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"I Think California Has Lost Its Way...."
By Michael O'Faolain
On May 22 giving what was the most accurate descriptive statement by any government official about California's economy, U.S. Education Secretary Arne Duncan told an assembly of California mayors and school administrators: "Honestly, I think California has lost its way, and I think the long-term consequences of that are very troubling."
We'll return to Duncan's concerns later after reviewing the state of the State's economy.
The Other Shoe
When I first wrote at the end of May that "the 'other shoe' is about to drop in our Great Recession," I had hoped I was wrong.
On June 24, the Business Forecasting Center of the University of the Pacific has reported that it sees the same problem. In the "California and Metro Forecast 2009-2013" UOP economists predict:
¥ California will lose another 200,000 non-farm jobs reaching 1,020,000 jobs statewide over the length of the two-year recession
¥ unemployment will reach 12% by the end of 2009 peaking at 12.3% in 2010
¥ unemployment will remain in double digits for the next two years through the end of 2011
¥ San Jose and San Francisco will be the first metro areas to in Northern California to regain their pre-recession employment levels no earlier than the summer of 2012
"The state budget crisis is a dangerous aftershock to...the foreclosure earthquake," said Jeff Michael, Director of the Business Forecasting Center.
And indeed the state budget wrangle continues as, on the same day the UOP report was released, legislators failed to reach a compromise on spending cuts and the State Controller warned that next week he will issue IOUs instead of checks.
In June the U.S. Department of Labor reported that California's unemployment rate climbed to 11.5 percent in May, the highest in modern record keeping, The state lost another 69,000 jobs that month.
The largest job declines in the month were in the government sector, down by 14,200 jobs. Every other sector saw losses except education and health services.
The reality is that in May, the state government and local governments hadn't even begun serious layoffs. Those will appear in July-September statistics. School layoffs may start to show up in June, but we won't really know how many cumulative job losses there were in the education sector until September. And the health sector job losses will likely not show up until September-November.
"Deep cuts in state spending in the past two years will translate to the loss of more than 60,000 public-sector jobs by the middle of 2010," a UCLA economist estimated in a report released June 16. Senior economist Jerry Nickelsburg said the jobs losses ...will create a substantial drag as California's economy tries to climb out of the recession.
The impact on the private sector may not be felt until after September, but my opinion is that it will be of major significance to the national economy and it is like to last much longer than projected by economists - perhaps to 2015.
Tom Tarabicos, a financial adviser at Wells Fargo Financial Advisors Network in Roswell, Georgia, when he was asked about California state and municipal bonds said: "Nothing is going to change in that state, fiscally, over the next two or three years. I just don't see anything positive coming out of there. It's going to be dead for quite a while."
Dust Bowl II & the New Trickle Down Economics
Further, as in The Great Depression where the nation saw a drought (the Dust Bowl) impact its economy, California's agriculture economy is struggling with a drought, a struggle which is likely to continue for several years.
California Senators Barbara Boxer and Dianne Feinstein are joining Gov. Arnold Schwarzenegger in calling on the Obama administration to issue a federal disaster declaration for Fresno County.
In a letter to the president, the Senators said the county has been hit hard by water shortages. A disaster declaration would help the region obtain emergency unemployment and other benefits.
In much of the San Joaquin Valley the unemployment rate is above 30%. UC Davis agricultural economist Richard Howitt has reportedly estimated that job losses due to drought will be in the range of 30,000 this year.
The effects from this will not only increase the cost burden on the "safety net" as more families require assistance but also will result in long-term higher food costs across the nation.
The Obama Administration's relief program for The Great Recession is a peculiar twist on "trickle down" economics offering no real "fast acting relief."
Instead a 1930's WPA direct employment program or even a 1970's CETA program, they are counting on money that is given directly to corporations for such things as green energy development or indirectly through states and local governments for contractor built infrastructure projects to get people back to work rapidly.
It probably will be more effective than tax breaks for the wealthy, but if you understand how things work in the real world, it will be operating at a trickling pace, too slow to prevent California from becoming a serious drag.
Education - California Has Lost Its Way
Then there's the long-term situation and the comment by Education Secretary Duncan.
