The MARE policy: what economic recovery?

The Obama Administration's financial gurus are continuing the huge gamble with our future - what I call a Maintain the Appearance of a Recovering Economy (MARE) policy, which has two elements:

• A "talk about it enough and they will come around" philosophy designed to reinvigorate the American consumer economy with the optimism that a recovery is underway.
• The "trickle into" theory of economics involving the short-term use of government debt (instead of private debt) to infuse money into select businesses and the banking industry hoping the money will trickle into the rest of the economy.

According to the press the economy is nearing recovery. Most economic pundits experts appear to believe that what's important in the economy is how upper level employees of banks and brokerage firms are doing. At least that is the core of the current economic optimism as presented in the media.

And as that optimism is repeated, stock prices rise which immediately benefits (1) individual corporate executives and large shareholders (mostly over 50 years of age) and (2) a greatly reduced number of retirees and baby boomers over 60 still holding stocks as part of their retirement investments. (That's "the old gray" MARE benefit.)

What's this policy doing for ordinary people with children under 22 who are going to school? At some point, after all, the economy is not about banks or brokerage firms or any corporation or business. It should be about people having money, money to spend on food and money to pay their bills.

Right now it appears that the "trickle into" MARE policy has trickled in enough money so upper level and mid-level employees still employed by banks and brokerage firms may be reasonably assured of an income, perhaps huge incomes in the firms that received the most federal bailout money directly, or indirectly from AIG.

Swell. Now about the remaining 300,000,000 Americans, many of whom are in families that have greatly reduced or no income, including those who worked for brokerage firms and banks who were laid off in 2007-2008....

One in six Americans are unemployed or underemployed. Here in California are being told that in terms of jobs we "will have lost more jobs - over 1 million - than any other state in the union" and that we should "be prepared for the long haul" as the employment will not be recovering at least until 2013. But we'll not be alone as many states will be waiting until "after 2015."

What will happen in the meantime? A pretty good indication is being reported:

About 1 in 10 Californians with a home loan is now in default, and there's growing evidence that the mortgage meltdown is spreading to commercial real estate.

The home mortgage delinquency rate -- the percentage of borrowers who have missed several payments and are in the first stage of foreclosure -- climbed in June to 9.5% in California and 9.9% in Los Angeles County....

The staggering number of home mortgage defaults probably will lead to large numbers of foreclosures through at least this year, housing experts say.

Oh. The millions unemployed won't be making payments on their mortgages, or on other loans and credit cards. And they won't be buying much which results in delinquent lease payments from retail stores to mall building owners, causing delinquent payments on commercial mortgages....

But we keep reading that things are getting better. Certain economic indicators tell folks that in some parts of the country the economy is stabilizing. After all the housing sector showed a significant gain in the number "newly-built home" sales and the third straight monthly increase in the sales of previously owned homes. Oh sure sales are still near all-time lows, but things are improving.

Or maybe the jump is simply short term because buyers are taking advantage of federally subsidized record-low interest rates, the new temporary tax credit for first-time home buyers, and the close-out-sale-prices in areas hit hard by foreclosures.

After all there is a glut of existing "inventory" in most urban areas and "newly-built homes" doesn't necessarily refer to homes the construction crews finished last week. The term "newly-built homes" means homes that have not been occupied since construction was completed.

There are thousands of "newly-built homes" across the country that no construction worker has been in during the last six months. And there are thousands of construction workers in the home building industry unemployed or underemployed who won't be seeing their economic recovery any time soon.

How is the government stimulus program working out for the ordinary family? It being reported that IHS Global Insight, one of the more reliable economic forecasters, still expects infrastructure spending to decline 4.3% in 2009, to decline 1.6% in 2010, then increase 2.4% in 2011 when both state government tax receipts increase slightly and the federal $120 billion stimulus package becomes fully implemented.

Statistics like this can be misleading. If one makes the big (and incorrect) assumption that the 2008 infrastructure spending level was not below a desirable level, with the one time stimulus 2011 infrastructure spending will still be 3.6% below 2008.

Therefore employment in infrastructure construction in 2011 will still be significantly below 2008 levels. In other words, without continued borrowing by the federal government to expand state and local government infrastructure spending over the next three years, it will be nearly impossible to see the employment levels in infrastructure construction industry recover to 2008 levels until at least 2014.

The "Great Recovery" headlines are misleading unless you accept that an increase in Gross Domestic Product is great without jobs - a "Jobless Recovery," Federal Reserve Chairman Ben Bernanke is calling it. A jobless recovery means that the difference in economic well-being between economic classes will increase further. If workers continue to be unemployed or underemployed, they aren't sharing in the "recovery" so it isn't a recovery for the middle class and poor.

Sure, it helps the grinning car salesman whose commission income past year has been a disaster to have the so called "Clunkers" subsidy program, which quite literally is a transfer of money from the grandkids mostly to corporate interests. After all, the bloated inventory of new cars on dealers lots around the nation was reduced by 250,000 in one week by people applying for the $1 billion in borrowed federal money. Unless you work for or own a car dealership, it's no big deal. Comments from those in the auto industry still are pessimistic:

"There's nothing here to support a major change in the forecast," said Gary Dilts, senior vice president of global automotive at J.D. Power & Associates.
Dilts, whose former employer, Chrysler Group L.L.C., went through bankruptcy this year along with General Motors Co., does not expect vehicle sales to even flirt with the 17-million-a-year level they had reached four times since 2000. He is holding firm to a forecast of 10 million for this year.

In other words, it isn't going to alter the recovery for former auto workers and laid-off workers in related industries. It was money given to auto dealers, perhaps shared with employees and perhaps resulting in new car orders, hopefully benefiting US. Government owned Chrysler and GM or at least American-owned Ford.
AutoNation is the largest U.S. dealership chain by sales operating 264 dealerships in 15 states and sold more than 3,000 new cars in the week. AutoNation's President and Chief Operating Officer Mike Maroone commented in the company's recent earnings call:

Our observations are that the majority of our ‘Cash for Clunkers’ volume is incremental, a larger percentage of the trade ins are domestic, and on the sales side the majority are imports. In aggregate credit scores for our ‘Cash for Clunker’ customers are better than normal and the program has not negatively impacted our used vehicle business.

So the customers are mostly people not in financial difficulty who are trading domestic clunkers for new imports. The company's Chairman and CEO Michael J. Jackson said:

"It's been a huge success. "I think there has been a psychological effect and gotten consumers to start buying cars again."

It's an interesting take, and it illustrates what's really going on.

Ignoring the paperwork snafu's and the fact that the first billion is theoretically gone (Congress is trying to provide a couple more billion), what is happening is that dealers will now have to decide how many of the cars to replace with new ones. The options before dealers are to reduce their debt (they borrow to "floor" their inventory) or gamble that after the pent-up demand flushed out by the subsidy program is gone, they'll find customers with the money to buy cars.

