Saturday, July 31, 2010

What do you want from the American economy?

What do you want from the American economy over the next two decades?

Last October in What's the purpose of an "economy" two contrasting definitions of an "economy" were offered:
At 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."

On the other hand the folks at Wikipedia [until the middle of December 2009] offered 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 - having food, clothing, shelter, medicine, and other "stuff ." The other could be about computers and robots using material resources to increase something called "productivity." Do you ever wonder what purpose our economic growth has served?

Distribution of economic growth since WWII

Here is a chart that reflects the outcome of our economy over the last 63 years (click on the chart to see a larger version):
Chart 1

The chart graphically displays:
  • Personal income adjusted for the Consumer Price Index has continued to rise;
  • Investment income (dividends and interest) as a percentage share of that income has grown substantially;
  • Wage and benefit income as a percentage of that income has shrunk.
Let's take a look at another chart covering the last 63 years (again, click on the chart to see a larger version):
Chart 2

This chart graphically illustrates the U.S. economic productivity growth and growth rates of personal income by source. Looking at the period from just after World War II until mid-2010, the Gross Domestic Product after adjusting for inflation and population growth grew 186%. We find that during the same period personal income grew 209%.

One cannot help but notice with concern that wage and salary income has grown only 147% and, more alarming, business proprietors' income - usually small businesses that are single proprietor or partnerships -which has grown only 33%.

Those percentages are in sharp contrast to dividend and interest income has grown 565%, nearly four times that of wage and salary income and nearly 16 times that of proprietor income, confirming what was evident in the first chart, that the post-WWII economic growth pattern benefited:
  • Investor income three times the actual economic growth rate;
  • Worker-income 20% less than the economic growth rate
  • Small business owner income 80% less than the economic growth rate; and
  • Landlord (both residential and commercial) income ...well... it appears to have been a roller-coaster ride that ends at a point 50% less than the economic growth rate.
Using this information, what can one conclude was the purpose of our economy?

It would appear that the purpose of the American economy for the past 60 years has been to improve the return on money invested in corporations and financial institutions. That necessarily has resulted in a lesser share of income from growth for labor whether that labor was done by employees or by proprietors and partners.

Again, let's take a look at another chart covering the last 63 years (click on the chart to see a bigger version):
Chart 3

From 1947 to today, for each dividend and interest dollar paid to American investors, the amount paid for labor in America dropped from about $9.50 to $4.00.

Before proceeding, two things should be made clear. This is not about "Socialism" which at its core means state ownership of the real estate, machinery, and other means of production. This is not about the recent term "Ownership Society" which is a political slogan meaning different things to different people (but for advocates has generally meant the beginning point of an argument for the reduction in income transfers from the more affluent to the poor imposed by the government).

This post is not about socialism nor the politics of poverty. It is about a long-term economic trend in income distribution from what we like to refer to as our "mixed economy."

Remember the two definitions/descriptions of an "economy" at the beginning of this post? One is about people meeting their material needs. The other could be about computers and robots using resources to increase something called "productivity."

We seem to be doing very well at implementing using resources through automation with the result being increased productivity.

How well have we done in this country if we define "material needs" at its minimum? "Needs" after all means "what is required, necessities." Relative to other developed nations, we do poorly at making certain all our people have access to what is required to maintain a life free of need, meaning a minimum standard of living. We try, but particularly now, in The Great Recession, we're plagued with more homelessness and inadequate health care and we do have more than a few children who do not get "three square meals" a day.

But when Americans talk about the economy, we use a traditional American viewpoint regarding standard of living. When we discuss our needs - "what is required" - we really mean that which is needed to maintain a "middle class" lifestyle. The problem is, nobody seems to clearly know what that is.

What is the "Economic Middle Class"

We think we know what the "economic lower class" is (keep in mind these are not pejorative terms demeaning people, but terms related to income and assets owned). The government defines "poverty level" income for a family of three (usually with one wage earner) as $18,310, though the unspoken assumption (sometimes not true) is that this family would receive in "income transfer payments" in the form of medicaid, food stamps, and a housing subsidy plus training and other assistance to make them more employable.

Then we all need to know who is in the "upper class." Probably the best definition uses the personal net assets level to define the "economic upper class." The Generation-Skipping Transfer Tax Exemption is set at $2 million, a figure which was also the Estate Tax Exemption from 2006 to 2008. If the members of a "nuclear family" have $2 million in net assets (assets less liabilities), by American government standards they are in the economic upper class.

