Thursday, September 17, 2009

Californians and their government: the deer in the headlights

Californians and their government look like deer staring into the headlights of an oncoming tractor-trailer rig traveling at 70 mph - we just keep staring at the economy unable to move.

This past Saturday, the California Legislature adjourned. In recent months, much of the press focus was on the struggle with the State General Fund budget for the fiscal year running from July 2009 through June 2010. Basically, the best the Legislature and Governor could do was defer solving most of the deficit problem for a few months.

In the meantime, the Legislature and the Governor spent an incredible amount of time failing to address the looming water shortage, energy conservation policy, and a host of other issues, failing because of the fundamental structural weaknesses imposed by the voters on government in this state.

This is the first year of a two year legislative session. The usual plan is for the legislators to go home to prepare for the second year beginning in January. But the Governor has used his powers to call "extraordinary sessions" on education and the state's tax system, while legislative leaders have asked him to call a session on the water problem.

It's hard to imagine what could be accomplished in these sessions. More than 20 bills that required two-thirds approval were blocked by Republicans in the session just ended because the Democrats lack the votes for "two-thirds" bills. And the only way a water bill will get through will be to include new dams that, correctly, Republicans argue are needed to make the system work, but are heatedly opposed by the state's strong environmental community.

In a weird twist, the United Farm Workers and other unions are already organizing funds to oppose a still non-existent water bond proposal which would require voter approval if it were approved in the Legislature. As usual, the water interests are wrangling over the size of their pieces of a non-existent pie. And the Democrats want to divide the water bond proposal into two, requiring a vote next year and in two years because the numbers are so high.

Finally, in case there were people not locked into ideological positions on this issue, Fox News' Sean Hannity is doing a special on this Thursday - see Water Crisis Bringing Sean Hannity to Valley - which undoubtedly will throw a skunk into the room sending the parties running in different directions.

Meanwhile, back to the budget problems. Governor Schwarzenegger is putting all his legacy eggs into a basket called the Commission on the 21st Century Economy which has proposals to tinker with the State's tax structure (see my August post on this tinkering).

The Governor and the Legislature had great expectations that the Commission would design a new tax structure for an economy that is service based and not get bogged down in the ideological wars that are preventing any solution to any serious problem. Of course, any solution the Commission proposes will by its nature require at least one two-third's vote bill and voter approval of at least one referendum measure, both highly improbable achievements.

So how did the Commission do? From the Sacramento Bee:

The tax commission concluded its final meeting Monday at UC Berkeley and did not take a formal vote, instead opting to pass around a formal document later this week and offer each commissioner the opportunity to sign it for submission by Sunday.

At least three panelists have expressed public opposition to principal parts of the package, while labor and business groups have assailed the plan.

Oh good. The couldn't even agree enough to take a vote. That's an outstanding place for the Legislature to begin a special session.

Meanwhile, The Great California Slump economy continues, the current State General Fund budget continues to be in deficit at a rate of about $1 billion a month, the State Unemployment Fund continues to borrow from the federal government, the two State retirement systems lost billions that must be replenished sometime in the future, the State "borrowed" from schools and local government huge sums to be repaid sometime in the future, and everyone wants to talk about doing some grandiose scheme related to water and energy.

In May I warned:

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

...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.

In June I warned about probable future job losses:

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 opinion is that it will be of major significance to the national economy.

In July, I wrote:

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.

and I wrote:

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.

Economists now are using their crystal balls statistical formulas which confirm my fears of last spring and the press is reporting this as news, but with the usual spin variations. It's almost funny how these forecasts are reported.

The University of Pacific's Business Forecasting Center issued a news release headed Recovery in California Lags Behind the U.S.. The Sacramento Business Journal offered this headline on the news release: UOP: California economy will 'feel like a recession' for another year. But the Sacramento Bee offered two contrasting headline takes, Recession nearly over, UOP says and California's jobs picture will be grim for years, two forecasts say.

If you work for a living, the last headline more accurately reflects the UOP report. It also reflects the numbers in the UCLA Anderson Forecast news release is headed "UCLA Anderson Forecast: Economy Healing But Not Out of Hospital Yet" with a subheading of "California Budget Crisis Will Impact State's Ability to Recover From Recession". The Los Angeles Times headed it's story Southern California's vital signs are improving.

