The body builder, the technopreneurs, and the home builders

In the November 2nd TIME Magazine cover story:

"Whenever we have a problem, everyone makes a big drama — 'Oh, my God, it's the end. California is over,'" Governor Arnold Schwarzenegger told me. "It's all bogus." Schwarzenegger likes spin and drama too — he's issued warnings about a "financial Armageddon" — and he literally blew smoke in my eyes while we spoke. But his belief in the anything-is-possible dream of California is more than spin; he is, after all, its ultimate embodiment.

Yes, Arnold is the embodiment of California - an aging actor whose image is everything and substance is not very deep. In the case of California's economy, we do have a problem and the promise of California I knew in 1960 is over.

The article focuses on the promise of the future seen in the past of the technology entrepreneurs and venture capitalists - the technopreneurs - without any real analysis of either the past or the future that they represent to the vast number of Californian's who work for a living.

Californian's already know that most of those nifty high-paying technology jobs created between 1985 and 2005 have gone to people making half or less located in other countries and other states. But they keep hearing that the green revolution partly funded by the Obama stimulus bill will be the source of California's magical economy engine.

No one is explaining the truth about that, of course. A good example that has been in the news is Irvine, California's Fisker Automotive. Uh, who? Yes, you need to know who they are.

In January CEO Henrik Fisker announced at the Detroit auto show it would begin production of it's electric Karma in 2010. In June Fisker accepted the 2009 Production Preview Concept of the Year during a ceremony at the Automotive Hall of Fame in Dearborn, Michigan So what is Fisker? From it's web site:

Fisker Automotive is a green American premium sports car company with a mission to create a range of beautiful environmentally friendly cars that make environmental sense without compromise.

The concept was created between two independent companies who clearly wanted to make a difference in not only the automotive industry, but to the environment as well. Fisker Coachbuild, LLC and Quantum Technologies announced this joint venture partnership in September 2007. Fisker Coachbuild will provide exclusive design services for Fisker Automotive while Quantum Technologies (QTWW - a publicly traded company) will provide the latest technological advancements. Each car will feature cutting-edge plug-in hybrid penned as Q DRIVE exclusively for all Fisker Automotive vehicles.

A new segment is being created within the auto industry where people can really use their power of choice. They can choose to be environmentally friendly with their car purchase without compromising on the style and luxury that they are used to. We believe in less compromise and more efficiency.

Fisker Automotive strives to be a serious environmental alternative to other premium performance luxury cars on the road today. Fisker Automotive will be the first company in the world to have this type of a car on the road - a beautiful fast car that makes environmental sense.

Initial production is anticipated to be 15,000 vehicles annually with pricing to start at $87,900.

That's great! A California automobile manufacturer will begin production of its car in 2010. In Finland.

Well, they did have a problem. According to the company, the Karma has been designed and engineered in the U.S. with the majority (65% by cost) of its parts sourced from American suppliers. But they searched for a U.S. plant to assemble the Karma and found none that were willing and able to build the 15,000 of these advanced vehicles per year Fisker required. So they had to turn to Finland's Valmet Automotive, one of the most respected contract auto builders in the world.

But never fear. Fisker intends that the next generation Karma will be built entirely in the U.S. The fledgling American-maker of "green" autos was recently approved for a conditional loan of $528 million by the Department of Energy (DOE). Fisker's intent is that "the DOE funds will help create or save at least 5,000 U.S. jobs by bringing to market affordable, American-made plug-in hybrid vehicles and save more than 821 million gallons of gasoline (43.2 million barrels of oil) by 2016."

Of the loan funds, $169 million of the loan will be used in Pontiac, Michigan and Irvine, California to complete engineering work with primarily U.S. suppliers and $359 million will help support the planned manufacture of 75,000-100,000 plug-in hybrids per year at a retooled U.S. assembly plant, beginning in 2012. It was announced on October 27 that these California engineered and designed cars will be manufactured in the General Motors' defunct Pontiac Solstice and Saturn Sky roadster facility in Wilmington, Delaware.

According to earlier reports in the San Francisco Chronicle and the Wilmington News Journal, the plant is a good fit as its maximum capacity is about 250,000 cars a year. Since Fisker plans to export half its vehicles, the proximity of the plant to the Port of Wilmington is an advantage. And, of course, there is a pool of skilled auto workers.

One thing for certain, the cars won't be manufactured in California despite the closing of the GM/Toyota joint plant in Fremont as the plant is "way too big" according to Fisker.