It seems therefore that the American "economic middle class" is a vast number of people who find themselves outside what the government defines as the economic lower class (whew!) and the economic upper class (darned!).

But defining the "economic middle class" this way is very confusing as there are substantial variations in the "lifestyles" within this group of American. Is there one guideline Americans have used as an indicator of "middle-classness?" Probably having sufficient income to buy a home is an indicator of achievement to middle class. (Home ownership itself is not an indicator, just having sufficient income to buy a home if one wishes to do so is the indicator that a family has achieved the shared American dream.)

According to the California Association of Realtors, in the first quarter of 2007 the minimum household income needed to purchase an entry-level home in California was $96,910. By the third quarter of 2009 - after the housing price bubble burst leading to The Great Recession - the minimum income needed to buy an entry-level home in California was $43,500.

There seems to be a huge difference between these numbers. Do you need to earn $97,000 a year or $43,500 a year to reach achievement to middle class? The home price bubble really did a number on "middleclassness" in California and in many urban areas across the nation during the last decade. Fortunately, in much of the nation the numbers averaged half the California numbers from 1990 - 2007.

If we assume that in 2010 a wage-based income of around $45,000 a year is the indicator of arrival to middle class, then what about those with incomes between $18,310±($9/hr) and $45,000± ($22/hour). Historically this group would have been called the "working class" and "blue collar workers." Also historically, people above this level were proprietors (business owners) and professionals (attorneys, doctors, etc.), people who invested in, and owned the assets of, their businesses and were more likely to be called the middle class.

As we have seen in Chart 2 above, "proprietors" who own their businesses have become fewer and likely are seeing less personal income. In fact, during the past 60 years more of these Americans have become employees in medical groups like Kaiser or a corporate attorney or a manager of a business division of a large corporations. They don't own their business.

One confusion about the middle class here in the beginning of the 21st Century is identity. Employment including such diverse groups as academics and teachers, social workers, engineers, managers, doctors, nurses, pharmacists, and attorneys have been defined as "professional-managerial class." Barbara and John Ehrenreich formally described this group as "salaried mental workers who do not own the means of production and whose major function in the social division of labor...(is)...the reproduction of capitalist culture and capitalist class relations."

Though self-described as "middle class," those in the professional-managerial class tend to seek higher rank status and have higher incomes than average for factory, clerical and service workers. In the latter part of the 20th Century members of the professional-managerial class came to identify themselves with those in families whose income derives primarily from dividends and interest.

Thus, by the early 21st Century these mostly college-educated workers erroneously identified their interests with the interests of the economic upper class. This may have happened because in their nuclear families, through the advent of having two wage earners in the household and access to essentially unlimited debt, many of them acquired gross assets valued in excess of $1 million, though the asset value was inflated by the housing bubble, their net assets were well below that number, and their income derived mostly from work.

Dreams notwithstanding, if (a) you must earn wages or a salary to maintain your standard of living, (b) your income exceeds $20,000±, and (c) your assets minus debts total less than $2 million, you are in the working middle class whether you are a single parent family with an income of $30,000 a year living in a rental or a single child working couple with a family income of $110,000 a year living in your owned home. Today the vast majority of Americans who are working are in the middle class.

The median weekly earnings for full time employment is $740 a week or $38,480 a year or $18.50 per hour which means that most of single person or single parent American middle class families could not feel like they've achieved "middle-classness," meaning they could not buy a home if they wished to do so.

As a subgroup the median weekly earnings for full time employment for those in the professional-managerial class is $1,050 a week, $54,600 a year, or $26.25 an hour. As a subgroup, single person or single parent professional-managerial class families need only one person employed to feel like they've achieved "middle-classness" meaning they could buy a home (though not in California in during the mid-2000's where two such incomes were required).

We've explored the idea of "middle-classness." Let's return now to the economy.

Returning to business as usual

According to Treasury Secretary Timothy Geithner in an August 2nd New York Times op-ed piece the economy is returning, even if it is doing so slowly. He lists a number of things that indicate a basis for optimism to him and other financial types including:
• Exports are booming because American companies are very competitive and lead the world in many high-tech industries.

