A billion here, a billion there - the $50 billion California deficit

"A billion here, a billion there, and pretty soon you're talking real money."

The above sardonic quote attributed to the late Minority Leader of the U.S. Senate Everett Dirksen could be thrown at the press and politicians here in California.

Everyone keeps repeating the number "$26.3 billion and growing" as the real deficit projection the State government is incurring. That may be the number for the General Fund. But since January the State has been borrowing to pay unemployment benefits. The May projection by the Employment Development Department was that the State of California Unemployment Insurance Fund will have a deficit of $18 billion.

Not to worry. The federal government automatically loans the State the money needed to pay benefits. According to EDD:

As part of the American Recovery and Reinvestment Act (ARRA), interest owed on borrowed funds will be waived for 2009 and 2010. Interest will begin accruing on January 1, 2011 and repayment to the Department of Labor would need to occur no later than September 30, 2011.

Hmmmm. That repayment could be a bit of a problem. You see, the $18 billion deficit was based on April unemployment claim projections. Unfortunately, they didn't have the May information which apparently was a bit of a shock when the unemployment rate jumped to the highest in the history of modern record keeping. And, of course, they didn't have the June information. We don't have the June information for California yet, but the national unemployment rate jumped higher than the economic prognosticators predicted. Presumably, the same will be true for California.

So let's revise the number. It is reasonable to assume that the benefits are going to run about $3 billion higher then the May estimate. It is reasonable to assume that the "employer contributions", a euphemism for what is a payroll tax, are going to run about $1 billion less than the May estimate. In other words, it is reasonable to assume that by the end of 2010 California is going to owe the federal government $22 billion for unemployment benefits.

So, from the taxpayers perspective, we have to find a way to cope with...oh, let's just go with the "a billion here, a billion there" approach...a $50 billion and growing deficit. That's a nice round number Senator Dirkson would appreciate.

Of course, this $50 billion number assumes the economy will somehow not be bad in 2011. And it assumes that the General Fund deficit number includes an accurate estimate of the likely reduction in property tax revenues.

Then there's the pension fund losses since 2007....

California and the Gods Unknown

"After a time of wandering, Joseph came to the long valley called Nuestra Señora, and there he recorded his homestead. Nuestra Señora, the long valley of Our Lady in central California, was green and gold and yellow and blue when Joseph came into it. The level floor was deep in wild oats and canary mustard flowers". - from To A God Unknown by John Steinbeck

In his 1933 novel To A God Unknown, John Steinbeck tells an allogorical tale of the California experience. The protagonist, Joseph, comes to California to create his future. He discovers a place of apparent wealth and promise. And indeed he appears to be achieving all that he dreams. But over time, tragedies strike and a drought undoes his life work.

The story is about the arrogance of Californians who hold the belief that their efforts as humans, individually and collectively, create orderly wealth in a place where natural wealth has always existed in its own order of things.

In the "California Gold Rush" from 1848 to 1853 some 12 million ounces of gold was removed from the streams of "Gold Country" before hydraulic mining was used on ancient gold-bearing gravel beds that were on hillsides and bluffs in the gold fields sending large amounts of gravel and silt, in addition to heavy metals and other pollutants, into streams and rivers. Once the gold was depleted, gravel and silt remained in the areas affected.

Farmers followed the miners to extract another kind of wealth. In the Sacramento Valley and the Sacramento-San Joaquin River Delta reclamation districts were formed to prevent the flooding of farm lands by building an extensive levee system. In the same period, dams with water diversion and canal projects were proposed and subsequently built to move water into the desert areas of the Southern San Joaquin Valley and all of the State south of the Tehachapi Mountains in the California Aqueduct. Water became "Liquid Gold" for Californians as it seemed quite plentiful in the 1950's.

New Californians hadn't read To A God Unknown. Instead they believed that water was an endless resource of wealth for future Californians. Lands that once were orchards in Southern California. the San Francisco Peninsula, and Santa Clara County and farms in the Central Valley became subdivisions of housing for large populations, urban/suburban populations that were now dependent upon that water for human consumption competing with the remaining agricultural interests. This year the Southern San Jaoquin Valley has become the first area in the State to suffer significantly from the continuing drought as reported in a previous post.

But this story doesn't stop with gold and water. A massive highway system was built by government beginning in the 1950's displacing the railroads built under a previous government effort. Other infrastructure was put in place in the 1950's and 1960's to support a growing state population.

Much of this infrastructure was not built to withstand severe earthquakes, despite the experiences with the 1906 San Francisco Earthquake, the 1933 Long Beach Earthquake, and the 1952 Kern County Earthquake.

Few Californians could tell you about the 1952 Kern County Earthquake. It was a 7.3 quake that cracked reinforced-concrete railroad tunnels having walls 46 centimeters thick; it shortened the distance between portals of two tunnels about 2.5 meters and bent the rails into S-shaped curves.

Along with Interstate 5, in the mid-1960's the Edmonston Pumping Plant, the largest pumping facility of the State Water Project, was built near the epicenter of the Kern County Earthquake to lift water almost 2,000 feet up and over the Tehachapi Mountains into Southern California. At peak capacity, the plant pumps almost 2 million gallons a minute through 10 miles of pipeline across the Tehachapi Mountains. (It may never matter that this facility is located where earthquakes have shifted railroad tunnels. In recent years, State officials have discovered that portions of the California Aqueduct are sinking.)

As this infrastructure aged, the taxpayers of California "revolted" in 1978 and have subsequently failed to effectively maintain or replace, much less expand, the dams, levees, canals, highways, and all the other infrastructure, along with failing to support it's once-proud school system. Instead, in a level of human arrogance rarely seen, Californians in the past 30 years have been using the "hydraulic strip mining" approach to live off this artificial and transient wealth structure.

Recently the rest of the nation has learned that California is "the country's fiscally weakest state," a description offered by bond fund managers. Reports of those statements fail to mention California is responsible for 13 percent of the United States gross domestic product and that California contains over 10% of the nation's population. But we do have U.S. Education Secretary Arne Duncan telling an assembly of mayors and school administrators: "Honestly, I think California has lost its way, and I think the long-term consequences of that are very troubling."

As noted in the previous nine posts, California has started a "belated" economic collapse. Unfortunately for the Obama Administration and the world, the collapse of what was the world's 8th largest economy would drag everyone else down with it. I previously described all the early indications. Now some are starting to see what's facing us, though these economic tremors are being reported piecemeal making it difficult to assemble a "big picture" from which to forecast.

Today, it is being reported that California's regional banks, which on the surface appeared to sidestep the national banking near-collapse, are showing signs of significant stress. Further, a second round of home forclosures is expected this summer, according to reports.

Meanwhile, the State has begin issuing Registered Warrants - IOU's - in lieu of money in payment of it's bills. And while this is thought to be temporary until the Legislature and the Governor agree on a budget, in fact it may last longer than expected and when a "balanced" budget is adopted new job losses in both the public and private sector are inevitable, causing further reductions in State and local sales tax revenue and State income tax revenue. This may force another round of Registered Warrants after March 2010.

The Sacramento region reportedly is already feeling the impact of the measures taken to reduce State and local government spending. This will slowly spread out across the state like an economic tsunami. For the State isn't taxing a smaller percentage of the economic activity than it did two years ago, it is just pumping far less money into the economy. That ultimately means less private sector activity because of the multiplier effect.

Recent analysis indicates that even after the continuing job eliminations cease, hiring might not rebound. And as reported in previous posts in the first quarter of 2009 California had the most mass layoffs in the nation, and that since then California's unemployment rate continued to climb to the highest in modern record keeping. Further, even with those new job losses which in May included significant government job losses, the major layoffs that will affect the education and health sector as well as government hadn't yet begun.

Today, in a report on the situation in California's fabled Silicon Valley, we are told the truth of the home foreclosure situation:

Like cinders from a fire, foreclosures and short sales are landing on the mini mansions with double staircases, triple-tiered fountains and four-car garages.

