Sunday, January 30, 2011

The California budget truth is "so horrible that we don't want to release it" says Governor Moonbeam

Gee. Finally, Governor Jerry Brown said the following according to Sacramento Bee pundit Dan Walters:
[Brown] not only defended the cuts [in the safety net programs] as "necessary because we just don't have the money," but made it clear that they are a big part of a permanent "retrenchment" in spending.

"They're a retrenchment in what California was attempting to do in recent years," he said, adding, "they look permanent to me" because "the money isn't there."

If Brown is serious about "retrenchment," it alters political dynamics. Budget stakeholders have been grudgingly willing to accept cuts in the past only because they were seen as temporary and would be reversed when revenue picked up.

As recipients and their advocates ponder permanent reductions in welfare grants, in-home care, adult day care, health care, child care and other safety-net programs, resistance is mounting, as last week's hearings indicated. It calls into question an assumption of budget politics....

"When we unwind what has been done (in the past)," Brown said, "it's very difficult," noting the outpouring of opposition. But if it's not done and the tax extensions aren't approved, he adds, the alternative is "so horrible that we don't want to release it."

After watching for 18 months in frustration, in May 2009 I posted here:
In Grapes of Wrath, John Steinbeck told a story about how folks migrated to California to find hope within The Great Depression. We are now in what Time Magazine calls "The Great Recession" but California is not going to be a place to find economic hope.

The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse. Of course, no one publicly calls it that because no one wants to see it. But the boring statistics are available....

...California will need to reorganize as a bankrupt entity....
It was obvious the moment I saw the details of Brown's budget he wasn't making California confront the truth which is "so horrible that we don't want to release it."

Anyone on the internet who can read and "do numbers" has the information at hand. The facts are that in 2007-08 the State disbursed from the General fund $107.3 billion and that the State will have $62± billion to disburse in 2011-12. That's a 42.2% cut over four years.

Is it horrible? Depends on our perspective, I guess. If one increases the amount disbursed from the General Fund in 1990-91 by the increase in population and cost-of-living since then, we should be disbursing $80± billion from the General Fund 2011-12. Brown's budget, which uses all kinds of gimmicks, is $7 billion higher than that.

An honest budget from Brown would have told Californian's the truth - we need to cut education and safety net General Fund support by 50% from 2007-08 levels. The immediate cause is that our economy crashed. We are in The Great California Slump.

But the underlying reason our government is in that position is that since 1978 we've relied on taxes that are too sensitive to the economy - sales, income, and corporate taxes.

When we gave up a huge chunk of our property tax revenue, we made our schools and government too dependent on economic cycles. In a recession we may buy less at Wal Mart because our income dropped 25%, but we don't pull one of our four kids out of school because the school's income dropped 25%.

On December 2, 2010 I posted:

Here's what the big picture might look like after another $25 billion in cuts are factored in on a formulaic basis:

STATE PROGRAMS & 2007-08 % of 2011-12 % of % of
LOCAL ASSISTANCE Actual Total Possible Total Cut
Total Education $52.2 48.7% $26.1 42.1% -50.0%
Total Health & Human Services $28.7 26.7% $14.3 23.1% -50.2%
Total Prisons and Jails $9.5 8.8% $8.5 13.7% -10.4%
Total Debt Payments $3.6 3.4% $6.0 9.7% 66.2%
Total Resources Protection $1.4 1.3% $0.7 1.1% -49.5%
Capital Outlay $1.3 1.2% $1.4 2.3% 9.9%
Everything Else $10.6 9.9% $5.0 8.1% -53.0%
Total Cash Disbursements $107.3
...In fact, almost no one in the press understood the facts before the election and Brown made no effort to educate them. So the public was, and still is, ignorant of the facts. Now no one offers even a guess regarding how General Fund spending could be reduced 40%....
Governor Brown 1.0, just "doing his thing" as a government philosopher and policy wonk 30+ years ago, was very much responsible for getting us into this situation we are in. Now Governor Brown 2.0 is treating us like kids - the truth is "so horrible that we don't want to release it."

Just keep doing your thing Governor Moonbeam, and you may have to release the truth, if the voters decide not to approve the tax increase extensions. Maybe that would be a good thing for California.

Friday, January 28, 2011

The economy, President Obama, Governor Brown, the disconnects, and the Democratic Party failure

Right now a malaise is affecting the American and California economies. The two leaders - President Barack Obama and Governor Jerry Brown - appear to be completely disconnected from economic reality and from each other, though they are both Democrats.

Of course, we all know the biggest problem is employment.

I don't always trust the statistics about employment, but over a period longer than a year they generally describe reality with accuracy. What the statistics show over the long term - 25 years - can be seen in this graph of employment in California (as with all graphs here, you can click on it to see a large version):

What the graph shows is that employment in California has crashed and appears to be headed further downward.

A second shorter term graph confirms that trend.

There are those, of course, who would suggest that is a California problem, not a national one. In fact, President Obama just told us in his State of the Union Address that there were "more than one million private sector jobs created last year."

The only problem I have with that statement is that it is totally misleading. We aren't told how many private sector jobs were eliminated last year and there is no mention of the public sector.

Two sources of employment data are available from the government. One presented in the press monthly is data from a population and employer survey. The other, presented weekly in the press involves data from the 50 state offices that handle unemployment claims.

Both sources provide employment data. The survey data extrapolates from it's information a number that purportedly represents about how many people are working. The state unemployment data also includes the number of jobs being reported for purposes of taxes and unemployment and disability insurance. Here's a chart showing and averaging the numbers from both sources to determine the probable the changes in employment in recent calendar quarters:

During no calendar quarter since June 2008 did the number of people working in California or the nation increase according to the official federal government numbers. In fact, at no time did we see less than a significant loss in jobs. Nor is there an indication that this will turn around soon.

 A basic disconnect exists in our economy. It's simple. Large corporation profits have soared for two years, as has top executive pay which is linked to profits. This has produced gains in the stock market which benefits everyone with investments, but mostly those who have large investments in stocks. Bonuses on Wall Street are rising. In the meantime, Americans continue to lose jobs, the median wage adjusted for inflation is barely rising, and the value of the only large asset owned by most Americans, their homes, is still dropping.

As I noted in a previous post, this is not a new situation. Consider this graph that represents the truth for wage earners:

For each dollar of dividends and interest earned, the wages and benefits paid to workers have dropped from nearly $10 to around $4.

Consider this chart:

What this chart shows is that after WWII the Gross Domestic Product after adjusting for inflation and population growth grew 186% but the benefits were distributed as follows:
  • 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.
It's hard to confront this pattern that became noticeable in the early 1960's from a political point of view. Regardless of their faults and weaknesses, I used to associate my political orientation with elected officials from the Democratic Party.

It was "the first half of the 20th Century" California Democratic Party of U.S. Senators James D. Phelan, William Gibbs McAdoo, Clair Engle, and Pierre Salinger, and of Governors Culbert Olson and Edmund G. "Pat" Brown. (Yep, that's all the California Governor's I'm willing to be associated with except the Progressive Party's Hiram Johnson). And it was "the first half of the 20th Century" National Democratic Party of Presidents Wilson, Roosevelt, and Truman.

These politicians weren't perfect. But the National Republican Party hasn't had room for my point of view since they threw out Teddy Roosevelt and Hiram Johnson. The Democratic Party in the first half of the 20th Century was the party advocating for the Californian who depended on a wage for a living.

Today? Well, during the past month we have heard from the Party's national leader and from the Party's state leader.

According to President Obama in his State of the Union Address, the problem for our economic future is the American worker is just not competitive enough. According to the President we need to better educate our young people. To be competitive they need to finish high school and college. According to Obama "America has fallen to ninth in the proportion of young people with a college degree."

