workers, and open production in China.

Evergreen Solar made feasible the "string ribbon" process for making solar cells which made them affordable technology. For nearly 10 years it looked like it was going to be a success and you can read the full story in this article by Edward L. Glaeser. Glaeser says:
...But it was always a mistake to think that clean energy was going to be a jobs bonanza, and we should be investing in green technology whether or not it produces jobs.

America has had many high-tech breakthroughs over the last half-century, but those innovations rarely provided abundant employment for the less educated workers who need jobs most. The Devens closing reminds us that even when ideas are “made in America,” production is almost always cheaper in China.

Failed public investments, like the money spent in Devens, reflect the fact that public officials are rarely skilled venture capitalists and that governments pursue many objectives that lead them away from solid investments. It’s easy to see why any governor would be excited about a green-energy manufacturing plant in a less prosperous area of his or her state. But the same forces that made Devens political catnip meant that it was unlikely to be a long-term success.
As noted in a Massachusetts newspaper: "Steep Chinese solar subsidies and inexpensive labor are the true competitive issues — big ones. You can call that unfair. But Massachusetts can’t and should not compete against forces like that."

Nor can the State and local governments of California compete against forces like that. After all, the Chinese have billions of our dollars to spend and millions of workers who will work for $300 a month.

Solyndra and Evergreen are small companies that represent the fact that green technology isn't going to create jobs for anyone not well-schooled in technology - engineers, chemists, biologists, physicists, and associated research technicians. And generally speaking, there will never be much job growth in those fields, most certainly not enough to replace over 1 million jobs lost in California. Even so, we still need to educate enough young people to replace those that retire, die, or otherwise leave the field plus enough to cover a normal growth rate.

So that brings us to the core disconnect. California's budget is in trouble because the large multinational corporations like Intel are not reemploying people in California despite the fact that profits are soaring. President Avatar, repeating the corollary lie to the big lie about jobs, tells us things like this:
...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 permanent jobs for workers not in research or other advanced "knowledge worker" jobs tend to go somewhere other than California. And there's only going to be a limited number of those "knowledge worker" jobs in technology.

That's not a problem for large shareholders like Intel's Patrick Gelsinger. It's when regular employees are laid off and depend upon government borrowing to fund their unemployment that we have a problem. Federal and state deficits rise. Corporate CEO's criticize the government for being irresponsible about the problem those corporations created.

Small Lie 1.3 - A Consumer Spending Recovery. If the unemployment number doesn't convince you we cannot recover economic growth lost in The Great California Slump, one can take a look at the sales tax revenues for the past decade to discover that taxable sales in California, another indicator of economic growth, are very unlikely to recover to the levels seen in this decade:

What the top graph shows is that in raw dollars taxable sales in 2009-10 were about the same as in 2002-03. What the bottom graph shows is that taxable sales in terms of purchasing power are below the mid-1990's.

It is not surprising that spendable income is down. What is surprising is that anyone thinks we can recover economic growth lost in The Great California Slump.

It is not possible for Californian's to deal effectively with the impact of The Great California Slump on State and local government, including schools, without recognizing that
  • Our state's economy lost a decade of growth in terms of employment and consumer spending.
  • When economic growth returns, it will begin at the then current levels of employment and spending and normal growth barely will keep pace with population growth and inflation.
  • No reason exists to believe that at any time in the future anything other than normal growth will occur, much less double normal growth which would be needed to both keep pace with population growth and inflation plus make up for the lost decade.

Only if proposals to stabilize our governmental finance address the fundamental fact that, absent major tax structure changes, nothing is going to happen to the California economy in the next decade that will create that stability.

Small Lie 1.3 - No Additional "Crash" within Five Years

Virtually everything being proposed by federal, state and local government leaders around the nation assume (as in "ass-u-me") there will be no new economic crash within the next five years. That's a dangerous assumption that likely will make it clear to ordinary Californians that what venture capitalists do should not lead other investors or our economy.