• Private job growth has returned — not as fast as we would like, but at an earlier stage of this recovery than in the last two recoveries. Manufacturing has generated 136,000 new jobs in the past six months.

• Businesses have repaired their balance sheets and are now in a strong financial position to reinvest and grow.

• The auto industry is coming back, and the Big Three — Chrysler, Ford and General Motors — are now leaner, generating profits despite lower annual sales.
The problem with this list is that it does represent a return to the economy that began with second half of the 20th Century. No one has bothered to ask the question "Is this what our economy is supposed to do?" Let's take these items one at a time and examine them from an American middle class viewpoint.

High-tech Industry Exports. As explained here last October in the post The iPad Economy we see growth in our GDP when Apple sells iPads to customers in Germany. The product is manufactured in China a shipped to Germany and Apple shareholders will make money. From that economic activity, few American workers will benefit, limited mostly to those in the "professional-managerial class"though a small number of support, clerical and janitorial folks will see continued employment.

But this technological export growth will not produce in the United States any manufacturing jobs and probably no other new jobs.

Private Job Growth. My reaction was "you've got to be kidding." According to recent statistics from the government that employs Geithner, so far during The Great Recession the U.S. lost about 7.3 million jobs while the workforce grew 0.7 million. We need 8 million jobs just to rebuild our economy where it was in November 2007. Any growth in recent months is negligible, barely keeping pace with the current growth in the workforce.

Then, particularly since he is a member of a Democratic Administration, one has to wonder under what rock Geithner has been living during recent decades that he would mention "manufacturing jobs." Since 1977 - 32 years ago - the United States has lost 7.5 million manufacturing jobs - yes, nearly 2 million of those were among the 8 million jobs lost in The Great Recession. But without a substantive change in dominant attitude among the financial gurus and those in the upper-most tier of the managerial class, we're not going to see even those 2 million manufacturing jobs come back in the next decade. This is a graph of our manufacturing employment since 1947:
Chart 4

Manufacturing jobs, really? Even if manufacturing employment in America could recover to 2007 next year, we'd still be short 6 million jobs. But where are these manufacturing jobs going to come from? Green industry? Which brings us to his next item.

New Investment Resulting from Repaired Business Balance Sheets. Which businesses? Big international corporations like GE are using the asset accumulation in the balance sheet to pay dividends to their shareholders and buy back their own stock in order to increase the stock value. We'll explore this asset use later in this post, but GE is a major manufacturer of alternative energy systems.

Large retailers? Are they planning new investment? Most retail sales depend entirely on American worker income. Costco, Home Depot, Walmart and Safeway all are ready to invest? In what? New stores???

High tech manufacturing? Yeah, a new plant opened in Taiwan to manufacture new iPads.

For a even clearer picture, let's move on to the next item.

The American Auto Industry Rebound. That the American auto industry is showing a rebound is true. Ford is the best example. Last month it reported a $2.6 billion second quarter profit, which is nearly 70% of it highest profits ever in 1999. It is doing it with half the employees it had back then.

General Motors. You remember them. The government bail-out left the taxpayers owning 60% of GM. It appears GM is going to be making a pile of money - in China. GM sells more cars in China than it does in the U.S. and produces them there. It employs 32,000 hourly workers in China and 52,000 in the United States. It employed 470,000 here in 1970.

And, if you're among the corporate professional-managerial class, such as an engineer on the electrical system in the Volt, you need to be aware that GM in China is building a $250 million advanced technology center to develop batteries and alternative energy sources (that green industry the President is suggesting might put Americans to work). Maybe we can still buy a 2021 Chevy Volt assembled here by robots, but the improved batteries in that year's model will have been developed and probably manufactured in China, by Chinese engineers and Chinese workers.

Fortunately, the American taxpayer will share in the profits if GM succeeds in China. Of course if you have been unemployed or are making half what you made in 2006, you won't share much. But those who depend on dividends and interest for income likely will see some benefit from those profits if only in the form of lower income taxes.

To repeat a previous paragraph: From 1947 to today, for each dividend and interest dollar paid to Americans, the amount paid for labor in America dropped from about $9.50 to $4.00. Is this the desired purpose of an economy?

What do we want from our economy?

What do you as an American want from the American economy? As indicated in Chart 3, at the beginning of 1952 ten dollars ($10.00) was paid to Americans in wages and benefits for each dollar of interest and dividends paid to Americans. By 2006 that number had dropped to four dollars ($4.00) where it has hovered since.