My first reaction was that this is a gross disconnect from the failure of our economy to benefit working people. But, first let's turn to Governor Jerry Brown on this subject of college education and the big disconnect.

California produces about one-seventh of America's college graduates. We have the largest public university system in the nation, one that exceeds most nations in the world. (We also have a lower percentage of our population that are college graduates, but that's another story.) The point for Obama to understand is that for the nation to increase its number and its percentage of college graduates, there will have to be a surge in enrollment in the California system.

In 2007-08 from the State General Fund California we spent $3.3 billion on the University of California system.

Governor Brown is proposing to spend $2.5 billion in 2011-12 or 24% less.

In 2007-08 from the State General Fund California we spent $3.0 billion on the state's other colleges and universities.

Governor Brown is proposing to spend $2.3 billion in 2011-12 or 21% less.

In 2007-08 from the State General Fund California spent $6.4 billion on it community college system.

Governor Brown is proposing to spend $5.8 billion or 9% less, but only if the voters approve a temporary tax increase extension can we maintain that level.

In terms of all expenditures for higher education in California, the Brown budget proposal would spend $2.139 billion or 15.4% less in 2011-12 than was spent from the General Fund in 2007-08, but it will be even less if the voters don't approve a temporary tax increase extension.

In the end, these cuts will result in fewer students attending college in California. Unless, of course, the Obama Administration is going to step up and provide the state with that $2.139 billion. We all know that's unlikely. In fact, Obama has pledged an austerity program freezing domestic spending for five years. Federal support for colleges and universities most certainly will be cut. In fact, with stimulus money running out, federal support of education generally will be less in future years. (And California is not the only state struggling with this.)

In other words, there is a major disconnect between reality and President Obama's higher education goal, caused in part by a lack of bold leadership from Governor Brown.

But there's another disconnect that is ironically odd for reasonably well educated political leaders.

In his State of the Union Address, Obama offered some "conventional wisdom" about our economy leading to his education premise (emphasis added):
Thirty years ago, we couldn't know that something called the Internet would lead to an economic revolution. What we can do -- what America does better than anyone else -- is spark the creativity and imagination of our people. We're the nation that put cars in driveways and computers in offices; the nation of Edison and the Wright brothers; of Google and Facebook. In America, innovation doesn't just change our lives. It is how we make our living.

Our free enterprise system is what drives innovation. But because it's not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need. That's what planted the seeds for the Internet. That's what helped make possible things like computer chips and GPS. Just think of all the good jobs -- from manufacturing to retail -- that have come from these breakthroughs.

...Maintaining our leadership in research and technology is crucial to America's success. But if we want to win the future -- if we want innovation to produce jobs in America and not overseas -- then we also have to win the race to educate our kids.
Well, not exactly. In fact it's hard to sustain a case demonstrating a positive relationship between technological innovation and gains for the American worker. In California, one can make a case to the contrary. Consider this graph (again, you can click on the graph for a larger version):

The San Francisco Bay Area and the San Jose Area include major technological centers including Silicon Valley, many established genetic research and development businesses, and many "green" technology centers. Employment, the number of jobs, in this area according to the federal government is the same today as it was in 1990.

We can only examine anecdotally what this means.

We know that American manufacturing employment in the computer industry is actually lower than it was immediately prior to beginning of assembly of the first PC, the MITS Altair 2800, in 1975. We know that about 1.5 million workers - factory employees, engineers, and managers - work in computer manufacturing in Asia.

Let's take Intel headquartered in Santa Clara, for instance. Intel was founded in 1968.  By the end of the 1990s, Intel was one of the largest and most successful businesses in the world. But Intel's employment in the Silicon Valley area has been cut drastically. It shut it's last Silicon Valley manufacturing plant in 2009. How did the corporation do in 2010? From its web site:
Full-Year Results
  • Revenue $43.6 billion, up $8.5 billion, 24 percent year-over-year
  • Gross margin of 66 percent, up 10 percentage points year-over-year
  • Operating income $15.9 billion, up $10.2 billion, 179 percent year-over-year
  • Net income $11.7 billion, up $7.3 billion, 167 percent year-over-year
  • EPS $2.05, up $1.28, 166 percent year-over-year
The company's net income in 1990 was $650 million according to its annual report. If one adjusts that number for the Bay Area consumer price index, it is the equivalent of $1.12 billion. So the corporation's net income in 2010 dollars has grown over 10 times in the 20 years.

If you were Patrick Gelsinger, an executive who left Intel in 2009 and who in August 2009 exercised his stock options for slightly more than 100,000 shares, you would have received $78,744 in dividends since you left and the value of the shares would have risen about $300,000 since you exercised your option.

If you worked in the Intel Silicon Valley manufacturing plant that was closed in 2009 and were well paid, you may have collected the maximum unemployment benefits spread out over 26 weeks of  $23,400 funded by a loan to the State from the federal government. The State needed the loan because Intel like other employers didn't pay enough contributions to the Unemployment Insurance Fund.

If need be, federal taxpayers will borrow up to another $65,700 to keep you and your family afloat over another 73 weeks. Hopefully you have a spouse who's working, as $3,900 a month in unemployment wouldn't cover payments on a modest house purchased in the region anytime after 2000.

Last fall, Intel Chief Executive Officer Paul Otellini at a meeting of the Council on Foreign Relations said the government should offer U.S.-based and foreign companies tax incentives, or tax holidays that would last five to 10 years, to encourage the construction of new factories or the expansion of existing ones. Otellini understands this kind of incentive.

In the last 20 years the taxpayers in New Mexico, Arizona, and Oregon have helped finance the company's growth. Starting in 1993 in New Mexico Intel built a $1 billion chip plant in a suburb of Albuquerque called Rio Rancho. Local officials provided about $455 million in property tax abatements and sales tax exemptions for equipment purchases.

Intel then built another plant in Chandler, Arizona, receiving $82 million in property tax abatements, sales tax exemptions and corporate income tax credits. In 2005 Intel lobbied the state to change the method it uses to calculate corporate taxes to the single sales factor system. Intel and other companies with property and a payroll, but relatively low sales in the state, use this method to avoid corporate taxes. Intel's products generally are sold to other companies located outside the state, indeed outside the country.

 In 1999 Intel expanded its semiconductor operations in Oregon after the state extended its Strategic Investment Program (SIP), which was adopted in 1993 with Intel in mind. The extension reduced Intel’s property tax bill by an estimated $200 million over 15 years. In 2005 the county extended the property tax break to 2025 offering $579 million in additional savings. Oregon also adopted the single sales factor corporate tax system.

President Obama has spent a lot of time with Silicon Valley corporate chiefs. Despite all evidence to the contrary, he thinks that technology oriented international corporations are going to replace the 7 million jobs lost since 2008 if we'd just educate another 7 million engineers, biologists, and lab technicians using money from some source other than the technology corporations.

Apparently Jerry Brown agrees because his budget message proposes adoption of a mandatory single sales factor apportionment method for multistate and multinational firms which should result in a substantial California tax savings for Intel. This is much more complicated than meets the eye. Given the fact that the other large states have adopted this rule, California may need to also.

But our Governor at least need to acknowledge that we are giving large tax breaks to corporations that sell outside California. This is a less-than-zero-sum game for the American economy causing losses in tax revenues.

So that brings us to the core disconnect. California's budget is in trouble because the large multinational corporations are not reemploying people in the United States despite the fact that profits are soaring, as we can see from Intel. President Obama told us:

...Because it's not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need. That's what planted the seeds for the Internet. That's what helped make possible things like computer chips and GPS. Just think of all the good jobs -- from manufacturing to retail -- that have come from these breakthroughs.
But as we see in the Bay Area and with Intel, the jobs go elsewhere. Large shareholders like Patrick Gelsinger do very well. Regular employees are laid off and depend upon government borrowing to fund their unemployment. Federal and state deficits rise. Corporate CEO's criticize the government for being irresponsible.