Duncan was most concerned about California's education system. Once the pride of "The Greatest Generation" most of whom experienced first hand The Great Depression and World War II and who paid sufficient property, sales, and income taxes not only to provide a strong elementary and high school education system for their children, but established the California Master Plan for Higher Education of 1960 based on the underlying principles that:
1 some form of higher education ought to be available to everyone regardless of their economic means;
2 only a person's academic proficiency should determine how far they can go;
3 the competing demands of fostering excellence and guaranteeing educational access for all would be balanced through the combination of the University of California campuses, the California State University system, and the California Community Colleges System;
4 a differentiation of function would be assigned so that each of the three systems would strive for excellence in different areas so as to not waste public resources on duplicate efforts;
5 the top 12.5% (_) of graduating high school seniors would be guaranteed a place at one of the University of California campuses, an additional 33% would be able to enter one of the California State University campuses, and the community colleges would accept all applications.
It was that generation who also learned first hand that only through a social compact assuring an adequate economic safety net - part of which in the 21st Century is a strong education system - can a society continually build a strong economy.
In stating that "California has lost its way" Education Secretary Duncan was acknowledging in May that California's public education system, once considered the national model, now ranks near the bottom in both school funding and academic achievement.
Instead of the achieving the dream of 1960, a 2006 study by UCLA's Institute for Democracy, Education and Access discovered that California sends a lower percentage of its seniors to in-state public four-year universities than any state but Mississippi. Only 12% of the California students who entered the class of 2004 as ninth-graders enrolled in one of the state's public four-year universities instead of the 1960 goal of 45%.
And though one might wish to attribute a multitude of reasons for this reality, the study found that at the heart of the problem, is a failure to invest in education. California is among the states with the highest per capita personal income in the country -- it ranks 11th -- yet when spending is adjusted for regional cost of living differences, it ranks 43rd in education spending.
Duncan also was expressing concern about the immediate future which is endangered by the financial crisis in California State Government and how it affects schools. California already is scheduled to receive $8 billion in stimulus funding for education over the next two years. That money will go elsewhere if the state fails to maintain funding levels for education.
The problem for the Governor and the Legislature is that the "wasteful spending programs" requiring meaningful General Fund expenditures are exactly the programs which would lose existing federal matching funds. They are also the main programs within the Obama Administration stimulus program directly targeted to aid people suffering the most from The Great Recession, plus education.
Last year California's per-pupil spending on K-12 education, which was ranked a shameful 43rd in 2006, fell to 47th.
The California I once knew, the one that created the world's 8th largest economy, has indeed lost its way and is about to stumble over a cliff. We can't rebuild an economy if we are providing the vast majority of our children a third-world education.
The Same Old Corporate Mantra
But you won't find that reflected in a report commissioned by the California Manufacturers and Technology Association, stating that California is losing manufacturing jobs faster than comparable states. Assuming you agree with their choice of comparable states, this is the one non-controversial statistic from the report Manufacturing 2.0: A More Prosperous California issued this month by the Milken Institute.
The remainder of the report is designed to support the idea that California is not "business friendly" despite the obvious fact that California (a) has been a home for the technology revolution (Silicon Valley is located here), (b) is considered likely to be the greatest beneficiary from the "Green Technology" emphasis in the Obama stimulus package, and (c) is host to the much of biotech research industry.
Nonetheless, the Los Angeles Times published an article piggybacking on the study - the headline is "Losses of factory jobs in California blamed on regulation". The article leads off with the story of a plant in El Monte shut down because compliance with air quality enforcement would cost too much. It then explains that the report talks about problems of too many agencies, frequent changes in labor law by the legislature, etc. Those may be all issues worth exploring.
At least the Times article offers opinions contrary to the study: "Not everybody agrees with the report's conclusion. Christopher Thornberg of Beacon Economics said manufacturing output has been as high as ever in the state and that there's no evidence that jobs are going to other states.
"''At least up to the last couple of years, the pace of job loss in manufacturing in California was no different than anywhere else,' he said, basing his calculations on the state gross domestic product, the value of goods and services made in the state.
"California GDP grew last year despite the global financial crisis, said Brian McGowan, the state's deputy secretary for economic development and commerce. And green-energy jobs in the state have grown at a rate 10 times faster than total job growth since 2005. To evaluate a state's business climate, he said, companies should focus on workforce skill, availability of capital and overall quality of life, rather than just on taxes and regulatory costs."
