Economy

Golden State of Denial

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Criticism of California "lacks any evidentiary foundation," says the man in charge of its Treasury.

How hosed is California? This hosed: State Treasurer Bill Lockyer and Stephen Levy of the Center for Continuing Study of Self-Immolation the California Economy have taken to the L.A. Times to deny that they even have a problem.

The headline is the confidence-uninspiring "California Isn't Broken," the argumentation is straight out of the obfuscation/decontextualization school of MarketWatch columnist Brett Arends (down to using the same hidden-ball trick of celebrating increased "share" of a venture capital market whose precipitous decline shall go unmentioned), and the only semi-firm ground the defense can rest on is opposite the straw man of state default. Here's how the thing starts; please note the word "any" in that second paragraph:

In the last month or so, an echo chamber of insults has engulfed California. An online opinion editor for the Wall Street Journal even called California "the Lindsay Lohan of states," describing our state as having squandered its promise.

Critics have suggested the state will default on its debt payments, that it is addicted to spending and that it has a hostile business climate. The criticism is long on inflammatory rhetoric, but it lacks any evidentiary foundation.

You want me to beg forgiveness, tender an apology // It's not my fault and you're not getting one from me

First, let's look at the default threat. California has never failed to make its bond payments on time and in full, not even during the Depression. And there is no chance we will smudge that pristine record.

Payment of debt service is constitutionally protected, with bond payments required even when the state is operating without a budget. Debt service has second call on general fund dollars, right behind education. Under the California Constitution, making sure bond investors get their money is a higher priority than providing healthcare to kids, protecting the environment and keeping our communities safe.

During the current fiscal year, general fund revenues are expected to total $89.4 billion. Education spending under Proposition 98 will total $36 billion. That leaves $53.4 billion available to pay debt service on bonds — more than eight times the $6.6 billion the state will need.

Aaaaannnnndddd CUT!! Sounds like Cali's critics are totally wrong about that whole default thing, right? Well they might be, if they ever actually talked about it that much.

Remember the episode where they balanced the budget and got unemployment under 10 percent?

The nameless Wall Street Journal writer (Allysia Finley, for the record) did not broach the D-word (or concept), and neither did the authors of the two highest-profile California-is-screwed pieces of the past month or so, Joel Kotkin and Victor Davis Hanson. Certainly the notion is out there–I recall being asked a time or two recently in Democratic-unfriendly media settings whether California faces imminent default (and I always say no). But to pretend that debt non-repayment is anywhere near the center of the complaint against California public policy is to live in what Gov.-elect Jerry Brown earlier this month rightly termed a "fantasy land."

The default-dodge is a handy way for not talking about the real trouble with reckless persistent borrowing: As Lockyer himself has neatly demonstrated in other venues [PDF], California has jacked up debt levels from $34 billion in 2003 to $88 billion in 2010, with annual debt service increasing from around $2.5 billion in fiscal 2004 to nearly $6 billion in 2010 (accounting for nearly 7 percent of the state's general fund revenue). And those numbers are set to deteriorate still further: According to Lockyer, "From FY 2013-14 through FY 2019-20, the State's General Fund debt ratio is estimated to range from 7.6% to 9.6%, assuming GF revenues grow between two and five percent annually and that no additional bonds are authorized by voters or the legislature." Note how rosy both assumptions are.

As Chris Newfield of the Remaking the Unviersity blog has observed,

These numbers reveal the extent of the disaster for the citizens of the state.  The increase in annual debt service during the Schwarzenegger administration of about $3 billion is about the same as what the state spends on all programs for the developmentally disabled, and what it spends on the University of California.  In other words, during the Schwarzenegger era, the state came to pay the annual costs for an entire second University of California entirely to the holders of its new public debt.

Italics in original. And to again quote Lockyer's non-denialist work, because of the inevitable price-increases that debt-buyers demand from fiscally reckless borrowers, "California pays a significant penalty for its low credit ratings."