"It's a mess," said Joe Fierro, who built a waterfall that cascades between his front steps.... Fierro looked out across Mountaire Lane to the hulking shell across the street, where his neighbor left behind dying palm trees, children's toys next to the outdoor kitchen....

The foreclosure numbers at The Ranch don't come close to San Jose's foreclosure epicenter — the East Side neighborhood near Story and King roads in the valley below — or in the cookie-cutter developments in the commuter towns from Manteca to Hollister.

But to those used to seeing the Lexus SUVs heading up Yerba Buena Road to The Ranch and other exclusive enclaves, the idea that these privileged people might be having trouble paying their bills is still a bit shocking.

Hidden within reports like this are the hints of further impacts. Major reductions in real estate values are already resulting in downward adjustments in assessed value which will result in reduced property tax revenues for schools and State and local governments. And as I noted in a previous post some property tax payments will not be made in this fiscal year due to these foreclosures . Many who in years past paid in full each December will take the option of paying half with the remainder to be paid in April. Some will choose to not pay anything in December hoping to be able to afford to pay the whole amount by April. We will not know until January what effect this will have on cash flow in California governments and schools.

Nothing in the Bush and Obama Administrations' Democratic Congress approved trickle-down bailout and stimulus efforts will be able to stop this further economic decline. That would have required funding an immediate direct hiring by federal, state and local governments significant numbers of new employees to work in programs to correct deferred maintenance of infrastructure and programs such as education and public health. And even if the Obama Administration and Congress could suddenly shift gears now, it would take six months for the effects of such a program to be felt.

I fear that the Gods Unknown of California are about to exact revenge in the form of a much deeper Great Recession.

California Currency - The "CC"

California officially started issuing "Registered Warrants" July 2, 2009. Some liken this to a situation in 1992-93 when there was a budget "kerfluffle" that at a cursory glance looks like the current State Budget situation. But there is a radical difference. This time around California is effectively issuing its own currency, what I call "California Currency" or "CC".

You might ask what is the difference between now and 1992-93? Well, back then the budget "kerfluffle" was as much of a philosophical disagreement between Governor Pete Wilson and the Legislature over spending policy as it was over a revenue shortfall. And at the time, California didn't have a budget. In fact, initially then State Controller Gray Davis wouldn't issue registered warrants to vendors because the State didn't have a budget.

California has a budget for the 2009-2010 fiscal year that began on July 1. It was adopted by the Legislature and approved by Governor Arnold Schwarzenegger in February. The income projections in that budget clearly won't materialize. So, lacking a revised budget, Arnold is unilaterally preventing some expenditures.

State Controller John Chiang is dealing with the fact that he must meet some expenditures with lawful U.S. currency as constitutionally required or required by federal law. Other obligations he is meeting with Registered Warrants in order to make sure he has enough lawful U.S. currency to get through December when property tax revenue will start to come in.

In other words, instead of using reserves which it doesn't have, California is operating under a budget that requires borrowing in a manner not unlike the federal government. California is just "borrowing" from vendors. local governments, and those it owes tax refunds to by issuing "California Currency."

I call these 2009 Registered Warrants "California Currency" because the situation is different from 1992-93, beginning with the fact that there is a State Budget. It's just unbalanced. It's becoming more unbalanced by $20-$30 million a day. Controller Chiang is hoping that by October the state will be in a position to issued revenue anticipation notes based on a revised adopted balanced budget which will indicate sufficient revenue that banks can anticipate being available for repayment of the notes. But four flaws exist in that plan.

The first flaw is that there may not be any chance of seeing a revised balanced budget. The budget cannot be balanced except by eliminating programs for the poor in the middle of a depression or significantly raising taxes in the middle of a depression. Neither may be an acceptable choice to enough legislators to get a budget adopted. That's why we have no revised balanced budget now.

The second flaw is that if a revised budget were adopted today, it is likely that the revenue projections will turn out to have been substantially too high by March 2010. Sales and income tax revenues are likely to continue to fall at a greater pace than projected. Property tax payments during November and December may be significantly lower than previous years. Some property tax payments will not be made in this fiscal year due to foreclosures . Many who paid in full each December will take the option of paying half with the remainder to be paid in April. Some will choose to not pay anything in December hoping to be able to afford to pay the whole amount by April.

The third flaw is that many temporary borrowing solutions to the revenue and cash flow problems have already been implemented which require repayment in 2009-2010. And many more temporary solutions outside the General Fund are going to require revenue increases in the coming fiscal years. For instance, the unemployment Fund is significantly overdrawn and is being shored up by federal funds that must be repaid from a major increase in employer payroll taxes.

The fourth flaw is that tax revenues will likely decline through 2010 and may not start recovering significantly until 2012.

In my scenario the State of California is doing what the federal government does. It is infusing the State's economy with money that didn't exist until the Registered Warrant was sent out. Since many banks will accept the Warrants and give their customers money, the available money supply will grow - temporarily.

But by September, folks will begin to realize that the state's General Fund shortfall is climbing to 33% of the adopted General Fund expenditure budget. Given the expenditures that by law the State must pay with U.S. currency, someone is bound to speculate that the earliest their could be any U.S. currency in the State's coffers available to cover the Registered Warrants is May 2011.

If and when that realization occurs, those warrants become "California Currency" backed by the full faith and credit of the State of California but not redeemable for U.S. currency any time soon. The "CC" will float against the dollar as a commodity comparable to foreign currencies. Thus a "CC" with a face value of $428.37 earning 3.75% might actually sell as a commodity in January 2010 for $405.39. In such circumstance one could say a one dollar denomination CC is worth US 94.6¢.

Perhaps this deficit spending will keep the State's economy from crashing as much as it would otherwise. That is the theory economists use for justifying federal deficit spending for the Stimulus Package. If successful, it could become routine.

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I wrote this as satire with a "tongue-in cheek" attitude. I certainly hope that was the right attitude and it is not in some way prophesy.

The latest economic forecast - heavy storms

I had hoped I was wrong when I first wrote at the end of May that "the 'other shoe' is about to drop in our Great Recession. California is hosting a "belated" economic collapse. Of course, no one publicly calls it that because no one wants to see it."

Now, a month later on June 24, the Business Forecasting Center of the University of the Pacific has reported that it does see it. In the "California and Metro Forecast 2009-2013" UOP economists predict:

• California will lose another 200,000 non-farm jobs reaching 1,020,000 jobs statewide over the length of the two year recession
• unemployment will reach 12% by the end of 2009 peaking at 12.3% in 2010
• unemployment will remain in double digits for the next two years through the end of 2011
• San Jose and San Francisco will be the first metro areas to in Northern California to regain their pre-recession employment levels no earlier than the summer of 2012

“The state budget crisis is a dangerous aftershock to...the foreclosure earthquake,” said Jeff Michael, Director of the Business Forecasting Center.

And indeed the state budget wrangle continues as, on the same day the UOP report was released, legislators failed to reach a compromise on spending cuts and the State Controller warned that next week he will issue IOUs instead of checks.

Without any solutions on the horizon, the following morning the State Assembly voted 69-0 and 54-0 to pass two stopgap measures to delay until after July 1 (the beginning of the new fiscal year) payments to all levels of the public education system and to cities and counties from gas tax funds for road repair. Further cuts would be made in state school spending in the fiscal year that ends next Tuesday.

A third bill likely to pass redrafts a measure legislators passed earlier this year that would transfer money from regional redevelopment agencies to the state. The earlier bill was ruled unconstitutional in April by Sacramento Superior Court Judge Lloyd Connelly because those property tax monies are required to be spent within the area served by the redevelopment agencies. The new bill would move the money to school districts within those boundaries allowing the state to reduce State General Fund transfers to those schools.

Governor Arnold Schwarzenegger says he will veto those bills because the Legislature needs to solve the big problem.