For nearly 60 years, we have rewarded capital investment with a larger share of income from economic growth than the share we rewarded labor. If the trend for American capital to invest in automation and in industrial/technological production in foreign nations continues, this shift in reward pattern will continue. If these trends continue, wages and benefits paid to Americans workers for each dollar of interest and dividends paid to American investors will drop to $1.60 by the end of the Century.

This investment pattern is not inherently bad. But do we want to see the same pattern of reward from American economic growth in the next few decades? Will that pattern depress the American retail and service economy further? Could it create a difference in classes similar to that seen in Third World countries today?

Maybe its all a perfectly acceptable pattern. But if not, the question is how to reconcile this investment pattern with a goal of maintaining both a minimum middle-class standard of living for the poorest among our population and a middle-class homeowner standard of living for most of our population.

One thing is for certain. No problem will arise in increasing the share for the American investor whose income comes wholly from interest and dividends.

Geithner in his Times piece concludes:
And as the president said last week, no one should bet against the American worker, American business and American ingenuity.

We suffered a terrible blow, but we are coming back.
What he and the rest of the financial community need to address is the fact that no one ever bet against the American worker, American business, and American ingenuity. It is simply a fact that like the auto industry, international corporations headquartered in America using typical American ingenuity are just choosing not to bet on the American worker at this time, but rather on automation and markets in other nations.

Ford is already a winner using automation, which makes a very large number of potential American auto workers not winners. GM is already a winner in China using Chinese workers and intends to be a winner there in alternative energy using Chinese workers.

The second quarter profit reports indicate that the 500 largest non-financial firms, after watching profits plummet in The Great Recession, have recovered to nearly 90% of pre-recession levels. Their managers are sitting on about a trillion dollars.

The managers know that profit growth is coming from their overseas operations where they are expanding. They know that future profit growth from U.S. operations will come from investment in automation. And they know it is in their best interest to use some of that cash to pay higher dividends and buy back shares to buttress increased share prices until that new investment in automation and in overseas operations pays off.

That's why in a July 23rd article we read:
General Electric Co., emerging from the global recession with a hoard of cash, raised its quarterly dividend by 20 percent and will resume stock buybacks sooner than it had predicted. The shares rose.

GE said in a statement it raised the per-share payout to 12 cents a quarter from 10 cents. The company extended stock repurchases through 2013 from the end of this year, and plans to begin buying shares this quarter.

Chief Executive Officer Jeffrey Immelt is scaling back some of the cash-saving steps he adopted in 2008 as the financial crisis deepened. GE said July 16 that it expects to have $25 billion in cash at the parent company level by year-end.

“We are able to restore the GE dividend at a historical payout level for 2010 earlier than previously anticipated and to extend our share buyback program because of continued strong cash generation, recovery at GE Capital, and solid underlying performance in our industrial businesses through the first half of 2010,” Immelt said in the statement.
The Friday prior to the announcement, GE shares closed at $14.55. The price of GE shares rose steadily from then on. Ten days later they closed 13% higher at $16.48.

Not that these companies won't start hiring American workers. They just won't be replacing the 2 million jobs lost in The Great Recession any time soon. Now would be a good time to examine economic growth reward patterns in order to make adjustments for the next 60 years.

Perhaps we'll need to find a way for all members of the American middle class to receive a larger share of the dividend and interest income from economic growth without having to risk their kids' college education, their own future retirement income, and their homes in the process.

Monday, July 19, 2010

The Bear Bones Era Take 2: "Stupid is as stupid does" - Forrest Gump

In January the pun "Bear Bones Era" was introduced here to describe the state of the State of California. The Gubernator in his annual State of the State Message had just offered up his depressing budget recommendation for the fiscal year running from July 2010 through June 2011.

Since then the Legislative Analyst also has offered revenue projections for 2010-11 that are somewhat more optimistic by about $1.4 billion. Building on that, a committee in the State Senate and a committee in the State Assembly each prepared a draft budget reflecting different ways of "optimizing" available cash to support spending programs.

Californians have yet to face the fact that the cash truly available is at the bare bones level meaning "the irreducible minimum; the most essential components." Existing proposals in the Legislature to spend cash are not at the most essential components and by any rational standard are not at the irreducible minimum.