The core disconnect is the Democrats (or Progressives like Teddy Roosevelt and Hiram Johnson) who at one time tried to interject balance into situations like this by informing and leading the public, by using government power.

Brown just wants California to fumble through, making poorly thought out changes to our government structure, apparently hoping it will work out well enough to get him through his four year term.

Obama. He focused on competitiveness in his State of the Union. He tells us he's set a goal of doubling our exports by 2014 - "because the more we export, the more jobs we create here at home." That's nice, but it isn't true. The quickest way to increase exports is to reduce the price of our products. The biggest cost is payroll. Reduce that cost through automation and forcing lower wages, and we can double our exports in four years.

Over the longer term we can push the value of the dollar down, by such techniques as having the Federal Reserve buy Treasury Bonds with money that it just created. Create more dollars faster compared to other currencies, and the value of the dollar drops. Gradually, our products become cheaper to buy. And the cost of clothing and iPhones all imported from other countries will go up, reducing what we can buy as we don't produce these products.

Perhaps we should measure our competitiveness on how well American multinational corporations are doing. By that measure, we're an unqualified success. Revenue from operations in China, Brazil, and India are climbing. Profits are growing because labor is cheaper and they've reduced the cost of  or shut down operations in the U.S.  Growing American exports are not the engine for this success. Reducing the American standard of living is the engine for this success.

No one wants an anti-business President or Governor. But the well-being of American giant corporations is not synonymous with the well-being of the American worker. Here is where I have to ask the question again as I have in other posts: "What's the purpose of an economy?"

The answer from a Democrat used to be: "The purpose of the American economy is to increase the number of and improve the quality of American jobs."

Obama did seem to be addressing that issue when, pointing to the past, he said "because it's not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need. That's what planted the seeds...."

But as we've seen, this doesn't create jobs over the long term. There's a clear disconnect. This sounds strangely like corporate spin.

He seemed to be addressing that issue when he said "higher education must be within the reach of every American."

But again there's a disconnect. With regard to higher education he offered this proposal: "I ask Congress to go further, and make permanent our tuition tax credit - worth $10,000 for four years of college." That's $2,500 a year. It won't cover the recent and near future tuition increases in California's public universities put in place to replace State General Fund support.

Nothing he discussed is going to accomplish the goal of getting Americans out of the problematic labor market of the past decade during the next decade. Americans are finding that getting a job is tough. When they get one, it pays considerably less than the one they used to have and/or the job has no permanency and/or its insecure contract work.

We have to reestablish the economic base that supports the middle class. The President simply was unable to address the disconnect between American jobs and American corporate profits which are being channeled to a few. We need money moved from the top down, not in trickles, but in a steady stream.

Unfortunately, unlike in the first half of the 20th Century, no leadership can be found in our political parties with the stomach to deal with that need. And no one at Intel is going to make that happen.

Saturday, January 22, 2011

The Audacity of Being Jerry Brown

One significant element in the 2011-12 State Budget submitted to the Legislature by Governor Jerry Brown on January 10, 2011, was a proposal to eliminate the local government redevelopment program known as "tax increment financing" and use the funds to offset $1.7 billion of state Medi–Cal ($840 million) and trial court ($860 million) costs.

The State of California invented tax increment financing in 1952. California cities and counties maintain over four hundred TIF districts with an aggregate of over $10 billion per year in revenues, over $28 billion of long-term debt, and over $674 billion of assessed land valuation (2008 figures).

The theory is simple. When a redevelopment project is carried out, it creates an increase in the value of real estate through new investment, new or rehabilitated buildings, for example. This increased site value and investment generates increased property tax revenues. The increased tax revenues are the "tax increment" which is used to repay debt incurred to finance the redevelopment project.

This past week, Brown spent time explaining his ideas to California city officials. One, Yuba City Mayor John Dukes, noted that the governor was being "a little bit hypocritical" given that he lives in a downtown Sacramento loft that was built using redevelopment funds.

According the LA Times:
In show of strength, more than 100 mayors and city council members from throughout California came together Friday to protest Gov. Jerry Brown's plan to shutter their redevelopment agencies, calling it an illegal money grab and warning that they will sue the state if it is adopted.

Standing together with labor activists and business executives at the Sacramento Convention Center, the city leaders said they would vigorously oppose the governor's redevelopment proposal in the Legislature and, if necessary, in the courts....

Evan Westrup, a spokesman for the governor, said later Friday that the state had done a "thorough legal review" of the redevelopment proposal before it was made.

"We are confident that the governor's budget proposal is legally sound," Westrup said. "Redevelopment agencies were created by an act of the Legislature, and they can be eliminated by an act of the Legislature. It's time for all of us, including local government leaders, to set aside narrow perspectives and turf wars and act as Californians first to address the state’s budget deficit."
Ah, well, Brown was Attorney General, so I guess they did a "thorough legal review." But at the same time Brown was elected, 60.7% of the voters gave him instructions in the form of Proposition 22 which put the following language in the State Constitution:
SEC. 25.5. (a) On or after November 3, 2004, the Legislature shall not enact a statute to do any of the following:

(7) Require a community redevelopment agency (A) to pay, remit, loan, or otherwise transfer, directly or indirectly, taxes on advalorem real property and tangible personal property allocated to the agency pursuant to Section 16 of Article XVI to or for the benefit of the State, any agency of the State, or any jurisdiction; or (B) to use, restrict, or assign a particular purpose for such taxes for the benefit of the State, any agency of the State, or any jurisdiction, other than (i) for making payments to affected taxing agencies pursuant to Sections 33607.5 and 33607.7 of the Health and Safety Code or similar statutes requiring such payments, as those statutes read on January 1, 2008, or (ii) for the purpose of increasing, improving, and preserving the supply of low and moderate income housing available at affordable housing cost.
I don't know if the Legislature could work around that language. Maybe. But....

It's sufficient language put in our Constitution by the voters three months ago to keep things tied up in court for over a year. In other words, while over the next few years we ought to examine tax increment financing created by the Legislature in 1952, Brown stuck this local revenue theft gimmick into his budget proposal that has no chance to reduce the 2011-12 General Fund budget deficit if for no other reason that it will be tied up in court.

It's unfortunate that Brown has wasted this critical time by not presenting a balanced budget that would show us what the problem is. I will reiterate what the difference would be between his gimmicky General Fund expenditure budget and a real balanced budget:

Friday, January 21, 2011

Obama appoints GE's Jeff Immelt to join his staff of bankers

President Obama has appointed GE's CEO Jeffrey Immelt head his newly renamed outside panel of economic advisers, replacing former Federal Reserve Chairman Paul Volcker. Obama touted Immelt to lead his President’s Council on Jobs and Competitiveness noting that the economy is “in a different place” from where it was and called for a new effort to put the economy into job-creation "overdrive."

It's logical I guess because GE has been a  leader in building stuff elsewhere. And, according to it's latest financial report just released GE earned about a third of its revenues for the year from GE Capital Services, the largest single beneficiary of a key federal banking bailout program. Just a quick reminder from a November 2008 Bloomberg article:
General Electric Co. said the U.S. government agreed to insure as much as $139 billion in debt for lending arm GE Capital Corp., the second time in a month it has turned to a federal program designed to help companies during a global credit crunch.

Granting GE Capital, which isn’t a bank, access to a new Federal Deposit Insurance Corp. program may reassure investors and help the unit compete with banks that already have government protection behind their debt....