Since 2007, an estimated 5 million overdue car buyers are waiting to find out if the value of their home will recover, if their 401(k) or kid's college fund will regain some of the losses that occured over the past two years, and/or if they will have a job next year. It's hard to believe that many are saying because of high auto sales in July 2009 could signal a bottom to the worst sales slump since 1976. If you want to buy a car, it's hard to ignore a $4,500 government gift. But this is hardly a good example for creating a responsible economy:

So even though it was the last day at his job as a production controller for a West Columbia, S.C., manufacturer Mr. Dunn took his severance check, his 1989 pickup with about 300,000 miles and headed to Dodgeland.

With the help of the rebate and cash from his savings, he bought a red, 2009 Dodge Caliber. "The economy is picking up," he said Friday. "It seems like it is anyway."

This is the worst example of the MARE effect. Even though Mr. Dunn lost his job, with an optimistic outlook he took his severance check and some savings to buy a new car. And if he doesn't have job two years from now, then what?

Within that question is the more critical one. A brief job retention effect will occur at car dealerships through the fall of this year, but not new hiring. Auto financing banks and auto dealership inventory financing sources generally have been bailed out - banking again. But even if dealers do order some new cars, manufacturers cannot sustain plant operations without continued retail growth.

As noted in the previous post, over the next four months 137,000 Californians will run out of unemployment benefits, with 62,000 losing them next month. Nationwide, the National Employment Law Project estimates that that 540,000 Americans will exhaust their unemployment insurance benefits by the end of September, and a whopping 1.5 million will run out of coverage by the end of the year.

Congress is likely to extend their benefits for a second time, by borrowing from the beneficiaries' grandchildren of course. This is the safety net that hopefully keeps the beneficiary families from having to live in their cars. These benefits don't produce anything nor help morale. These benefits won't turn the beneficiaries into conspicuous consumers. These benefits won't turn the beneficiaries into believers in the "recovery."

Nor should anyone forget that after the stock market hit bottom mid-November 1929 there was 48 percent bear market rally that peaked mid-April 30 1930 followed by the real crash that bottomed out mid-June 1932 after which no beginning of a real sustained similarly steep long term bull market appeared until May 1953. No one should think that the recent bear market is based on a "recovery."

A "recovery," meaning the end of the Great Recession and the end of the Great California Slump, can be declared when employed workers numbers exceed mid-2007 numbers increased by the percentage increase in the workforce and unemployment rates fall below 6%. The MARE policy of talking optimistically about a recovery doesn't make it so. Borrowing from our grandchildren to infuse money into banking and select businesses in the short term won't result in enough money trickling into the economy to create a significant increase in jobs.

It's the ordinary people's economic lives that have to improve for a shared recovery. That won't happen by borrowing from our grandchildren unless the money is spent by government hiring enough ordinary people directly to create enough of a multiplier effect within the economy to create confidence at the retail level so that businesses will create new jobs for ordinary people.

It's the ordinary people's economy that counts.

As the economy improves?

As I watch talking heads explaining hopeful signs in the economy, I'm glad the economy is doing well for bankers and brokers. As today's news reports that job losses climb more than the idiots economists expected, KPIX (CBS 5) ran a story on the fact that over the next four months 137,000 Californians will run out of unemployment benefits, with 62,000 losing them next month. (View the story here.)

This had to be happening nationwide, so I did a Google News search on "unemployment benefits run out" and came up with 135 results in the past month. I can't imagine this story on the WRAL (Raleigh-Durham-Fayetteville, N.C.) web site in 2007:

Durham, N.C. — More than 460,000 people in the state received unemployment benefits in the past month, according to the Employment Security Commission of N.C. But what happens when those benefits run out?

...Turning to the local social services office may be a good place to start.

“You can come and apply for any of the services we provide. Work First is the program that helps folks with cash assistance and will help you do your job search,” said Sharon Hirsch, a spokeswoman with the Durham County Department of Social Services.

Yes folks, welfare is available unless you're in California where Arnold and the Republicans are trying to shut down the "overly generous" back to work program.

Pot and Movies: Wouldn't Cheech and Chong be pleased

As Mendocino County's experiment with embossed zip ties for legal medical marijuana plants seems to be proving effective even raising some revenue, Oakland marijuana legalization advocates have taken the first step towards a broader legalization.

The pro-legalization Richard Lee, president of Oaksterdam University has filed a proposed ballot measure with the California attorney general's office. It would allow persons over the age of 21 to possess up to an ounce and homeowners could grow marijuana for personal use on garden plots up to 25 square feet.

This comes fresh on the heels of an overwhelming favorable vote in Oakland Wednesday on a 1.8% gross receipts tax on sales in permitted medical marijuana dispensaries within the City. This should raise about $300,000 a year for the City's tight budget.

Medical marijuana sales generate about $18 million a year in state sales tax. The cash-strapped status of the State of California has caused serious discussion about further legalization and taxation of what is considered the North Coast's largest (in value) agricultural crop. It is expected that the Assembly later this year will take up a bill that would further legalize and tax marijuana.

Perhaps this approach should be considered at the national level in order to aid Mexico in the fight against the drug cartels by reducing their income. According to a recent article in the San Francisco Chronicle headlined Mexican growers having big pot year in state:

Mexican drug traffickers have expanded their marijuana-growing operations in California parks as state and local governments have tightened spending and slashed jobs and services.

Law enforcement officials say the traffickers, taking advantage of the fact that there are fewer sheriff's deputies and rangers monitoring parks, are cultivating more pot than ever before. This year's multibillion-dollar crop is on pace to be the largest in history, said state officials.

In the meantime, efforts to reduce the outward flow of jobs in Hollywood are apparently producing some dividends. According to a Los Angeles Times article headlined 25 film, TV productions among first to get California tax credits:

The state is awarding $67.5 million in tax credits for the 25 productions. Amy Lemisch, director of the CFC, said those movies and TV shows will spend $347 million on below-the-line employees. Lemisch said she was confident the vast majority of that money would otherwise not have been spent in California.

"Based on my talking to these producers for some quite some time before they even applied, I'm confident most of these would not have shot here without the incentives," she said.

As previously noted here a very large number of jobs in California in and related to movie and TV production. California's share of movie production dropped from 66% in 2003 to 31% in 2008.

Stimulating growth in an old California industry and acknowledging the growth in a newer California industry are two ways to grow tax revenue. Pot and movies - wouldn't Cheech and Chong be pleased.

Figures don't lie, but the media sure do mislead

The home builder stocks jumped today. Why? Because of these headlines:

• New Home Sales Surge 11 Percent in June
• Home sales rise as housing market tries a comeback
• Shares of Home-Building Cos Spike On US New-Home Sales Data

I don't get it. Who's cheering up the headlines? Somebody is and it wasn't the Census Bureau. Their news release simply says:

Quote:

Sales of new one-family houses in June 2009 were at a seasonally adjusted annual rate of 384,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.0 percent above the revised May rate of 346,000, but is 21.3 percent below the June 2008 estimate of 488,000.