The most recent technology boom is online social networking. Some quick facts regarding the more prominent recent developments involving employees and investors:
  • The social-network games company that has tempted millions to grow virtual vegetables, Zynga, has been valued at $7-9 billion; it's headquartered in San Francisco.
  • Twitter, which has yet to see a profit, is already being discussed as a $8 to $10 billion asset should an established company like Google attempt to buy it; it's headquartered in San Francisco.
  • Google offered to acquire Groupon for $6 billion, but was turned down; indications are they are gearing towards an IPO of $15 billion; Google is now starting its own coupon service and other competitors such as LivingSocial are becoming stronger; fortunately for California, Groupon is located in Chicago where Obama is from.
  • Facebook, as most are aware, recently raised $1.5 billion from Goldman Sachs Group Inc. and Digital Sky Technologies, creating a theoretical value for the social network at $50 billion; rumors indicate that the company may let its employees sell as much as $1 billion of their shares in an offering that would allow large institutions to invest; Goldman Sachs attempted to offer Facebook shares to high net-worth individual investors in the U.S. through a private placement, but because of regulatory concerns, turned to foreign investors; Facebook is located in Palo Alto.
  • Quora, the question and answer collaborating website founded by two former Facebook executives who are under 30 years of age, raised $11 million (creating a theoretical $86 million valuation) in March 2010 from Benchmark Capital and individual investors, but reportedly has rejected offers that would value the company at more than $300 million; its primary competitor, Answers.com, sold this month for $127 million but those spinning Quora say that Answers.com has "low quality content" making its ad inventory cheap; Quora is located in Palo Alto.

I know the average American has a less-than-5-minute attention span, but I expect Jerry Brown and the members of the State Legislature to be able to remember the 1994–2004 "dot-com bubble" and be worrying about these developments.

In January 1994 the NASDAQ composite index was at 800. In July -September 2002 it several times closed at over 4,200. In September 2002 it frequently closed at under 1,200. That's the technology boom-bust pattern we have seen.

About half of the dot-com companies survived after 2004. A very few, like Amazon, eBay, and Google are significant firms. The layoffs in the private sector were in the hundreds of thousands in the corridor from San Francisco through San Jose as represented by this graph:

Essentially, in terms of private sector job growth the decade between 1995 and 2005 was lost, and as noted hereinabove the entire period from 1990 to 2010 in  in the San Francisco Bay Area and San Jose Area essentially has had no permanent net job growth in the combined private and public sectors.

Surely if California policy-makers can remember the "dot-com bubble" they can relate it to what is happening now. And they can realize that a significant risk exists that we will see a crash in the economy during this decade.

One has to ask: "Why would any rational person propose to increase the dependence of our State and local governments, including schools, on sales and income tax revenues over the next five years?"

Big Lie #2 - Cut Government Spending First

Our State and local government is full of waste. We should cut spending first. So say the anti-all-things-government folks.

Ok, let's do that. How much? Would cutting General Fund expenditures by around 20% be good enough for the critics?  That would mean cuts like this in the General Fund:

It appears we have some confusion here in California. California cut by 19%  its General Fund cash outflow, which supports everything from our schools to fighting wildfires, between 2007-08 and 2009-10. We already have cut government spending first.

Yes, probably we were spending too much in 2007-08. And there is some additional waste that can be cut. But in 2011-12 would spending $80-$90 billion really be spending too much? Many seem to think so.

But apparently some don't agree, because Jerry Brown is proposing to spend about $87 billion. Yep. Even while cutting off unused State cell phones, he's still going to spend more than we spent in 2009-10, if he succeeds in getting those increased sales and income taxes rates extended.

We could, of course, not approve any increase in tax rates. That would leave us with cuts that look like this:

I'm not sure the majority of the population is prepared to go there. Let's consider California's university and college systems, something that is not "life and death" like medical care for children and is removed from the daily lives of a majority of Californians who will vote - particularly many outside the community of major business executives and development capitalists.

Jerry Brown's dad, Governor Pat Brown, presided over the development of the California Master Plan for Higher Education of 1960. The underlying principles of the plan were:
  • that some form of higher education ought to be available to all regardless of their economic means, that academic progress should be limited only by individual proficiency; and
  • differentiation of function so that each of the three systems - the University of California, the then-California State College system of state senior colleges (now California State University (CSU)), the California Community Colleges system - would strive for excellence in different areas so as to not waste public resources on duplicate efforts.
The Plan provided that: the top 12.5% (1/8th) of graduating high school seniors would be guaranteed a place at one of the University of California campuses; the top third would be able to enter the California State University; and that the community colleges would accept all applications.

