The Bare Bones Era - 2012: Tech giveth and tech taketh away

Last week's Facebook IPO was a bit of a flop, disappointing those in our State government who had hoped for huge taxable profits.

This week's headlines reflect the long-term impact of California's child-like dependency on new bright shiny objects designed in the Bay Area and Silicon Valley - Hewlett-Packard to Cut 27,000 Jobs.

Jerry "Moonbeam" Brown's opponent in the California 2010 Gubernatorial election was Meg "Teletubby" Whitman, the former CEO of eBay, whose success at that dot-com company was built on making bad acquisitions of other companies and outsourcing labor (for more details see the July 2010 post Governor Moonbeam or The Overpaid Corporate Bigwig).

After losing to Governor Moonbeam who took office in January 2011, that same month Whitman joined the HP Board of Directors and in September was appointed CEO. The HP Board had publicly renounced the prior decade of of acquisitions and layoffs that seemed to have led to long-term failure. Instead the Board emphasized focus on investment and innovation. So Whitman was the logical choice since her success at eBay was built on making bad acquisitions and outsourcing labor....
Eight months after assuming the position of CEO, at this week's quarterly earnings call Whitman offered assurances about innovation and investments, and oh but right now HP needs to layoff 8% of its workforce or 27,000 people. To put that layoff number in perspective, that's just 12,000 more people than eBay employed at the end of Whitman's tenure there, so she's obviously gained in stature being able to fire that many people.

She explained that HP would be taking $3.5 billion in charges against earnings over two tax years to provide severance and early retirement packages for some folks being laid off. That means it will be at least three years before the layoffs might generate a dime for new investment and innovation.

One needs to be aware of this from the Silicon Valley Mercury News story:

HP has taken an ax to its workforce on several other occasions in recent years. In June 2010, it announced it was cutting about 9,000 positions "over a multiyear period to reinvest for future growth." Two years earlier, it disclosed a "restructuring program" to eliminate 24,600 employees over three years. And in 2005, it said it was cutting 14,500 workers over the next year and a half.

In a note to its clients this week, Deutsche Bank analysts said past layoffs "have done little to improve HP's competitive position or reduce its reliance on declining or troubled businesses." And despite HP's assertion that the latest cuts will enable the company to reinvest in other key market areas, Deutsche Bank questioned that rationale because the company "has been restructuring for the past decade."

Don't get confused. The issue here is not what HP needs to do.  The issue here is California tax revenue, specifically personal income taxes and corporation taxes.

Governor Moonbeam and his Legislature were hoping for big income tax revenues from a tech company one time IPO to somehow save the State.

What they were doing is committing malfeasance. Perhaps too many of them learned math in California schools. This graph reflects the truth about California's tech industry:

As was explained about this graph in the February 2011 post Lies big and small: Why California will fail to fix Brown 1.0's mess:

This "M-curve" is typical for employment changes associated with new technology. Jumps in employment are followed by a drop, followed by another spike, followed by a drop. There are things we know about this from experience in the latter quarter of the 20th Century and the first decade of the 21st Century.

One of those things we know is that being in the center of technology innovation does not give the Bay Area and San Jose a permanent increase in jobs, it just keeps employment steady.

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. These things are facts. They shouldn't surprise us. It is disturbing that political leaders lie about it.

Perspective - the big picture view - is essential to managing the State of California's finances. The fact is that the fiscal health of the State depends entirely on taxable personal income of Californian's and how much of that income they spend purchasing merchandise subject to state and local sales taxes.

In the last fiscal year before politicians started to panic over The Great California Slump, 2006-07, personal income and sales taxes brought in 72% of all State revenue which was typical for the prior five years.

Corporation taxes, the next highest single revenue source, brought in only 9% of the total State revenue. In the State known for its motor vehicle traffic, Gas Taxes bring in about 3% of total State revenue and Vehicle License Fees another 2.5%.

In that year, one-third of all State revenues, about $41 billion, went to support local public schools (K-14), augmented by about $20 billion in local property taxes.

Also in that year,  about 5% of all State revenues, about $6.2 billion supported the two California university systems.

Don't get lost in all these numbers. The simple fact is that 70%-75% of all state revenue comes from Californian's paying income and sales tax. And about 45%-50% of those monies are used to support public education, preschool through graduate school.

When the total personal income of Californian's drop, we have a problem funding public education. In 2008, taxable personal income fell about 9% from the year before and the taxes due on it fell 18%.  Compared to 2006-07, by 2010-11 taxable sales had fallen 11%.

If we had responsible leaders in our State government, tax revenue from a one-time corporation IPO would not be a factor in budgeting. What would be a factor is employment numbers. That's all that matters in California.

That great economic miracle, Facebook, launched in 2004 now has about 3,200 employees and some in California's tech sector.

Over the last decade, in the process of acquiring 59 companies HP has announced job cuts totaling 120,000 some in the California Tech Sector. Right now HP's workforce is about 350,000 with 54,500 in the U.S. including about 16,000 in California.

While exact numbers are not publicly available, it is likely that while Facebook, one of our wow-isn't-this-an-economic-dynamo tech companies, was hiring 3,000 people, HP, one of our former wow-isn't-this-an-economic-dynamo tech companies, likely laid off 5,000 Californians.

Yeah, sure, there will be some income tax revenue from the Facebook IPO in the next year. At the same time, income tax revenue from employment plus sales tax revenue will remain stagnant or even decline, in constant dollars.

Since 1990, the tech sector - with the help of California's Democratic Party politicians - defrauded Californian's into thinking tech was going to be the source of stable job growth and therefore stable tax revenue growth. In fact, it is as unstable as the construction and the film industries, and maybe even as seasonal as agriculture. But those politicians raised long-term spending commitments in years when one-time extra revenues came in.

For government and schools in California, how Moonbeam and the Legislature handle the 2012-13 Budget will be critical. Honest leadership requires forcing Californian's to face up to the fact that taxes on personal income and sales cannot sustain the current General Fund expenditure levels, even with Brown's tax-the-rich-and-the-poor scheme. The Great California Slump will continue.

In February 2011, the truth about our situation was stated clearly and honestly to President Obama by one person who understood how the tech sector really works:

When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. "Those jobs aren’t coming back," he said....

The future of California's middle class cannot be found in venture capital used to create new technologies. As the New York Times article describing the exchange between Obama and Jobs noted:

The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that "Made in the U.S.A." is no longer a viable option for most Apple products.

At some point in the future, there won't even be jobs flipping burgers at MacDonald's or restocking socks at Walmart because there won't be enough working Californian's who can afford to buy them. We need to educate and train our children for a 21st Century economy.

Californian's need to recognize the leadership offered by Molly Munger and pass her tax initiative measure designed specifically to achieve that goal. That would, of course, require California's upper middle class (those families with incomes between $80,000 and $500,000) to overcome its self-involvement addiction. Governor Moonbeam knows that won't happen because he doesn't want to take the political risk of providing honest leadership.