In other words, you don't have to risk imminent default to have a serious borrowing problem. And it's worth pointing out that if the annual debt service keeps doubling every five years, it'll take less than two decades for the state budget to be spent solely on K-12 education and bond payments. But at least the latter will be "constitutionally protected"!

Oh I thought I'd be out of here by now

In their LAT op-ed, Lockyer/Levy tease and massage various numbers to give you the impression that California's economy is A-OK (more on that in a minute). But the most damning number I've seen about California in a long time came this week from the Census Bureau:

For only the second time in its history, California will get no new congressional seats from the latest Census.

(And the last non-increase had nothing to do with population growth.) Take a look at the population numbers at the Census Bureau's nifty website and you'll see that for the first half of the 20th century, California's population grew roughly 3-4 times faster each decade than the rest of the country. Decades from the '50s-'80s saw growth rates roughly 1.5-2.5 times higher. But since 1990, the western frontier has become just another state–13.8 percent population growth compared to the country's 13.2 percent in the '90s, 10.0 percent to 9.7 percent in the aughties. The Dream is Over, Long Live the Dream!

A final note-slash-beg about Lockyer/Levy (whose denialism has been greeted with a predictable standing O). They include this claim:

Still, over the last decade, California has seen strong growth. From 1999 to 2009, the state's GDP rose by 27.2%. That's better growth than in the U.S. as a whole, which saw GDP growth of 20.2%, or in Texas, where GDP grew by 25.9%.

I have been doing my worst with the Bureau of Economic Analysis website, and every comparative number I come up with has Texas GDP growing faster. Google so far has not been my friend. What am I missing?

And oh–speaking of Jerry Brown, you wanna read a cracking-good libertarianish speech by a sitting U.S. governor? With a tip o' the hat to Chris Newfield, try Gov. Moonbeam's Second Inaugural.

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  1. Wow, I actually have a Concrete Blonde song on my ipod. Who is Concrete Blonde?

    1. …is an excellent song.

  2. First, let’s look at the default threat. California has never failed to make its bond payments on time and in full, not even during the Depression. And there is no chance we will smudge that pristine record.

    Well, I am not a betting man, but…

    1. And there is no chance we will smudge that pristine record.

      The ratings agencies and bond markets beg to differ. There is indeed a non-zero chance you will default. That’s why you don’t have AAA rating, and why you pay a risk premium on your bonds.

      You lying, economically illiterate sack of crap.

      1. Re: R C Dean,

        You [Bill Lockyer and Stephen Levy] lying, economically illiterate sack of crap.

        My thoughts exactly, except not that succinct…

      2. Precisely. Let’s see what Lockyear is saying when the bond market starts sodomozing him like like he wished on CA prison inmates.

  3. Wow, I actually have a Concrete Blonde song on my ipod.

    If it’s “Your Haunted Head,” you might still be cool.

    If it’s not, GO BACK TO RUSSIA

    1. I’m afraid it’s the extended version of Bloddletting. Decent riffs at the intro.

  4. California is a fine state, full of good, hard-working people and honest, responsible elected officials. It’s not fair to tarnish the reputation of the Golden State to win political points when clearly the problem is with the other states. If other states would fairly compensate California for what she brings to the Union these issues wouldn’t exist and your petty demogoguery would be as dust in the wind.

    1. Re: shortbus,

      If other states would fairly compensate California for what she brings to the Union these issues wouldn’t exist and your petty demogoguery would be as dust in the wind.

      +100 for the satire.

    2. Sometimes I wish I could stick to one handle. But sometimes you need to make a point. I wonder if California received the federal dollars per citizen that Alaska does what their budget would look like. But it’s also a stupid question because WE ARE OUT OF MONEY.

      It still amazes me that Cali can deny that WE ARE OUT OF MONEY, but then again, should I be surprised?

      1. They should secede, then they can keep those precious federal dollars for themselves.

      2. Yes, but if every state gets back what it sends to DC, pretty soon every state is going to start asking why they bother to send it in the first place, no?