"Since the first day we began working to solve this $24 billion deficit, I have been clear: the legislature must solve the entire deficit, must make the hard decisions now, and must not ask California taxpayers to foot the bill," the governor said. "The current proposal in the Legislature amounts to nothing more than a piecemeal proposal and a second day of drills and if passed, I will veto it because it doesn't solve the problem."

Senate President Darrell Steinberg, D-Sacramento, countered the governor was making a mistake.

"If the governor wants his legacy to be 'I refused to sign a bill that would have prevented IOUs,' that's his choice," Steinberg said. "I think it's a bad choice."

In the background, however, leaders for the League of California Cities said in a news conference held as the bills were being considered they will sue if the state attempts to steal gas tax funds. The failed budget proposal included a plan to divert $1.7 billion from the local share of gas tax funds over the next two years as well as borrow another $2 billion in local property taxes from local governments to help make ends meet. Local governments have warned that the proposals would devastate jurisdictions already suffering the effects of the recession in the form of lower sales and property tax revenues.

California Economics 101: Ignore the California Manufacturers and Technology Association

According to a report commissioned by the California Manufacturers and Technology Association, California is losing manufacturing jobs faster than comparable states. Assuming you agree with their choice of comparable states, this is the one non-controversial statistic from the report Manufacturing 2.0: A More Prosperous California issued this month by the Milken Institute.

The remainder of the report is designed to support the idea that California is not "business friendly" despite the obvious fact that California has been a home for the technology revolution (Silicon Valley is located here), is considered likely to be the greatest beneficiary from the "Green Technology" emphasis in the Obama stimulus package, and is host to the much of biotech research industry.

Nonetheless, the Los Angeles Times published an article piggybacking on the study - the headline is Losses of factory jobs in California blamed on regulation. The article leads off with the story of a plant in El Monte shut down because compliance with air quality enforcement would cost too much. It then explains that the report talks about problems of too many agencies, frequent changes in labor law by the legislature, etc. Those are all issues worth exploring.

At least the Times article offers opinions contrary to the study:

Not everybody agrees with the report's conclusion. Christopher Thornberg of Beacon Economics said manufacturing output has been as high as ever in the state and that there's no evidence that jobs are going to other states.

"At least up to the last couple of years, the pace of job loss in manufacturing in California was no different than anywhere else," he said, basing his calculations on the state gross domestic product, the value of goods and services made in the state.

California GDP grew last year despite the global financial crisis, said Brian McGowan, the state's deputy secretary for economic development and commerce. And green-energy jobs in the state have grown at a rate 10 times faster than total job growth since 2005. To evaluate a state's business climate, he said, companies should focus on workforce skill, availability of capital and overall quality of life, rather than just on taxes and regulatory costs.

An article in the San Francisco Chronicle headlined California manufacturing jobs cross state lines offers no such counter-opinion. Instead it gives a platform for a spokesperson for the California Manufacturers and Technology Association, the powerful lobbying group that commissioned the report:

"Everyone says the regulatory burden in California is too much," said Gino DiCaro, spokesman for the Manufacturers Association. "Over time, we're dropping off the list of states that companies are willing to consider."

The report is not specifically connected to any bill, but manufacturers ultimately want lawmakers to change state policies that, they say, kill jobs. For instance, DiCaro said, California makes companies pay sales tax on new factory equipment, a practice followed by only two other states: Wyoming and South Carolina.

The report states: "California’s poor performance in this category is largely due to increases in taxes (corporate, individual, unemployment) during the study period." The one thing the report has buried in its tables is the reason why this is true. In fact property taxes in the seven states compared to California are much higher. For every dollar of property tax that California would charge a business,

• Washington would charge $1.66;
• Arizona would charge $1.78;
• Oregon would charge $1.79;
• Minnesota would charge $1.87;
• Kansas would charge $3.07;
• Indiana would charge $3.12;
• Texas would charge a whopping $3.78.

Texas is perhaps the perfect example to compare. In California, the CEO of a corporation would pay an income tax rate of 9.3% on taxable income over $100,000. The CEO's of corporations in Texas pay no state income tax. California's corporation income tax is much higher than Texas. California's sales tax is also higher than Texas. Texas is considered more "business friendly." From a government standpoint, it is also more financially stable as property tax is a more stable sources of tax revenue.

Perhaps there is a lesson to be learned from Texas. Repeal Proposition 13, quadruple property tax revenue, and severely reduce or eliminate state individual and corporate income taxes.

I wouldn't support that but many of the folks who decided to have the Milken Institute study done most likely would.

The one thing Californian's do not need to do in the crashing California economy is panic over technology oriented jobs. Silicon Valley is the best example of the issues surrounding both technology oriented industrial growth creating jobs and the related subsequent job losses of the past few decades.

As we know it, Silicon Valley began to gain shape with a few entrepreneurs and corporations such as IBM in the 1960's. As the innovation expanded, demand for educated and skilled personnel arose. Wages went up to attract more people. Housing development didn't keep pace so housing prices climbed. It became more costly to live in the area. Wages went up again.

School districts and state and local government then had to raise wages so that employees could afford to live there. Because of Proposition 13, increasing real estate prices to did not result in corresponding revenue increases for schools and government. Schools and government scrambled to find revenue becoming "creative" and placing heavier burdens on income related taxes.

Better educated personnel became citizens who didn't like pollution and abusive labor practices. Ironically, they liked restrictive zoning and less development. So they pushed legislators for more regulation and more effective regulation.

Still, the region continued to attract innovating businesses. But chip manufacturing was sent overseas to (1) avoid regulation regarding toxins used in and toxic waste produced by manufacturing processes and (2) take advantage of cheap labor. As the Chronicle story notes, the report indicates that the steepest decline in factory jobs was in high-tech manufacturing which had an average annual wage of $115,000 in 2007.

The manufacturers lobby would like us to believe those jobs left mostly because of taxes and government regulations. Why, then, do I believe that those jobs were moved to other states where labor costs could be reduced by as much as 60% or to other countries where labor costs could be reduced by as much as 90%. This is a debugged version of the Milken Institute report - let's call it "California Economics 101: Ignore the California Manufacturers and Technology Association."

The California economy likely will experience The Great Recession as a depression, as noted in the previous six posts:

• Because the schools, State Government and local governments will make significant layoffs in the coming months;
• Because State Government may soon begin paying bills with IOU's;
• Because of a drought significantly depressing agricultural production and related employment;
• Because people are moving out of the state reducing growth to nearly none;
• Because California abandoned its commitment to educate its children;
• Because many service and retail business can't survive, and none can flourish, in this economic environment; and,
• Because, yes, we haven't found a way to create technology industries and provide them with an adequate supply of affordable labor since it costs too much to live here.

The troubles of our proud and angry dust....

The value of California’s 2007 agricultural exports achieved an all time high of $10.9 billion, an 11 percent increase from the 2006 total. - from a U.C. Davis Agricultural Issues Brief

California farmers constitute an essential part of the state economy. ...farm production is closely linked to many other industries: the production of farm inputs, the processing of food and beverages, the textile industry, transportation and financial services. Including multiplier effects, California farm and closely related processing industries employ 7.3 percent of the state’s private sector labor force and account for 5.6 percent of the state labor income. Every dollar of value added—labor and property income and indirect business taxes—in farming and agricultural related industries generates an additional $1.27 in the state economy. For every 100 jobs in agriculture, including the food industry, there are 94 additional jobs created throughout the state. California agriculture is also large on a global scale. Depending on the method applied to measure the value of agriculture here and elsewhere, California ranks between 5th and 9th in the world, ahead of such countries as Canada, Mexico, Germany and Spain. - from the U.C. Davis publication The Measure of California Agriculture

The facts presented above place in context the reality that much like in The Great Depression where the nation saw a drought (the Dust Bowl) impact its economy, California's agriculture economy is struggling with a drought, a struggle which is likely to continue for several years. From the AP via San Francisco Chronicle:

California Sens. Barbara Boxer and Dianne Feinstein are joining Gov. Arnold Schwarzenegger in calling on the Obama administration to issue a federal disaster declaration for Fresno County.