Fisker is typical of California startups. It is financed by Silicon Valley venture capital firms, including Kleiner Perkins Caufield & Byers of Google fame, and which has Al Gore as a partner. The outlook that comes with the money is to focus on the quality of an idea. They know that experience can be purchased in the market place. In order to gain venture capital financing, Fisker and their startup competitor Tesla Motors had to produce a solid business plan that makes money "really quick" to use Henrik Fisker's own words.

Delaware Gov. Jack Markell has had staff working to locate an automaker for the Wilmington plant. Early in October Alan Levin, director of the Delaware Economic Development Office, was reportedly going to meet with United Auto Workers representatives to smooth the way.

California Governor Arnold Schwarzenegger, on the other hand, is in the deep end of water negotiations with the Legislature when he isn't complaining about federal judges undoing the budget deal. Arnold and the Legislature's leaders intend to solve the State's water problem with a multibillion-dollar water bond. That's just what California needs - our leaders creating more debt while standing back letting jobs go elsewhere.

The most fundamental truth facing Californian's who work for a living is that venture capitalists, technology and biotech gurus, Hollywood producers (aka "stars") and other pseudo-liberals who attended all those Obama fundraisers would not have been called liberals or progressives in 1900 or 1935. They either cannot or will not think in terms of employing Californians and Arnold is unable to think outside that box.

Sure, technopreneurs do invent stuff. But in the end, they find the cheapest labor to use to produce the product or service. During the initial process of development, the ventures do employ highly qualified, highly paid engineers, biochemists, and technicians, plus a few accountants, attorneys, and office assistant types. Then the ongoing production work disappears off into the reaches of the globe. Sometimes it takes awhile, but even Intel now produces most of its products elsewhere.

What we know is that the income disparity between professionals and managers and low-income service, construction, and farmworkers in California has doubled. Between 1993 to 2007, the share of the total income of the top 1 percent of earners went from 13.8 percent to 25.2 percent.

Technopreneurs are not going to significantly grow the economy for the average working stiff in California.

The reality for the California worker can be seen in the housing unit construction numbers that even a body-building actor should be able to understand. In February 2009 the California Building Industry Association (CBIA) offered:

The Association is forecasting just 63,400 units will be produced in 2009, a 3 percent decrease from the record-low 65,380 units produced in 2008. In comparison, the low point of the homebuilding recession in the early 1990s was 84,656 units in 1993, while the worst year during the recession of the early 1980s was 85,656 in 1982. To meet the need for new housing generated by population growth, the state estimates builders should produce about 220,000 new homes and apartments annually.

On October 26th the CBIA continued to move further away from Arnold's cheerleading pyramid in its monthly news release by revising its housing unit construction forecast for 2009 to just 37,700 total units, the lowest on record and half its February projection. The following graph would tell TIME Magazine and Arnold almost everything they need to know about California's economy:



The residential unit construction sector and the internet sector offer an opportunity for comparison of employment effects.

Since the fall of 2000 employment in the internet sector in California fell 46.7% which sounds like an employment disaster. But as a comparison, employment in residential construction in California dropped 38.5% from July 2006 to July 2009. But difference is in impact. The number of jobs lost in residential construction in the past three years is 3.6 times the number of jobs lost in the internet sector in nine years.

While neither sector is creating jobs for California, the fact is that employment in the internet sector was never greater than 33% of employment in residential construction and today represents about 20%.

If the Gubernator or TIME got the stars of technology and Hollywood out of their eyes, they would be aware of the statistics about California that came out in October. On October 9th, the Sacramento Bee reported:

California exports were down sharply for the 10th straight month in August from the same period a year ago, according to the University of California Center Sacramento.

...State import numbers were likewise dismal....

The following day the State Controller issued this news release:

State Controller John Chiang today released his monthly report covering California’s cash balance, receipts and disbursements in September. For the first three months of the fiscal year, total General Fund revenue was nearly $1.1 billion below the recently amended 2009-10 Budget Act estimates.

“Revenues more than $1 billion under estimates and recent adverse court rulings are dealing a major blow to a budget that is barely 10-weeks old,” said Controller Chiang. “While there are encouraging signs that California’s economy is preparing for a comeback, the recession continues to drag State revenues down. I urge lawmakers and the Governor to prepare for more difficult decisions ahead.”