        If the federal beast isn’t for plundering others, what good is it?

      3. Alaska got bunches of federal money because we wanted people to go live there and send back useful goods like salmon, trees, and oil. Not a totally unreasonable use of federal funds if you are going to throw money around anyway. Then we won’t let them drill for oil, are blocking logging and fishing but are still sending the money. WTF?

        1. Hahahaha. Psyche!

      4. I wonder if California received the federal dollars per citizen that Alaska does what their budget would look like.

        The unintended consequences of a progressive income tax and redistribution policy. Couldn’t happen to a nicer state.

  5. And there is no chance we will smudge that pristine record We know Uncle Sugar will bail us out.

  6. I swear I hear the voices singing to me
    Keep on, keep on, keep on…

  7. assuming GF revenues grow between two and five percent annually

    and BFF revenues do not decline.

  8. Matt, you have fucking good taste in music, even if you don’t hate Ween. Personally, I think Candy Apple Grey was Husker D?’s best, despite the general consensus about Zen Arcade. And against ? and sage, I preferred Concrete Blonde’s first album.

    OTOH, you don’t have any disclosures about getting royalties from the I.R.S. receivership to make, do you?

    1. Ha! No, I’m just dating myself.

      1. No, I’m just dating myself.

        You should try matchDOTcom 🙂

    2. They actually released a 20th anniversary version of Bloodletting with 6 bonus tracks.

      A previous post has a screen cap from the movie Pump up the Volume, which had a Blonde single on it. Did you guys plan that?

      1. A 20th anniversary edition? Now I feel old. I still have my copy from when it came out.

    3. Warehouse. Could you be the one? is their best song.

  9. Under the California Constitution, making sure bond investors get their money is a higher priority than providing healthcare to kids, protecting the environment and keeping our communities safe.

    Right – the California State government follows the letter of their Constitution just as zealously as the US Congress follows the US Constitution, I would fancy…

    1. That struck me, too. But what struck me first about this sentence is what he’s actually saying:

      Under the California Constitution, making sure bond investors [who lended us money to provide healthcare to kids, protect the environment and keep our communities safe] get their money is a higher priority than providing healthcare to kids, protecting the environment and keeping our communities safe.

      In any case, I can think of no better indication that the state is going to default than the Treasurer publicly denying that the state is going to default.

      1. kind of like when the CEO of a corporation suddenly shows up in their TV ads, reassuring the public that everythings fine. Usually right before he get’s sacked and the company bought.

        1. It’s like Kevin Bacon at the end of Animal House: “Remain calm! All is well!”

          1. Or any coach of a professional sports team getting a “vote of confidence” from the GM or team owner

  10. Under the California Constitution, overpaying teachers is a higher priority than making sure bond investors get their money.

    Wonder what that will do to bond rates?

    1. For the 2007-08 school year, the Los Angeles Unified School District spent $29,780 per student. The district also has the country’s second lowest graduation rate of 40.6%. http://www.calwatchdog.com/201…..r-student/

      CA public school teachers the 2nd highest paid in the nation after NY. The average 2008-09 CA educator salary was $69,093 ? 7.25% higher than the previous year’s $64,424 average. http://www.nea.org/assets/docs/010rankings.pdf Page 21, table C-18

  11. Under the California Constitution, making sure bond investors get their money is a higher priority than providing healthcare to kids, protecting the environment and keeping our communities safe.

    As it should be. You have an actual contract with bondholders. You should always honor your contracts before giving money to charitable causes.

  12. According to Lockyer, “From FY 2013-14 through FY 2019-20, the State’s General Fund debt ratio is estimated to range from 7.6% to 9.6%, assuming GF revenues grow between two and five percent annually and that no additional bonds are authorized by voters or the legislature.”