Now we have in Assembly Speaker John A. Pérez, the voters' perfect legislator. Pérez was first elected to the Assembly in 2008, his first job in State and local politics. So, reelected in 2010 and having that really significant two years of experience - ironically more than many of the newly elected Assembly members filling seats where incumbents have been termed out by voter mandate - the Assembly Democrats elected him Speaker.

Favoring the "Progressive" point of view, his budget game plan relies on more taxes and borrowing, and limited cuts to schools and social services. He has strong support from the state's most powerful labor unions. And he shares their ignorance of reality, so has no problem pressuring Senate President Pro Tem Darrell Steinberg whose first goal is to find a way to adopt a budget that works.

Steinberg has a real disadvantage. He has the knowledge gained from experience - as a Sacramento City Council member (1992-1998), an Assembly member (1998-2004), and the Senate (2006-current). He appears to know there is a real problem.

So in the Assembly, we have a leader adhering to the "Progressive" point of view and a Republican block larger than one-third adhering to a rigid "no new taxes or tax increases" point of view. It's the perfect storm of voter accomplishment - a two-thirds requirement for budget adoption and a room full of legislators with no experience representing ideologically firm to mostly ignorant constituencies.

This situation is exacerbated by "hope," mostly the optimistic belief that the underlying economy will improve substantially within a year or two. This causes many to believe that if we can just find some money to borrow to be paid back in ...say... 2015, it will all work out.

In other words, the prevailing mantra is "let's just all ignore the fact that no reason exists to believe that the economy will improve significantly before 2015." California needs to acknowledge we are in a "Bear Bones Era", the first since the 1930's. And by "era" I mean at least a decade.

We needed a "statewide reality check" last year, before the State Budget was adopted. The situation is even more critical now.

The "Cash Flow In" Reality

The starting point is that total cash flowing in to support governmental functions including education will be near the 2004-05 fiscal year level as can be seen on this graph (as with many graphics here, click on it to see a full size version) which includes cash in from temporary and permanent sales and income tax increases plus increased withholding tables, all adopted since 2004-05:

You won't see a graph elsewhere that includes half of the statewide revenue from the 1% property tax rate (set by Proposition 13). The fact is that the State must fund K-12 which means making up the difference between spending and property tax revenue received by the schools.

According to the August 2006 State Board of Equalization publication California Property Tax: An Overview:

The property tax raised more than $43.2 billion for local government during 2006-07. These funds were allocated as follows: counties 17 percent, cities 11 percent, schools (school districts and community colleges) 53 percent, and special districts 19 percent.

It is obvious that changes in property tax revenue are just as important to the State budget as changes in sales tax revenue. A downward change in the trend of property tax revenue has occurred that will impact school funding for at least three fiscal years - the year just completed, 2009-10; the current fiscal year, 2010-11; and the 2011-12 fiscal year.

The average increase in the assessed value, and the corresponding revenue from 1% property tax rate, in the period beginning July 2000 and ending June 2009 was 8.6% a year. In fiscal year 2009-10, the assessed value statewide dropped 2.4%, it likely will drop another 3±% in 2010-11, and (my estimate) drop by 2±% in 2011-12. California has not seen a graph that looks like this since the 1930's:

Any income, sales, or property tax revenue increases of any significance are just not going to happen in the next decade because "it's the economy, stupid," to use a phrase from Clinton's 1992 election campaign.

The Underlying Reality: Our Economy

The second basic reality check is the economy within California. No "recovery" from The Great California Slump will occur any time soon.

First, Californians and their economic experts must acknowledge that it does not matter how well multinational corporations are doing - if that corporate "economy" has begun a recovery, that's nice but nearly irrelevant. Economists point to growth in the world and U.S. economy based on revenue growth reported by multinational corporations. In the U.S. those numbers are included in the Gross Domestic Product (GDP).

But almost no Californian lives for free in a home owned by such a corporation, eats meals prepared daily in that home by employees of such a corporation, dresses in clothing provided by such a corporation, and a large number don't receive health care provided by such a corporation.

The success of an "economy" must be measured in terms of the number of people it benefits through jobs, as argued here previously.

The only important economic question is: "How many Californians are earning from jobs?" The graph below shows 35 years of data - the size of the workforce and the number of jobs in California. Click on the graph to examine a full size version.

