Topic: Economics
Razing California Description of what is troubling our largest state, and how it must be resolvedby Ben Samuel
(centrist liberal libertarian)
Thursday, September 10, 2009
With the State's budget resolved at least until September, what will it take to keep the wildfire from raging again? The level of destruction from the recent blaze is at best yet unrealized, and no amount of speculation will adequately project the affects Californians are about to endure. Will we get to a point where there will be nothing left to raze?
California was the gem of America. Fully eleven percent of Americans live here. The standard or cost of living here is or was the pinnacle of the American states. In 1978, the Jarvis-Gann Initiative, Proposition 13, was passed, limiting the rate at which property tax could be assessed. Real Estate began a nearly thirty-year boom of investment and speculation. With the introduction of the microprocessor, a technology industry bloomed and flowered into our Silicon Valley. For anyone who breathed, the lure of opportunity was California. Immigration both from the world and other states nearly doubled our population over thirty years. Our ports served as host to the products of the newly emerging Pacific Rim nations, further adding to our largesse. California contributed twenty percent or better to the American Gross Domestic Product and to Federal Tax Revenues.
Success brings its growing pains. The population of our cities grew beyond the capacity to support such growth. No problem. New towns and cities emerged in recovered deserts and lesser valued farmlands. California, a state in a constant love affair with the automobile, saw the distances grow between home and work, facilitated by relatively inexpensive fuel costs.
The old and new cities and towns needed to prepare for their emerging and growing populations. Police and fire services, water treatment and sewer services, utilities, development planning services, recreation and parks development and administration all competed with a thriving private sector for employees in an environment often with less than two percent unemployment. Natural assumptions emerged.
Everything in California would always move up, wages, home prices, and profits. A generation of Californians was born and grew up in an environment of unfettered prosperity. It should be no surprise that no one could imagine a downward slide, to do so would have you scoffed at like the soothsayer in Julius Caesar. But down it has come. Why?
The State mainly derives its revenues from personal income taxes, corporate taxes and sales taxes. Counties and cities rely mainly on property and property transfer taxes, and sales taxes. None of these government entities enjoy a great deal of discretionary authority over their revenues, and often are mandated to spend in accordance to federal requirements on programs for which the federal government provides little or no assistance. During twelve years of Bush administrations, California received back about seventy-two cents for each dollar it sent to Washington. It was a steady and slow drain on California's wealth, more than any other state. But with the continuing illusion of infinite growth, it always seemed that California would overcome that. State and local government could still project increasing revenues to meet a rising demand for services from their growing populations.
Like the singeing pain that travels your left arm signaling the onset of a heart attack, the first shock to California's system struck with the bust of the dot com businesses in 2000. The recession that then occurred is considered mild. The unemployment growth that occurred was speedily offset by an increase in government employment, government having a need to update its information systems to replace now antiquated processes. There was a slowdown in State revenue growth, if not for cities and counties. A slowdown is not a decline. Government could still project revenue growth into the future. The growth in government employment begins to ascend to the thirty percent level of the total workforce. A still booming real estate market draws budding entrepreneurs to brokerage houses, fed up with the eight to five drain of regular employment. More signs of the crisis yet to unfold emerge with enticing home equity lines of credit and adjustable rate mortgages. Consumerism and entrepreneurship are to be bolstered by easing lines of credit. Manufacturing quickens a decline, but easy credit and still strong demand provide full employment in residential and commercial construction. Property taxes and sales taxes begin a steep climb upward, but the same could not be said for State Income Tax revenue.
To adjust for it’s slowing revenue pattern the State reached into the pockets of the cities and counties in 2004-2005. It was a shock to these local interests, which had made commitments in borrowing to adjust to growing demand for services rising from local constituencies. Taken with a promise to pay back, the local governments were compelled to reach into credit markets to both refinance existing debt and new projects. Additionally, wage pressures moved many of them to commit to wage and benefit improvements financed by borrowing. Among these were pension enhancements where some localities were compelled to make those both by the need to distribute excess earnings of the plans, and to attract labor in a competitive labor environment. With credit seeming never endingly cheap, such decisions at the time seemed practical.
The elements for disaster were neatly in place, and the fuse was lit by an aggressive monetarist policy fostered by the Federal Reserve. In 2007, banks that had thought they discovered magic formulas to package as risk-free various lending instruments whose premise for lending was anything but viable for reliable payback found that either the magic did not work, or that the jig was up. Credit froze, and the steam that drove California’s engine stopped. Property values sank as property stopped exchanging hands. With the decline in both values and transfers came serious declines in the manna that fed local government. Unemployment spiked to 8% by the end of 2007, and has reached nearly 12% today. The anticipated revenue from state income tax did not materialize, and the sales tax that feeds both state and local governments sank to levels not seen in over five years. All this because normally reliable California consumers had nowhere left to turn to find money to create projects or buy products, nowhere to find money to start a business.
To Be Continued:
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