    “Assuming my wife does not spend anymore…”

  13. So instead of being as bad as Ireland, California is only as bad as France.

  14. Isn’t it obvious that this story over time will shift from indignancy that default is ever mentioned to indignancy that debt service is required? Then the case will be made that stiffing bondholders is all to the good because it will free up money for “vital services”. A few Larry David columns and John Stewart commentaries about the moral primacy of providing money for social services over bond payments will make this a cause celebre. Once the notion gains currency on the left side of the spectrum, a default will become a foregone concluson.

    1. The good news is that it will make it harder for them to borrow money in the future, and since they can’t print, they’ll be stuck between tax increases (thus further crippling their economy and tax base and driving them deeper in the hole) and cutting programs. Eventually California will either learn to cut (and once it learns to cut, it will start cutting with the zeal of a new religious convert), or else it will die. Either way works for me.

      1. When you say “cut” I can’t help but think of an emo 16 year old with a box cutter, crying her eyes out in a locked bathroom with the water running.

    2. Isn’t it obvious that this story over time will shift from indignancy that default is ever mentioned to indignancy that debt service is required?

      They’re already implying that. Hence the talk about “see, the Constitution says we HAVE to pay our debts even if it means we can longer protect THE CHILDREN from MONSTER ATTACKS”.

      1. Yep. Once bond payments start impinging on spending or public employee pension payments bond holders will be demonized as greedy capitalists who throw widows and orphans out into the snow. The state constitution will be changed by voters, and bond holders will be left in the lurch. Just as with the auto bailouts, senior debt will be ignored to channel funds to the most politically powerful entity at the table, and that will be the public employee unions.

        California has a great business plan: borrow money, and then don’t pay it back. You can get higher yields from CA bonds, but the trick is to sell them before everyone else catches on to what their business plan is.

    3. This.

  15. Re: Matt Welch,

    I have been doing my worst with the Bureau of Economic Analysis website, and every comparative number I come up with has Texas GDP growing faster. Google so far has not been my friend. What am I missing?

    The “Right-Off-My-Ass” component that Lockyer/Levy are factoring in, Matt. What else????

  16. That leaves $53.4 billion available to pay debt service on bonds ? more than eight times the $6.6 billion the state will need.

    So naturally that means that general fund expenses will be less than $46.8b, right?

  17. and that no additional bonds are authorized by voters or the legislature.

    Here’s proof that the entire editorial was bullshit.

    At some point, they are right that no additional bonds will be authorized. BY THE MARKET!

  18. “…the Lindsay Lohan of states…”

    LMAO!

  19. Libtards are really going all out to make California’s failures theirs. While any other sane person would be embarrassed by even thinking of writing such drivel, only California Democrats and the LA Times would find such bullshit worthy of publication. The article just plagiarized Brett Arendt’s boneheaded apologia of California failures. The sad thing is, as a Californian, if the state eats the pavement, the libtards at LA Times and SF Chronicle would blame Republicans like they always do. These two newspapers are what keeps voters in this state dumb and clueless. So the Spring Street Cuntwipes could print stories about Bell abuses brought by Democrat and public union excess but then turn around and endorse the entire slate of public union backed Democrats. Stupid, stupid, stupid.

    Liberals lie lie lie lie lie. It’s fucking sickening.

    1. The sad thing is, as a Californian, if the state eats the pavement, the libtards at LA Times and SF Chronicle would blame Republicans like they always do.

      It is clear that the L.A. Times has a credibility problem.

  20. In a totally unrelated matter, “100 US Cities Under The Threat Of Going Under A 2 Trillion Debt Weight”

    http://www.guardian.co.uk/busi…..-us-cities

    More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.

    Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery.

    “Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy,” Whitney told the CBS 60 Minutes programme on Sunday night.

    “There’s not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults ? more. This will amount to hundreds of billions of dollars’ worth of defaults.”

    New Jersey governor Chris Christie summarised the problem succinctly: “We spent too much on everything. We spent money we didn’t have. We borrowed money just crazily. The credit card’s maxed out, and it’s over. We now have to get to the business of climbing out of the hole. We’ve been digging it for a decade or more. We’ve got to climb now, and a climb is harder.”