In a letter to the president Monday, the senators said the county has been hit hard by water shortages from a lack of rainfall and the need to protect endangered species. A disaster declaration would help the region obtain emergency unemployment and other benefits.

In another story, the endangered species issue is put in perspective:

The Director of the State Department of Water Resources, Lester Snow, accompanied the Governor. He says fish are not the primary reason water supplies to growers in Western Fresno County have been reduced.

"About 25 per cent of that difference is related to the fish protection standards and about 75 per cent of that difference is related to the drought." Snow said.

From a Fresno Bee story, we have this:

Los Banos is one of many pockets of the San Joaquin Valley hit by foreclosures and reduced water deliveries, which has led to thousands of acres of fallowed farm fields. The jobless rate throughout much of the valley is in double digits.

Actually, in many of these areas the unemployment rate is above 30%. UC Davis agricultural economist Richard Howitt has reportedly estimated that job losses due to drought will be in the range of 30,000 this year.

The effects from this will not only increase the cost burden on the "safety net" as more families require assistance but also will result in long-term higher food costs across the nation.

"I think California has lost its way...."

In what was the most accurate descriptive statement by any government official of the situation in California during The Great Recession, on May 22 U.S. Education Secretary Arne Duncan stated to an assembly of mayors and school administrators: "Honestly, I think California has lost its way, and I think the long-term consequences of that are very troubling."

California's economy is perched at the edge of the precipice. As noted on May 26:

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.

Education Secretary Duncan was most concerned about California's education system. Once the pride of "The Greatest Generation" most of whom experienced first hand The Great Depression and World War II and who paid sufficient property, sales, and income taxes not only to provide a strong elementary and high school education system for their children, but established the California Master Plan for Higher Education of 1960 based on the underlying principles that:

1. some form of higher education ought to be available to everyone regardless of their economic means;
2. only a person's academic proficiency should determine how far they can go;
3. the competing demands of fostering excellence and guaranteeing educational access for all would be balanced through the combination of the University of California campuses, the California State University system, and the California Community Colleges System;
4. a differentiation of function would be assigned so that each of the three systems would strive for excellence in different areas so as to not waste public resources on duplicate efforts;
5. the top 12.5% (⅛) of graduating high school seniors would be guaranteed a place at one of the University of California campuses, an additional 33% would be able to enter one of the California State University campuses, and the community colleges would accept all applications.

It was the generation which also learned first hand that only through a social compact assuring an adequate economic safety net - part of which in the 21st Century is a strong education system - can a society continually build a strong economy.

Education Secretary Duncan was acknowledging in May that California's public education system, once considered the national model, now ranks near the bottom in both school funding and academic achievement.

Instead of the achieving the dream of 1960, a 2006 study by UCLA's Institute for Democracy, Education and Access discovered that California sends a lower percentage of its seniors to in-state public four-year universities than any state but Mississippi. Only 12% of the California students who entered the class of 2004 as ninth-graders enrolled in one of the state's public four-year universities. And though one might wish to attribute a multitude of reasons for this reality, the study found:

At the heart of the problem, concludes the study, is a failure to invest in education.

California is among the states with the highest per capita personal income in the country -- it ranks 11th -- yet when spending is adjusted for regional cost of living differences, it ranks 43rd in education spending, according to the report.

Duncan also was expressing concern about the immediate future which is endangered by the financial crisis in California State Government, including schools and local government. According to an Associated Press article, as it stands right now:

Under the governor's plan, K-12 schools and community colleges would lose $5.3 billion over the coming year — on top of billions of dollars in recent reductions and payment delays.

The state would spend $7,806 per K-12 student in 2009-10, almost 10 percent less than two years ago, according to the Legislative Analyst's Office.

Federal stimulus funds have prevented deeper cuts to a public school system that educates 6.3 million children, of which about a quarter do not speak English well, and nearly half are considered poor under federal guidelines.

School districts have already issued layoff notices to more than 30,000 teachers and other employees, and they could issue more pink slips this summer, according to the state Department of Education.

Duncan was concerned because California already is scheduled to receive $8 billion in stimulus funding for education over the next two years. That money will go elsewhere if the state fails to maintain funding levels for education.

The problem for the Governor and the Legislature is that the "wasteful spending programs" requiring meaningful General Fund expenditures are exactly the programs which would lose existing federal matching funds. They are also the main programs within the Obama Administration stimulus program directly targeted to aid people suffering the most from The Great Recession, plus education.

Last year California's per-pupil spending on K-12 education, which was ranked a shameful 43rd in 2006, fell to 47th.

The California I once knew, the one that created the world's 8th largest economy, has indeed lost its way and is about to stumble over a cliff. We can't rebuild an economy if we are providing the vast majority of our children a third-world education.

California's Economic Crash - The Statistics Begin

Well, here we go. The initial article today from the Sacramento Bee:

California's unemployment rate climbed to 11.5 percent in May, the highest in modern record-keeping, the U.S. Department of Labor reported Friday.

The loss of another 69,000 jobs comes as a blow to the state....

In an earlier post I noted my fears: "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." This appears more and more likely particularly the way Arnold and the Legislature are handling conflicts over the collapsing state budget.

The article reports that the largest job declines in the month were in the government sector, down by 14,200 jobs. It also says that every other sector saw losses except education and health services.

The reality is that in May, the state government and local governments hadn't even begun serious layoffs. Those will appear in July-September statistics. School layoffs may start to show up in June, but we won't really know how many cumulative job losses there were in the education sector until September. And the health sector job losses will likely not show up until September-November.

The impact on the private sector may not be felt until after September, but my opinon is that it will be of major significance to the national economy.

I hope I'm wrong.

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.

The Wrath of Consuming All The Grapes

As a short followup on the previous post, The Other Shoe - California's Belated Economic Collapse, that began with a discussion of The Grapes of Wrath, a certain irony can be found in a Sacramento Bee article today headlined Golden State losing folks as old Dust Bowl beckons. The article reports that Californian's have been moving back to states where their grandparents migrated from during the The Great Depression. But that's not the real followup.

I also mentioned in that previous post that during The Great Depression, state and local government entities including school districts across the nation issued registered warrants (check shaped IOU's) to pay vendors and employees. Hallye Jordan, spokewoman for State Controller John Chiang, is quoted today in the Sacramento Bee as saying "we may have to go straight to registered warrants. That's something that we are looking at daily."

This is within the context of the Governor and the Legislature being unable to "rebalance" the budget for the coming fiscal year which was adopted in February. The article reports:

"This week I sat down with the controller and also with the treasurer," Gov. Arnold Schwarzenegger told a Southern California audience on Friday, "and we all agreed that after June 15, every day of inaction jeopardizes our state's solvency, and our ability to pay schools and teachers, and to keep hospitals and ERs open."

The actual fiscal jeopardy is neither that dire nor that simple, but it's still serious.

The problem with the Bee writer's perspective is that during The Great Depression it became that dire and that simple. During The Great Depression, banks wouldn't honor the warrants as doing so was essentially issuing a loan to the governments involved with no assurance as to when or how the loan would be repaid. Grocery, drug, and other stores and vendors quit accepting them after it became apparent that after a few months they still couldn't redeem them for money.

Many teachers and nurses continued to work as long as they could. In The Great Depression that kept things going for awhile because most people didn't have the debt they have today and most folks could walk to work. Now in The Great Recession that 23 miles to the job will be an impossible situation when the local Chevron quits taking registered warrants.

The Bee writer and most governmental officials including Legislators believe that couldn't happen today. Yes it can.

The Other Shoe - California's Belated Economic Collapse

In Grapes of Wrath, John Steinbeck told a story about how folks migrated to California to find hope within The Great Depression. We are now in what Time Magazine calls "The Great Recession" but California is not going to be a place to find economic hope.

The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse. Of course, no one publicly calls it that because no one wants to see it. But the boring statistics are available.