On October 16th the LA Times reported:

Employers cut 39,300 workers from their payrolls last month, according to figures released this morning by the state Employment Development Department. That's nearly six times the number of jobs the state now says were lost in August, led by cuts in construction and government.

A separate survey of joblessness showed that California's unemployment rate was 12.2% in September, down from a revised 12.3% in August. The unemployment rate in September 2008 was 7.8%.

The lower unemployment rate as compared to August was clarified in an article in the San Francisco Chronicle on the same day:

But Stephen Levy, with the Center for the Continuing Study of the California Economy, said one of the biggest reasons for September's 12.2 percent rate is that many people quit looking for work and dropped out of the labor force.

However, the unemployment rate is not the important number. At the end of September California had 1.2 million fewer jobs then it did in November 2007. During the same period it is likely that an additional 385,000 persons entered the California workforce, which means we're in the hole 1.6 million and counting.

If anyone does the math anticipating public policy and technological development, they would discover it is highly unlikely that California will have as many people employed in 2015 as it did in 2007 and that may be true for 2020. What could be true for 2020 is that California will have a huge number of "permanently discouraged" workers, people for whom there is no chance for long-term employment at wages rising to the level of "middle class."

Apparently, economists are struggling with how to make this the accepted norm. According to one article:

Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.

This restructuring -- in what former Federal Reserve Chairman Paul Volcker calls “the Great Recession” -- is causing some economists to reconsider what might be the “natural” rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as “full” employment.

So, at the end of October, using Fisker as an example, one can say that for Finland and the State of Delaware, our California technopreneurs and venture capitalists have been "an unparalleled engine of innovation" (using the words of TIME Magazine) potentially bringing new employment to many tens of folks here in the Golden State of 1.6 million unemployed people and new employment to thousands elsewhere.

That's OK, according to economists.

What's the purpose of an "economy"

In an October 12, 2009, article in Reuters, we are told:

The worst U.S. recession since the Great Depression has ended....

"The great recession is over," NABE [National Association for Business Economics] President-Elect Lynn Reaser said.

"The vast majority of business economists believe that the recession has ended, but that the economic recovery is likely to be more moderate than those typically experienced following steep declines."

At Dictionary.com we learn that we can describe an economy as "the management of the resources of a community, country, etc., esp. with a view to its productivity."

That is consistent with what the NABE folks think. From that article:

The NABE survey, conducted in September, predicted real GDP growth expanding at an annual pace of 2.9 percent over the second half of this year. Output for all of 2009 is expected to contract 2.5 percent and next year, rebound 2.6 percent.

On the other hand the folks at Wikipedia offer a different definition: "an economy is the ways in which people use their environment to meet their material needs."

The difference between these two descriptions is informative. One is about people meeting their material needs. The other could be about computers and robots using resources to increase something called "productivity."

This first view is what economists measure without regard to what is being produced. It could be food for people. But it could be robots that produce more robots designed to produce robots. The benefits of productivity are quantified only in the sense that electronic numbers representing value transfer between the producer and the entity receiving the product. In an obvious sense today, everything that the economists measure are really the results of computers exchanging data.

So we apparently are about to see the end of The Great Recession because "productivity" is rising, according to the data.

About that second definition, the one that says an economy is about people meeting their material needs. Unemployment is still rising and jobs are still being lost. So while productivity may very well rise, it appears it's not accomplishing much towards meeting people's material needs.

Well, that's not exactly true. It's increasing the material wealth for substantially fewer Americans than it did three years ago. And it appears it is likely to continue in that direction, an increasing productivity that benefits fewer and fewer Americans.

I suppose at some point the first definition economy could consist of millions of robots serving the needs and desires of fewer than 10,000 people. Maybe even fewer than one person.

But if productivity is rising, "economists" apparently would see the economy as "healthy."

It should make one wonder, though. Are the "economists" who are quoted in news stories and "journalists" who write those stories people, or are they simply computers regurgitating data created by other computers? It's hard to imagine a human being accepting, much less announcing, information that describes an economy as in a "jobless recovery." But apparently it's all a matter of your definition and what you think the purpose of an economy is.

We don't seem to have a common definition for "an economy." Those who think it is all about productivity apparently don't see an economy as purely a description of activity engaged in to feed, clothe, house, entertain, or transport me and mine or you and yours. Instead it is purely a description of numbers exchanged between computers.

