California Finds Economic Gloom Starting to Lift
nytimes.com
nytimes.com
But did the NYTimes just point to California's current budget as a sign of our State's "economic stability"?
They quote that the "California Legislative Analyst’s Office projecting . . . . [that] California might post a $1 billion surplus in 2014"
That is such an irresponsible thing to publish - a "surplus" makes it sound like the government is totally on top of the situation here and a model for success.
The reality is that CA would be going off the @!@W$! rails right now in 2012 if voters hadn't just passed Prop 30.
Prop 30 was an EMERGENCY, retroactive (from Jan 1 2012), and "short-term" (7 year) tax on high income earners + a moderate increase in sales tax which is going to raise $6B a YEAR to pull CA's ass out of the fire.
So while the gloom may be lifting, I remain pessimistic that our state gov't has any long-term solutions to their continued budgetary missteps.
http://www.nytimes.com/2012/09/21/us/california-debt-higher-... http://www.usgovernmentspending.com/california_state_spendin...
edit
Just looked it up. Just shy of a 2 trillion dollar Gross State Product? 100 billion is a big number, but 5% debt is not that bad. (the state) Going into debt during the good times is stupid, going into debt in recession is probably smart.
"California's current debt burden is 7.8 percent of the state's general fund budget of $88.5 billion for the current fiscal year that ends in June 2012. That 7.8 percent is more than double the 3.4 percent of fiscal 2003-04."
http://www.ocregister.com/articles/debt-320389-interest-stat...
However, with the decreasing shortfalls and expected balanced budgets that debt is no longer increasing and with the projected surpluses it can be paid down.
The debt is a legacy of the past. Great strides have been made in the past few years to get the state's fiscal situation in order.
Suppose you have an income, a year's worth of savings in the bank, and a mortgage with 20 years left on the term. You don't lie awake at night worrying about 19 years' worth of unfunded liability, even though you don't currently have the money to pay it off. In fact, right now is a good time to have debt or even issue more because interest rates are at historic lows.
Sure you can. Spending increases are very predicable, and generally increase with the size of the governed populace. There is a limit to how much efficiency you can extract from technology and procedural changes when there are legal (and especially constitutional) restrictions on what you can do and how you can do it.
The Republican minority repeatedly attempted not only to prevent spending increases, but to reduce budget revenue to 1960s levels, i.e., to the level of spending when the state's population was roughly half its current size. The only success they had was in reducing budgets for (very successful) social programs and drug rehabilitation.
If there was one iota of spending restraint in the lead up to the recession, California wouldn't be in a crisis.
It's all fantasy land economically. Mortgage rates at 3.4% is obscene based on any historical norm. When those rates revert to an average (or worse) as they must, the housing market will tank. The opposite reaction that the Fed's extreme intervention will invite, is going to cause massive destruction just like the last housing bubble they brewed. They learned nothing from their past mistakes.
It's hard to cast 2007 to date as perpetual and the end goal is not to keep interest rates down, but inflation.
In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
http://www.federalreserve.gov/newsevents/press/monetary/2012...
In fact, this statement and others made at the time are an attempt to get additional traction with expectations about future interest rates.
-- nuff said.
They have to get traction somehow. Because of the inability to lower short terms rates any further, QE was introduced. As that failed to have enough of an affect they decided to assure the market that that they won't revert to business as usual at the first sign that things are springing back. Setting this expectation is necessary for them to get any traction with the market.
Of course, if you think the slow recovery we're experiencing is going to falter or halt, then they might well be pursuing such policies for a long time. If it comes to that politics is likely to intervene in a large way.
2007-2012 = 5 years
2007-2015 = 8 years
It goes without saying that these are not equal. or equivalent. etc. If you google "fed" and "forseable future" you will get a variety of reports discussing the recent movements and QE decisions from 9/12 (at various levels of sohistication). So to sum, the notion of "perpetual" (or: open-ended) QE is closer to realtity than what you suggest (the finite 5 years of QE, etc). [1]
TLDR: we are in a period of "open-ended" QE
edits: clarity
__________
[1] The fed hasn't gone further explicitly because "further" is not "foreseeable" with any credibility. Policy parameters = f('hope') is not what they get paid for, or why they are entrusted with power. etc.