The San Francisco Chronicle article headlined "California manufacturing jobs cross state lines" offers no such counter-opinion. Instead it gives a platform for a spokesperson for the powerful lobbying group that commissioned the report:
"'"Everyone says the regulatory burden in California is too much,' said Gino DiCaro, spokesman for the Manufacturers Association. 'Over time, we're dropping off the list of states that companies are willing to consider.'
"The report is not specifically connected to any bill, but manufacturers ultimately want lawmakers to change state policies that, they say, kill jobs. For instance, DiCaro said, California makes companies pay sales tax on new factory equipment, a practice followed by only two other states: Wyoming and South Carolina."
The report reiterates the usual information offered by that lobbying group: "California's poor performance in this category is largely due to increases in taxes (corporate, individual, unemployment) during the study period." The one thing the report has buried in its tables is the reason why their tax complaint is true. In fact property taxes in the seven states compared to California are much higher. For every dollar of property tax that California would charge a business,
¥ Washington would charge $1.66;
¥ Arizona would charge $1.78;
¥ Oregon would charge $1.79;
¥ Minnesota would charge $1.87;
¥ Kansas would charge $3.07;
¥ Indiana would charge $3.12;
¥ Texas would charge a whopping $3.78.
Texas is perhaps the perfect example to compare. In California, the CEO of a corporation would pay an income tax rate of 9.3% on taxable income over $100,000. The CEO's of corporations in Texas pay no state income tax. California's corporation income tax is much higher than Texas. California's sales tax is also higher than Texas. Texas is considered more "business friendly." From a government standpoint, it is also more financially stable as property tax is a more stable source of tax revenue.
Perhaps there is a lesson to be learned from Texas. Repeal Proposition 13, quadruple property tax revenue, and severely reduce or eliminate state individual and corporate income taxes.
I wouldn't support that but many of the folks who decided to have the Milken Institute study done most likely would.
The one thing Californian's do not need to do in the crashing state economy is panic over technology-oriented jobs. Silicon Valley offers the best history of the issues surrounding both technology oriented industrial growth creating jobs and the related subsequent job losses of the past few decades.
As we know it, Silicon Valley began to gain shape with a few entrepreneurs and corporations such as IBM in the 1960's. As the innovation expanded, demand for educated and skilled personnel arose. Wages went up to attract more people. Housing development didn't keep pace so housing prices climbed. It became more costly to live in the area. Wages went up again.
School districts and state and local government then had to raise wages so that employees could afford to live there. Because of Proposition 13, increasing real estate prices did not result in corresponding revenue increases for schools and government. Schools and government scrambled to find revenue becoming "creative" and placing heavier burdens on income related taxes.
Better educated personnel became citizens who didn't like pollution and abusive labor practices. Ironically, they liked restrictive zoning and less development. So they pushed legislators for more regulation and more effective regulation.
Still, the region continued to attract innovating businesses. But chip manufacturing was sent overseas to (1) avoid regulation regarding toxins used in and toxic waste produced by manufacturing processes and (2) take advantage of cheap labor. As the Chronicle story notes, the report indicates that the steepest decline in factory jobs was in high-tech manufacturing which had an average annual wage of $115,000 in 2007.
The manufacturers lobby would like us to believe those jobs left mostly because of taxes and government regulations. In fact those jobs were moved to other states where labor costs could be reduced by as much as 60% or to other countries where labor costs could be reduced by as much as 90%. That is a debugged version of the Milken Institute report - let's call it "California Economics 101: Ignore the California Manufacturers and Technology Association."
The Great Recession as a Depression
The California economy likely will experience The Great Recession as a depression:
¥ Because the schools, State Government and local governments will make significant layoffs in the coming months;
¥ Because State Government may soon begin paying bills with IOU's;
¥ Because of a drought significantly depressing agricultural production and related employment;
¥ Because people are moving out of the state reducing growth to nearly none;
¥ Because California abandoned its commitment to educate its children;
¥ Because many service and retail business can't survive, and none can flourish, in this economic environment; and,
¥ Because, yes, we haven't found a way to create technology industries and provide them with an adequate supply of affordable labor since it costs too much to live here.
The real question will be: "Can Californian's recover from the shock of not being able to have it all without regard for the future?" And that means dealing with the problems created by initiatives that make governance impossible, beginning with the unforeseen results of 1978's Proposition 13 - the poster child for the "I've got mine and won't share it" generation.