    American cities and states have debts in total of as much as [$2 Trillion.] In Europe, local and regional government borrowing is expected to reach a historical peak of nearly [$1.3 Trillion] this year.

    1. Get ya popcorn, y’all!

  21. And oh?speaking of Jerry Brown, you wanna read a cracking-good libertarianish speech by a sitting U.S. governor?

    I haven’t been this jazzed about the future since Matt Welch told me Sam Zell would make the L.A. Times a less libertarian-hostile paper!

    1. Days of future passed, eh Tim?

  22. ” We always take my car cause it’s never been beat
    And we’ve never missed yet with the Banks we meet.

    I get around…”

  23. The worst fucking music show I ever saw was Husker Du. Aside from the total lack of AC or any kind of ventilation at all in the Fla Panhandle Summer, they pulled one of those “we’re only playing songs off the new album (New Day Rising IIRC) and our recent unreleased material we don’t play that old stuff anymore” totally unadvertised pretentious fan-hating artist bullshit. I hated that fucking faggot Bob Mould even when he went on to write for WCW.That was at least a step-up from the total shit that was Sugar.

    1. I once walked by the Grog Shop while he was playing there, and considered for about a second seeing him play. I’m glad I didn’t.

    2. …they pulled one of those “we’re only playing songs off the new album… pretentious fan-hating artist bullshit…

      WTF? They had 4 albums previous to New Day Rising. That’s a bullshit move in any event, but for a band that new to do it is pretty messed up.

      I could see (if not agree with) them possibly not playing any of their hardcore from Land Speed Record or Everything Falls Apart, but not playing anything from the next two (closer in sound to NDR) is just stupid.

    3. For your patience, you get this.

  24. OK, how about some alt-text!

    1st pic) Of course I’m full of shit – you think I make this face all the time?

    3rd pic) Levy, on the left and Lockyer on the right, wave a fond farewell to California’s productive citizens

    1. I was kinda thinking along those lines, that California doesn’t look nearly as good in a thong and wet tee shirt.

  25. I always liked the Grant Hart songs better than Bob Mould’s.

    1. Yes. Too bad Hart wasn’t as prolific as Mould.

      1. Hard to be prolific when you’re jacked up on heroin

  26. I’m interested in the data that they are using to back up the CA v. TX growth rates. Best info I can find on that shows that Texas grew faster than California from 1997 to 2009 total GDP growth of 90% for TX v 82% for CA

  27. I’ve had both records for over 20 years, but I never realized how much that Husker Du 12-inch cover looks like the cover of “Tim”.

  28. I’d really like to see the nitty gritty details behind those VC numbers.

  29. This is going to be SOOOOO fun to watch.

  30. “”I have been doing my worst with the Bureau of Economic Analysis website, and every comparative number I come up with has Texas GDP growing faster“”

    The below is handier, & quicker than BEA website. Same data though, aside from the projections.

    I dont know if the link-to-chart works, but give it a try

    http://usgovernmentspending.co…..mp;local=s

  31. ” From 1999 to 2009, the state’s GDP rose by 27.2%. That’s better growth than in the U.S. as a whole, which saw GDP growth of 20.2%, or in Texas, where GDP grew by 25.9%.”

    GDP is not a valid measure of economic prosperity in the first place, since the calculation includes government spending.

    It is an exercise in circular logic. The government jacks up spendinng, which jacks up GDp and then claims the increase in GDP “proves” that government spending “improves” the economy.

  32. I advocate ending tax increment funding. The state will have more money to pay its obligations, and the redevelopment agencies will all go belly up. Anyone who bought a redevelopment bond deserves a kick in the butt anyway.

    We are really not in that bad shape except for pensions. And pensions could be solved with RICO charges, forfeitures, rendering retirees to Syria for questioning, housing them at Gitmo to await trial.

  33. ONe argument that I want to nip in the bud now:

    California’s budget problems are similar to Texas’s budget problems. Texas is expected to incur a 20-25 billion dollar deficit compared to a 20 billion dollar deficit in California.