The Plan called for significant financial assistance to students. It also had a provision that if proposed today would rankle many, but was and is critical to the success of the system. The plan called for:
Greatly increased salaries and expanded fringe benefits, such as health and group life insurance, leaves, and travel funds to attend professional meetings, housing, parking and moving expenses, be provided for faculty members in order to make college and university teaching attractive as compared with business and industry.
Today, many credit the California universities for the place California holds in the world economy and its own economic makeup, with great investment in high technology (Silicon Valley, biotechnology, pharmaceuticals). These and other sectors are the backbone of the "knowledge worker" economy, which needs an educated workforce to exist.

Indeed, the California economy has two core employment groups of significance - workers related to agriculture and workers related to knowledge-based technology. (Ironically, over the past sixty years, knowledge-based technology has reduced the demand for workers in agriculture by genetically altering plants and automating harvesting and processing.)

It's a simple fact that we have to educate people like Intel's Paul Otellini who got his MBA from the University of California, Berkeley. In fact, let's digress for a moment.

Intel co-founder Gordon Moore received his B.S. degree in Chemistry from the University of California, Berkeley in 1950, but prior to studying at Berkeley, he spent his freshman and sophomore years at San José State University, where he met his future wife Betty Moore. But as I said, this is a digression.

Let's look at some of the impacts that the cuts since 2008 have had on our State University system.

Humboldt State University announced this month that it will eliminate its nursing program. One thing the economy doesn't need is more nursing professionals. No, wait, that's wrong. Exactly the opposite is true.

So why eliminate the program? It's expensive and the University could not retain tenure-track faculty given the cuts in General Fund support. The fact is, we've stopped making "college and university teaching attractive as compared with business and industry." Ironically RN's can command very high pay in the marketplace. We'd have to pay faculty well. And no taxpayer can tolerate that, even though he or she might end up in a hospital short on RN's because we've quit teaching them.

Here's the twist. While technology-based companies essentially have netted us no increase in permanent jobs in two decades, one "knowledge-based" field produced about 450,000 new permanent jobs during that same period:

Did we know this? Yes. Do we relate this to the need to maintain our higher education system? Apparently not, because we are cutting support for that system.

Dry statistics do exist. In a recent study it was learned that 80% of students at Cal State Northridge said it is harder now to afford college expenses, partly because of the impact of the economy on their families, and partly because of spiraling tuition which rose 32% in 2009-10 and will increase 15% more this fall. And to add insult to injury, classes have been reduced and most have been unable the classes needed for a degree and expect it to take an additional year or more to finish.

Yes, more online classes are being offered. Other steps are being taken by the Cal State system to reduce the stress and prevent drop out. The people running the colleges and universities for us are not stupid.

But would it really hurt tax paying Californian's to adjust their lifestyles a little and pay a bit more in taxes to support our higher education system in the manner envisioned by The Greatest Generation? Here's what would have to happen comparing 2007-08 General Fund support of higher education to 2009-10 actual and to 2011-12 with no tax increase:

Do we really intend to destroy our higher education system or are we just striking out, both angry and uninformed?

The problem with understanding state finances is that people somehow equate the State General Fund with standing in line at the hated DMV. Of course, the DMV is a fee-for-service operation like many State operations, not a tax supported one. What most people refuse to understand is that the State of California employs in tax and fee supported positions fewer employees than are employed by the state's multitude of school districts which depend on the State General Fund and property taxes.

Yes, we can cut General Fund spending from 2007-08 by 40% by cutting K-PhD education support 50%. But will we want to live with the result?

Big Lie #3 - High Taxes

Apparently taxes in the United States are too high. No one ever says what country they are using for a comparison. Information does exist.

Now I know statistics can be misleading. But at some point when a person is offering an opinion about taxes in the United States being too high, some evidence should be offered. What evidence I can find from the Tax Policy Center says U.S. taxes are low relative to those in other countries in the Organization for Economic Co-operation and Development (OECD).

Among OECD countries in 2006 only Mexico, Turkey, Korea, and Japan had lower taxes than U.S. taxes at all levels as a percentage of GDP.