The Wall Street Journal had one article with a more cautious observation, but perhaps too cautious:

Quote:

Many investors celebrated Monday after June's "surge" in U.S. new-home sales. Alas, it was largely wishful thinking. True, the Census Bureau reported sales up 11% from May. That's a big number, at first glance justifying Monday's 4.5% leap in the Dow Jones U.S. Home Construction Index. But it fails a close inspection. First, home sales quite often jump in June, the height of the spring selling season. When trying to gauge the strength of home sales, then, it makes more sense to compare them to the same month a year ago. That comparison is less kind -- sales were down 21.3% from June of 2008. Seasonally unadjusted data show a total of 36,000 new homes were sold last month, the lowest June total since 1982, notes Richard Moody, chief economist at Forward Capital.

My question is: Do most casual investors just read the headlines and think things are looking up? I guess if you glance at the Washington Post headline you'd really think new home sales "surged" in June as opposed to down 21% over a year ago.

If you did your homework, you'd know that the May 2009 sales of new one-family houses was down 32.8% from May 2008. So the June news is good. But not good enough to run out and buy shares in a home builder. Maybe next month or August if the trend continues.

The Great California Slump is upon us and we won't admit it

In May I posted:

The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse.

Now that the California Legislature has adopted an out-of-balance "balanced" budget for the State General Fund, it's time to wrap up the ongoing discussion of The California Great Slump and make room to comment on other issues. This post summarizes the situation as it stands now and as described in detail in the 17 posts since May.

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When I wrote in May that California's Great Recession likely will begin "in earnest" in July 2009, I hadn't really thought about a proper name for it.

The term regularly used in describing the current American economy, "The Great Recession," was formalized by Nancy Gibbs of TIME magazine though it had been used in other recessions, most recently in 1989-91 and 1999-2001.

It's a terrific "euphemism," which means "the substitution of a mild, indirect, or vague expression for one thought to be offensive, harsh, or blunt." The term "The Great Recession" has the feel of thinking that pervades the Wall Street of the Ivy League Baby Boomers and Gen X'ers, regardless of individual family background. It is that group that in economics the term "bubble" should be applied, applied to their view of the world.

The problem with relying on "The Great Recession" to describe what's going on in California can be framed in terms of job loss. According to economists, the U..S. as a whole was in a recession at the end of 2007. But California lost "only" 294,185 jobs or 1.71% of its jobs in all of 2008. According to the U. S. Department of Labor, California lost 483,367 jobs or 2.87% of its jobs in the first six months of 2009, which is an annualized rate of job loss of 5.7%. So while in 2008 Californian's may have been experiencing some impact of The Great Recession, the worlds 8th largest economy hadn't crashed.

As I thought about what would best describe what's begun here, the best term I could find is "slump," the first definition of which is "to drop or fall heavily; collapse." The Great California Slump has an appropriate sound. And The Great California Slump began in 2009.

When Americans think about a truly depressed economy today, they think of Detroit. Thus one could see considerable irony in the fact that while the California Legislature struggled with adopting a "balanced" 2009-10 budget in July, the news media were reporting that Toyota has decided to liquidate its interest in the Fremont, California manufacturing plant that it jointly operated with General Motors, the last such plant in California.

The plant had employed about 4,600 workers making Toyota Corollas and Tacomas and Pontiac Vibes. Last month when it was learned that GM would be abandoning its interest in the plant to Motors Liquidation Co., the East Bay Economic Development Alliance said the plant closure could impact 30,000 jobs indirectly related to the factory.

Assuming Toyota asks Motors Liquidation Co. to liquidate the plant, the jobs directly and indirectly lost would appear in the job loss statistics in the second half of this year and perhaps the first half of next year. Remember this, as it is important to understand the timing of job losses with The Great California Slump.

For instance, few of the 7,000 new layoffs announced in May and July by the Governor, and now incorporated in the "balanced" State budget, won't occur before September 15 and definitely won't appear in the job loss statistics until the last quarter of this year. The state's layoff procedure takes 120 days from when a worker is notified of a possible layoff.

Most of the layoffs of school employees necessitated by this round of state budget cuts, teachers and other staff, will show up in the jobs loss statistics over the next four months. The local government jobs lost did begin this spring, but many more will also be seen in the next four months.

The State's two university systems this July joined the other State employees taking unpaid furlough days each month for the foreseeable future. Most of the 300,000 employees will be taking three furlough days, representing a 15% reduction in gross pay.

While this $1.5 billion loss of pay hurts the employees and their families, in terms of the impact on the private sector, it is comparable to laying off another 45,000 state employees as this is money that won't be spent on clothing or iPhones or paid in State income and sales taxes. Without this money, the retail sector will lay off additional employees whose job loss will be reflected in the statistics in the remainder of this calendar year and the first half of next year.

Which brings us back to the out-of-balance State General Fund Budget. The May estimate was that the State's General Fund Budget was out of balance by $26.3 billion based upon projected revenues. On July 12 State Controller John Chiang issued a news release reporting that the May estimate for June revenues was $1.14 billion too high because personal income taxes were $987 million below (-18%) and sales taxes were $154 million (-5.8%) below the May estimate.

Nonetheless, on July 24, the Legislature adopted and sent to the Governor a budget based on the May estimates. We'll find out in the second week of August just how badly the July revenues fall short of the May estimates. Maybe they won't.

It's my opinion that instead of $26.3 billion budget gap, the gap was at least $34 billion. However, the National Conference of State Legislatures latest report on the status of budget problems across the nation singles out California as having a cumulative General Fund gap of a "whopping $38.9 billion or 35 percent of the general fund budget." Choose the size of your problem - $8 billion or $12 billion. Let's just agree that it's likely that the revenues shown in the adopted budget will be about $10 billion short by June.

When the U.S. Department of Labor reported that for June "the largest over-the-month decrease in the level of employment occurred in California (-66,500)," it was dutifully reported in the Los Angeles Times with some additional pieces of information.

"'Even more worrisome," said Esmael Adibi, an economist at Chapman University, 'is that the rate of decline in jobs is not slowing. Total nonfarm employment fell 5.1% from last year, dropping at a quicker pace than in previous months. Total nonfarm employment fell 4.8% in May from the previous year."
"...There are signs that Californians are increasingly frustrated with the state's economy,' Adibi said. He noted that the state's labor force lost 46,200 jobs last month, indicating that some people have stopped looking for jobs entirely.

We know that in May California manufactured exports were down 28% while agricultural and other non-manufactured exports were down by 23.3%. Year-to-date exports were down by 31% in five months. Imports coming through California's ports in May were down 31.7%.
Both these indicator statistics lag behind the rest of the economy. They are based on orders placed months ago. It is likely that these numbers will continue to drop well beyond when the national economy hits bottom.

The Los Angeles Times reported recently that according to the "Employment Development Department, jobs in movie and television production were down 13,800 in May compared with a year earlier." The article also reported that "California's share of U.S. feature film production dropped to 31% in 2008 from 66% in 2003, according to the California Film Commission. That largely reflects a falloff in the Los Angeles area, where feature filming activity in 2008 was nearly half what it was at its peak in 1996."

Ignoring the recent University of Colorado study warning that population growth in the West along with climate changes and poor management of resources could threaten long-term water supplies for Southern California, the drought within California has already impacted Central Valley agriculture.