    THis is pure fiction. Yes, Texas will incur a 25 billion dollar deficit during the next budget period, but in Texas, budgets are arranged for a period of 2 years. In reality, Texas will incur about a 10-12 billion dollar annual deficit each year. Also, Texas currently has 9 billion dollars sitting in a rainy day fund. The rainy day fund requires a 2/3 vote to access, but it is there. So really, Texas is only looking at a 6-8 billion dollar annual deficit if rainy day funds are accessed. This is also before any budget cuts. I’m sure that TExas can get its true annual deficit down to about 4 billion dollars.

    Meanwhile, even with budget cuts and creative accounting, California will incur 20 billion dollar annual deficits for potentially the next three years.

    For a sense of proportion, Texas has two thirds the population of california. California has 50% more people and will incur 300% more annual borrowing.

    Also Texas already starts with a lower debt level.

    Texas state debt total per resident 2009: $1,368

    California 2008: $3,000+

    I couldn’t get great numbers for California, and I didn’t feel like snooping around.

    It would really surprise me if Texas wasn’t able to close its budget gap by the time the next two year budget rolls around. After all, they closed a 10 billion dollar budget gap in the early aughts. Texas also has a low tax rate, and it could probably afford to raise taxes slightly. California will probably have to raise taxes no matter what, and they already have a high tax rate.

  34. Without a doubt, the state government is very badly run.

    The notion that population growth that only matches the U.S. average is some kind of sign of failure, however, is just bizarre. Good grief, we’re approaching 40 million residents as it is. Welch has been to L.A. — how many million more people would it take for you to think it feels full?

    1. The population inference is probably included as an indicator of a dynamic, growing economy; Not Matt’s preference for more traffic congestion.

      1. Right. That’d explain why Nevada has an unemployment rate more than double Iowa’s, yet is picking up a congressional seat while Iowa loses one.

  35. I see you cited to the article by William Bradley. His article is full of bogus assertions–I had never heard of him before and when I tried to find the source for his ridiculous assertion that California is only 15th highest in tax rates, he got abusive and really couldn’t cite anything to justify his outlandish statement. (Depending on how you look at it, one could argue that California is not number 1, but only number 2 or number 3–but even that is a hard argument.)
    I would warn people about how the Hufington post apparently approaches comments–they apparently let the author who is being challenged reject posting of comments. I’d urge everyone to stay away from such biased coverage and approach as seems to be allowed in HuffingtoPost.

    All IMO.

  36. From less than 18 months ago and spoken like a true slimy politician:

    “Lockyer warns of state’s economic collapse”

    http://sacramento.bizjournals……a=e_du_pub

    “California will pay dearly if the state’s credit rating is cut to ‘junk’ levels, California Treasurer Bill Lockyer warned Thursday.”
    ….
    “The ultimate victims will be taxpayers and families up and down the state,” said Lockyer. “They’re the ones paying for the ratings downgrades we’ve already suffered. They’re the ones paying the interest on IOUs issued by the government of world’s eighth-largest economy.
    “I ask them to stop devoting energy to any issue that does not directly relate to closing this year’s budget gap without adding to out-year liabilities,” Lockyer said. “Give Californians and the world a pleasant surprise, for once: Balance the budget now, and get back to the work of getting our state back to work.”

  37. We really have to look this up to know Texas has grown faster than Cali?

    Numbers from Statistical Abstract of the US (Census)

    GDP by State, 2000 to 2008

    Nominal growth / Real growth
    TX: 68.2% / 27.2%
    CA: 43.5% / 20.1%

    see:
    http://www.census.gov/compendi…..0s0655.pdf

  38. Governor Jerry Brown is indeed an interesting dude. His RHETORIC in the latter stages of his 80’s governorship became increasingly libertarian. But ultimately what he decides to do seems to correlate best with what he ingests for breakfast.

    That being said, check out my column suggesting that Brown may be a RELATIVELY good governor.

    http://open.salon.com/blog/ric…..d_governor

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