The red line indicates that despite fluctuations from month-to-month and year-to-year, the growth of the workforce in our state continues at a fairly predictable, consistent level. The green line shows that beginning in late 2007 the number of jobs plunged to near the level it was in 2000 (purple line).

Simply, the entire decade from 2000-2009 was a private sector jobs-creation zero for California, though many California-based multinational corporations have grown revenue beyond imagination. As I noted previously, this was the first "Lost Decade" of the 21st Century for California's economy. No reason exists for the next decade to be any different (except possibly for the lack of an artificially created employment bubble). Having lost over a million jobs (with more to come as government pares down), there is no reason to believe that income tax and sales tax revenue will increase at any significant rate over the next ten years, if at all.

Property tax revenue will not increase either. As noted above during the period beginning July 2000 and ending June 2009 property tax revenue 8.6% a year and has now begun a decline because of the home price bubble crash. Although more stable than the other tax bases, it has begun a slow decline because of the following:

And while there was a slight increase from 2009 to 2010, the expiration of the federal new home buyer tax credit resulted in a 2.9 percent drop in the median price in June as new home sales plummeted a record 32.7%, largest drop the since the government began collecting such data in 1963.

While it is reasonable to discuss the idea that California has a revenue problem because of declining bases - declining personal income, declining taxable sales, declining home prices - it isn't likely that the voters will allow any revenue rate increases in the near future. This is particularly true with regard to property tax revenue controlled by Proposition 13. Property taxes should be adjusted upward. Which brings us to the crux of California's problem - the voters have mandated costs well beyond the State's revenues. Voter mandated expenditures far exceed what the voters are willing to pay. This isn't surprising as overall voter personal expenditures exceeded what they made in recent decades. Deficit spending is a Californian's way of life but apparently we don't understand that our State and local governments cannot join us, unlike the federal government.

The "Cash Flow Out" Reality - Voter Overspending

California voters have been involved in school funding (Proposition 98 - California Mandatory Education Spending), our prison system (the Three Strikes Law), and a whole host of bond acts, some of which are listed below along with measures to fund anything which were voted down:


1988G 98 California Mandatory Education Spending P
1998G 1A Public Education Facilities Bond P
2000G 39 School Facilities Bonds P
2002G 49 After School Programs P
2004P 55 Public Education Facilities Bond Act P
2006G 88 $50 per parcel property tax; provides public school funding for K-12 F


1994G 184 Sentencing Repeat Offenders P
1994G 189 Denial of Bail; Felony Sexual Assault P
1996P 195 Punishment with Special Circumstances P
1996P 196 Punishment for Murder P
1996G 205 Funding for Incarceration Facilities F
1998P 222 Murder - Punishment P
2000P 18 Murder; Punishment P

1996P 192 Seismic Retrofit Bond Act of 1996 P
1996G 204 Water Bond P
2000P 12 Park Bond P
2000P 14 Library Bond P
2002P 40 Clean Water and Parks Bond P
2002G 46 Housing Bond P
2002G 46 Housing Bond P
2004P 57 Economic Recovery Bond Act P
2006G 1C $2.85 billion bond for low-income housing and shelters P
2006G 1E $4 billion bond for levee improvements and flood control P
2006G 84 $5 billion bond for safe drinking water, flood protection and park improvements P
2008G 3 Children’s Hospital Bond Act. Grant Program P
2008G 1A Safe, Reliable High-Speed Passenger Train Bond Act P

1996G 217 Top Income Tax Brackets F
2004P 56 State Budget, Taxes, & Reserve F

In fiscal year 2001-2002 the effects of the "Dot-com" bubble bursting were seen in the revenue decline of the State, but actual expenditures were almost in line with revenue that year. Since then the Legislature has been blamed by an thoroughly ignorant press for all the subsequent deficits.

In fact, the voters are directly responsible for the spending mess of the State government since 2001-2002. In the three areas where the voters have assumed responsibility for micromanagement, by 2007-08 spending exceeded reasonable increases to keep pace with inflation and population growth by a whopping $33.8 billion. In the remaining areas controlled only by the legislature, increase have been kept under inflation and population growth by $3.6 billion. The chart below lays this out (click on the chart to see a large version):

This year the only real option regarding expenses is to roll back expenditures to near 2004-2005 levels, particularly the Department of Corrections which went up 44% between 2004-05 and 2007-08 and local schools (K-14) which went up 30% in the same period. This would require the voters of California to give up trying to micromanage the criminal justice system with such things a the Three Strikes Law and mandating annual school system funding increases.