Much like in The Great Depression where the nation saw a drought (the Dust Bowl) impact its economy, California's agriculture economy is struggling. In many areas of the San Joaquin valley the unemployment rate is above 30%. It is estimated that job losses due to drought will be in the range of 30,000 this year.

Reportedly 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 foreclosures has begun.

Newspapers around the state have begun reporting the net assessed value drop information from various County Assessor offices, in some areas as high as 26%. Most local government agencies have anticipated this in their budgets for 2009-2010. But 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 or simple lack of money. 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. Yes, these will be shown as "receivables" on our governments' books, but the State has a cash flow problem.

These accumulating facts represent the reality that the Legislature and Governor, and the schools and local governments, and the employees of governments and schools, and the taxpayers all seem to be ignoring.

And these folks also seem to be ignoring the facts that:

• half of the "solutions" for closing the General Fund budget gap were one time fixes and short of some miracle revenue increase by July 1, 2010, the budget will be out of balance $30+ billion,
• the Unemployment Insurance Fund will likely have borrowed at least $23 billion by the time repayment requirements kick in September 2010, and
• the two State employee retirement systems have each lost $50± billion in the past year, the approximate net worth of Bill Gates, and there's no way state and local agencies can absorb contribution increases in the next few years sufficient to replace the losses.

California can recover but not rapidly. Even the legendary Silicon Valley has nothing to offer but hope for the longer term. The Sacramento Bee described that situation recently:

In the Silicon Valley region, unemployment tops 11 percent and investment capital has all but dried up. Here, unemployed tech professionals are showing up in droves at Bay Area mixers – and signing on en masse on career networking sites – to volunteer labor and expertise in exchange for equity shares in Silicon Valley startups that have no money to pay them....

With a half-million Internet, computer, biotech and financial services workers, the pool of jobless talent here is so deep that Jobnob scheduled separate college-themed "happy hours" for tech professionals from Stanford, Harvard and Berkeley alone.

Virtually no responsible economist thinks California's economy will hit bottom before the middle of 2010 or begin to recover before the middle of 2011. It's difficult to imagine where in California's economy the State will find revenue from sales, income, corporate, and property taxes, and employer unemployment insurance to cover its costs for fiscal year 2010-11.

The Legislature will have to find a way to deal with 2010-11, which won't be easy because to balance the 2009-10 budget, they ordered that June 30, 2010 paychecks for State employees be dated July 1, 2010 "saving" a billion or two in 2009-10. Further reductions in State and local government employment and/or substantial increases in tax and unemployment insurance rates beginning in the middle of 2010 would further worsen the economy.

California's credit rating has already dropped below that of the most sound private corporation. While the Governor, State Treasurer and State Controller plan on the State borrowing enough money through Revenue Anticipation Notes to pay its bills and in October cash in the IOU's already issued to vendors, local governments, and others, someone must have a gnawing in the back of their mind that Wall Street might not think California is credit-worthy.

One of the bills to implement the budget contained provisions "allowing", or "requiring" depending on your point of view, the State Compensation Insurance Fund and the State Lottery to "invest in" state debt, much like the federal government first borrows from its own Social Security fund. One has to wonder if in March or April CalPERS and CalSTRS will be required to "invest in" or "bail out" the State government.

The Great California Slump indeed will be "slumping" in earnest for many months to come. Once known for its economic opportunities, for its schools and higher education system, and for its commitment to the social compact, California is slumping into the ashes, the ashes from wildfires and the ashes from Californian's burning through their wealth.

The Great California Slump

The term regularly used in describing the current American economy, "The Great Recession," was formalized by Nancy Gibbs of TIME magazine. It's a terrific "euphemism," which means "the substitution of a mild, indirect, or vague expression for one thought to be offensive, harsh, or blunt." It has the feel of thinking that pervades the Wall Street of the American Baby Boomers and Gen X'ers.¹

When I wrote in May that California's Great Recession likely will begin "in earnest" in July 2009, I hadn't really thought about a proper name for it. But as I thought about what would best describe what's begun here, the best term I could find is "slump," the first definition of which is "to drop or fall heavily; collapse."

The Great California Slump has an appropriate sound. According to the chart available from the U. S. Department of Labor, California lost 483,367 jobs or 2.87% of its jobs in the first six months of 2009, which is an annualized rate of job loss of 5.7%. Though according to economists, the U..S. as a whole was in a recession at the end of 2007, California lost "only" 294,185 jobs or 1.71% of its jobs in all of 2008. So while it may have been experiencing some impact of The Great Recession, The Great California Slump began in January 2009 and continues.²

Presently the Legislature's staff labors to assemble and the members ponder the 31 bills needed to adopt a $10±-billion-out-of-balance "balanced budget" (some of the bills are posted here for downloading and the Floor Report of the 2009-10 State Budget was made available late tonight).

While they were doing that, The Los Angeles Times and the Associated Press are reporting that this morning a Japanese news agency learned that Toyota has decided to liquidate its interest in the Fremont, California manufacturing plant that it jointly operated with General Motors. The plant had employed about 4,600 workers making Toyota Corollas and Tacomas and Pontiac Vibes. Last month when it was learned that GM would be leaving its interest in the plant with Motors Liquidation Co., the East Bay Economic Development Alliance said its closure could impact 30,000 jobs indirectly related to the factory.

Assuming Toyota asks Motors Liquidation Co. to sell the plant, the jobs directly and indirectly lost would appear in the job loss statistics in the second half of this year and perhaps the first half of next year.

Few of the 7,000 new layoffs announced in May and last week by the Governor, and now incorporated the State budget proposal, won't occur before September 15 and definitely won't appear in the job loss statistics until the last quarter of this year as the state's layoff procedure takes 120 days from when a worker is notified of a possible layoff. (Some positions may register earlier as jobs lost as a few hundred of these employees have transferred to other departments and some jobs were vacant when the announcement was made.)

Most of the layoffs of school employees necessitated by this round of state budget cuts, teachers and other staff, will show up in the jobs lost statistics over the next four months. The local government jobs lost did begin this spring, but more will also be seen in the next four months.

It appears that with the two state university systems, at least 300,000 state employees are going to continue to take three unpaid furlough days a month for the foreseeable future. While the loss of 15% of gross pay hurts the employees and their families, it also means that $1.5 billion will not be put into the state's economy through spending and taxes. In terms of the impact on the private sector, it is comparable to laying off another 45,000 state employees as this is money that won't be spent on clothing or iPhones. As each "furlough friday" goes by, some $4,000,000 is not spent by furloughed state employees. Without this money, the retail sector will lay off additional employees whose job loss will be reflected in the statistics in future months.

Exactly how the State government itself has calculated that over the next 12 months this won't result in major sales and income tax revenue reductions well beyond the May estimates is a puzzle in itself. But when it does, there will be more gnashing of teeth in the halls of the State Capitol. Although....

Break out the fireworks! Tomorrow California may become ever more like a nation on its own. One of the bills to implement the budget "allows" or "requires", depending on your point of view, the State Compensation Insurance Fund and the State Lottery to "invest in" state debt, much like the federal government first borrows from its own Social Security fund. One has to wonder if next year CalPERS and CalSTRS will be required to "invest in" or "bail out" the State government.