GE’s finance businesses are able to seek FDIC debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify. GE last month started using a new Federal Reserve program designed to revive demand for commercial paper amid the global crisis.

The company’s exposure to the deepest global financial crisis since the 1930s has cut its market value by more than half this year....
This is, of course, just a continuation of "The Bankers White House" as I posted previously. From GE's own web site we learn:
Mr. Immelt has held several global leadership positions since coming to GE in 1982, including roles in GE's Plastics, Appliance, and Medical businesses. In 1989 he became an officer of GE and joined the GE Capital Board in 1997. A couple years later, in 2000, Mr. Immelt was appointed president and chief executive officer.

Mr. Immelt is also a member of The Business Council, and he is on the board of the New York Federal Reserve Bank.
He's on the board of the New York Federal Reserve Bank not because he's an economist but because he controls one of the world's largest banks.

So within two weeks, Obama has now appointed bankers as his Chief-of-Staff, his Chief Economic Advisor, and Chairman of his Council on Jobs and Competitiveness.

Could anyone have anticipated this? Is there a precedent for this in a Democratic Administration and I just missed it?

Saturday, January 15, 2011

About Money

It is important that everyone understand what "money" is. By "everyone" I mean not only the poor and the middle classes, I also mean the wealthy and particularly the new "global elite" described by Chrystia Freeland in her Atlantic Monthly cover story  The Rise of the New Global Elite.

What is "money" really? It's easiest to begin the discussion by relating to the American dollar.

The United States Government creates from scratch one, and only one, commodity - money. And only the government can support its value because it has no intrinsic value. It's value is only psychological - you have to "believe in" its value. If enough people believe in it, mostly because they reliably can trade it for goods and services, then it has value.

You can get some of that commodity by working. Or you can "plant" some of it and it will "grow" more. If you have some, you can trade it for food or an iPhone. It is the "stuff" of a national government.

Like most commodities - like grain or oil - if the government creates too much of its commodity, it will take more of that commodity to trade for food or an iPhone because there is so much money to be had and relatively few iPhones. If the government commodity becomes scarce, the same amount will get you more food or an iPhone can be purchased for less money. Of course, if the commodity is scarce, it becomes harder to get. If you store enough of the commodity, you can use it to acquire power and influence in the government.

Money and Morality

While money may be the root of all evil, it is the bedrock of an economy. At no other time in human history has the concept of money been so important. And, as with so many subjects, most Americans do not understand how this came to be nor what money is. In fact, many Americans give mystical associations to money.

As a worldly philosopher, Jesus had no illusions about the relationship between "belief" and money. In Luke 16:13 (translated into modern American English) Jesus stated clearly: “No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. You cannot serve both God and money.”1

You may remember another passage that begins "render unto Caesar...." We sometimes get confused by this. "Caesar" is an imperial title meaning the head of the Roman State. So in explaining about money and taxes, Jesus said "Give the Emperor what belongs to him and give God what belongs to God."

Taken together, in dealing with money created by the government and symbolizing wealth, Jesus imparted this wisdom: "You cannot serve both God and money. Give the government what belongs to it and give God what belongs to God."

Jesus believed so strongly in the importance of putting money in its place that he drove from house of worship those who changed the standard Greek and Roman money for Jewish and Tyrian money as he believed monetary activities defiled his religion.

Americans are so confused about this that we even print "In God We Trust" on American money, a practice that began in the middle of the Civil War (embracing on our money the idea that Jesus/God would cheer on Christian soldiers slaughtering other Christian soldiers on behalf of the state). In fact, we even print it over the home of the equivalent of our emperor apparently endowing money with religious political associations:

Fiat Money

The point about money is that:
  • Money is a creation of government in order to facilitate an economy and the creation of wealth.
  • The government is the sole arbiter of the worth of money.
  •  The government that has the inherent right to regulate the use, acquisition, and storage of money.
  • The government has the inherent right to require that people "render" some or all of that money back.
If you are sputtering in outrage at this point, that is because you don't have any idea what money is.

As explained in Wikipedia all contemporary money systems are based on "fiat money." "Fiat" is not about an Italian car. A "fiat" is an arbitrary decree or pronouncement by an absolute authority with the power to enforce it, for instance "The king ruled by fiat."

"Fiat money" is without intrinsic value as a physical commodity, and derives its value by being declared by a government to be legal tender. It must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private". Of course, you have to believe in the efficacy of a government in order to believe in the continuing value of "fiat money." But it gets more complicated.

It's easy to understand that the money supply of a country consists of government issued currency (paper money and coins). More confusing is that the quantity of currency is supplemented by demand deposits or 'bank money' (the balance held in checking accounts and savings accounts). These demand deposits usually account for a much larger part of the money supply than currency.

Bank money is intangible and exists only in the form of various bank records. It can only be effective as part of the money supply if the government assures that it is the same as "fiat money" and, in more recent times, guarantees it's existence. The need to guarantee demand deposits came into being because previously they were only backed mostly by bank customers promising to repay loans. When people couldn't repay the loans, demand deposits became worthless an the money supply shrunk.

It gets even more complicated when you realize that after World War II, the value of most "fiat money" in countries around the world became dependent upon the value of American "fiat money." But in more recent times the value of all "fiat money" can affect the value of American "fiat money."

Simply, the issues around money and money supply are so complex that the world's economy depends upon what's happening in the American economy plus what's happening to the economy in small nations such as Greece or Ireland.

In terms of our money, we Americans need to be able to trust Irish and Greek "Caesars" more than we need to trust God.  But we need to control our "bankers" through our government and quit associating bankers with some higher power - we need to throw them out of our mental "temples."

Finally, we need to quit associating the acquisition of money with good and taxes with evil. As Jesus noted, money (and wealth) does not deserve respect and is entirely the realm of government. If you don't understand that, the "Devil" has taken control of your mind.

Emotions, Ideology, and Money

More than any other people on Earth, including those who lived in past centuries, American's imbue money with emotional content. American's believe - all evidence to the contrary - that there is a potential for "fairness" and "equality" associated with money. American's believe that the definition of "freedom" includes a promise of the possibility of prosperity and success, the latter referring to wealth accumulation measured in dollars.

While our Declaration of Independence proclaims that "all men are created equal" and that they are "endowed by their Creator with certain inalienable Rights" including "Life, Liberty and the pursuit of Happiness," we have subconsciously confused the idea that "the pursuit of happiness" with the pursuit of wealth through hard work and that hard work is so associated with "good" that it will bring just rewards. We even have a term, "Protestant work ethic." The term was coined by Max Weber, a German sociologist and political economist who lived in the late 1800's and early 1900's.

It isn't surprising that the term was coined in Germany during that period. It is a term of bigotry that has nothing to do with religion other than considering oneself a "better Christian" than those other Christians, as explained in Wikipedia:
It is based upon the notion that the Calvinist emphasis on the necessity for hard work as a component of a person's calling and worldly success and as a sign of personal salvation.

It is argued that Protestants beginning with Martin Luther had reconceptualised worldly work as a duty which benefits both the individual and society as a whole. Thus, the Catholic idea of good works was transformed into an obligation to work diligently as a sign of grace. Whereas Catholicism teaches that good works are required of Catholics to be saved (viewing salvation as a future event), the Reformers taught that good works were only a consequence of an already-received salvation.

