Dan Walters

California’s economy has recovered, but overdue for a budget-busting recession

Gov. Jerry Brown uses a graphic chart to demonstrate the unpredicatability of taxes on capital gains paid by the wealthiest Californians he unveils a revised 2016-17 budget May 13, 2016. The state is heavily dependent on those taxes for its budget.
Gov. Jerry Brown uses a graphic chart to demonstrate the unpredicatability of taxes on capital gains paid by the wealthiest Californians he unveils a revised 2016-17 budget May 13, 2016. The state is heavily dependent on those taxes for its budget. Sacramento Bee file

It’s the economy, stupid.

The line, uttered by James Carville as he managed Bill Clinton’s successful 1992 campaign for the White House, still holds true, as this year’s presidential election proved anew.

Whatever we may hope for California in 2017, it all begins – or ends – with the state’s uniquely complex, notoriously volatile economy.

The housing meltdown-centered Great Recession that struck a decade ago clobbered California harder than all but a handful of other states.

Our unemployment rate soared to more than 12 percent, hundreds of thousands of Californians who thought they were homeowners learned that they weren’t as the housing bubble burst and lenders foreclosed, and the state experienced a 20 percent decline in general revenues.

We’ve been recovering ever since, gaining more than two million jobs since 2010, and seeing our unemployment rate cut by over half and our housing market boom again.

In fact, at 80-plus months, this has been California’s fourth longest recovery from recession since 1960, albeit one that has been very uneven across economic sectors and regions.

The technology-heavy San Francisco Bay Area has almost single-handedly lifted California’s economy and while other regions are better off than they were during the depths of the recession, their recoveries have been more sluggish.

The question hanging over the state, therefore, is whether technology can continue to buoy its economy, or whether another recession is just waiting to happen.

The consensus among economists appears to be that our economy will likely continue to expand for at least a couple of more years.

“This, however, is not a certainty,” the Legislature’s budget analyst, Mac Taylor, warns in an extensive overview of the state’s economic and fiscal condition he issued in November.

“The possibility exists that a slowdown or recession could emerge in the short term,” Taylor continues – adding that the effect of a Donald Trump presidency is still an unknown factor for the nation’s economy, and therefore for California’s.

Taylor’s evident nervousness will doubtless be magnified by Gov. Jerry Brown as he unveils his new budget in a few days.

Brown is predisposed to see the glass as half-empty, rather than half-full, and has consistently warned about an overdue recession. A year ago, he cautioned that a recession “is not too far off, given the historic pattern of the 10 recessions that have occurred since 1945.”

A significant downturn could affect Brown’s hopes of leaving a balanced budget when he vacates the governorship two years hence, particularly since the state is ultra-dependent on how well a handful of high-income taxpayers are doing with investments, particularly those heavily invested in technology.

His Department of Finance calculates that a moderate recession could cost the state $55 billion in revenue losses over three years.

Brown has been pumping as much money as possible into the state’s reserves as a modest cushion for a recession’s impacts, but he’s facing increasing resistance from his fellow Democrats in the Legislature, who want to save less and spend more, particularly on a big expansion of early childhood education.

More importantly, millions of Californians would be adversely affected if job prospects dry up and/or the equity in their homes and the values of their retirement investment portfolios once again plummet.

Economic contractions are not pretty, and their effects can linger on for many years after they officially end.

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