The Great California Slump indeed will be "slumping" in earnest for a number of months to come.

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¹That several recessions, most recently in 1989-91 and 1999-2001, were termed by some as "The Great Recession" is more indicative of a total unawareness of what it takes for an economic slump to become "great," than of what is going on. What's going on now viewed with any sense of history is a "depression" preceded by a "panic."
²A "slump" in economics is considered "any mild recession" so it seems reasonable to couple the term with "Great" to indicate that it is a significant, major slump.

"The best we can do" budget - more details

First, the big news. Five important Californian's have agreed on a compromised compromise budget for the fiscal year July 2009 - June 2010 that closes the estimated (in May) $26.3 billion gap between revenues and expenditures - the Governor plus the four leaders of the Senate and Assembly Democrats and Republicans.

On the other hand, while the Governor's "vote" is his alone, the other four have to sell the budget to enough of their peers in each house to get it passed. They are going to have to sell it as "the best we can do" because every major interest group is going to bleed some.

I called it a "compromised" compromise budget, that is because it isn't balanced for 2009-10 and doesn't even begin to deal with the reality of the 2010-11 deficit, as less than half of the changes constitute sustainable spending cuts. Thus while these leaders have reached a "compromise", meaning "a settlement of differences by mutual concessions," the settlement is "compromised" meaning the settlement is "impaired, unable to function" because the budget is known to be out of balance.

Let's face it. It is an interim budget. If adopted it could permit State Controller John Chiang to stop issuing Registered Warrants (or IOU's as they are called by the press) in payment of obligations to vendors, local governments, and even employees (expense reimbursements) in lieu of actual money. It could further permit Chiang to actually redeem the several billion dollars in Registered Warrants he has already issued.

But this will only work if "Wall Street" accepts the budget as a basis for buying State revenue anticipation notes. "Wall Street" will have to be willing to ignore the truth. The difference between the agreed budgeted expenditures and what are now expected revenues is at least $10 billion. For instead of a $26.3 billion gap, as I indicated last Friday the budget was likely is out of balance by at least $34 billion and as I indicated yesterday the National Conference of State Legislatures reports that the deficit is actually $38.9 billion and growing.

If there is any truth to these numbers, by sometime between December and March, State Controller Chiang again will be issuing Registered Warrants.

A clearer picture is forming of what's in the compromise.

Schools. New cuts total $6 billion for K-14 on top of the $1.5 billion cut in 2007-08 and an added retroactive $1.6 billion cut for 2008-09. A total repayment of $9.8 billion has been promised at some future date when the economy rebounds, perhaps beginning in 2012. Higher education budget cuts total $3 billion. The deal allows school districts to reduce the school year by five days.

School districts are attempting to find out what this means in terms of detailed numbers. The Los Angeles Times reported today regarding the Los Angeles Unified School District, the nation's second largest school system of 688,000 students:

Pollard-Terry said the school system of 688,000 students thought it had made sufficient — and painful — cuts to get through the next school year. But some conflicting media reports have put the size of the education reductions at levels that could require another round of tough budgeting decisions, she said. And getting a clear answer from officials in Sacramento has been difficult.

Budget actions in L.A. Unified have slashed about $1.29 billion starting with the 2008-09 school year, which ended June 30. On that date, the district laid off about 2,000 teachers; it has since been trying to determine which non-teachers to lay off and how many. The district's general fund, before the wave of cuts, was about $5.9 billion.

The district also is engaged in intense negotiations with its teachers union over compensation concessions that would, if successful, result in hiring back some laid-off teachers. District officials also have talked of placing a parcel tax on the ballot to fund ongoing operations. Until now, the district has asked voters only to approve school-construction bonds, which have to be reserved for building, repairing and upgrading school facilities.

The district’s budget plan, which includes many future reductions, was supposed to take the district through June 2012.

The State's two university systems already have staff, including professors, on mandatory furlough schedules. The California State University system has stopped taking new student applications for mid-year enrollment. Fees and tuition have already been increased.

While the smaller of the state's two major teachers unions, the California Federation of Teachers is urging legislators to vote against the compromise, the 340,000 member California Teachers Association President David Sanchez is supporting the compromise according to the LA Times:

Sanchez and his union had been particularly concerned about an earlier proposal by Gov. Arnold Schwarzenegger to suspend Proposition 98, which guarantees base levels of funding for education. And he was relieved that the budget deal includes a payback of some lost revenue to education.

The settlement “protects the state’s minimum school funding law and restores much needed funds to education once the economy improves,” Sanchez said. “California educators are calling on both houses of the Legislature and the governor to quickly approve the budget plan.”

Local Government. The actual impact on cities, counties and special districts is probably in the neighborhood of $4.7 billion. About $1 billion in gas tax revenues, $1.9 billion in municipal funds (mostly from counties), and at least $1.7 billion in redevelopment agency money will be shifted. It appears that some may be "borrowed" as indicated in yesterday's post, but the details are fuzzy. Discussions apparently included certain exemptions from the shift for small cities and counties.

The shifting of redevelopment tax increment funds could be extended into future years.

According to the San Francisco Chronicle, Paul McIntosh, executive director of the California State Association of Counties, said the plan to take money from counties would be devastating and called it "one of the largest takes of local government monies ever in the state." The LA Times reporteds that the Los Angeles County Board of Supervisors today voted to sue the state.

The Times also reported that the City of Los Angeles likely will join statewide lawsuits to block the taking of redevelopment and gat tax funds. Chris McKenzie, Executive Director of the League of California Cities called the budget proposal a "Ponzi Scheme" and stated: "We have assured state officials we will see them in court the day after a budget is signed if it contains illegal provisions." Judith Mitchell, Mayor of Rolling Hills Estates and President of the League stated:

While some at the state level will try to pass this proposed state budget off as a major breakthrough, city leaders know it only passes the buck and the problem to the future. As an elected official who took an oath to protect and defend the state constitution, I am embarrassed that any state officials would propose a blatantly unconstitutional budget that promises to fail within weeks of its adoption.

Lawsuits would, of course, put the $4.7 billion in doubt. It is unclear if that would affect the State's ability to issue Revenue Anticipation Notes.

Health and Welfare. Dealing the health and welfare programs was a difficult task. The primary problem was not to take action that would result in the loss of federal funds. Still, the budget agreement offers $850 million in cuts to In-Home Supportive Services, CalWorks, and Healthy Families which means many seniors and children will lose access to health care while the safety net for families in a major recession would become out of reach for many.

That part of the budget deal is confusing and odd, and has future elements. For instance, apparently there was an agreement to look at a proposal to centralize enrollment possibly using a private contractor even though other states have experienced higher costs and operational problems. Republican leaders are assuring their members that increased sanctions to enforce welfare recipients into work will take effect in July 2011 including more interviews as well as benefit reductions. And In-Home Supportive Services providers and recipients would be fingerprinted to facilitate new background checks, though the deal would exempt amputees with no hands from the fingerprint requirement.