In the first quarter of 2009, "California had the most mass layoffs with 115,014 workers let go, followed by Michigan with 46,817, Illinois with 41,887 and Texas with a more modest 33,005," according to an article in Forbes. More than Michigan? After all, the same article reported that in Detroit "57 mass layoffs snuffed out 14,781 jobs in the first quarter of 2009." But California had 2.5 times the number of mass layoffs than Michigan.

We could comfort ourselves with the fact that California has 3.6 times the population of Michigan. But thing is, Michigan lost 285,000 reported jobs between April 2008 and April 2009. California lost 543,300 jobs in that same period. Most significantly, California lost 428,400 of those jobs in the first quarter of 2009.

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.

By February of 2009, the state Unemployment Insurance Trust Fund ran out of money. According to a Sacramento Bee article published at the end of January, California will "rely on a $1.84 billion federal government loan to pay benefits through March." Of course, that's old news.

The State of California should have filed for bankruptcy in March, not because the Unemployment Insurance Trust Fund is empty, but because the General Fund is overdrawn.

There aren't many old enough to remember when during the depression, along with banks going under, state and local governments including schools started paying vendors and employees with "warrants" which were IOU's based on the hope that someday enough cash would come into the treasuries to cover them.

The State of California is about to start massive layoffs beginning with about 6,000 employees in the next month with the initial largest layoffs in the Department of Corrections (yes, prison guards).

While most Californian's don't see the magnitude of the problem, the State and local governments of the world's 8th largest economy will suffer a financial shock over the next 6 months. I mention local governments, because the State is considering "borrowing" property tax revenues and will be unable to remit sales tax revenues to local governments because the State is again getting low on cash. The State's deficit is now 25% of the State General Fund and rising.

State spending on everything from cars and computers to food and toilet paper is going to have to be cut by a minimum of 15% (although it should be double that number). This is a surprisingly large amount of money that is going to cease to enter the private sector. The ripple effect in the national and world economy will be noticed by the economy's statistics keepers.

It's just the way it is unless Congress decides to intervene to bail out another poorly managed "too-large" economic entity within the American economy in order to reduce the impact on the world's economy. The Los Angeles Times, in discussing the likelihood that private investment in California's economy will dry up, noted:

"We lose competitive advantage by being the state that can't solve its problems," economist Stephen Levy said. "Regardless of what we think the solution is, the fact is we can't find a solution."

The budget crisis threatens to further weaken the state's job market, which lost 63,700 more jobs last month, according to figures released Friday. The state's overall unemployment rate actually fell slightly, to 11% from 11.2%. But new job losses could prolong the vicious cycle in which the California economy is now trapped, with rising joblessness reducing consumer spending and delaying a housing rebound, thus leading to more layoffs.

Business Week called California a "basket case" in an article noting that 47 states face budget gaps. Writer Christopher Palmeri explained:

The California state legislature will now have to consider many more cuts. They'll range from relatively smaller items—a $4 million-a-year poison-control hotline that gets 900 calls a day—to sweeping cuts in health-care spending that will reduce coverage for 2 million poor state residents. "These are folks who may go to the emergency room, but they'll face the bills afterward," says Anthony Wright, executive director of advocacy group Health Access California. "If you're trying to lift yourself out of poverty, that won't help you."

California legislators had already passed $16 billion in spending cuts and $12 billion in fee hikes to tackle the current fiscal year's budget. Schwarzenegger says his own office has been reduced by 27 positions, to 147 people, and remaining staffers are taking a 9% pay cut. State legislators, though, say the governor's decision this week to stop pursuing short-term borrowings came as a surprise to them. Noreen Evans, a Democrat who chairs the budget committee in the State Assembly, says she was against borrowing more money to begin with. She thinks the fix lies in a number of spending cuts and tax increases—everything from putting a sales tax on tickets to sporting events to the $750 million a year that could be gained from taxing oil production in the state. "We should think about taxing oil producers before we cut health care coverage to 200,000 children," she says.

Some see California's fiscal crisis as an opportunity to address structural problems with the state's government....

That would be true, of course, if Californians were able to switch their fundamental political orientation back to the social compact of the mid-1950's when they attempted to tax themselves sufficiently to provide governmental services and infrastructure for all. But there isn't time to avoid an overall collapse of the economy within the state.

California's economy is too large for the federal government to ignore. But things may already be out of hand. Before California became the state with the most mass layoffs in the third quarter of the 2008-2009 budget year, the Legislature working with the Governor put together a budget that included $15 billion in spending cuts, $12.4 billion in borrowing, and $12.8 billion in tax hikes. But tax revenue continued to drop dramatically, costs for programs like unemployment, MediCal, and health care for children climbed, and the voters overwhelming turned down ballot measures that were needed to balance that budget. Within 48 hours after the May 19 election, State Legislative Analyst Mac Taylor placed the deficit at $24.3 billion and growing.

What we all know is that a realistic take on the 11% unemployment rate reported this month is that it is more likely an 18% unemployment rate because of those who have fallen off the bureaucratic radar with another 7% of workers who became underemployed in the last 18 months.

As the State reduces its purchases of supplies, equipment, and services from the private sector and starts laying off employees whose families stop spending, the multiplier effect will put more private sector workers on the unemployment roles. This will result in reduced sales tax and income tax revenue which will increase the State budget deficit.

Actual cash income from property taxes will drop as people miss their payments. Local government will begin to face cash shortfalls. The problem is that the State has already experienced one cash crunch when it had to delay paying it's bills this fiscal year and will likely experience a similar problem again soon. So the State is not going to solve the problem for local agencies. In fact it will worsen the problem, for that last budget included borrowing $692 million from cities, $960 million from counties and $330 million from special districts which supposed has to be paid back over the next three budget years, beginning in July with the budget year 2009-2010 which is impossible.

As things started getting bad in 2008, the Legislature and the Governor cut school funding by $7.9 billion claiming that the state's education finance formulas the money doesn't require the money to be repaid in future years. School groups such as teacher's unions disagreed arguing that the schools were owed $1.4 billion from the 2007-08 fiscal year. Argue all you want, it is a moot point.

These issues cover current cash flow only which is only part of the picture. The budget proposal for the 2009-2010 fiscal year includes "accelerating" collection of $2.3 billion in personal income and corporate taxes which would have accrued in the following budget year, taxes that are at least 30% overestimated. And there are issues like $48+ billion the State is behind in contributions to cover health and dental benefits for retired state workers, a picture that sounds ominously like GM and Chrysler.

Some said the recession in California got going in earnest in 2008. Not really. It started to ramp up to earnest in November 2008. The real picture looks like this "monthly new unemployment claims" graph:

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 will need to reorganize as a bankrupt entity. It would be wise to seriously consider the Three Californias Proposal.

Your Tax Money, The Players You Don't Know and The Inadvertent Outsourcing of Our Auto Industry

While I have been a supporter of the Obama political and social movement, I have concerns about the Obama Administration's handling of the American automobile industry crisis. At his last prime time news conference the President said: "I don't want to run auto companies...."

I don't want him to run them either. But I want him to find a person with a "big picture" view and a significant far-more-than-financial knowledge base to oversee them for him in order to achieve goals that protect North American workers and the American economy in the long term.

Reading about Fiat's U.S. government supported move to own a significant interest in Chrysler and acquire some or all of GM Europe is troubling. GM purchased a 20% stake in Fiat in March 2000 with a much lauded goal to get some mid-size vehicle front drive technology. GM never used the technology and by 2005 it ultimately cost the company $2 billion to get out of the deal. It is clever dealing like this that make one wonder if American car manufacturers shouldn't just be allowed to flounder and die using their own skills (or lack thereof).

Fiat's proposal to create a separate auto division out of it's European brand names (not including Ferrari) as well as GM Europe brands and Chrysler products is disturbing on many levels as the company appears to be looking at Eastern Europe to reduce labor costs.