The something-for-nothing-mentality that has plagued California government because of voter attitude must stop. The only honest balanced budget for the current fiscal year 2010-11 would be as suggested below.*

The problem, of course, is that such a budget would violate two voter spending mandates, one for local schools and one to overcrowd prisons and jails. At some point after 1970, governing this State became impossible. Some drastic action must be taken to resolve the problem. Continuing to act in a stupid manner just makes us a stupid people. Or as Forrest Gump said: "Stupid is as stupid does."

My solution is to divide the State into three states - see Three Californias.


*Unfortunately, voter approved General Obligation Bond issues require that payments continue to increase and the increase in All General Fund Other State Operations includes the State absorbing into its budget the cost of local courts a few years ago as well as unavoidable costs for supplies and services from the private sector. Also, the year-to-year variation in Resources expenditures results mostly from costs for fighting wildfires.

Wednesday, July 14, 2010

Group or Societal Verbophobia

"Verbophobia" means "fear of words." It is a real phobia that with symptoms common to other phobias like breathlessness, excessive sweating, nausea, etc. It also can result in a full blown anxiety attack leading to detachment from reality and an inability to think and speak clearly.

All phobias are an irrational, intense and persistent fear accompanied by an excessive and unreasonable desire to avoid the feared stimulus. Phobias are linked to the amygdala, an area of the brain located behind the pituitary gland. The amygdala triggers secretions of hormones that affect fear and aggression.

"Verbophobia," then, is an irrational, intense and persistent hormonally based fear of words accompanied by an excessive and unreasonable desire to avoid the feared words which may result in aggression caused by the hormones.

Groups of people from a relative few to whole societies can be affected by phobias. Xenophobia is the most commonly known. A group or societal phobia can create collective behavior or even mass hysteria. In the case of xenophobia, in the group it can result in collective behavior that ranges from discrimination to genocide, from tribalism to nationalism.

At most of the time in our history, America has struggled with verbophobia. In 1793 one pundit commented:

‘The United States’, instead of the ‘People of the United States’, is the toast given. This is not politically correct.

A large number of groups of Americans in the political left, most common within academic institutions, began to be affected by verbophobia in the 1970's. The result was a cult-like movement with that term "politically correct" at its core.

Freedom to use words is fundamental to the United States. The first provision in the Bill of Rights - the First Amendment - clearly states:

Congress shall make no law abridging the freedom of speech, or of the press.

And yet, America seems to have a split personality. Because of a large variety of personally subjective, culturally related and historically changing values and attitudes, at various times specific words have been attacked as indecent, un-American, and/or politically incorrect.

Group verbophobia can get so bad that collective behavior becomes detachment from reality. Ironically, the following philosophy is a children's recitation in the English language but frequently seems not to be effective:

Sticks and stones
May break my bones
But words will never hurt me.

But as we all know, American parents don't believe what their children recite.

Words are not indecent or politically correct. Applying such labels to words and then "being offended" when they are used is essentially offering up a prejudice to justify acting in a discriminatory manner to impair freedom of speech.

Censorship and ignorance go hand-in-hand. George Carlin’s “Filthy Words” monologue dealt with that in a straightforward way. Today an appeals court noted the District Court ruling on the case about his aired monologue, later overturned by the Supreme Court, commenting:

In finding the FCC’s order both vague and overbroad, the court pointed out that the Commission’s definition of indecent speech would prohibit “the uncensored broadcast of many of the great works of literature including Shakespearian plays and contemporary plays which have won critical acclaim, the works of renowned classical and contemporary poets and writers, and passages from the Bible.”

What Carlin was saying, in effect, was decency has nothing to do with words, it has to do with behavior. And though he was not the first to point this out, he did frequently note that those in politics who protest about indecent language the most frequently are discovered to be persons who engage in questionable behavior.

We need to keep in mind that this is not about nude sunbathing in a public place or yelling "fire" in a crowded theater. This is about broadcasting.

"Community standards" in this context should be handled by the community within the private sector, as an alternative to government enforcement actions which can range from reasonable to illegally hamfisted and which, within this context, clearly risk violation of the First Amendment right to free speech - you know, the one that our founding fathers number first before that really important one on guns.

