The easy answer is the expiration of federal incentives on April 30th, but that is not enough.  For one thing, sales in May were still buoyed by the stimulus.  As long as the escrow was entered into before April 30, the sale could close in May.

Incentives do move sales forward.  I have no doubt that the tax incentive moved sales from the Summer to Spring.  Incentives also move sales to the future.  I’m currently considering purchasing a rental unit, but I can promise you that I won’t enter into a deal as long as I think another incentive is in the future.  I do think one is in the future.  I’m not shopping today.  I expect to shop in August or September.

Fewer homes being built is also a contributor to the decline in new home sales.  California building starts, reflecting previous overbuilding and very limited demand, fell through 2008 and have been flat since.  At the same time, builders have slowly reducing inventory.  So, part of the decline in new home sales reflects fewer new units for sale.

Finally, I note that real estate sales are far less sticky than real estate prices.  Declines in sales, especially declines of this magnitude, often precede declines in prices.  Maybe we haven’t seen the bottom of California’s real estate markets?

“NASSCO-General Dynamics , the last major shipbuilder on the West Coast, laid off 290 of its 4,100 workers in San Diego on Monday because of a downturn in business and fluctuations in the repair work it does for the U.S. Navy.

The company, which is among San Diego County’s 20 largest employers, also eliminated the jobs of 270 subcontractors. The overall loss of 560 jobs was about half the number that NASSCO had said earlier it might have to cut.”

These are 570 highly-skilled and specialized people.  Most of them will leave California, because few, if any, other jobs requiring their skills exist in San Diego.  If NASSCO-General Dynamics ever considers expanding its San Diego operations, they’ll consider the lack of skilled workers, and it will make expansion less likely.

Losing highly-specialized, high-skilled, workers is a bit like losing infrastructure.  It reduces California’s ability to rebound, and it is a serious problem.  Domestic migration trends (mostly negative for 20 years now, depending on data source) imply that California has lost a lot of these workers.  California is worse for it now.  It will remain worse for it for years to come.

“Yesterday, I read your newgeography.com post, Green Shoots and Immigration, in which you encouraged massive new immigration as a solution for our poorly performing economy. Today you blogged, Income Inequality and California’s Future, in which you call out international immigration as a catalyst for California’s growing low wage population.

What’s the difference? Is immigration an asset or a liability? After reading Green Shoots and Immigration, my first reaction was to recoil at the suggestion of massive new immigration when we have 10% unemployment. I tried to bring myself to your point of view, reasoning that a new wave of legal immigration could bring the skilled workforce we need to reinvigorate our industrial economy (although reinvigorating our industrial economy will require more than a new wave of skilled workers). But, why would any immigrant with workforce skills migrate to the U.S. now. Today’s blog makes more sense — the immigrants most likely to move to the U.S. would be under-skilled & under-educated, adding to the unemployment problem.

Help me find economic truth.”

Here was my answer:

“The inequality issue with immigrants in California is because California’s international immigrants tend to come with very low human capital, and our educational system is so bad.  However, people from all over the world want to come here, and many have lots of human capital.  I see students every year who have to go back home, because their visa expires, but they want to stay.  And these people tend to be the best and brightest.  That’s why they come here to study.  Many more, very talented people would come, if we only would let them.  So, the easy plan would be:

a.  Relax immigrations restrictions on high-human-capital people.
b.  Control illegal immigrationI would argue that the current immigration policy is inhumane.  Border crossings are very dangerous, especially for women.  Men here find it difficult to see their families.  Villages in Mexico and south are often without men of working age.  So, after a and b, I’d grant citizenship and amnesty for workers and their families, even if the family is in currently another country.

Finally, I’d note that the United States has a history of low-human-capital workers doing good things for the country.  I think they do now.  Inter-generational mobility can be high, but it is difficult if we don’t provide the education and opportunity to allow them to achieve their potential.  That’s California’s real problem.  With an effective education system and a business environment that created opportunity, I’d let anybody in that wants to come to the United States, (subject to criminal checks and the like) and I think we’d be better off for it.”

Fixing the underlying problem is beyond most politicians’ planning horizon, and thus of little interest to them.  Wealth transfers have well-known incentive problems, and they eventually result in high government debt.  Still, this path is popular in some countries, Greece for example.  It is, however, not sustainable in the long run.

In the United States, we choose to increase credit availability, in large part through housing markets.  Ultimately, though, this process is also self limiting.  The debt buildup eventually results in a crisis, one with huge social costs.  As Rajan notes, the current crisis is not the first where the United States tried to lend its way out of an inequality problem.

California has a huge and growing inequality problem, one that I’ve been talking about for years.  Santa Barbara and Monterey are extreme examples of what we see statewide. These are communities of the wealthy, most of whom made their fortunes elsewhere, and the mostly low-wage workers who provide services to the wealthy.

The middle class has mostly left Monterey and Santa Barbara, and they are leaving California.  California’s domestic migration has been negative for years now.  At the same time, the low-wage population is growing.  International migration contributes to the problem, but it is by no means the sole source of the problem.

California must implement two sets of reform to address the growing inequality problem.  It must stem domestic migration tide by increasing opportunity for the middle class.  This would involve several policies that would make California more profitable for business and manufacturing: increased infrastructure investment, tax reform, and regulatory reform.  The benefits of a pro-business regime would be felt most by low-wage and middle-wage workers.

Stemming domestic migration is only part of the problem.  At present, California completely fails its lower class population.  It begins with an educational system that many don’t complete, while many of those who do are often unprepared to participate in a 21st century economy.  It ends with a lack of opportunity and upward mobility.