But what most people aren't aware of is a company like Magna International, self-described on it's web site as follows:

We are the most diversified automotive supplier in the world. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers (OEMs) of cars and light trucks in our three geographic segments - North America, Europe, and Rest of World (primarily Asia, South America and Africa).

Our capabilities include the design, engineering, testing and manufacture of automotive interior systems; seating systems; closure systems; metal body & chassis systems; mirror systems; exterior systems; roof systems; electronic systems; powertrain systems as well as complete vehicle engineering and assembly.

We have 240 manufacturing operations and 86 product development, engineering and sales centres in 25 countries on five continents as of December 2008.

In their own words, Magna is a manufacturing outsource alternative for auto manufacturers that currently services 75+ auto brands including every American brand:

For many years now, automobile manufacturers have increased their outsourcing of components, assemblies, modules and systems. The primary factors driving this outsourcing have been the need by OEMs to reduce costs, minimize the time required to bring a new vehicle to market, capitalize on the technical and engineering expertise of suppliers and minimize capital expenditures. This has increasingly resulted in OEMs outsourcing production of larger assemblies and modules to suppliers including Magna. With our broad and deep capabilities in design, engineering, testing, manufacturing, program management and system integration, we are well positioned to continue to capitalize on the outsourcing trends.

An example is offered in a graphic on Magna's web site:

Now they've formed a significant new partnership with the only U.S. non-government-owned auto manufacturer, Ford:

AURORA, ON, Jan. 11 /PRNewswire-FirstCall/ - Magna International, the world's most diverse auto parts supplier, announced today a vehicle-development partnership with Ford Motor Company to introduce a zero-emission lithium-ion battery electric vehicle (BEV) to be delivered to market in 2011.

The electric vehicle, which Ford announced at this year's North American International Auto Show in Detroit as a key vehicle in their electrification strategy, will be a small car with an expected range of up to 100 miles without using a drop of gasoline and without compromising customer performance expectations. The Ford BEV is expected to offer consumers a familiar driving experience - it will operate similar to a conventional vehicle, but with smoother acceleration, less noise and zero emission.

"This vehicle adds an important piece to Ford's product lineup with a zero-emission vehicle that will be both affordable and meets customers' needs," said Don Walker, co-CEO of Magna International. "In addition, the joint partnership demonstrates valuable OEM/supplier collaboration by sharing in the expertise and investment that the auto industry now requires for new advancements in energy independence and reduced CO(2) emissions."

"Our collaboration with Magna on a Ford BEV is the result of a shared vision of the potential of electrification in transportation," said Derrick Kuzak, Ford's group vice president, Product Development. "This partnership leverages the technical expertise of two global companies to achieve a common goal, delivering a no-compromise, zero- emission, battery powered car for the retail market."

Magna will be responsible for providing critical components that make-up the powertrain and battery modules in the vehicle. In addition, Magna will also play a key role in the engineering required to integrate the electric propulsion system and other new systems into the vehicle architecture.

Simply put, the best we can expect is that at least some of the "critical components that make-up the powertrain and battery modules" will be manufactured in the U.S. and Canada. The company has been acquiring technology as can be seen from these news releases:

AURORA, ONTARIO, Canada, October 23, 2008 – Magna Electronics, an operating unit of Magna International Inc., announced today the acquisition of BluWāv Systems LLC, a developer and supplier of electric and energy-management systems for hybrid electric vehicles, plug-in hybrid vehicles and battery electric vehicles. BluWāv is located in Rochester Hills, Michigan.
BluWāv will enhance Magna Electronics’ position in developing and supplying components and systems to the emerging automotive market for electric and hybrid vehicles.
“BluWāv provides technical leadership in multiple product areas for Magna Electronics as well as our other operating units,” said Carlos Mazzorin, President of Magna Electronics. “In addition, this acquisition will allow Magna to bring innovative electric/hybrid-vehicle systems to market faster, while simultaneously developing the next-generation systems for tomorrow’s hybrid and electric vehicles.”
“As a leader in advanced electric propulsion and energy-management systems, we look forward to joining the Magna family and contributing a competitive edge in advanced systems for hybrid and electric vehicles,” said Kevin Pavlov, President and CEO of BluWāv Systems.
About BluWāv
BluWāv Systems LLC, is based in Rochester Hills MI and is a developer and supplier of electric propulsion and energy management systems for Hybrid Electric Vehicles (HEV), Plug-in Hybrid Electric Vehicles (PHEV), and Battery Electric Vehicles (BEV). BluWāv focuses on incorporating advanced technology into its products in each segment and creating an optimal combination of products to form complete propulsion systems. BluWāv’s products are grouped into three distinct segments that together provide more than 80% of the propulsion system content for an HEV, PHEV, and BEV. BluWāv is truly “changing the way the world moves™”.
SAILAUF, Germany and SENNWALD, Switzerland, March 4th, 2009 – Magna Electronics, an operating unit of Magna International Inc., and BRUSA Elektronik AG, a developer and supplier of high-efficient power electronics and electric motors, announced today a collaboration on electric and hybrid vehicle applications. This collaboration enhances both companies’ positions in developing and supplying components and systems to the emerging global automotive market for electric and hybrid vehicles.
“With this collaboration, Magna Electronics has another strong partner in the field of electric and hybrid vehicles,” said Matthias Arleth, Vice President Magna Electronics Europe. “In combination with Magna Electronics’ years of experience and know-how in industrialization and production, we remain a trusted partner to manage future serial orders. Within the network of our competence centres we offer system solutions from concept to production.”
"For more than 20 years, BRUSA has been developing key technologies and components for electric vehicles, which now bear a very high degree of maturity,” said Josef Brusa, President of BRUSA Elektronik AG. “Now the time has come to turn these innovative technologies, together with a strong partner, into competitive volume products in order to support the market breakthrough of electric vehicles."
About BRUSA
BRUSA Elektronik AG, is a Swiss Company with actual 50 employees, which develop and manufacture innovative power electronic and drive technology for electrical Vehicles. In focus are the research and development department of the Automotive manufacturer as well as innovative Small Companies and Start Ups in the range of Electrical Vehicle. Long years of experience and high Innovation strength makes it possible to offer customers High-Level-Technology in every case, from the E-Motor over the partial components like Motor-Controller, DCDC-Converter, Charger, etc. till the whole system Vehicle drive. www.brusa.biz

What is of concern is that this Ford partnership with Magna represents the failure of the American auto industry. Why didn't Ford buy BluWāv in 2008? Magna is foreign owned. Engineering, and therefore the licensing revenue, for the very innovations we seek in our auto industry will be paid to a company outside the U.S. And BluWāv not only is an American company under foreign ownership, now on January 9 it announced that "the recently-passed Fiscal Year 2008 Omnibus Appropriations Bill directs $1.2 million to the company to accelerate its research and develop an energy storage system for hydrogen based and hybrid vehicles."

But at least the manufacturing of some of the parts may occur at BluWāv in Michigan and at Magna Powertrain in Troy, Michigan. And we'll still have final assembly done in automated robotic assembly plants here.

Magna is competing against Fiat regarding a possible partnership/acquisition in GM Europe. From Bloomberg:

OAO Sberbank, Russia’s biggest lender, and OAO GAZ, its second-biggest carmaker, are joining Magna International Inc. in a bid for a stake in General Motors Corp.’s Opel unit, a German minister involved in the talks said.
A takeover proposal for Opel from North America’s largest auto-parts supplier is being supplemented by offers from Moscow- based Sberbank and Nizhny Novgorod-based GAZ, Juergen Reinholz, economy minister in the German state of Thuringia, said today in a phone interview, declining to elaborate.

Eastern Europe is hungry for jobs that could result. I understand the need, but is that what the partnerships between Chrysler, GM, the UAW, and the U.S. taxpayers was intended to accomplish?

The problem with the Obama Administration is what the New York Times reported:

The Obama administration decided not to have an independent car czar, as was proposed in a House bill late last year. Instead, the administration chose to use a task force, giving President Obama the ability to be more directly involved in seeking solutions to the auto industry’s problems.