However, the Calvinist and Lutheran theologians taught that only those who were predestined to be saved would be saved, by grace alone through faith in Jesus alone. Since it was impossible to know if one was predestined (since one might not receive the "grace of perseverance," and one's conversion might be only lip-service), the notion developed that it might be possible to discern that a person was elect (predestined) by observing their way of life. Hard work and frugality were thought to be two important consequences of being one of the elect; thus, protestants were attracted to these qualities, seeking to be obedient to God to whom they owed their salvation.
This concept - worldly success as a sign of having received "the grace of perseverance" because one is among God's chosen - led to a more insidious conventional wisdom among Americans. Again, from Wikipedia:
Horatio Alger, Jr. (13 January 1832 - 18 July 1899). Alger wrote over 100 books for young working class males, beginning with Ragged Dick, which was published in 1867. His books have been described as rags to riches stories. “By leading exemplary lives, struggling valiantly against poverty and adversity,” Alger’s protagonists gain both wealth and honor, ultimately realizing the American Dream.
Among the many things that came out of the Victorian Era (1837-1901) was an American population tending to embrace "the Horatio Alger story" buttressed by what they learned was "the Protestant Ethic" which established a sense of values around wealth - that wealth is earned, if you have money you are entitled to it, and accumulating money has nothing to do with the government.

In the 21st Century, we find that we have successfully proselytized this fallacious construct around the world as if it were a basis for a religion. That religion, well really a political ideology, is "American Capitalism."

And thus we have some peculiar events. Stephen Schwarzman, billionaire chairman and cofounder of the Blackstone Group, one of the world’s largest private-equity firms, didn't like the Obama administration's proposal to raise taxes on private-equity-firm compensation—by treating “carried interest” as ordinary income. So sure was Schwarzman of his moral right to that compensation for his hard work that, in July 2010 in a board meeting of a non-profit organization, he said of the proposal: "It’s a war. It’s like when Hitler invaded Poland in 1939.”

Yes, Schwarzman apologized. But this is weird for so many reasons. Schwarzman, 63, is in finance, he's not dumb, he's a Yale and Harvard Business School graduate. He's Jewish. What it indicates to me is that he's so vested in the core values of the political ideology of "American Capitalism" he doesn't even know the truths about fiat money, that:
  • Money is a creation of government in order to facilitate an economy and the creation of wealth.
  • The government is the sole arbiter of the worth of money.
  •  The government that has the inherent right to regulate the use, acquisition, and storage of money.
  • The government has the inherent right to require that people "render" some or all of that money back.
Instead, like so many of his billionaire peers who did not inherit their wealth (as well as those who did inherit their wealth), Schwarzman doesn't keep in mind that though he acquired his wealth with hard work (and some favorable circumstances), he did so using money - he depended entirely on the good faith and credit of the United States government and its citizens.

And underlying this is the fact that the American money system became what it is today because many, many ordinary American's worked very hard over two centuries taking advantage of the fact that there were seemingly unlimited natural resources available to them.

As Chrystia Freeland notes in her article:
...The rage in the C-suites is driven not merely by greed but by a perceived affront to the plutocrats’ amour propre, a wounded incredulity that anyone could think of them as villains rather than heroes. Aren’t they, after all, the ones whose financial and technological innovations represent the future of the American economy? Aren’t they “doing God’s work”?
This is worrisome thinking, because when those who spearhead fundamental economic change embrace self-serving ideology in an attempt to alter the exercise of governmental power, historically political turmoil has resulted frequently with bad results for humankind.

It is worrisome when many Americans, both rich and poor, see equality in inequality, possession of wealth as an ideological right, and any government effort to be the balancing force against obvious, self-evident concentrated economic power as a move towards "tyranny."

In the end, possession of most of the money can mean possession of all the power in society. Ironically, the truth is that a commodity created by government transferred into the hands of a few because of government action or government inaction can give those few control of the government. There is nothing democratic or "American" about that.

American's need to remember that:
  • Money is a creation of government in order to facilitate an economy and the creation of wealth.
  • The government is the sole arbiter of the worth of money.
  •  The government that has the inherent right to regulate the use, acquisition, and storage of money.
  • The government has the inherent right to require that people "render" some or all of that money back.
In other words, without that government created and supported commodity there would be no modern economy and you and members of the new global elite would be paid for your work in chickens. How many chickens is an iPhone worth?

1English speakers frequently relate to "You cannot serve God and mammon." Some people even capitalize "mammon" thinking it was some Greek god.  Jesus spoke Aramaic and "mammon" derives from Late Latin 'mammon', from Greek 'μαμμωνάς', Syriac 'mámóna' (riches), and was an Aramaic loan word in Hebrew meaning wealth although it may also have meant 'that in which one trusts'.

Thursday, January 13, 2011

You've got to be kidding - Brown's budget gimmick free????

A "gimmick" in the context of something like a budget plan means "a concealed, usually devious aspect or feature of something, as a plan or deal" according to

Coming into this year, newly elected Governor Jerry Brown seemed to be indicating that he would be offering a budget proposal that cut State General Fund spending to balance expected revenue but then would ask the voters to approve tax revenue increases to restore education and some other programs.

In a shocking interpretation of his presentation on Monday,  a number of stories in the press and blogs on line have appeared declaring Governor Brown's 2011-12 budget proposal "gimmick free." I don't know how he sells this spin!

The State Legislative Analysts Office in their analysis of the budget proposal lists in Figure 1 a total of 27 items used by Brown to reduce the deficit. Of those 27, in my opinion seven are not "gimmicks" and four may not be. The remaining 16 are clearly "gimmicks."

The core of his budget General Fund deficit-elimination proposal is to get the voters to approve a five year extension of the temporary tax increases put into effect in 2009. He then proposes to permanently shift some program expenses to local government along with some of that temporary revenue. When those extensions expire in five years, two things will be true. First, Brown won't be Governor. Second, the loss of revenue will not be the State's problem, but rather the problem of local government. If that whole thing is not a "gimmick" I don't know what is. I'm not even going to discuss the details of that in this post.

In terms of actual proposed budget cuts, his proposal offers a total of $7.0 billion in cuts. Using the Legislative Analyst list to find real cuts, they are as follows:

Looks like a worthwhile list to review. What does the Legislative Analyst have to say about them generally?
As we discuss in detail later in this report, our initial review of the Governor’s budget suggests that in some key program areas, the administration’s estimated savings are optimistic. These areas include some proposals in corrections, state employee health plans, and In–Home Supportive Services (IHSS). In addition, the budget plan includes $200 million of unallocated reductions to state operations for efficiency purposes. In some cases, the administration has not provided significant detail yet on how the savings from these proposals would be achieved. Historically, such lack of detail often has been associated with budget actions that fail to produce the desired level of savings.
More specifically, the first two items on the list are good goals. But as the Analyst says: "Historically, such lack of detail often has been associated with budget actions that fail to produce the desired level of savings."
Realities work against it. Costs beyond State control, such as fuel, are rising.

"Reduce UC and CSU budgets" simply means reduce General Fund contributions to those institutions by $1 billion. Simple enough. But Brown proposes that these reductions be reflected in operational costs without offering specifics. He doesn't want to see increases in tuition. In fact, he wants to keep student aid at current levels and he does this with a gimmick. As explained by the Legislative Analyst:
The Governor’s proposal would shift $947 million in Cal Grant costs from the General Fund to federal Temporary Assistance for Needy Families (TANF) funds. This fund swap would have no net effect on total funding for Cal Grants. As discussed later in the report, the TANF funds would be provided through an interagency agreement with the Department of Social Services, whose TANF funding would be freed up by the Governor’s proposed cuts in CalWORKs.
In other words, he's simply redirecting existing funds for one group of needy to another group of needy. That's ok, maybe, but it doesn't really cut total budget expenditures, though it moves some out of the General Fund. It's a gimmick to reduce the backlash at universities.

He's proposing to reduce state employee salary and insurance costs by $400 million through various cuts in pay and benefits. As the Legislative Analyst notes, that is not very likely.