So why is "grim" used in the one Bee story? The devil is in the details. Let's begin with the concept of "recovery" as it is being applied to The Great Recession and The Great California Slump.

Economists do not apply the term "recovery" to a situation where there is job growth in isolation. For instance, if all other indicators show no continuing economic growth but the government hired 6 million unemployed people at near-minimum-wage next month, most economic models would not see that as "recovery." It would register once as a single reduction in the unemployed without much growth in retail sales.

If California's current rice production and Toyota's American car production both increased by 10% using employees working overtime rather than new hires, and both outputs were to show up as increased exports to other countries instead of domestic retail sales, and both resulted in importing more parts to manufacture cars and to repair harvesting equipment, that all would be a part of a statistical sign of a recovery. It wouldn't put anyone to work and that is irrelevant to the models.

To put it simply, if for the next 5 years the U.S. averaged net job losses at a rate of around 10,000 a month but other economic activity increased the GDP 1.5% a year, then economists would say we were in a slow recovery. A level of "net job losses" at 10,000 a month could easily become "acceptable" in economic models and among bankers, brokers, and executives of international corporations because the GDP increase would grow profits for them.

For most of us economically unsophisticated folk, a "recovery" is not seen until the unemployed in our communities, states and nation go back to work. This requires a sufficient net job increase to employ everyone who wants a job, right now a growing labor pool.

Right now the magic number nationally to just keep pace with the increasing work force and put to work 0.1% of those currently unemployed is about 150,000 net new jobs a month. At that rate, it would take 83 years to catch up from the declines of The Great Recession. That would not be a "recovery" in my opinion, I don't care how well the banks and corporations are doing.

In my view, for a recovery the U.S. will need to be creating at least 350,000 net new jobs a month, which would represent getting everyone back to work within 10 years. California would need to create 45,000 net new jobs a month to be in such a recovery.

As it stands, in the past week the nation experienced 407,869 initial claims for unemployment benefits last week according to the Department of Labor. In the corresponding period in 2006 the number was 264,251 initial claims. It is clear that we are still losing jobs at a significant rate.

So what do the expert economists forecast for California? How do the forecasts relate to my discussion in previous posts that it will be 2013 before we see anything like a recovery, as I define the word.

Both forecasters indicate that they believe statewide unemployment will remain at near current levels for two years. The UOP forecast indicates a peak of 12.6% official unemployment next spring, while the UCLA forecast indicates a peak of 12.2% this winter. Since the current rate is 11.9% and we are still losing at least 20,000 jobs a month in California, it's not hard to imagine it will be beyond the summer of 2012 before we see a consistent net job creation level at 45,000+.

Which brings us back to the Legislature and the Governor. Their problem is that because of the economy the State is running a deficit which will become visibly huge when they attempt to tackle the 2010-11 budget.

Never mind that. First they want to reach agreement on issuing some water bonds. Why? And apparently the Legislature even first wants to lock the unemployed masses into buying expensive green energy made in California in the relatively near future. Again, why?

I hope I don't hear the answer that we can't ignore other problems just because the State budget is hopelessly out of balance. If we Californians don't first solve the state and local government budget problem for 2010-11, 2011-12, and 2012-13, we might as well ignore all the other problems.

If the Legislature can't figure it out, they need only step outside the Capitol Building and walk a few blogs over to the County of Sacramento administrative offices for a chat. This week, according to the Sacramento Bee, last Friday the Board of Supervisors and the County Executive's Office thought they were ready to adopt a budget. On Monday they learned that based on a final analysis of the last quarter revenues show sales tax down 27% instead of the 14% originally anticipated and a corresponding decrease in "Proposition 172 Public Safety Augmentation Fund" which comes from a statewide half-cent sales tax rate.

Statewide the counties are adjusting day-to-day (see stories on Tulare County and Orange County) while the City Council of Los Angeles plans to vote at the end of the month on a budget that would eliminate hundreds of jobs and impose more unpaid furlough days.

The University of California Regents, meeting this week, indicated they feel they must approve a 32% hike in student fees, an increase that will not even begin to backfill the budget shortfall projected for 2010-11.

On the other hand, the Legislature and the Governor have no plans to reexamine the budget before January despite the fact that the revenue projections in the current budget are too high. It is clear that personal income tax, sales tax, and property tax revenues will not significantly increase for four years. It is clear that a significant percentage of whatever corporate income increases occur must be diverted to the Unemployment Fund, not to other corporate taxes.