Now I know that this does not mean my taxes aren't too high. And apparently many Americans believe their taxes are too high. But then that's an opinion based upon selfish desires, not a comparison.

On a comparison basis, it might appear to some that our taxes are too low, particularly when one is aware of the fact that our military budget is $663,255,000,000, about 6.7 times higher than the next highest, China.

We spend about 4.3% of our GDP on the military. We spend less than half of that on interest payments on the national debt.

You see, saying "taxes are too high" has been an American habit from before the founding of the United States. It's fun. Unless we start operating irrationally as if it were true and scary.

Unfortunately, Californian's started operating irrationally in 1978, the last time Governor Moonbeam was in office. Voters arbitrarily cut the property tax.

First of all, taxes are not too high. They are too high in the opinion of some, but it is not a "fact" supported by some objective data. There are those who have noticed that as a share of the nation's economy, the federal tax take will be the lowest since 1950. Yet today most Americans
  1. on the one hand revere "The Greatest Generation" that not only won WWII but built our interstate system, our universities, our airports, our space program, etc., by paying more of their income in taxes, and
  2. on the other hand selfishly deny even reasonable maintenance of that infrastructure by refusing to pay taxes.

Small Lie 3.1 California's Taxes Are Business Unfriendly. Here in California we are constantly told California's tax structure is business unfriendly. Critics point to the State of Texas, which is now struggling with a deficit as bad as ours, to understand the nature of this lie. Anti-government types in California for years have been pointing to Texas as an example of a better place because it's better for business.

According to a 2010 study done by the accounting firm Ernst & Young done for its business clients, Texas state and local business taxes exceed California's as a percentage of each state's business activity, 4.9% versus 4.7%. The real difference is Texas doesn't have a personal income tax, the primary reason many highly paid executives and corporate owners tell people Texas is more business-friendly. Taxes on businesses are not an issue, personal income taxes on rich people are the issue. Here's how Texas handles taxing businesses:

OMG! Texas collects 42.9% of its revenue from the property tax. What the anti-tax forces don't tell Californian's is that greedy rich executives don't care if a state collects more revenue on their businesses and that it collects far more of its revenue from the property tax. They do care if the state collects its revenue from them personally using progressive personal income taxes!

Since Proposition 13, California has had to rely upon income taxes. If, instead of increasing sales and income tax collections, California had been funding its schools and government with property tax revenue increases, according to the "look-see-how-much-better-Texas-is-for-business" advocates, California would have been a more business friendly state.

So why is Jerry Brown working so hard to have the voters approve an extension of the temporary income and sales tax increases? Well, he's got a big budget deficit. Guess what, so does Texas. Almost anyone who has examined the issue knows that ... no, don't take my word for it ... let me quote someone else saying what I've been saying for years:
States with broad-based tax policies that balance property, income and sales taxes are best equipped to ride out economic cycles, because those levies don't all move in lockstep with the economy. Neither California, with its over-reliance on income and sales taxes, nor Texas, which has no income tax, qualifies.
Whatever else may be true, both states need to balance out their tax policies. In the case of California, we need to overhaul Proposition 13.

Small Lie 3.2 California's Taxes Are Too High. Here we go again dealing with another "my taxes are too high" subjective opinion. So what facts could we find out.

Our economy is the largest among the states and the eighth largest in the world. In 2008 our Gross State Product was $1.85 trillion, 13% of the nations GDP. As of 2010 California along with Texas leads all other states in the number of Fortune 500 headquarters at 57 companies each.

Compared to other states, as indicated in the chart below, California ranked #17 in combined federal and state plus local taxes as a percentage of gross domestic product:

Are taxes too high in California? We do collect in taxes about 5.5% of our "gross domestic product" mostly from sales and personal income taxes. According to the chart above, about 20 states are collecting taxes at a rate within 5 cents of ours. Texas, on the other hand, only collects 3.5% of its "gross domestic product" mostly from sales and property taxes.

Do we want to collect less taxes like Texas? Well, Texas ranks 34th in median family income, $47,143, California 13th, at $56,852. We do use some of that extra tax money for some good. For instance, in providing prenatal care to expectant mothers, Texas is dead last, California eighth. Maybe because we have a higher family income we want to provide some better services for our kids.