He's proposing unallocated cuts in the General Fund contribution to the court system by $200 million. The Legislative Analyst notes this has been offset by such things as fee increases in the last few years. If that happens, it is not a reduction in expenses, it's an increase in fees. The Analyst suggests the courts could use electronic court reporting plus competitive bidding to reduce costs for court security. Yeah, let's just assume this is a fee increase.

The next five items on the list are reductions in health and human services. This is a complex set of recommendations that involve federal rules, shifting of funds allocated by ballot measures, etc.

The last item is a joke. It says "reduce Receiver’s inmate medical care budget." That refers to the fact that a federal judge took over the matter a few years ago because the State didn't conform to reasonable care. Every year Governor Schwarzenegger made that reduction and every year the federal judge did what he thought was right. It's a gimmick.

Now I have to point out that the Legislative Analyst included six items in the heading "Expenditure-Related Solutions" that aren't expenditure reductions. One has to admire Brown for convincing the press that these are somehow reductions. For example, one is "shift redevelopment funds to Medi-Cal and trial courts." The redevelopment funds are local government monies. Shifting them to cover state costs isn't a cut in expenses, it's a gimmick. It's incredibly complicated and unlikely to be achieved by 2011-12.

The press is already confusing the question of whether it might be a desirable goal with whether it is a goal that can be accomplished. Here's the Analyst's explanation:
For more than 50 years, state law has authorized cities and counties to create redevelopment agencies. The administration proposes to revise these laws to (1) dissolve the state’s 425 redevelopment agencies and (2) transfer their revenues (primarily, over $5 billion of annual property tax revenues) to local successor agencies. The successor agencies would use these funds to retire redevelopment debts and contractual obligations and make other payments described below. The successor agencies also would shift any unspent redevelopment housing funds to local housing authorities to use for low– and moderate–income housing.

In 2011–12, the successor agencies would use the redevelopment revenues to:

  • Pay redevelopment debts and obligations, estimated by the administration to cost $2.2 billion.
  • Offset $1.7 billion of state Medi–Cal ($840 million) and trial court ($860 million) costs.
  • Allocate $1.1 billion to schools and other local agencies pursuant to current laws that require redevelopment agencies to “pass through” some of their funds to affected local agencies.
  • Distribute $210 million to cities, counties, and special districts in proportion to these agencies’ current shares of the property tax.
Beginning in 2012–13, any property tax revenues remaining after the successor agencies pay redevelopment debt would be distributed to other local governments in the county. Distributions of these revenues generally would follow provisions in existing law, except that:
  • The additional K–14 district property taxes would augment their existing state funding (not offset state education spending) and would be distributed to districts throughout the county based on enrollment.
  • The property taxes that otherwise would be distributed to enterprise special districts would be allocated instead to counties. (These districts primarily are fee–financed water and waste disposal districts.)
The administration’s plan will require considerable work by the Legislature to sort through many legal, financial, and policy issues. Several voter–approved constitutional measures, for example, constrain the state’s authority to redirect redevelopment funds, use property tax revenues to pay for state programs, or impose increased costs on local agencies. In addition, the administration’s plan does not address many related issues, such as clarifying the future financial responsibility for low– and moderate–income housing (currently, a redevelopment program).

Although the administration’s approach to estimating the annual cost of redevelopment debt is reasonable, their assumptions regarding debt terms, interest rates, and other factors err on the side of understating debt costs. Our initial review indicates that the annual cost to pay these debts could be $1 billion or more higher than the administration assumes. If our initial review is correct, this would reduce the funds available for other purposes. For example, the Legislature may not be able to use $1.7 billion of these revenues for state programs and make $1.1 billion in pass–through payments to local governments.

The rationale for providing school districts with property tax revenues in addition to their existing property taxes is not clear. The administration’s proposal does not devolve more responsibilities to school districts. The distribution of these additional school property tax revenues would be uneven throughout the state, with schools in 15 counties (where there is little or no redevelopment) not getting additional property taxes and schools in counties (where there is extensive redevelopment activity) receiving significant sums. The distribution of these new property tax revenues further complicates an already complicated school finance system.
In other words, the proposal for the 2011-12 fiscal year is a gimmick. What Brown found out was that he couldn't stomach proposing a balanced 2011-12 budget. Or he's setting things up for failure so he can devastate the education system. Here's a comparison between what was spent in 2007-08, what Brown proposed. and what balanced General Fund disbursements would look like at the end of 2011-12 without a revenue increase:

The trade-off: drop 1 American from the middle class, add 4 elsewhere

Keeping an eye on the post-Great-Recession economy is always interesting. The Atlantic Magazine has a long article this month offering a great deal of information about how those in power (not government folks - they don't have any real power over the economy) view how things are going to change for us:
The good news—and the bad news—for America is that the nation’s own super-elite is rapidly adjusting to this more global perspective. The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.
I recommend this article, but it is quite imposing in its length as will be this post.

Anyway, how this change is slowly but incrementally progressing can be illustrated by an example I read about today.

I was perusing my news email and noticed this article:
It makes sense that an expert in electrical technology is getting into what could be a huge burgeoning market: the power infrastructure for cloud and mobile computing applications. General Electric plans to pay approximately $520 million for Lineage Power, of Plano, Texas, which provides DC power conversion technology.

As rationale for the deal, GE cites the potential $20 billion market for power conversion infrastructure, which is being accelerated by cloud computing services, mobile Internet access, and the spike in video and data applications.
Being a GE shareholder, I had to followup on this story. It is, of course, a "cleaned up for American general consumption" version of the news release. What we have here is the typical American-based mega-international-corporation spending a tiny portion of its huge cash reserves, cash partly protected by a recent government bailout, to make more cash with limited potential benefits the American middle-class workforce (if any at all), as the news release explains (emphasis added):
Lineage Power had revenues of approximately $450 million in 2010. The transaction is valued at approximately $520 million or eight times enterprise value on 2011 EBITDA basis. The deal is expected to close in the first quarter of 2011, subject to customary closing conditions, including receipt of regulatory approval. Lineage Power is headquartered in Plano, Texas, and has nearly 2,300 employees, with manufacturing operations in China, Mexico and India.
So we know that company has no employees building anything in the United States. Not that the company doesn't have employees in the U.S. They do have R&D, customer support, and administrative employees in Texas. In fact, at the beginning of The Great Recession the Dallas Business Journal reported:
Lineage Power has laid off 166 employees, according to a filing with the state's Texas Workforce Commission.

...The Mesquite facility is the headquarters for the company, which has 2,400 employees worldwide. It's also Lineage's primary research and development center. The layoff leaves it with 325 employees in Mesquite.

...The employees -- which included electrical and mechanical engineers, program and project management and materials handling people -- were laid off Jan. 15. The Workforce Commission's rapid-response team is assisting workers in finding other jobs, Stalnaker said.
When you go to the Lineage Power web site you learn that GE actually just acquired additional federal grant monies:
Lineage Power is excited to have been named the recipient of a U.S. Department of Energy (DOE) $2.4 million research and development grant to develop technologies that minimize the power loss and heat generation that occurs as electricity moves through the ever-growing wired, wireless, and broadband service provider infrastructures.
In an overall "FAQ Sheet" on the acquisition, GE offered the following corporate-speak assurances to Lineage employees:
12. Q: What changes should be expected by employees?

A: Prior to closing, the approximately 2,300 employees of Lineage Power should expect no changes as we will continue to operate in a business as usual manner between announcement and close of the transaction. Lineage Power employees are expected to remain focused on delivering the industry’s best customer experience, built on a foundation of great products, reliable service, and world-class operations. There is nothing more important than our customers.

