California Forum

Viewpoints: Assume the recovery keeps going … and going …

There’s an old joke – and, please, don’t bother stopping me if you’ve heard this one before – about economists and their models.

A physicist, a chemist and an economist are stuck on a desert island with nothing to eat. One day, a can of soup washes ashore. The physicist says, “Let’s smash the can open with a rock.” We’ll spill too much, the chemist and economist object.

“Maybe we could build a fire and heat the can until it pops open,” the chemist offers. But the physicist and economist retort that the fire would make the can explode, leaving them with nothing.

Then the economist begins scrawling equations in the sand. This goes on for some time until at last he pops up with his solution. “First,” he says, “let’s assume we have a can-opener ...”

The media erupted with delight last week when the Legislative Analyst’s Office announced that California could expect a $5.6 billion budget surplus by mid-2015. After years of seemingly nonstop fiscal crisis, the LAO’s forecast came as welcome relief. Sunshine and lollipops for everyone!

Until killjoy Mac Taylor went and snatched the lollipops back. “Despite the large surplus that we project over the forecast period,” the legislative analyst said, “the state’s continued fiscal recovery is dependent on a number of assumptions that may not come to pass.”

In other words: first, let’s assume we have an uninterrupted economic recovery.

Yes, the economy is growing. Not as fast as it did during the go-go 1990s, but what can you expect in an age of diminished expectations? The LAO notes that, if all goes well, the surplus could cushion another economic downturn in 2016.

Of course, that assumes the stock market continues to generate record gains. Capital gains are key, and California’s revenues remain as susceptible as ever to Wall Street’s unforgiving bulls and bears. Taylor noted that the market is “not out of line like it was during the dot-com boom,” which is true as far as it goes.

Watch closely, however, as the Federal Reserve begins tapering its multitrillion-dollar bond-buying binge. What happens when easy money isn’t so easy? Don’t assume the good times will go on forever.

Let’s also assume the Legislature can control itself. (I know, that’s even funnier than the old economist joke!) Never mind the spenders’ record is miserable on this score. They’ve invariably poured one-time dollars into continuing programs. What’s to say they won’t succumb to election-year pressure and do it again?

As vital as it is to take certain assumptions into account, it’s equally important to know what the LAO does not assume. Despite the projected surpluses, the LAO forecast notes an $8 billion shortfall in the elementary and secondary education budget for 2014-15. Not to mention – because Brown didn’t include it in this year’s budget – the $4.5 billion a year the California State Teachers’ Retirement System claims it needs to remain solvent.

Then there’s health care. David Crane, Arnold Schwarzenegger’s former economic adviser, pointed out in a Bloomberg column the other day that health care costs will continue to grow unabated, especially as Obamacare takes full effect. The law is expected to cost taxpayers an additional $2 billion to $4 billion a year.

“That means even less money for California’s colleges and universities, parks, courts, transportation, environment and welfare, and even more pressure for fee and tax increases,” Crane wrote. Assume the worst.

A few days after the LAO forecast made headlines, newspapers up and down the state touted the latest decline in unemployment is another sign that the Golden State’s economic resurgence is moving along at a terrific clip. California’s jobless rate fell from 8.9 percent in August to 8.7 percent in September, and held steady in October.

Putting more Californians to work is good news, right? Yes – but not unambiguously so. Our unemployment remains persistently and stubbornly above the national average, which was 7.3 percent last month. And most of the new jobs were in government, health, education, and the fairly low-paying leisure and hospitality sectors.

Meantime, the state last month lost another 5,600 high-skilled, well-paying manufacturing jobs. California has lost 618,000 manufacturing jobs since 2001. The jobs that didn’t head offshore are going to Texas and the Gulf Coast. Sorry, but that’s nothing to cheer.

Finally, a new study by the U.S. Bureau of Economic Analysis underscores what anyone who’s been paying attention these past few years should already know: California’s recovery, such as it is, is largely a coastal phenomenon. San Francisco and the Silicon Valley cities are riding high, ranking second and third respectively in per-capita income among major U.S. metropolitan areas. Yet California has a worse poverty rate than Mississippi.

Not to spin bad news out of good, but maybe what passes for optimism these days is just wishful thinking, and happy budget assumptions mask more intractable problems.