Here in the "good ole USofA" our government did put in place a Television content rating system. The TV Parental Guidelines system was established in 1997 as a voluntary-participation system, with ratings to be determined by the individually-participating broadcast and cable networks and designed to be used with the V-chip, which was mandated to be built into all television sets manufactured since 2000. That mandate seems reasonable.

Yes the guidelines themselves have no legal force, and do not apply to news or sports programming. Nonetheless, most television programming is voluntarily rated by the broadcasters. If you don't like the way a channel uses the ratings system, you can not turn that channel on or get your TV from a signal provider like Dish Network that allows you to block channels.

So, in addition to an on/off switch and a channel switch on the TV, the government working with the private sector endowed Americans with the ability to limit what they might see on their TVs. Unfortunately, some members of the public apparently don't make the V-chip work in their homes because they are incompetent, lazy or scared of their kids. That's their problem and it shouldn't ever be mine.

Some paranoid Americans worry about what I watch. Particularly with this V-chip tool in place, I detest the idea that any American would want the government to prevent my access to information and entertainment they don't approve of.

Americans need to be vigilant that within our society the basic rights of individuals as agreed upon in what we call our Bill of Rights are never lost simply because of the current majority opinion, which is constantly changing and frequently whimsical.


We now hold that the FCC’s policy violates the First Amendment because it is unconstitutionally vague, creating a chilling effect that goes far beyond the fleeting expletives at issue here.

So perhaps once again the Bible and Shakespeare could be broadcast verbatim in the United States and, for a moment, the verbophobes won't rule our airwaves.

Friday, July 9, 2010

State of California tax revenue data for 2009-10 is not good news

State Controller John Chiang today released his report for June 2010.

According to Chiang's analysis "The second half of the 2009-10 fiscal year saw mostly positive results in the State’s fiscal position...." He then compares the June 2010 results to estimates done in way back in May 2010!

He does also compare the results to the 2008-09 fiscal year (ended in June 2009) without reflecting any of the tax rate increases or withholding changes:

Compared to June 2009, General Fund revenue in June 2010 was down $1.2 billion (-9.7%). The total for the three largest taxes was below 2009 levels by $1.2 billion (-10.6%). This was driven by corporate taxes that were $2.5 billion lower (-56.7%) than last year. However, personal income taxes were up by $1.3 billion (28.8%), and sales taxes came in slightly above last June by $29 million (1.2%).

The report also explains that the budget isn't his problem, just cash flow.

While apparently the annual budget for the State of California isn't the Controller's problem, nor apparently is it the Legislature's problem as they recessed without adopting one for the fiscal year that began July 1, it is of some interest, if not concern, to me.

Compared to the 2009-10 budget numbers as adopted by the Legislature and approved by the Governor, the following facts can be reported:
  • Personal Income Tax revenue came in $4.24 billion (8.67%) less than budgeted.
  • Sales Tax revenue came in $950 million (3.44%) less than budgeted.
  • Corporation Tax revenue came in $647 million (7.35%) more than budgeted.
  • Total "Big 3" Tax revenues came in $4.54 billion (5.33%) less than budgeted.
Using the figures Chiang reported to examine California's economy, we can learn that compared to the 12 months ended in June 2007 (the last fiscal year before The Great California Slump), taxable sales in 2009-10 were down 19.26%, taxable personal income was down 19.23%, and taxable corporate income was down 12.27%.

We know that taxable sales were distorted by the "Cash for Clunkers" program and that personal and corporate income were distorted by the home purchase tax credit, two programs that expired, both of which increased revenue results. It is reasonable to assume that all three of these sources of State income will drop further in 2010-11 unless the economy makes some totally unexpected recovery or Congress unexpectedly approves some similar stimulus program.

Adding to this information, the State Board of Equalization's Annual Report indicates that statewide the total assessed value used for property tax purposes in 2009-10 fell $106.3 billion or 2.35% , "the first year-to-year decline in the statewide total since the BOE began keeping records in 1933." In terms of revenue, under California's Prop 13 property tax rate of 1% of value, it meant that property tax revenue dropped $1 billion statewide. The State uses half of the property tax collections to fund schools with the balance of school funding made up from General Fund revenues. The other half supports cities, counties and special districts.

Initial reports from County Assessors indicate that assessed valuations have declined again and likely will result in further loss of revenue to the State for school funding.