GE and Lineage Power share a culture of energy technology innovation. GE values the employees that will be joining our team as part of this acquisition. Employee expertise and industry experience are important factors in GE’s decision to acquire Lineage Power. There are no plans at this time to alter the current direction of business operations and it is much too early to speculate on any functional changes.

GE does not anticipate closing any Lineage Power facilities. The global GE brand, supply chain scale and distribution network combined with growing market demand for power conversion products is anticipated to increase opportunities in the coming years. At closing, employees will learn more about GE benefits offerings.

Lineage Power employees have built an innovative and customer-centric company with a foundation of technology leadership and strong, long-term relationships with customers. GE will be working closely with Lineage Power’s management team to design an integration strategy that will build upon both companies’ existing expertise. We will communicate as openly and as frequently as possible as new information becomes available after the close of the transaction.
GE, of course, has it's own approach to R&D as indicated on its web site:

It's easy to project how the Lineage folks will be affected in the long term by this acquisition.

GE Energy already has a large field services operation in Houston where right now they're recruiting for a Engineering Services Manager - North America who will probably help "integrate" Lineage Power field support folks who don't mind moving from the Dallas-Ft. Worth area to Houston. Of course, selling their homes might be a bit of a problem, as explained in the Dallas Morning News last Friday:
Home sales in the Dallas-Fort Worth area have continued to slide. And prices are still drifting lower, albeit only slightly.

...Through the first 11 months of 2010, sales of single-family homes through the Realtors' Multiple Listing Service were down 7 percent from the same period of 2009.
Adding to this bad news, Tuesday's paper offered in this article "the percentage of Dallas-area homeowners facing foreclosure has inched higher after months of decline" and in this article we learn:
CoreLogic Inc. said Tuesday that Dallas-area prices fell by 3.9 percent in November compared with November 2009.

Even if you take out distressed property sales including foreclosures, CoreLogic estimates Dallas-area home prices were 1.4 percent lower in November than a year earlier.

Prices were down 3.3 percent in the Fort Worth area.
If they desire to remain with GE and keep their homes in the immediate Plano area, Lineage Power R&D personnel might be able to find positions as openings occur in the GE Health technical operation there.

This is an example of how the American post-Great-Recession economy has transitioned into a highly profitable corporate economy offering no real "growth sharing" to the American middle class. It involves one of those legendary American small businesses that created jobs.

How does one respond to the statement "if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade."

One might respond by saying why not lift four people in China and India out of poverty and into the middle class and, instead of buying a new yacht this year, in some imaginative, productive way, prevent the one American from dropping out of the middle class.

Of course, to truly understand that statement we need to understand what "middle class" as a "lifestyle" means in India, China, and Mexico compared to what it means in the United States.

The World Bank's definition of middle class households are those with annual incomes ranging from $4500 to $22,000.

Here at the beginning of our post-Great-Recession experience, those are the new numbers that will define achieving middle class in the new 21st-Century international economy as understood by those holding economic power around the world.

Tuesday, January 11, 2011

The Golden State to become The Brown State: The 5-Year Plan

 California is nicknamed "The Golden State." Adopted by the Legislature in 1968, it reflects back to the California Gold Rush which lasted about eight years. After that? The state has had its many economic periods, most like the Gold Rush, short lived, beginning with a boom and ending with bust.

In the late 1970's California was going through one of those booms, a real estate boom. It had some political fallout - Proposition 13. Then Governor Jerry Brown was partially responsible for that fallout, as explained in a previous post. Now he is Governor again and, due to his lack of foresight and leadership then and now, he is proposing to make California unofficially "The Brown State" in five years.

"Golden" reflects the hope and dreams of California. "Brown" reflects what the state's dreams have turned to. Jerry Brown's dad was also a Governor. Edmond G. "Pat" Brown's two terms as Governor were at the end of the "hopes and dreams" period and can be summarized as follows:
Brown's two terms were marked by an enormous water-resources development program. The California Aqueduct built as part of the program now bears his name. He also presided over the enactment of the California Master Plan for Higher Education, fair employment legislation, a state economic development commission, and a consumers' council.
He was the last Governor of "The Greatest Generation" which after WWII invested heavily in the future of the State. Since that time all generations have chosen to "invest" in themselves.

But that's the past. At the beginning of his third term in office, this week Governor Jerry Brown "2.0" has offered his first shot at 21st Century political leadership in the form of a budget proposal. After a big publicity run-up on the problems of the budget and how he would present it honestly to the Legislature and the public, he submitted an expenditure budget that is $25 billion higher than I thought possible.

But who am I? Brown is, it turns out, a miracle worker. Somehow he has taken a State General Fund cash crisis and turned it around. I prepared the following comparison sheet to discover what he has proposed:

It's actually a miracle. Despite the much criticized "smoke and mirrors" of one-time fixes, plus temporary tax increases plus taking funds from local government all used to balance the 2009-10 budget, Brown has been able to propose a budget that will not be reduced from that year, in terms of total cash paid out! And he did this without expecting much of an economic turn-around!

Hmmmm.  Maybe we'd better take a look at the income side of the ledger:

Obviously, this is all confusing, as is much of the 266 page 2011-12 budget summary. But if you notice a 25% increase in corporation tax revenue over the current year (15% increase over the "boom times" 2007-08 fiscal year) you immediately start to wonder about this miracle budget.

Wading through the text of the budget summary document, the answers are there:
To maintain funding for schools, fund public safety services at the local level, and to balance the budget, this proposal maintains current tax rates for another five years. The Budget also proposes to uniformly apply the single sales factor income allocation rules to certain corporate taxpayers and to eliminate an ineffective tax expenditure program. These proposals will generate $12 billion.

While most of the budget solutions are ongoing, the Budget includes some one-time savings and borrowing. These include $1.8 billion in borrowing from special funds, $1.7 billion in property tax shifts, $1.0 billion from Proposition 10 reserve to fund children’s programs, and $0.9 billion from Proposition 63 moneys to fund community mental health services. $8.2 billion of the budget gap is one-time in nature. Closing a portion of the gap with some one.time solutions is appropriate because a portion of the budget gap's one-time in nature.
Nothing too complicated here. It looks just like the solutions Governor Arnold Schwarzenegger and his Finance Director used. Oh, dumb me. Brown's Finance Director is Ana Matosantos who was Schwarzenegger's Finance Director.

So Brown proposes to balance the 2011-12 General Fund Budget using
  • one-time solutions involving moving money around between funds, agencies, and from local government,
  • a 25% increase in the corporation tax, and
  • a five-year continuation of the temporary tax increases implemented back in 2009-10, increases in the personal income tax, in the sales tax, and in the motor vehicle license tax.
One has to ask: "Why a five-year continuation of the temporary tax increases?"

The answer comes very quickly - Jerry Brown isn't planning on serving a second term this time as he would be 77 years old.

But what a mess he plans on leaving.

Tax revenues needed (in his words) to "maintain funding for schools" and "fund public safety services at the local level" would disappear in five years.

Then there is the whole government "Realignment" proposal which supposedly will be the answer to California's government funding problem.

First there is the spin on his law enforcement proposals:
Public safety in the community is more than public safety officials on patrol, management of the local jail, or fire prevention and response. Public safety is a community effort which involves the safety of children who are in the county child welfare system, the safety of adults through the Adult Protective Services program, as well as such supportive services as mental health and substance abuse treatment services, which people need to successfully change their lives.
In simpler language, he is proposing that "low level offenders" be housed in local jails or monitored by local probation departments. Counties, which have been and are laying off employees, will get some money for this, from the temporary five-year tax increase.

This will move issues of increasing costs away from the State back to the counties, as the prison overcrowding issue becomes less urgent, and it won't reach a crisis level for five years when it will be a local government problem. (He is also proposing to keep the courts under the state jurisdiction but transferring responsibility for court security back to the counties, again with funding from the 5-year tax increase continuations.)

