28 June 2009

Double Dip Recession - Courtesy of California

This recession has one more dip in it before it’s over. The problem doesn’t stem from Obama’s stimulus package: California’s fiscal woes will be the cause.

If California were a country, its economy would be ranked 8th in the world – smaller than France and Italy and larger than Spain and Canada. All of the ten largest economies in the world have adopted aggressive stimulus policies. All, that is, but California. This is going to undermine Obama’s efforts to stimulate the economy.

Californians recently voted against taxing themselves more and will now start slashing programs. For instance, professors within the state university system will be put on furlough and lose about 10% of their income. Layoffs, program cuts, and discontinuation of services will hit every community. These, just as the economic numbers for the US are looking better.

California’s contraction won’t be enough to completely de-rail the recovery. It will, however, delay it by one or two quarters.

Governor Schwarzenegger now finds himself in the same position as Gray Davis – the governor he replaced in a recall election. The problem wasn’t Davis or Schwarzenegger. California is the only state to require a two-thirds vote in the Legislature for BOTH tax increases and budget approval. A small minority can hold the legislature hostage and the odds of finding agreement among 66.6% of the diverse population of Californians on anything – much less tax and budget – are close to 0.6%. Until this system is changed, California’s problems will continue and the requirement for balanced budget means that the state government will always exacerbate down turns and bubbles alike.

California’s budget problems are about to spill over into the rest of the nation. Expect the economic numbers to fall again in the Fall. And look for the cause in California.

6 comments:

wheelsonthebus said...

this is why we want to get the F out of california

Big Al said...

wheelsonthebus, if you leave CA, where do you go? What state has found the magic formula? I live in OR, which has the lovely distinction of being #2 behind the state of Michigan for highest state unemployment rate.
Every state is scrambling to find additional revenues within current constraints while at the same time attempting to attract new business. Oregon's legislature, with a Democratic majority in both houses, just last week overroad the veto of our Democratic Party governor to pass a new budget that dipped into Oregon's "Rainy Day Fund" a little deeper than the Governor thought prudent given there's no telling how long or how much worse the current economic crisis could/might get.
I could write on ad nauseam about how bad it is in Oregon and how Lobbyists have done a great job insuring taxes don't get raised on any industry, like the beer tax that hasn't been raised in over 30 years (no WONDER Oregon has so many craft breweries).
Just today I read where Intel Corporation is nearing completion of their largest mfg facility in the world, with this factory located outside Ho Chi Minh city in Vietnam. Yes you read it correctly: Vietnam. This means yet again a US-based company has diversified and struck the best profitable business deal with a country offering lucrative tax incentives and incredibly cheap labor.
We in the U.S. scream bloody 'ell at companies sending mfg jobs overseas and also scream about illegal aliens in the U.S. yet we all want our saleries to continuously increase while at the same time we expect goods and services to be provided at the lowest cost possible: we want it all without paying for it. The American Dream . . . NOT!

Lifehiker said...

What ticks me off is that our media hardly ever gives us facts - they give us consequences that are useless when it comes to us making decisions about what actions to support or resist.

For example, professors will have their salaries cut 10%. "From what", I ask? Where is the salary schedule for professors published? Should the salaries actually be cut 25% because they are outrageous, or raised 10% because the professors are on food stamps?

How the heck did California get into such a pickle? Here in New York the overly generous salaries, benefits, and pensions of public employees who can't be fired for about any reason have left us on life support. Is it the same in CA, or another problem?

I've heard that California's sales taxes and income taxes are really high. Where is the money going? Is the answer more taxes or less services? I got no clue...all I know is that CA is going bankrupt and, per RWorld, will put a drag on the recovery.

DO YOU SENSE A LITTLE FRUSTRATION HERE? There must be an answer, or are the special interests going to gridlock this thing indefinitely?

Big Al said...

Lifehiker,

Unfortunately, every state has its issues. In OR, we have no sales tax, *BUT*, we have a 9% state income tax which was just raised to 12% if single making over $125k/year or married making $250k/year. Texas has no state income tax, *BUT* they have high sales taxes plus unbelievably high property taxes and utility rates. Another problem in OR is that public employees have a retirement system that is fantastic if you're in the public sector. It was modified a couple of years ago for new employees but public employees have been retiring in droves recently because, get this: they actually make MORE money in retirement than they did while working in the public sector! And yes, my fellow Oregonians and I are footing the bill. sigh . . .

Nothing like a recession to REALLY show the cracks in the facade.

David said...

Well, CA voters (mostly democrats) voted against serious refoms that would have avoided the current problems plaguing CA. So Arnold capitulated and has let the spending go unchecked. He has become like Gray Davis and it's likely the next Gov will be even worse. When there's a real election campaign the only question I want to ask a candidate is, "where will you cut spending?"

Actually Arnold had no basis to fight anymore. We get what we vote for or against and we're getting it now in CA and nationally. Serves us right. There is no place to run now. Even now our state legislators are talking about raising taxes everywhere in order to pay for "needed increases" in spending. Our PIT won't initially be as high as OR but other taxes will eat our lunch and here's the rub: increase our indebtedness.

LH: there is no reasonable method in CA of determining what's fair in terms of salaries for teachers or state employees, etc. Everyone is underpaid in their view and their unions back that. The unions spend millions promoting increased spending and cry "not enough" simultaneously. In the end they win. Look at what they're gaining from the GM grab.

More unrest is coming and maybe even open rebellion. You can lay off teachers and even police and fire fighters but when you close the rest rooms in city parks to save money guess what people are going to do? You got it.

I guess we could use stimulus money to create jobs to clean up parks.

Life Hiker said...

I'm starting to get the picture that none of the politicians want to talk about: the "pie" is going to be smaller for a long time to come, so lots of people are going to get less (of a standard of living, that is).

Some states like Arizona, where one of my sons is a teacher, still have the flexibility to cut back state employees and adjust their salaries and benefits. In others, the unions have the upper hand. I wonder how long the general public that lacks these legal protections will suffer the arrogance of unions that refuse to share the pain?

Times have changed. Maybe bankruptcy for a few states will be the only way to get their spending under control. California would be a big one!