Or maybe we don't.

What I do know is that factually as a percentage of GDP, U.S. combined tax collections are generally lower than other developed nations, California's taxes compared to Texas are more friendly to business but less friendly to wealthy executives and wealthy business owners, and as a percentage of state GDP California's rate is near the median of all states.

Yes, my taxes are too high. But apparently yours may not be high enough, so both ours may have to go up. Or not.

I would suggest that we need to take a hard look at our tax structure and then decide what we can afford to spend.

The Great California Slump Tax Balancing Proposal

As noted in the discussion above in Small Lie 3.1, we have a tax structure balance problem. To successfully survive economic cycles we need broad-based tax policies that balance property, income and sales taxes.

As opposed to the tax structure proposed in the Brown Budget, it's time to restructure our tax revenue indicated (in billions) below in the column labeled "Property":

The revenue numbers above come from Schedule 3 in the Brown Budget document, plus Board of Equalization information and reported preliminary information from county assessors. They don't reflect what goes into what fund and what's been or is proposed to be shuffled around by politicians. It's just our governments' revenue.

What this proposal suggests is that California:
  • Proceed to use the Brown Corporation Tax proposal;
  • Cut the current Personal Income Tax to generate a third less revenue;
  • Reduce the state sales tax back to 5% (from 6%); and
  • Increase the Proposition 13 property tax rate from 1% of assessed value to 1½% of assessed value and put that the half-percent in a special fund to fund education, from pre-school to graduate school, and to assure health care and day care for infants, toddlers, and all students.
For whatever reason, California politicians consider touching any element of Proposition 13 to be the "third rail" of California politics. Why some think an initiative measure formulated by special interests to appeal to the public's "gripe-of-the-moment" cannot be revisited 32 years later is a puzzle. In fact, failure to do so will stretch the budget crisis out for a decade.

Since 1978 we've relied too much on taxes that are overly sensitive to the economy - sales, income, and corporate taxes. When we gave up a huge chunk of our property tax revenue, we made our schools and government too dependent on economic cycles.

In a recession we may buy less at WalMart because our income dropped 25%, but we don't pull one of our four kids out of school because the school's income dropped 25%. Nor is this a time when we should provide less medical care to our children because our taxable income is less; it's when we need our safety net programs the most.

What we don't need is to exacerbate our tax revenue mistake of the past thirty years by voting in extensions of temporary sales, income tax, and vehicle tax increases. This is the time Brown needs to own up to his leadership failures of the past and deal with our tax structure which was screwed up on his watch.

Under this proposal, we still would be collecting proportionately less property tax than in that bastion of conservative pro-business, pro-rich state, Texas. And we could put critical education and child care programs on a relatively stable financial basis.

No one automatically disagrees about the various proposals to realign government services, whether it's Brown or the State Legislative Analyst offering the suggestions. But too many changes are being proposed for fair, serious consideration in a three month period. The proposals would shuttle money around like it's on a craps table while the dice are being thrown to determine who, if anyone, put out the fires, both figuratively and literally, the latter in the case of wildfires.

I know that many on the left find significant problems with certain elements of Proposition 13 and would consider raising that property tax rate as an act exacerbating the problems. We do need to reevaluate several other provisions of Proposition 13. It would be reasonable for the voters to consider the following ideas sometime in the future:
  • Remove property other than owner-occupied residential property from the assessed value near-freeze of Proposition 13.
  • In the case of rental residential property, the assessed value should be tied to changes in tenants and rents paid by new tenants combined with appropriate renters tax credits.
  • In the case of all non-residential property, the assessed value should be increased 10% a year until it is equal to market value.
  • Restore and fund the Williamson Act to conserve agricultural properties.
But not now.

Rather, let's act to balance our tax revenue sources instead of adopting a five year extension of our unbalanced system. Then let's consider all that other legally complex, controversial stuff the Brown budget contains, and reconsider the other details of our tax systems.

Or we could just dismantle everything the progressive movement has put in place over the past 120 years, particularly regulation of large corporations and monopolies and support for the goals of organized labor with Governor Moonbeam and President Avatar leading the modern Democratic appeasement movement.