Apparently $1.3 billion is to be saved in the Medi-Cal system.

Prison System. Supposedly $1.2 million will be cut from prison system spending, but no information on how that will be accomplished. Law enforcement groups say that could only be accomplished by allowing the early release of up to 20,000 prisoners. But reports indicate that would not be part of the deal.

Gimmicks. About $1.2 billion will come from changing the date on the June 2010 payroll checks to July 1.

While taxes are not increasing, withholding will go up 10% beginning January 2010 as will quarterly estimates. This will not generate any new tax revenue, but result in some increase in collections from January through June. However, lower than normal revenues in 2010-11 will make up for it when those who didn't opt out receive a large refund in April 2011. It is unclear how much revenue will be shifted into 2009-10 as one can opt out of the increased withholding and income tax revenue has already dropped faster than projected in May.

The deal includes the sale and leaseback of 17 state office buildings and the Orange County Fairgrounds, but did not allow the sale of CalExpo or San Quentin Prison as proposed by the Governor.

An effort would be made to sell of part of the State Compensation Insurance Fund which would supposedly generate $1 billion. But complications with that idea may delay that a year.

State Employee Furloughs. The Governor has already ordered many employees to take three unpaid furlough days per month, reducing their salaries by about 15% and saving $1.3 billion. The budget deal effectively institutionalizes that practice which likely will be carried in to 2011-12.

Other Items. Only a few state parks will be closed rather than the 220 the Governor indicated in May. And those will be offered to local and federal governments and others to keep them open.

The High School Exit Exam will not be suspended except for special education students.

The Integrated Waste Management Board will be eliminated saving six figure paychecks to political appointees but staff would operate as elements of other departments.

The Board of Geologists and Geophysicists would be eliminated.

HIV/AIDS programs would lose some, but not all, funding.

The Bureau of Narcotics Enforcement task forces are cut as are National Guard educational benefits.

Then there is the Santa Barbara coast oil lease mentioned yesterday. Apparently it will bring in $100 million. No mention is made of an oil separation tax.

"But what about" items

As pointed out in previous posts, the State's Unemployment Insurance Fund will be billions in debt by the time repayment has to be made beginning in September 2010.

And then there's this article in today's Los Angeles Times:

The California Public Employees' Retirement System, the largest in the nation, today posted a preliminary drop of $56.2 billion for the fiscal year ended June 30. The second-ranked fund, the State Teachers' Retirement System, reported a preliminary loss of $43.4 billion.

...The tremendous drop in value is expected to have a direct effect on the amount of money that the state and about 2,000 local governments and school districts must contribute in coming years to pay for pensions and healthcare for 1.6 million government workers, retirees and their families.

As income from the pension investments fall, the governments would have to make up the difference to meet the state's pension obligations.

This isn't a "smoke and mirrors" budget proposal. It is a "put on the blinders and vote" proposal for the Legislature.

Fading Into the Ashes

Once known for its economic opportunities, for its schools and higher education system, and for its commitment to the social compact, California is fading into the ashes, the ashes from wildfires and the ashes from Californian's burning through their wealth.

However, most are choosing to ignore this California, "the other shoe" in the economy. According to news reports this morning, things are looking up in the economy because the Conference Board issued a news release that the Leading Economic Indicators "increased for the third consecutive month in June" even though the same news release notes that "the strengths among the leading indicators have remained balanced with the weaknesses in recent months."

If the upcoming significant downturn in California's economy isn't important, then optimism is justified. But California was the source of 13% of the nation's GDP. It is reasonable to project that between May 2008 - May 2009 the nation's GDP could lose 2.3% in California alone.

At this point, the significant segment of the economy will be State and local government. Everyone seems to be aware of that in the abstract, but fail to relate to the consequences of the major retrenchment facing the state.

Despite the fact that it is likely they will have to "find" at least another $10 billion for the General Fund between now and next July, the Legislature and the Governor are reported to be close to a revised July 2009-June 2010 budget using a several of one time "fixes" for California's $26 billion General Fund deficit, a deficit number which we already know could be 50% too small (see A billion more.... below).

As proposed, the "balanced budget" involves taking more than $4 billion from cities, counties and special districts. In order to avoid being sued over whatever contrivance is dreamed up, a promise of future repayment is in the proposal which everyone knows can't occur for at least three to four fiscal years, if ever. Reports indicate that "local governments are seeking language that assures the state will place a priority in 2013 when it repays them the money, so that they can obtain loans from Wall Street to cover that loss." This is needed because as it was discussed previously local governments were behind schools for repayment.

So it appears that the Legislature and the Governor do not expect to be able to begin repayment before 2013-2014. And, of course, this revenue shift may also be needed for 2010-11.

Which raises the interesting question about school funding. Under the Constitution, the State owes schools $1.5 billion for 2007-08 budget cuts. Apparently the compromise proposal will be to pay schools an extra $9.5 billion in future years to repay cuts made in 2007-08, 2008-09, and 2009-10. This is being discussed in the context that things will not be quite as bad in 2010-11 as they are today.

As proposed, the "balanced budget" involves increasing income tax withholding schedules by 10 percent to shift money from 2010-11 to 2009-10, as well as delaying state worker paychecks next June 30 to July 1. That cannot be repeated next year, so that extra "income" will not be available to balance the 2010-11 budget.

The "balanced budget" will also involve a one-time 15% reduction in California's motor vehicle fleet including a used vehicle sale. Somehow this is going to represent a gain of $24.1 million this year. Presumably that will mean the State will not buy at least some replacement vehicles this year which will reduce the income to auto dealers. In any case, this will result in a reduction in activity that would have occurred in the private sector car market.

The governor also wants executive authority to sell office buildings that the state would lease back. That would, of course, represent a one time revenue source and a long-term increase in expenses.

The budget proposal effectively institutionalizes the Governor's "temporary" three day unpaid furlough plan for state employees, which saves 15% in salary and wage costs on some positions or about $1.3 billion. The report is that the Governor would "reduce the number of furlough days if the economy improves and the state takes in more revenues." Since the Legislature and Governor know that the earliest they will be able to repay the "borrowed" local government money will be in 2013-14, it is likely that these "temporary" furloughs will be in effect for at least three years.

This is all in the context of a huge deficit in the Unemployment Insurance Fund financed by loans from the federal government that must be paid back, and with interest accumulating, beginning in September 2010 from employer unemployment insurance contributions that must also cover current current claims and build a reserve for the future. That is, of course, essentially impossible as layoffs in both the public and private sector continue.

What is the State going to do once employment starts to rebound? Tripling unemployment insurance costs for employers would be the only way to handle this burden which would, of course, result in fewer employees working which would result in reduced unemployment insurance payments. In the past few years it was known that the rates collected were too low, but no one wanted to make it more expensive for employers while the economy was booming.

In the meantime, health and welfare programs are going to be hit with some significant reductions, though at this time it is unclear how large.