So why not fight over selling some water bonds and fight over where we will buy the already reduced amount of energy we're using that we can't afford.

Right now Californians and their government look like deer staring into the headlights of an oncoming tractor-trailer rig traveling at 70 mph.

Wednesday, September 9, 2009

Withdraw from Afghanistan & adopt a "guns and no butter" war policy

Even Herman Göring, hardly a international affairs policy genius, knew a clear truth about a nation using war as a policy when he said, "Guns will make us powerful; butter will only make us fat."

As America struggles with a poorly-understood continuing decline of its economy and tries to find a path for an affordable health care system that serves all, it is ironic that we find ourselves with a self-confident, well-educated Democratic President who chooses to follow a losing economic and defense strategy begun by his predecessor, a self-confident, well-educated Republican President.

This strategy was demonstrated to be a loser by another Democratic President, Lyndon Johnson, who was surrounded by well-meaning, well-educated advisers left over from a self-confident, well-educated predecessor. The Johnson Administration's Vietnam policies proved that "guns and butter" cannot work when America commits to a protracted "limited" war with unclear goals in a distant location such as the one in Afghanistan.

To begin with, it is clearly asking too much of the troops on the ground to accept a commitment that says "we'll give you what you need within the context of making economic choices between domestic and war goals." In Afghanistan we now pursue a "limited" war with eerie parallels to Vietnam:
  • American soldiers seek to engage an elusive enemy in difficult terrain.
  • The enemy hides in plain sight in the villages.
  • The enemy has sanctuary across an international border.
  • The population has successfully challenged an occupying army in the recent past and has a long history of defeating foreign armies.
  • Casualties among the civilian population fuels resentment creating more enemies.
  • Corruption pervades the national government America backs in a country that has no experience in complex democracy and in which the population adheres to a strong ideology.
Unlike Iraq which many erroneously tried to compare to the Vietnam quagmire, Afghanistan has no modern history of a stable Western-style economic and social structure. Unlike for Iraq, the the "best and brightest" in the Obama Administration seem to have no clear objective with a planned withdrawal strategy for Afghanistan.

While we put our troops in harms way, we seem to think we can maintain an unrestricted consumer economy supported by debt, both government and private. When will we learn that war doesn't work that way? When will America learn?

If American troops are going to war for more than 30 days, a declaration of war from Congress is the necessary and only appropriate legal step. When such a declaration is made, we agree to the obligation that every citizen to sacrifice. We are saying "draft everyone's kids and send them off to kill and be killed." We are saying "do whatever needs to be done to win at whatever risk to our well-being is involved." We are saying "we'll quite buying iPhones and new clothes and new cars" as we have to put all our economic resources into supporting the war effort. We are saying all this because we believe a war necessary to defend our nation from danger.

Instead, we have repeatedly engaged in "limited" wars. This means that we don't debate whether what we are doing is necessary to defend our nation. This means we don't do what we need to do to win and leave, setting up restrictive engagement rules that get our troops killed. This means that we send someone else's kids to war while we continue to consume the expensive butter that does only make us fat.

Did we have a military goal in Afghanistan? Capturing or killing Osama bin Laden is not a proper military goal, its childish vengeance. Wars are between nations. Disrupting al-Qaeda through military action taken against the Afghan government was a proper military goal. We did that in the first few months. Turning Afghanistan into a Western democracy also is not a proper military goal.

We've been at this in Afghanistan now for eight years, long after we deposed the Taliban government and disrupted al-Qaeda there. All we've done by staying is to make Pakistan more dangerous. All we needed to do was make a statement that warned all other nations that harboring terrorists came with high risks.

Pundits and bloggers on the right and the left are starting to create a noticeable noise about this war. They're correct to do so. Let's take a major step in solving our deficit problem by declaring victory in Afghanistan and systematically removing our troops from harms way there. And let's don't wait until we have years of "peace now" demonstrations in our streets and accumulate much more debt to fight this war to attempt to achieve losing goals.

Finally, let's stop getting ourselves into protracted "limited wars" thinking we can maintain a "guns and butter" economy at home. If in the future we think a war is necessary, let's send the entire nation to war, achieve a defined military objective, and return to peacetime.