Instead, the Administration is leaning on "one of the most politically connected investment bankers on Wall Street, Steven Rattner," according to the article:

Mr. Rattner, a well-known media banker, is playing a central role as car czar lite, traveling to Detroit to visit plants, meeting with the automakers’ bankers, unions and bondholders, and advising the White House on which companies seem salvageable and how. If he succeeds, he may get a chance at a larger job in the administration.

In my mind, this does not bode well for America.

The critical issue here is not how the taxpayers ought to invest in order to get their money back ASAP. It's how to build an revitalized auto industry within our national boundaries even if we don't get our money back directly for 30 years. Our economy has been demolished by the ownership society "short-term return" attitude in the investment banking industry. Let's don't extend that attitude into the attempt to restructure and rebuild our manufacturing base.

Yes, we don't want the government to own or the President to run an American auto industry. But maybe that is needed in order to, in the long run, have an American auto industry beyond a few accountants keeping records working with a few technicians who run automated robotic assembly lines putting together parts, all designed and manufactured elsewhere.

That's what happened in our clothing industry. Levi Strauss & Co. used to be one of our largest clothing manufacturers. Now it's a warehouse and accounting business keeping track of orders to and shipments from fabric and finished clothing manufacturers in other countries, temporarily (hopefully) warehousing some of the products in the U.S., and shipping and keeping track of sales to retailers. Levi Strauss & Co. manufactures nothing, like too many American businesses.

There is no point in using taxpayer funds to save an auto industry if that is what it will resemble.

Plastic Ties, Weed, and Taxation with Representation

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6/24/2009 update
As is normal for governmental deliberations, it took two months longer than anticipated. But on Tuesday, June 23, 2009, the Mendocino County Board of Supervisors by unanimous vote added the voluntary medical marijuan zip tie fee of $25 per plant to the County's master fee schedule.

Details of the administrative process are still being debated in committee. Fourth District Supervisor Kendall Smith reported the final committee recommendations wouldn't be ready until after the start of the 2009/10 fiscal year. Board Chairman John Pinches indicated that the fee would be reduced for veterans and disabled patients.

---

Perhaps embracing the national general discussion on the wasteful War on Drugs, marijuana, and the need for tax revenue, on Monday the Mendocino County Board of Supervisors will take up a "zip tie" proposal at a special meeting.

In Mendocino County the traditional start of the marijuana outdoor growing season begins in April. Mendocino County Sheriff Tom Allman is reprising a program tested in 2007 - medical marijuana zip ties. Allman's office distributed 1,500 test zip ties in 2007 test.

Under the new proposal the zip ties would be sold by the Public Health Department in order to assure compliance with the privacy provisions of the Health Insurance Portability and Accountability Act (HIPAA).

Applicants would be required to present their California Medical Marijuana Card. They will be issued six zip ties unless their doctor recommends more. Allman is proposing that the charge be $25 per tie with a 50% discount for Medicare patients. The ties would be wrapped around the base of the plant and would be imprinted with "Mendocino County MMP" and a serial number.

In an interview with Ukiah Daily Journal reporter Rob Burgess, Allman said: "A zip tie acts like a prescription bottle. Whereas before deputies would spend three hours investigating a marijuana garden, now they'll be able to do that in five minutes. Before legal patients were concerned that, What if I'm gone? Will the cops take my marijuana?' With this they don't have to worry about that. This serial number will speak for them. This is the identification mark for this."

Allman said they would be monitoring for counterfeit ties.

While some see this as a taxation program, in fact the proposal is that half the money collected would go to fund a half-time employee in the Public Health Department and half would go to the County General Fund which does support the Sheriff's Office.

The goal is to begin to create a clearly separate identity for legal growing in order to identify illegal commercial growing.

The commercial growing of marijuana has become an identifiable problem for law enforcement in California's North Coast. In discussions with a member of the cooperative drug enforcement task force of federal, state, and local personnel, this writer learned that in the past few years raids of several large gardens in National Forests and other state and local forest lands have resulted in the arrest of Mexican citizens with apparent ties to the infamous Mexican drug cartel.

In 2000 Mendocino County voters approved Measure G which called for the decriminalization of marijuana when used and cultivated for personal use, making it the first county in the nation to do so. In 2008 County voters approved Measure B which repealed portions of Measure G making local regulations conform to state law implementing the provisions of the statewide voter approved Compassionate Use Act of 1996 (Proposition 215).

Under guidelines issued by the California Attorney General's office, persons who have qualified as patients or primary caregivers may grow no more than six mature or twelve immature plants per patient. Counties and cities are allowed regulations that would permit qualified persons to possess more.

The narrow passage of Measure B was not a rejection of the concept of decriminalization of marijuana. The most significant problem while Measure G was in effect was that gardens within urban and suburban neighborhoods gave off fumes and odor from growing plants.

This writer can speak from personal experience that at certain times during growing season, his yard became unusable because a neighbor's garden gave off fumes so strong that your eyes and sinuses would burn. And the odor is not similar to the not-so-offensive smell of smoking marijuana as it is like living adjacent to a chemical processing plant. This is a land use issue which, if marijuana were legalized, could be regulated by zoning in a manner that all commercial agriculture is regulated.

Given the general discussion around the nation about legalization/taxation of marijuana, it is not a surprise that some outside Mendocino County believe this is an attempt to tax the large annual marijuana crop grown within the County. While the zip tie proposal certainly creates a system of fees that theoretically could expand to a significant revenue producing mechanism much like the "tax stamps" placed on liquor bottles, at this point in time it only applies to medical marijuana growing for patients who live in Mendocino County. No significant revenue is represented by the proposal.

However, one cannot ignore the "winds of change" within the state. The San Francisco Chronicle Political Writer Carla Marinucci recently reported that for the first time the since EMC Research began tracking attitudes about legalization of marijuana a clear majority of voters say marijuana use should be generally legalized with 54% in favor and 39% against.

Prominent conservatives and liberals have long advocated legalization of marijuana as part of a change in the approach to the war on drugs. Even Fox News' weird right-wing talking head Glenn Beck blurted out on February 25: "...Look, I'm a libertarian. You want to legalize marijuana; you want to legalize drugs — that's fine."

But Monday's Mendocino County Supervisors' discussion is much more mundane. It's about procedures and processes to help law enforcement distinguish between lawful medical marijuan plants and illegal plants.

Oh, and it likely will generate enough revenue to fund personnel to administer the rules. As Allman noted: "Three years ago when we first offered this some of the other sheriff's snickered, But now, zip ties are going to be something other counties are going to look at. If this is successful, other counties could view this as a model."

The Mystery of Woodstock 2009 - West Coast

Ok, we have what appears to be a serious proposal for something called "Woodstock reBirth" that would be a 40th Anniversary version of the original. (See post immediately below.) Supposedly it is tied to producer Michael Lang, one of those involved in. and the production face of, the original Woodstock. He has a Wikipedia entry.

Indeed Lang has been talking about a New York and Berlin celebration. But we haven't heard from Lang about Willits.

On the other hand, months ago a well-known Bay Area group - Musicians and Artists for Peace - on their web site indicated they have "formed a coordinating committee to help organize and promote 40th Anniversary Woodstock events in 2009." I received information today that no changes have been made in their plans for a Woodstock 40th Anniversary event in San Francisco's Golden Gate Park on October 25th.

The problem with the person announcing the Willits event in August is that neither he, Roscoe Smith, nor his company, Monsoon Entertainment of Tempe, Arizona, have any web presence. A Roscoe Smith associated with the Navajo Nation, does show up in a Google search narrowed to that region. And a Monsoon Entertainment Magazine is referenced in two items on the web.

Until we hear from Lang, no reason exists to rearrange our August plans here in Willits.