The Healthy Familes program that provides health care coverage for children whose families make too much to qualify for Medi-Cal, but not enough to pay for private health insurance began placing new applicants on a waiting list even as more families fall into that class when one wage earner in the family loses both a job and health insurance. Given the current economy, reports indicate that up to 400,000 children might not be able to be covered.

Also part of the proposed budget is to cut prison costs. This could include early release of prisoners. The numbers involved are still being negotiated.

And then there are the odd proposals.

One is an oil lease off the Santa Barbara Coast. It is being presented as a revenue source. But in reality, it is part of a negotiation to get Republican votes for a 9.9% oil severance tax which could generate billions along with the lease revenue. Environmentalists are livid, of course.

Another odd item on the table is whether to eliminate the state's high school exit exam. It's indicative of how deep the cuts reach into the policies of the state in ways that may surprise people.

Finally, it is clear that all of this effort likely will not balance the budget. It was noted here Friday that "one can easily project that the State General Fund as now configured for fiscal year 2009-10 likely is out of balance by at least $34 billion." However, the National Conference of State Legislatures latest report on the status of budget problems across the nation singles out California.

California deserves special mention because of the sheer size of its gap (in FY 2009 as well) and the moving target that it presents. California's initial budget gap for FY 2010 was $24.8 billion. That gap, along with a $14.8 billion gap for FY 2009, was resolved in a February 2009 budget agreement—except that it wasn't. The resolution included five ballot measures, representing about $5.8 billion of the fix, that failed to get voter support in a May special election. Adding the $5.8 billion unresolved figure to the amount of the gap that was closed ($18.9 billion), plus the newest gap ($14.2 billion) that officials expect because of declining revenues, California's cumulative FY 2010 gap explodes to a whopping $38.9 billion or 35 percent of the general fund budget.

The Governor and the Legislature are trying to close a $26 billion deficit. That appears to be about $10 billion short. The Sacramento Bee reported today:

State Controller John Chiang won't stop issuing IOUs until he is confident the budget plan provides California with sufficient cash, said his spokeswoman, Hallye Jordan.

What that means is unclear. Adopting a budget theoretically would give the State the ability to issue revenue anticipation notes which would provide Chiang with cash. He would be able to redeem the IOU's (Registered Warrants) when they come due in October. And he can pay bills, for how long nobody knows.

Wildfire season is underway now. Maybe it won't be as bad as the past few years or as expensive.

Will California become the Weimar Republic of The Great Recession?

As expected, in a news release today, the U.S. Department of Labor reported that for June "the largest over-the-month decrease in the level of employment occurred in California (-66,500)." As noted here in May:

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.

At the end of the second quarter of 2009 that unemployment number is now 2,146,200 which adds an additional 2.6% to the monthly Unemployment Fund deficit.

In it's article on the drop in employment, the Los Angeles Times reported:

Even more worrisome, said Esmael Adibi, an economist at Chapman University, is that the rate of decline in jobs is not slowing. Total nonfarm employment fell 5.1% from last year, dropping at a quicker pace than in previous months. Total nonfarm employment fell 4.8% in May from the previous year.

...There are signs that Californians are increasingly frustrated with the state's economy, Adibi said. He noted that the state's labor force lost 46,200 jobs last month, indicating that some people have stopped looking for jobs entirely.

In two articles yesterday headlined Report sees big dive in health coverage in California and Fear strikes jobless who lose health benefits, the Sacramento Bee delves into the statistics and reality of one of the more significant side affects of the growth of unemployment. The first article says:

This year alone, more than 330,000 people are expected to lose coverage in California, according to Families USA, a Washington, D.C.-based health care advocacy group.

...From 1999 to 2008, the average cost of health insurance premiums has more than doubled, from $5,791 to $12,680, according to the Kaiser Family Foundation.

The second notes:

"More than getting laid off, health care creates the most panic," said Maureen White, a Sacramento management consultant who recently found herself having to learn and navigate the health-benefits system. "The No. 1 thing people worry about is health care."

With a record number of layoffs during the first five months of the year – and an unemployment rate that's now at 11.5 percent – many Californians are deep in worry, trying to figure out how to keep themselves and their families covered.

The second article also discusses ARRA – the American Recovery and Reinvestment Act, the part of the stimulus package which pays for 65 percent of COBRA premiums for nine months for people who've lost their jobs from Sept. 1, 2008, through the end of this year. This means that for those who lose their jobs this month, the ARRA program will help only until April.

Meanwhile, this week in another Bee report:

Gov. Arnold Schwarzenegger is prepared to cut another 2,000 jobs from the general fund, state officials told state employee union and exempt employee association leaders in a conference call this morning. The cuts could be part of a deal that must close the state's $26.3 billion fiscal gap, which widens by $25 million each day lawmakers fail to enact a budget.

An additional article tells us of additional cuts which will impact on the private sector by October:

A committee of University of California regents approved a plan today that will force most of UC's 180,000 employees to take unpaid leave and pay cuts as part of a plan to address cuts in state funding.

We've also learned this week:

Moody's Investors Service downgraded California's general-obligation bond rating to Baa1 from A2, citing the state's ongoing political impasse and its reliance on IOUs to pay bills. It was the second two-notch downgrade this month after Fitch Ratings issued an identical drop last week.

And to add to the general confusion, we have this report:

SecondMarket Inc., which creates markets for hard-to-sell financial instruments, said it is opening an electronic market for California's registered warrants. The state has issued several hundred million so far, and plans to issue a total of $2.8 billion this month, as it struggles with a cash shortage.

The firm says hedge funds and other investors have expressed interest in buying the interest-bearing IOUs.... While it's not clear what price the notes will bear, a search on Craigslist shows that buyers are offering 80 to 95 cents on the dollar. Local governments and private vendors are the main recipients of the IOUs. Taxpayers expecting refunds from the state are also getting the notes.

The "new trickle-down" economics of the Obama Administration and the Democratic Congress consisting of

• federal stimulus money made available for states to hire private contractors for public works projects
• federal stimulus money made available to private companies and contractors for energy programs
• federal TARP money made available to banks to loan to private companies

cannot get workers back to work fast enough to significantly reduce the impact of these current job losses plus the job losses the state budget problems will cause in the next four months. The multiplier effect will kick in this fall resulting in additional job losses in the private sector.

Further, it appears that many are overlooking the "sleeper" here in California. As noted here previously, the State's deficit is really more than $50 billion and the May projections for sales and income tax revenue in the state budget were off for June, the very next month, by 16.3%.

A realistic projection of California's economy (ignoring the overly-optimistic projections for the national economy), one can easily project that the State General Fund as now configured for fiscal year 2009-10 likely is out of balance by at least $34 billion (instead of the $26.3 billion figured discussed in the press) and the Unemployment Insurance Fund will likely have borrowed at least $23 billion by the time repayment requirements kick in September 2010. What's the plan beginning in July 2010?

Virtually no responsible economist thinks California's economy will hit bottom before the middle of 2010 or begin to recover before the middle of 2011. It's difficult to imagine where in California's economy the State will find revenue from sales, income, corporate, and property taxes, and employer unemployment insurance to cover its costs for fiscal year 2010-11. Further reductions in State and local government employment and/or substantial increases in tax and unemployment insurance rates beginning in the middle of 2010 will further worsen the economy. If no alternative exists at that point, what once was the world's 8th largest economy will continue to slide through 2011. It appears that what I said in May is coming true:

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 could easily become the Weimar Republic of The Great Recession, the symbol for how everything went wrong for the world's economy.