"Few seem to want to hear it, but the housing 'recovery' is based strictly on a Fed that provides perpetual QE to hold down interest rates forever. ..."
That's a much stronger statement than saying it's open-ended. Maybe I should have let it slide as a little hyperbole, however I disagree with overall thrust of the comment.
Plus, the Fed's current policy is only open-ended in the sense that the recovery is not guaranteed because nothing is guaranteed. On our current trajectory it's not looking too bad. A lot slower than we'd like, but there is progress.
I do not think it is unreasonable to expect the recovery to be complete to the Fed's satisfaction (with respect to their QE promise) in three or four years. (I'm not saying we'll have unemployment, for example, where it was in 2007 anytime that soon). If you add on a further period of QE to let them meet the commitment they have made, then I grant that is a long time but it is not forever.
"Policy parameters = f('hope') is not what they get paid for, or why they are entrusted with power. "
I was being a little flowery with 'hope', is all. They do have to act on what they believe are the facts and what they believe will happen, whether or not I call it 'hope'. However, what the Fed is supposed to do is look after inflation and unemployment. They've been very assiduous about the former while neglecting the latter for some time now and are finally allowing the idea that inflation could go a little higher than 2%.
Infinite QE = False
Determinant QE = False
_________
Open-ended QE =~ True
Wait, wat, why?
The reason: The only way the Fed gets to where it wants is with (at a minimum) a credible threat of perpetual QE. The fed is trying to play the house at a casino. It does not want a high-roller doubling down all-in on Black at infinite repitition. That game goes to whoever lasts the longest at the table. The threat of perpetual QE needs to be credible to keep this type of speculation off the table. Only when it is clear that this has gone (ie, such bets are irrational on fundamentals) will it change its position.
So, in that sense, we should expect to see a reversion in policy that will make QE finite. But that is different than saying that bets should be placed in as if we were in an environment of (tractably) finite QE (that would be bad advice--per above). So to get to the state-space where your notion is true, you have to go through the state-space where the notion you dis-agree with is true. But these are sequential, and the time that you are correct is iff and after the time that the other notion is correct first. And we are in that latter state-space now.
So housing prices are being supported by QE; QE is open-ended for the forseable future; At some stage this will revert but the half-life on a 30 year mortage is 15 yrs and we will have at least 8 years of QE so at least some (half or likely more) of the value of the housing market is (arguably but) correctely attributed to QE.
I think this is a fair/useful elucidation, but YMMV.
Yes, they need a credible threat, but the threat is merely that they'll continue with this policy a little past the inflection point instead of right up to it. And, at least to me, the inflection point doesn't seem all that far off.
I think 8 years is a better upper bound than a lower one.
http://qz.com/14060/qe3-is-forcing-banks-to-lend-and-its-working
It’s never been so profitable for US banks to give
mortgages. Yet they’ve almost never been so reluctant to do
it. So now, the Fed is forcing them.
Much has been written about the Fed’s announcement of its
latest effort to support the US economy with a new round of
money creation and mortgage-bond buying—QE3—on Sep. 13. But
few have recognized that it amounted to a shot across the
bow of some of the biggest financial institutions in the
country.
Here’s why. The Fed is aiming its unlimited buying power
(since it can literally create money) at the market for
mortgage-backed securities (MBS), the pools of mortgages
where nearly all American home loans eventually end up. And
the one of the largest holders of these MBS are the banks.
Further taxes will only increase this exodus. All of Prop 30's projected revenue is based on the fallacious idea that smart, high-earning people are stationary targets. They will leave, just as many companies have left.
http://money.cnn.com/2011/06/28/news/economy/California_comp...
http://www.nytimes.com/2011/11/27/us/california-rail-project-advances-amid-cries-of-boondoggle.html?pagewanted=all
The first phase would be a 130-mile stretch from
Bakersfield to just south of Chowchilla in central
California, at a cost of just over $6 billion; of that,
$2.6 billion would come from a $9 billion high-speed rail
bond passed by California voters in 2008, and $3.5 billion
from federal stimulus money.
...