So if 10,000 Americans out of 300,000,000 are sufficiently involved in creating those numbers and the numbers are increasing to the benefit of those 10,000 then by definition the economy is fine. If the remaining 290,000,000 die from starvation and exposure it will keep some of the remaining 10,000 busy as morticians. That will show up as increased productivity indicating that the economy is growing.

Of course, that example would be rejected as unreasonable and ludicrous. So let's look at real examples occurring in real time now in what economists and journalists are describing as a "growing" economy.

This month the Mortgage Bankers Association is holding a convention in San Diego. What are their "people" saying? According to a report:

The Mortgage Bankers Assn. said Tuesday that it expected home foreclosures in the U.S. to continue to rise before leveling off late next year. The reason: Job losses have replaced adjustable subprime loans as the main cause of defaults.

Jay Brinkmann, the group's chief economist, predicted that unemployment would rise through next summer, causing delinquencies to rise. And because of the loss of income, it will be increasingly difficult to keep troubled borrowers in their homes by modifying their loans, he said.

As a result, the foreclosure rate is expected to increase "through the latter part of next year," Brinkmann said in San Diego at the trade group's annual convention. "And even when it starts to come down, it's going to come down very slowly."

We know that more folks are going to be thrown out of their homes. No, they probably won't die. Yes, families will break up as a result. But hey, productivity is going up. In fact, some economist will soon note that the vacancy rate of apartments is getting too low, spurring construction of more apartments. So people losing their homes to foreclosure actually could be reported as an increase in productivity within a few months.

Under the economists' definition of "an economy" it's purpose is being achieved.

Let's take a look at another foreclosure situation recently reported.

More California hotels are being pushed into foreclosure as tourists and businesses alike scale back their travel plans and owners are unable to pay their mortgages.

Statewide, more than 300 hotels were in foreclosure or default on their loans as of Sept. 30 -- a nearly fivefold increase since the start of the year, according to an industry report released Tuesday.

..."I have never seen so many lenders contemplating mothballing properties," said Jim Butler, a hotel lawyer and chairman of the global hospitality group for Jeffer, Mangels, Butler & Marmaro. "It can and it will get worse for the hotel industry."

The reality of this report is found in the probable multiplier effect of these property closures.

First, as each "property" closes it means a loss of jobs - service jobs. You remember "service jobs." Those are the jobs that were created in the past several decades to replace the loss of manufacturing jobs. "Service jobs" were the jobs economists and politicians pointed to as part of our growing employment and productivity.

Second, in addition to lost jobs, as each "property" closes state and local governments will see a reduction in related tax revenue which already declined in 2008. In the immediate term, the loss in sales tax and "occupancy tax or hotel tax" revenue will be significant to many tourist and convention destination cities and counties. That will result in more job losses. But in the longer term, properties will be devalued resulting some long term loss in property tax revenue.

This situation is not limited to California and the projection that it will get worse is very clear. Smith Travel Research is the primary source of hospitality industry projects which are being reported as follows:

Occupancy is projected to slide again in 2010 by 0.6% to 55.1%, while ADR (average daily rate) is forecast to decline 3.4% to $93.16, and RevPAR (revenue per available room) is expected fall 4% to $51.29.

That's on top of the STR's projections for 2009: an increase in supply of 3% and a drop of 5.5% in demand. STR's forecast projects 2009 hotel occupancy to be down 8.4% to 55.4%, ADR to decline 9.7% to $96.43, and RevPAR to end with a 17.1% decrease to $53.43.

Lower occupancy rates and lower room rates mean it will be a buyers' market for those properties in foreclosure well into 2012, if any buyers can be found.

The point is that the loss of these jobs in the next few months are not going to be offset by recent "less bad" sales and profit reports by Intel which closed two American plants this year - its 200mm wafer facility in Hillsboro, Oregon and the D2 plant in Santa Clara, California. Not-so-bad profits at Intel are not going to materially help laid-off, newly-homeless American Intel former employees meet their "needs," though a very few other Americans will show increasing asset values on their month-to-month balance sheets.

If because of how it is defined, a nation's economy can be healthy even though the increased productivity benefits only a few citizens, then that definition, "the management of the resources of a community, country, etc., esp. with a view to its productivity," is a problem.

To this writer, the definition should read "the management of the resources of a community, country, etc., with the goal to meet the material needs of, and increase the material wealth of, all the people residing therein."

Using my definition The Great Recession in the United States appears to have only just begun. And depending on which definition guides public policy, The Great Recession in the United States may extend for more than a decade.