Leading edge economic indicators

The Sacramento Bee has created an interactive graph/map to represent visually what they call "California's wave of lost jobs" with a brief explanation:

Few California cities have been spared the deep impact of a large layoff during this recession. And it's still getting worse. So far this year, companies are laying off workers twice as fast as they did during the same period of 2008.

As I wrote on May 26, California's Great Recession likely will begin "in earnest" in July 2009. In addition to the warning signs noted here in the previous 13 posts, additional information is available to us both in the form of statistics and anecdotally.

The U.S. Department of Commerce reported that in May the U.S. trade deficit fell because exports gained slightly while imports dropped for the 10th straight month. Unfortunately for California, exports from the state fell dramatically for the 7th straight month, down 25.2% from last year. Manufactured exports were down 28% while agricultural and other non-manufactured exports were down by 23.3%. Year-to-date exports are down by 31% or $13.5 billion in five months. (Data from the Sacramento Bee.)

Adding to those dismal statistics is the drop in imports going through California's ports. Imports in May were down 31.7%.

The problem with both these indicator statistics is that they lag behind the rest of the economy. They are based on orders placed months ago. It is likely that these numbers will continue to drop well beyond when the national economy hits bottom.

This means that California's normally busy ports will remain not-so-busy for some time. In April it was reported that cargo leaving the ports of Los Angeles and Long Beach was off 18 percent and exports from San Francisco International Airport were down 34 percent.

While it is likely that in the long term, the ports will see as much of a recovery as the national economy allows, this will not be true for one of California's most famous "export" businesses - film and television production.

The Los Angeles Times reported recently that according to the "Employment Development Department, jobs in movie and television production were down 13,800 in May compared with a year earlier." In addition to reporting the effects on individuals, the article reported the following:

California's share of U.S. feature film production dropped to 31% in 2008 from 66% in 2003, according to the California Film Commission. That largely reflects a falloff in the Los Angeles area, where feature filming activity in 2008 was nearly half what it was at its peak in 1996.

Television production, which recently has been a more reliable source of jobs in the region, is also declining. A recent survey from Film L.A. Inc. found that 44 of 103 TV pilots this year were shot in such disparate locations as Canada, Illinois, Georgia, New York, Louisiana and New Mexico.

Part of the problem is competition from other states that offer special tax benefits. But the other part of the problem is that because of high living costs, the cost of doing business in California is also high.

It is unlikely that the California film and TV production industry which used to produce exports from this state will rebound from this migration to other states.

These accumulating facts represent the reality that the Legislature and Governor, and the schools and local governments, and the taxpayers all seem to be ignoring.

A billion more....

Personal income taxes in June were $987 million below (-18.0%) estimates in the May Revision, and sales taxes were short by $154 million (-5.8%).

The above item was in a July 10 news release from State Controller John Chiang as his department released the June 2009 Financial Statement for the State of California.

If you were looking for that in the news, you'd have to stumble across this blog item in the Sacramento Bee or this California Briefing short in the Los Angeles Times. Don't try to find it as a news story in these or the other major newspaper or TV news websites as it's a waste of time.

This apparent non-news is that collections of two of California government's primary sources of income - income and sales taxes - ran a $1.14 billion (16.3%) short of the estimates. These are the estimates used in the current discussions of the estimated 2009-10 budget which already was $26.3 billion out of balance. It appears that the deficit just increased by another 4%, until July's figures come in.

On May 26 the following statement was offered here:

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.

Nothing that is about to happen should be a surprise. Everything written here since May 26 is based on information available to anyone. So why was the State's May budget estimate 16% off on income and sales tax revenue? The answer is simple but I'll let someone else explain it. From a July 5 Associated Press article on politicians blaming someone other than themselves for bad estimates:

State forecasts often rely heavily on national models, which also have been wrong, said Wilbur Maki, a professor emeritus in the Department of Applied Economics at the University of Minnesota who served as state economist in the early 1980s. The depth of the recession and its effect on financial institutions and housing markets also have made it difficult to compare to other downturns, he said

"This recession is especially troublesome," Maki said, "so there is very little immediate past experience that would help to make the forecast."

That, of course, is the crux of the problem. The national estimates showing that "The Great Recession" is "showing signs" of a recovery are off by a factor of two years for California. All raw data indicates that there is no room for optimists in the halls of California government but plenty room for panic.

As noted here July 8, the taxpayers of the State of California needs to find a way to avoid a deficit in excess of $50 billion at the end of 2010, not $26.3 billion and that's without considering state pension fund losses. Further, that $50 billion number could easily be 50% low.

The Obama Administration and the world must stop offering the most optimistic forecasts in what economist Maki admitted is an "especially troublesome" recession in which to make forecasts. Among other problems, what was the world's 8th largest economy - California's economy - will drag everyone else down with it because of those forecasts.

Property tax base declines, forecast to continue through 2011

Newspapers around the state have begun reporting the net assessed value drop information from various County Assessor offices.

As previously noted here property tax revenue is going to be a problem statewide, beginning with the net drop in assessed value. Reports so far range from a drop of 26.7% in San Jacinto (in Riverside County which had an overall drop of 10.5%) to a few locations such as commercial hubs like Irwindale (in Los Angeles County which had an overall drop of only a .09%) with an increase of 8.7% mostly due to peculiarities of Proposition 13 rules.

Other reports include Merced County down 13%, Contra Costa County down 7%, Sacramento County down 6.4%, and San Bernadino County down 6.2%. A few places such as Marin and San Francisco Counties will see net increases because home foreclosure rates are relatively low and sales and other transfers that kick in a Proposition 13 reassessment have resulted in substantial increases offsetting reductions in residential value for homes sold in the last few years.

The fact is most local government agencies have anticipated this in their budgets for 2009-2010. Whether the Legislature and the Governor have adequately anticipated this as it affects schools is unclear.

The more significant issue will be how cash flow will be affected. As noted here previously property tax payments during November and December may be significantly lower than previous years. Many of those who in previous years paid their full tax payment for the fiscal year in November will choose to pay half in April 2010. More than few may not pay in November hoping to have enough money in April. Some property tax payments will not be made in this fiscal year at all, particularly those in the midst of the foreclosure process.

Then there is the dismal future. The Walnut Creek, California-based mortgate insurer PMI Group issued its quarterly Economic & Real Estate Trends report this week indicating the two year probabilities of lower house prices through the end of March 2011 in the Metropolitan Statistical Areas. In California, 20 of the 28 MSA's have a 99% or greater chance of lower house prices and only two had less than a 90% chance - the two Bay Area MSA's. But all are considered a high risk area as seen on this map:

It seems unlikely from the projections that the State of California will see any significant property tax recovery before fiscal year 2011-2012 that could help the State with its deficit and its ability to support the education system.

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.