The authority said it chose the relatively remote section
in the Central Valley as the first leg to be built, even
though few people there are looking to use a railroad, so
that construction could begin next year and meet deadlines
for using federal money. But critics suggest that the real
motivation was to get the spur in place, calculating that
future legislatures would not be able to abandon the
project before it reached major population centers.
“What they are hoping is that this will be to high-speed
rail what Vietnam was to foreign policy: that once you’re
in there, you have to get in deeper,” said Richard White, a
professor of history at Stanford University. “The most
logical outcome to me is we are going to have a white
elephant in the San Joaquin Valley.”
There is no plan on how to finance the project once the
bond and federal money is exhausted, beyond a hope of
private investment and public money during flusher times.
... Beyond that, several experts suggested that the train
would never attract the promised ridership, in no small
part because unlike, say, the Amtrak Northeast Corridor,
the bullet train would go into cities that do not have
particularly extensive public transit networks, forcing
people to rent cars once they arrived. Low ridership would
undercut the economic and environmental benefits that are
part of the argument for the project.One of the main excuses why it won't work seems to be because no one thought it was important to build better mass transit.
Btw, I was in SF last summer. BART and the trolley seemed sufficient.
It the current stretch that is funded, i.e., Bakersfield, there is essentially no public transportation other than the occasional bus.
The fallacy is that will be an exodus of high-earners: http://www.cnbc.com/id/49884352/Super_Rich_Flight_From_Calif...
The assumption is that those earners can produce the same income anywhere they go. While that appeals to Randian ideals, it's simply not the case in reality.
All you need is a few people to start defecting. Is it really "Randian" to believe that people will increasingly use the internet/cloud/telecommuting/Skype/Anybots to work remotely?
It would be foolish to assume that all locations are equivalent when it comes to generating income. The differences in different areas far exceed a 1.3 increase in tax rate.
Now on to debt: Greece owes some money. It's a nation. California owes some money; it's a state. And, the US owes money. If California were to serve in full its debt, and arrange that it no longer had to incur debt to pay its employees, or raise greater taxes to do so, I would say it became solvent--however, if the day after the United States Treasury defaulted on its multi-trillion dollar debt, California would find itself in trouble all the same. So, really, California also owes a share of the US government debt.
Is the similarity enough for California to emulate Greece should the latter emerge triumphant from this shitstorm? I don't know. But it's enough for a metaphor about the current problem.
I like your point on US debt, but the US is in a unique position in that it can print money if needed. Because the odds of a default are so infinitesimally small, I don't think it warrants any discussion when considering the fate of CA's financial issues.
Greece is in trouble because it entered the EU, lost control of it's currency, and as a consequence, cannot attempt to use inflation to minimize their debt. To make matters worse, their economy is a train wreck (professional guilds, rampant tax dodging, heavy reliance on government programs) making growth in the face of austerity nearly impossible. CA has neither of these problems (A dynamic, innovative economy and a strong federal government to rely on for assistance (as compared to the relatively weak-willed EU)).
The size of the ballpark depends on the ball game. As far as heights, if yours were half of mine we would not be playing in the same league, let alone in the same ballpark at the same time. But wealth's utility falls off very quickly (cf. log-utility), and to this day Greece is a member of the OECD.
Greek is in trouble. There's no denying that. California, not so much. Still in some. But the worst may have passed already, because it's better grounded: on sovereign US soil, that strong federal government you mentioned. It's a state in a good federation, whereas Greece is in a bad (weak-willed = opt-in) federation.
But insofar as there's been an attempt to wrap California's negative trajectory around the neck of the Democratic party like an albatross -- as the article says, it's been compared to Greece and all but written off as a symbol of socialist blue state excess -- it might be fair enough to let its recovery do some buoying.
And I'm not sure why they wouldn't deserve some credit for the improvement in state/public finances.
The Dems have dominated the state legislature since 1959 except for 69 to 71 when the Republicans took control of both houses and a brief period from 94-96 when the Republicans controlled the Assembly.
The Democrats can pretty much take credit for everything good and bad.
It is one thing to bemoan that the other side is in your way, it is a completely different ball game when you don't have them to blame.