Next we have the spin on reducing the cost of CAL FIRE:
Under this proposal, responsibility for fire protection and medical emergency response in these populated wildland areas will be assumed by local government. As a result, this proposal will ensure that local jurisdictions making land use decisions which result in housing development encroaching in wildland areas are also responsible for providing the necessary emergency response services associated with more highly populated land use patterns.

...It is estimated that this proposal will result in the realignment of up to $250 million of CAL FIRE’s fire protection program to local governments.
This would have been a thoughtful, significant proposal thirty years ago, back in 1981 in Brown's first stint as Governor. But since then, thousands of homes have been built in the urban-forest interface. They aren't going away (unless they burn down).

The entire budget for the Department of Forestry and Fire Protection is/has been around $750 million. The Brown proposal is to shift a third of that budget to local fire departments with some funding for five years.

The problem with that theory is that local agencies are not in a position to contract for helicopters and other aircraft. What will happen is that many more fires will get away from under-equipped local firefighters in that urban-forest interface area, moving into the state responsibility areas, making it significantly harder for a later response of CAL FIRE units to suppress creating a corresponding cost increase to the state.

The whole program will take several years to implement. I assume Brown hopes it will be at least five years before anyone notices the wildfire damage problem.

A whole series of mental health and social service programs are proposed to be shifted to counties, supposedly with revenues. Describing each and every one would take many, many more paragraphs here. So I'll limit the discussion here to the mental health proposal which would shift three programs to counties explained as follows:
The Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) Program, which is a mandatory federal program under Medicaid designed to improve the health, including the mental health, of low.income children under the age of 21. The EPSDT program is funded by the General Fund and federal funds with the counties paying a 10.percent share of cost above a specified baseline.

Mental health managed care provides psychiatric inpatient hospital services and outpatient treatment services through county mental health plans. This program is funded with General Fund and federal funds.

State.mandated mental health services for special education students (AB 3632) are those services included in an Individual Education Plan (IEP) that county mental health must provide to have a student succeed in school. This mandate has been suspended for 2010-11.

Beginning in 2011-12, these three programs would be funded with Mental Health Services Act (Proposition 63) funds rather than General Fund, resulting in savings of $861 million. This would be a one-time use of Proposition 63 funds; beginning in 2012-13, these programs, as well as community mental health services currently funded with 1991 realignment funds, will be funded through the proposed revenue source.
This sounds plausible, except any reasonable person should ask: "Aren't Proposition 63 funds being used for other programs now?"  And many of us with short memories also need to ask: "What was Proposition 63?"

In 2004 the voters approved Proposition 63, levying a 1% income tax on personal income in excess of $1 million. That money was to be used as described in the ballot measure to remedy some of the more serious gaps in our mental health system.

In fact, these funds have been used extensively by counties for programs as intended, using the funds to match extensive federal funds. Brown's proposal is exactly the type of diversion of funds voters thought they were objecting to when they voted for Proposition 22 in the same election Brown was elected.

What Brown is really doing is adding to the burden of Proposition 63 funds three programs now funded by the General Fund, and he's handing them off to counties. This avoids the onerous task of he and the Legislature deciding to reduce mental health services, something their base constituencies would find objectionable.

Foolishly I thought Brown was going to offer a severely reduced balanced budget to the Legislature with a possible solution such as proposing to increase the Proposition 13 tax rate of 1% of assessed value to 1½% of assessed value to avoid completely devastating our systems to educate and care for children. I thought he was going to create a serious discussion about the future of California government rather than attempt to put it off for five years.

In five years, the opportunities to keep California "golden" will be even more severely constrained. This is some legacy the son of Pat Brown is going to leave us.

Of course, with these proposals he simply just restarted the same old political arguments....

Sunday, January 9, 2011

The Banker's White House, African Women, and Sprinkle Out Economics

The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow’s hands. - Will Rogers
Nothing in anything I read about Barack Obama would have led me to believe that in his Presidency we would see as his Chief-of-Staff William Daley, a man who
  • was President and CEO of Amalgamated Bank of Chicago;
  • was special counsel to President Clinton on issues relating to the passage of the North American Free Trade Agreement (NAFTA);
  • was a President of what we now know as AT&T;
  • was Midwest Chairman of J.P. Morgan Chase and Bank One Corp. to oversee post-merger operations; and
  • currently serves on the Boards of Directors of Boeing and Merck & Co.
In an Administration already awash in bankers, this is appalling and seems more so when on Friday Obama announced as his Chief Economic Advisor former Goldman Sachs advisor Gene Sperling.

Sperling was one of the principal Clinton Administration negotiators securing the passage of the Financial Modernization Act of 1999 that repealed large portions of the depression-era Glass-Stegall Act deregulating banks, securities firms and insurance companies, ultimately leading to the economic collapse of 2007.

I'm sorry. I just can't remember when the policy orientation of Democratic Party leaders merged with the views of international bankers. At one time, it was a Party that at least on the surface vehemently opposed "trickle down" economics.

Apparently, sometime in the past 30 years Democratic Party leaders embraced "sprinkle out" economics, and apparently did so in concert with Republican Party leaders.

Elected officials from both parties have watched as American corporations "sprinkled out" to other countries jobs that previously at least had "trickled down" some of the benefits of economic growth to ordinary Americans. It has become so bad that practically everyone acknowledges that in the midst of The Great Recession "recovery" American corporations are hiring thousands of workers, but just not in the United States.

These same elected officials "sprinkled out" our national debt to Chinese and Middle Eastern interests, people from whom we can't expect to find sympathy for what ordinary Americans understand is "The American Way."

Let's take a hard look Sperling's record, as an example of what's wrong with the Obama White House.

In 2008 while our economy collapsed because of his work on behalf of the banking industry during the Clinton Administration, according to Bloomberg New's analysis of financial disclosure forms Goldman Sachs paid Sperling $887,727 for advice on one of its charitable projects, known as "10,000 Women," which provides business education to women in poor countries.

It sounds like laudable work except that well over 10,000 American women were in the process of losing their homes - their small piece of the "Ownership Society" - while he earned over a million dollars that year (the rest came from speaking to hedge fund executives).

The problem with guys like Sperling, Daley, President Obama, and former President Clinton when he was in office is that they explore "growing" wealth as an intellectual scientific subject as if it is about increasing spinach production, expressing lofty thoughts about economic theory while carefully avoiding the obvious - the accumulation of obscene amounts of wealth by a relative few corporations and individuals around the world.

They reach to find evidence of successful women in Africa who have increased their income from less than $2,000 a year to as much as $5,000 a year. They never explore the idea that while the world's poor are seeing some economic growth, middle class women in the U.S., Europe, and Japan are seeing a greater relative loss of real income.

The potential is that the income of those successful African women and of those middle class women are going to reach a common level - at $15,000 - $18,000 a year in today's dollars. This is an income level that will marginalize the economic (and political) power of most people.

The Obama Administration is dismissing concern from the Political Left in much the same manner as the Bush White House essentially abandoned the Christian Right. Ironically, both groups are concerned about the welfare of the rapidly growing number of Americans on the margins of our economy. The two groups just don't approach solutions from the same perspective.

But neither group believes that the solution to improving the lives of ordinary people around the world is to increase the sales of yachts. Yes, just as economists report the recession is over, various sources report yacht sales are up in Texas, the European Union, "Communist" China and other parts of the Third World. I guess Sperling's advice to Goldman Sachs was so good those 10,000 women are buying yachts.

Advocating policies that improve the world-wide sales of yachts is exactly the image of White House economic policy for the past 20 years and appears will remain the policy orientation.