The Truth about California: It's actually saving the rest of the USA

http://www.marketwatch.com/story/the-truth-about-california-2010-11-22

by ENOTTY • 16 years ago

154 56 16 years ago

sabat2• 16 years ago

IANAE (I am not an economist), but here's an observation from a born-and-bred Californian: whenever the economy is bad, the state budget takes it on the chin. California is big -- bigger than a lot of people realize. I mean this in terms of geography and population. So it seems to me that national problems are magnified here in our microcosm.

Once the economy picks up, the state problems ease.

Tangential anecdote: I was at a JBoss conference a few years ago, talking with a guy from the company who'd never been to California before. I mentioned that I had just driven back here -- I'd been snowboarding over the weekend. He gives me a dubious look, and says, "You don't have snow in California."

j_baker3• 16 years ago

Here's what strikes me as funny: California's budget crunch is $25 billion. Texas (a paragon of small government) is facing a deficit of... $25 billion. The fact that both states have similar deficits would seem to back your argument that this has more to do with the economy than budgetary policy.

http://www.dallasnews.com/sharedcontent/dws/news/politics/st...

http://articles.sfgate.com/2010-11-11/news/24826042_1_budget...

gruseom• 16 years ago

But California's economy is 50% larger than Texas', according to http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP. Since economists mostly talk about debt to GDP ratio, doesn't that make Texas considerably worse off?

ataggart2• 16 years ago

The debt (read: accumulated past deficits) isn't the only, or even main, issue; rather it's the future liabilities that are killers.

For example, California has unfunded pension liabilities of over $500 billion [1]. To put that number in perspective, it's almost seven times greater than all the outstanding voter-approved state general obligation bonds in California.

[1] http://www.stanford.edu/group/siepr/cgi- bin/siepr/?q=/system/files/shared/GoingforBroke_pb.pdf

Semiapies6• 16 years ago

"paragon of small government"

You must be thinking of a different Texas than I live in. :P

Even if the $25B deficit pans out in the end, and aside from the other differences between the states (including the counter-intuitive one that Texas has been less hard-hit during this downturn), you still end up with a situation where states face major budgetary crises at every downturn because revenue only balances spending near the height of economic booms.

That's a budgetary policy problem even when it's not unique to California. And for California, it's turning out rather badly.

karzeem2• 16 years ago

Most criticisms of California target public sector backwardness, so it's not a refutation of that to point to the strength of the state's private sector. And "CA's private sector is strong, ergo it hasn't been harmed by the government" is a circular argument.

This is an argument over the precise extent to which bad policies are bad. Seems more useful to discuss what genuinely good policy looks like.

boucher• 16 years ago

The argument that California's policies must be bad, regardless of the fact that they've produced the strongest private sector in the country, is equally fallacious.

karzeem2• 16 years ago

True, though for a lot of state policies, people seem to generally agree that they're bad, just not on whether they're bad enough to justify the pain of changing them.

The policies, good or bad, coexist with the country's strongest private sector, but that doesn't mean they caused it.

dhbanes• 16 years ago

Maybe I am mistaken, but it seems to me that California's private sector is strong despite its backward government, not as a result of it. California is an extremely desirable place to live. This attracts business owners and highly qualified employees alike. I would be interested to hear which of California's policies you believe play a significant role in the success of its resident businesses.

ataggart2• 16 years ago

The argument that California's policies produced the strongest private sector in the country is equally fallacious.

uuilly• 16 years ago

Most of the pain of California's bad policies have not yet been felt. Things are easy when you're spending but they get harder when you have to pay people back. Also rich people and corporations are leaving the state and poor people, mainly Mexican immigrants, are moving in. So along with a completely unsustainable budget, the largest tax contributers are decreasing and the largest tax recipients are increasing.

California cannot survive without some combination of:

-Huge Spending cuts

-Huge Tax increases (which, if overdone, may result in less tax revenue.)

-Federal Gov't bailout.

You can play cause and effect all you want, but basic arithmetic is really all that matters.

ggchappell• 16 years ago

Interesting article.

One statement struck me as odd:

> Most of the states that have grown faster than California during that time are farm states, riding an incredible boom in agriculture prices.

I suppose there is nothing wrong with this statement, strictly speaking. However, it suggests that CA is not a "farm state". But it certainly is. CA is the number-one agricultural producer of all the 50 states. It's a clear number one in crops, and number two (after TX) in livestock.

aaronblohowiak• 16 years ago

Agricultural products are also a big export for the US.

j_baker3• 16 years ago

I would imagine that the other states' economies depend much more on agriculture than California's does though. Thus, California has a lot of farmers, but it doesn't get as much from a surge in agriculture prices like the others do.

waterlesscloud• 16 years ago

California %2 is agriculture. Texas is 0.8.

protomyth• 16 years ago

I can see where they might not think of CA that way as it is not the only game in town and the whole water situation might come into play at some point.

