Thursday, June 25, 2009

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.

Wednesday, June 24, 2009

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.

Tuesday, June 23, 2009

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. 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.

Monday, June 22, 2009

"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.

Friday, June 19, 2009

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.

Tuesday, June 16, 2009

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.

Sunday, June 14, 2009

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.