Woodstock 2009 August Event Proposed for Willits, California

A serious plan has emerged to hold one of possibly three 40th Anniversary Woodstock concerts in August in the small Mendocino County town of Willits, California.
According to a Ukiah Daily Journal report, the Mendocino County Board of Supervisors was having a special meeting focused on some development permit issues and a court building proposal when Roscoe Smith, of Monsoon Entertainment in Tempe, Arizona, announced that he represented a group of investors from both Florida and New York who were interested in staging a concert in August in Willits that could draw "around a million" attendees for the 40th anniversary of Woodstock.
Smith indicated he is working with Michael Lang, one of the co-founders of the original Woodstock, who discussed the status of the plans for the 40th Anniversary celebrations with a Billboard Magazine reporter this past week. Lang was in Austin, Texas, as part of a South By Southwest panel discussion entitled WOODSTOCK: Untold Stories.
Michael Lang described his plans for a 40th anniversary Woodstock concert as "all speculative ideas" for now, but he hopes to bring them to reality this summer. Venue ideas discussed were those reported earlier in the year - New York City and Berlin, Germany. Smith told the Daily Journal the event is being planned by original Woodstock co-founder Michael Lang to be simulcast concurrently with the possible sister venues in New York and Berlin. The Willits site is the only one on the Pacific Rim.
Both have indicated that the plan is to have the events be "green." "We want to have as small a carbon imprint as we can and use as many green techniques as we can," Lang indicated. Apparently the theme or title will be "reBirth."
"It's called reBirth because the event promotes sustainability," Smith said. "Each day has a different themed event. Our goal is to preach and educate in this event and people can walk away and make it a rebirth for themselves."
"We started researching this about two and a half years ago," Smith explained. "We looked at three spots in Louisiana, four or five in Texas, a few in Wyoming, Illinois, Missouri befpre settling on Willits. We could do a bigger impact on the community if we were to do one of those areas ... Up here it might bring more innovation. We would like to get any and every service in the community involved. The less amount of corporate sponsorship the better."
The local economy could use a boost and the "green" focus is logical for Willits and Mendocino County, home to a number of innovative "green" industries.
The critical question is: "Can they avoid the disasters of Woodstock 1999?" Lang appears to be acutely aware of this. It is not 1999. The Obama Generation of college-age folks is different. So is the original Woodstock generation, who also would be attracted by the talent being discussed, different from who they were in the '90s and the '60's.
Previous concerts in other areas of the nation in 1994 and 1999 marking the 25th and 30th anniversaries of the original Woodstock had significant security and public utility problems among others. Critics deplored the 1999 use of the Woodstock brand name as that event was labeled crass commercialization. Concert organizers were said to have gouged the kids with grossly overpriced water, beer, and food. Tickets for that event were priced at $150 plus service charges.
According to Lang, the 2009 concerts will be free. Smith said the mistakes of the past, such as price gouging for basic amenities, would stand as lessons for the future of the event.
"94 was a disaster," he said. "With every ticket that we sell we'll send that out we'll send a Nalgene (water) bottle. When people are there they'll be able fill up for free. Water won't cost people."
Smith said security would be alerted to potential problems by trained medical staff who would walk the grounds and alert security when they found out about problems.
"This will be its own event," he indicated. "We're still trying to plan how we want it to go on; if it will be open doors so people can stay in the community. As an option some families might say 'We'll bring somebody in.' They do that in certain events around the country. It gets the community more involved and lets people see what the community offers. They might just say, Hey instead of buying organic carnie food we might want to go out into the town and see what the community offers' and do things like ride the Skunk Train."
"We are trying to make it as little (impact) as possible," he said. "Any kind of offsets we are doing we are trying to balance them out on the other end. Whatever property we choose obviously we're going to have to prepare the site. We're going to have some brush and trees removed, however all those trees will be used on the property. Any rocks we remove will be used for fences. Any trees will be used for walkways. Most of the water being used will be collected from the springs."
Smith said that once the site selection was complete his office would set up a communications base that would be open to the public so that those seeking more information would have a point of contact.
"We're about two to four weeks from finalizing that," he said.
As of Friday no documentation had yet been filed with the County according to Nash Gonzales, Mendocino County Building and Planning Services director. Monday Smith indicated he would be submitting paperwork to the county "by the end of the week".
On Friday Smith told the Ukiah Daily Journal in a phone interview: "We're still working on that and we are planning on having something in by mid-April. The way we look at it we want to do everything right the first time and make sure we cross our t's and dot our i's."
Cindy Lindgren, of Century 21 Realty, accompanied Smith during his presentation on Monday and said on Friday that she would have an announcement on the search for a property by "next week."
Gonzales commented: "It's overwhelming for this county. It would be a very large undertaking. There would have to be an EIR because of the magnitude. We would have to throw everything at this event," he said. "It's not just the planning department; there's law enforcement, environmental health, etc. You're also talking about outside agencies. Caltrans, the city of Willits, Regional Water Quality Control, Highway Patrol. There's lots of state agencies that would have to be involved."

Chris Brown, Mendocino County air pollution control officer, said no one had contacted his office about the event either.
"I would have very serious concerns," he said. "Frankly, it's inconceivable...There's road access, transportation, generators to power musical equipment, vehicles, truck traffic. Everything in terms of air quality is serious. What if there is a wildfire? Then I have a million more people that could be exposed to smoke."
Brown said the number of agencies involved in the planning of such a large-scale event would be prohibitive given the less than five-month window before the slated opening.
"The first thing I would look at is the location," he said. "Is there naturally occurring asbestos? We have that in this county. You can't have an outdoor event on that. Diesel equipment has to meet pretty strict standards. You also have to think about vehicle traffic and campfires from a million people."
Brown said air pollution from traffic congestion on the area's major arteries would be unprecedented for the area.
"That alone on 101 would be a significant concern," he said. "Let's say you have two people a vehicle. That's 500,000 vehicles. To me this event is just not realistic. I may review a plan and have a different opinion, but I don't see how you could get that many people in an area near Willits without having severe impacts...My feeling is there would be significant air quality impacts, and I'm not sure how they would mitigate them. They could be significant and non-mitigatable."

As a locale, compared to Rome, NY, population 35,000±, located in Oneida County, population 240,000±, where Woodstock 1999 was held, Willits population of 5,032 and Mendocino County's population of 90,163 is more akin to the location of the original Woodstock. It's probably an advantage to be more rural, but where advance permitting is involved an April application getting approval before August might be a challenge.
Whether or not this proposal actually comes to fruition, one Willits area resident noted: "We can provide a more relaxing choice than alcohol in order to avoid a riot like in 1999." In 2000, Mendocino County voters approved a measure decriminalizing marijuana when used and cultivated for personal use.

Why Don't We Call It the "Panic of 2008"

While watching the talking heads try to explain why this isn't a "depression" but just a "recession", I was wondering what happened to the word "Panic" which was used to described economic conditions. Wikipedia has entries for:

• Panic of 1819 - pervasive USA economic recession w/ bank failures; culmination of U.S.'s 1st boom-to-bust economic cycle
• Panic of 1825 - pervasive British economic recession in which many British banks failed, & Bank of England nearly failed
• Panic of 1837 - pervasive USA economic recession w/ bank failures; a 5 yr. depression ensued.
• Panic of 1857 - pervasive USA economic recession w/ bank failures
• Panic of 1873 - pervasive USA economic recession w/ bank failures; a 4 yr. depression ensued.
• Panic of 1893 - pervasive USA economic recession w/ bank failures
• Panic of 1901 - limited to crashing of the New York Stock Exchange
• Panic of 1907 - pervasive USA economic recession w/ bank failures

To me, "panic" is a word that completely described the situation. People go through a cycle in modern economic times - (1) fair ordinary returns on investments, (2) greedy extraordinary returns on investments, (3) karmic extraordinary losses on investments exacerbated by panic.

I wonder why we stopped using the word "panic". The entry in Wikipedia for the current situation is entitled "Financial crisis of 2007–2009". It is such a meaningless heading compared to "Panic of 2008".

Meanwhile, the government has to tells us to stop our panicked behavior. If folks thought of it as a "panic" maybe the would get over it sooner.