It should be noted that at least one "farm state" (ND) is becoming much more of an oil state in recent years. It looks like this will continue as they just discovered another reserve that is bigger than the current one.

If you have some free money, building rental housing in northwest ND is a very safe bet.

//edited because of odd autocorrect

webXL5• 16 years ago

The gist seems to be that despite numerous stories predicting its demise, California:

- is wealthy and talented

- has more (people, VC, etc.) than it did in 1999

- has been funding the rest of the country in federal transfers (he calls them bailouts, therefore you can't complain if CA asks for one)

- has a small budget deficit relative to its budget

It leaves out $138B of unfunded liabilities for state employees until the end, and ignores companies like Facebook opening datacenters out of state, a growing number of people leaving the state (I'm one of them), and its awful credit rating.

Unfortunately if I owe the bank money, I can't tell them how good of an investment I was up until 2008 and expect them to give me a pass. I need to figure out a way to come up with the money. California doesn't appear to be serious about that.

Locke1689• 16 years ago

and ignores companies like Facebook opening datacenters out of state

Explain this to me. It seems obvious that companies would open datacenters outside of just California. What would be more obvious to me would be placing them close to 1) backbone hubs and 2) cheap electrical power.

webXL5• 16 years ago

Well that's fine, but don't tout that your state is an engine of economic growth when the companies you mention decide to "offshore" major chunks of their operations. Figure out a way to keep them in state, or generate some kind of equivalent growth, maybe even outside silicon valley.

sabat2• 16 years ago

Well, wait --

ignores companies like Facebook opening datacenters out of state

The bulk of Facebook's employees don't work in datacenters, and (as another poster noted), big companies do this for redundancy and to reduce latency -- not because of some ill will against the state.

a growing number of people leaving the state (I'm one of them)

Sounds anecdotal to me, and I've noticed nothing but a surge of out-of-state license plates in the past few months -- but given a population of some 40 million, I don't think a "growing number" of people leaving is a huge problem. It's the economy, not strictly the population number.

California doesn't appear to be serious about [owing money].

No more or less than any other state.

webXL5• 16 years ago

Sounds anecdotal to me

More people leave California than arrive: http://articles.ocregister.com/2010-09-05/finance/24551853_1...

My main point was that while silicon valley might be booming, the rest of the state isn't. The article doesn't address that fact.

aidenn0• 16 years ago

"It leaves out $138B of unfunded liabilities for state employees until the end, and ignores companies like Facebook opening datacenters out of state, a growing number of people leaving the state (I'm one of them), and its awful credit rating."

From the article:

"But how big are these costs in California? The non-partisan Legislative Analysts’ Office in Sacramento estimates there’s a $136 billion gap in the state pension and benefits system. It may work out to more or less. But that’s the actuarial figure at the moment."

webXL5• 16 years ago

I said "until the end". If you only read 80% of the article, you would think CA was an oasis of economic growth with a model government. If I were trying to persuade people that things aren't so bad in CA, I would start with the most glaring problem and perhaps offer reasons why it isn't a problem, or state how the problem will be overcome.

Sure that $136B gap is only 1/7 of the CA GDP, but a lot of that GDP is being siphoned by the Fed's gap, too.

rubypay• 16 years ago

Fiscal facts aren't all that matters. Investors' perceptions can also have an impact--if California is perceived to be in trouble, investors demand higher premiums on bonds, and the costs for California to borrow money increase. This can lead to a detrimental cycle of destruction, akin to what happened to Lehman Brothers.

VladRussian• 16 years ago

>akin to what happened to Lehman Brothers

there is also, more probable for a state, scenario of AIG/etc... - federal government stepping in.

JSig• 16 years ago

The author has a serious chip on his shoulder. Lots of politicking in this article that distract from the point being made.

Take a look at what the market thinks of the chances for a California default.

http://www.economist.com/blogs/dailychart/2010/11/credit-def...

As of a week ago, "The state with the biggest budget problems, California, is seen as slightly less likely to default than Spain but slightly more so than Italy."

Note that Spain is a total mess with an unemployment rate around 20%.

It's hard to default when your can print your own currency. I think the California bond holders will never take a haircut. The US will just print more dollars.

bd_at_rivenhill• 16 years ago

I will not argue against the case that the US will print more dollars, because I think that will happen, but will they print enough to refloat California's obligations without specific funds being allocated by Congress for a bailout. The Republicans control enough votes to determine whether this happens or not, and it would appear that the political benefits to them could outweigh the damage in the near term.

jonah• 16 years ago

One of Spain's big impediments to getting themselves out of their economic mess is that they're on the Euro. In ways similar to the varying economic situations in US states. http://www.nytimes.com/2010/11/29/opinion/29krugman.html

pyre2• 16 years ago

  > Take a look at what the market thinks of the chances
  > for a California default.

This assumes that 'the market' is a rational actor. But it's proven time and again that it isn't.

bjnortier_hn• 16 years ago

The question around the [ir]rationality of markets is irrelevant. Markets determine the cost of borrowing. If California wants to lower the cost of debt, or maintain the current (low) cost, it must value the opinion of the markets.