Progressivism was taken over by the Democrats in the Mid-20th Century. But beginning in the 1960's a pattern of income distribution became noticeable, as indicated on this chart (click on the chart to see a larger version):

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 is three times the actual economic growth rate;
  • Worker-income is 20% less than the economic growth rate
  • Small business owner income is 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.
More to the point, for $1 of dividends and interest earned, the wages and benefits paid to workers have dropped from nearly $10 to around $4 as indicated in this chart:

Given the economic history of the past 60 years and the tenuous situation for our middle class, perhaps it's time to look at the example of the Vermont Progressive Party now that we have restructured our election system here in California.

Tuesday, February 1, 2011

California politics are similar to Egypt. What????

"When democratic ideals and calls for the right to vote are stirring the imagination of young people in Egypt and Tunisia and other parts of the world, we in California can’t say now is the time to block a vote of the people. In the ordinary course of things, matters of state concern are properly handled in Sacramento. But when the elected representatives find themselves bogged down by deep differences which divide them, the only way forward is to go back to the people and seek their guidance. It is time for a legislative check-in with the people of California". - Governor Jerry Brown to the Legislature on January 31, 2011, just 90 days after the voters elected him, the members of the Legislature, approved 4 and rejected 5 statewide ballot measures.
I'm not quite sure who Governor Brown is trying to incite comparing the California budget situation to this past week's situation in Egypt. It's tempting to call it demagoguery except it's so absurd it's stupid.

For a moment, let's discuss Governor Moonbeam's game. Basically he's saying that Republican Legislators who oppose putting on the ballot in June an extension of the "temporary" sales, use, income and vehicle taxes (imposed as part of the 2009-2010 budget agreement) are like Egyptian President Hosni Mubarak.

Nevermind the fact that these Legislators were just elected in a free, fair, and open election 90 days ago, just like Brown. Nevermind the fact that the constituencies of these Legislators elected them knowing they opposed any tax increase beyond June 2011.

Brown said this because the voters placed in the Constitution of the State a provision that such a tax increase proposal requires a two-third's vote of each house of the Legislature. He's unhappy that the Republican Legislators constitute more than a third in both houses. So Brown tells us:
Under our form of government, it would be unconscionable to tell the electors of this state that they have no right to decide whether it is better to extend current tax statutes another five years or chop another $12 billion out of schools, public safety, our universities and our system of caring for the most vulnerable.
Doesn't Brown remember that less than two years ago the voters exercised their right to decide this issue. On May 19, 2009, Proposition 1A was on the ballot in California as an legislatively-referred constitutional amendment which could have extended the very same temporary tax increases through 2011-12. The voters rejected the measure by a 65% "no" vote.

The State's financial condition hasn't changed that much since May 2009. Not that it matters. What the voters say doesn't matter to Governor Moonbeam.

It is a fact that 90 days ago 60.7 % of the voters approved Proposition 22 telling him to not "require a community redevelopment agency (A) to pay, remit, loan, or otherwise transfer, directly or indirectly, taxes on advalorem real property and tangible personal property allocated to the agency" nor "(B) to use, restrict, or assign a particular purpose for such taxes for the benefit of the State, any agency of the State, or any jurisdiction."

In his speech, in defense of his proposal to redirect those funds Brown said:
In recent days, a lot has been made of the proposed elimination of redevelopment agencies. Mayors from cities both large and small have come to the Capitol and pressed their case...

They base their case on the claim that redevelopment funds leverage other funds and create jobs. I certainly understand this because I saw redevelopment firsthand as mayor of Oakland. But I also understand that redevelopment funds come directly from local property taxes....

So it is a matter of hard choices, and I come down on the side of those who believe that core functions of government must be funded first.
So maybe it's Governor Moonbeam who's like Egyptian President Hosni Mubarak since they both choose to ignore the voters when it suits them. After all, it's a great leader who knows better than his people when it comes to choosing policy.

Of course the Sacramento Bee reported this is the same Brown who said if the tax extensions aren't approved, the alternative is "so horrible that we don't want to release it." Presumably if the measure is placed on the ballot he'll tell us what would happen if the extensions aren't approved? Maybe he doesn't know because those decisions would be up to the Legislature and he has yet to offer them or us a suggested budget without those taxes.