The calculation of the author, with state debt costing $6billion a year, assumes a constant cost of borrowing into the future! Investors have been selling municipal debt in the past two weeks, which will result in higher borrowing costs [1]. The same thing happened and is happening with the PIIGS, where those in power have been complacent about their ability to service debt because of the assumption of constant debt servicing costs.

[1] http://search.ft.com/search?queryText=muni&ftsearchType=...

November 25, 2010 US muni bond funds lose another $2.3bn November 18, 2010 US muni bond funds see record outflows November 16, 2010 US muni bonds see biggest drop since 2008

Semiapies6• 16 years ago

"Californians are so productive that every year they send billions of dollars in surplus dollars to the rest of America. Year after year they have sent vastly more in federal taxes than they ever get back in federal spending."

So many seemingly educated Americans can't tell - or artfully avoid telling - the difference between state and federal taxation and spending. Also, here's the dirty secret: people in other states don't really "get back" any of that federal money unless they work at federal facilities, including military bases, common in the states accused of getting more federal money than they give. If they're really lucky, they might get that money at a remove or two if they work in lower-end service jobs near a military base.

But then, that whole thing is a strawman. Some random idiot might be saying Californians are all lazy good-fer-nuthin's, but everyone else isn't talking about Californians, but an unsustainable state government.

"California’s a basket case? The state has one of the highest living standards in the country..."

I'm rather horribly reminded of global warming "skeptics" who hoot every time it snows.

lr• 16 years ago

"Also, here's the dirty secret: people in other states don't really "get back" any of that federal money unless they work at federal facilities,..."

People in these states don't drive on federally-funded roads, or have anything to do with anything else that receives federal dollars? Right-wingers are keen on talking about trickle-down when it comes to tax cuts, but mention nothing of the multiplier effect of the spending habits of the people who earn money which comes directly from the federal government. So yes, people in those states "get back" big from federal spending!

Semiapies6• 16 years ago

"People in these states don't drive on federally-funded roads"

They don't pay federal gas taxes, either? You might do better picking something better than federal road spending when trying to defend California, incidentally.

But that's the problem you face when you try to reduce distinctly different things like federal and state spending to "But California really has a surplus, honest!"

"Right-wingers are keen on talking about trickle-down"

So? They're also big on "starve the beast" deficit spending, but that hasn't worked in California, either.

ETA: Suggestion - disengage from your partisan reflexes. Think. Remember than the Republican Party in California has been as much of a contributor to the problem as the Democratic one, at least in proportion to how much power they have had, if that helps.

California's in trouble. It'll certainly survive and improve, but the spending cuts and tax hikes that they'll have to have this time (or if they sweat and bluff it through a few more years, the next time there's an economic downturn) will be far from fun.

Semiapies6• 16 years ago

Dang, shouldn't have baited the "skeptics".

Oh, well.

jerf2• 16 years ago

Shouldn't have baited, period.

brc• 16 years ago

I'm pretty sure the reason you hear 'skeptics' hoot every time it snows is because 'alarmists' hoot every time it gets hot. The celebration of colder weather is probably equal parts mocking sarcasm and genuine belief that cold weather means the end of global warming.

To me, it's always been a way of saying 'you can't have it both ways'. But then, I don't know what people are thinking when they say these things, so that's just my opinion showing through.

Semiapies6• 16 years ago

This is perhaps true for a few; I've mocked the "every single instance of bad weather of any kind is due to global warming" folks myself.

That said, most of the "It's snowing! So much for global warming!" BS is far from a sarcastic comment on that behavior.

redteddy23• 16 years ago

I thought it was a case of referenda being used to demand things be done but the voters not actually wanting to have to pay for them.

fleitz• 16 years ago

The point about the State of California heading towards bankruptcy is not affected by either its tax rate compared to other states or the amount of venture capital dollars it sucks up. The primary driver for the state going bankrupt is its expected income vs. its expected expenses. Venture funding in California has little affect on its tax base as most profitable startups are incorporated in Delaware or have their revenue generators incorporated offshore.

Yes, they'll be good revenues from the employees but no windfall should be expected. (i.e. the state should not expect abnormal returns because of in state venture capital investment)

My point is that when you take look at expected income vs. expected expenditures you can expect to see the state go further and further into debt. It's anyone guess as to whether that will lead to filing for bankruptcy or not, but the direction the state's fiscal health is heading is clear.

Regarding the state's fiscal picture this article largely addresses a straw man. No one is arguing that the state will go bankrupt because it's tax rate is wildly out of whack, or because it is not getting enough venture capital funding.

People are arguing that the state will go bankrupt because the state already has a fair amount of debt relative to GDP, it runs large current accounts deficits relative to GDP, and has large unfunded pension mandates. This article addresses none of these points.

The Truth about California: It's actually saving the rest of the USA

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