California’s K-12 program is a failure.  Dropout rates are extraordinary, and those who finish are often unprepared for employment or college.  The failure continues when the few who do manage to prepare for college find that the price has gone up and is now unaffordable for many.  Just as bad, classes are often not offered at times that are convenient for working students.

California needs to renew its commitment to education, at all levels.  In particular, it needs to make education more effective and available to disadvantaged students.  In the end, Education and opportunity, and you need both, are the only long-term solution to inequality.  In the end, we can’t afford not to address the problem.

I have no doubt that California’s public employees are overpaid.  Their combination of salary, retirement, work rules, and health-care benefit is among the best in the world, and a contributor to California’s fiscal crisis.  It is also true that some of the package has been gained by holding essentially holding California citizens hostage.

Still, their methods do not justify unethical behavior by California.  If we have trouble with public employees’ their negotiating methods and pay package, we change the rules and renegotiate their salary.

We have plenty of economic pain in California, and public employees should share that pain, but holding them hostage is not the way to do it.

Going to Peoria was a bit nostalgic and a bit of a culture shock. It was nostalgic because Joyce and I purchased our first home in Glendale Arizona, just next to Peoria, and our first son was born in Phoenix exactly 34 years ago today. It was a culture shock because Arizonans aren’t afraid of change, in contrast to many Californians these days.

I saw so much public infrastructure spending in Maricopa County (home of Phoenix, Peoria, and several other cities) that I wondered if the County had more going on than the entire state of California. They did some checking, and they think so. Imagine that, a county with under 4 million people investing more in public capital than California with its over 36 million people. It’s because they plan on having a future.

In my talk, I was asked about the role of government, and I talked about safety-net issues, but I failed to discuss some of the positive things that government can do. A key is Infrastructure investment, public investment in capital that would make private capital more productive. Freeways, ports, airports, the Central Arizona Project, the Tennessee Valley Authority, the Rural Electrification Program, and the Panama Canal are examples, and the list could go on and on. The problem with the current federal stimulus plan is that so little of it is being used to create productive capital.

Local governments have options. Ventura City has its Jobs Investment Program, where they partnered with a venture capital firm to attempt to bring tech business to Ventura. San Jose has a different type of partnership with a venture capital firm. They are trying to create job opportunities for their lower-wage workers.

Peoria itself is doing some interesting things. It is actually trying to recruit at least one private college. That’s right they are working to help an existing college pack up and change states, and they have colleges considering taking them up on it. They are also looking at their version of a possible partnership with a venture capital firm. Best of all, they asked me out to talk to them.

One of most important things local government can do to help growth is to be really ready for it, to have the infrastructure in place or ready to go, to have the planning and zoning in place. It looks like Peoria does this pretty well too. I think that if you wanted to locate your business there, they could identify possible sites and get you up and running pretty quick, quite a contrast with California cities where you could fight for years before you start construction, if you start construction.

No city is perfect. The economy has hurt Arizona, its cities, and its citizens. But they respond differently. Instead of California’s gridlock and malaise, Arizona is optimistically working its way through the recession. You get a sense of a future that you don’t get in California. Peoria’s peripheral growth has also left the older sections of town looking a bit ragged, but they are working on it. I saw lots of work being done to improve the look of the historical section.

Best of all, Peoria and the rest of Maricopa county are middle-class friendly, another contrast with much of California. Housing is affordable—the daughter of one person I spoke to had an $80,000 offer in for a single family residence—and unemployment, while up, is far less than in California, 9.6 percent versus 12.6 percent. Families can live and work in Central Arizona.

I’m willing to bet that Central Arizona’s recovery will be far stronger than California’s recovery.

Rick’s right. Governments don’t create jobs. They can do their best to create an environment that encourages job growth, but that’s about it. I tend to think that a region has a certain job-growth potential, and governments should try not to kill too much of that potential in the process of providing government services or addressing inequality issues.

Rick is also justifiably proud of Ventura’s somewhat unorthodox, approach. The City has a couple of really creative initiatives. They created what they call a Jobs Investment Fund, to partner with a major venture-capital firm to attract new, high tech, businesses to Ventura. They also have a new City-owned incubator.

This is all good. I’m glad to see my city working to improve opportunity, and I’m glad to see them being creative. I’m afraid though that they may not have much success, and it is not the City’s fault.

To continue Rick’s war analogy, in California, cities and counties are the infantry. The State is the general, the one with the big guns: artillery, air support, tanks, and the like. Unfortunately, the general is withdrawing. Local governments, the infantry, are sitting in the foxhole without support. Odds are the war can’t be won by a few guys in a foxhole.

April 16, 2010

Foreclosures continue to plague California’s residential real estate market.  In the first quarter of 2010 California Notices of Trustee Sale (i.e. a notice of foreclosure) rose 10.7 percent.  Nearly 90,000 notices were sent to California home owners in one quarter.  The situation is worse in Ventura County, where Notices of Trustee Sale increased 17.2 percent from the first quarter of last year.  Nearly 1,600 county residents received a notice.

Why are foreclosures increasing?  It appears that the weak job market is finally catching up with us.  The longer people remain unemployed the harder it becomes to remain current on a mortgage.  Unemployment benefits are not sufficient for most individuals to meet their monthly needs and savings account eventually run out.  Very few, if any, plan to be unemployed for more than six months.

It is important to note that the cause of foreclosures is changing.  During the initial stage of the recession, foreclosures increased because so many home owners found themselves upside down on their mortgage.  In other words, they owed more than the home was worth.  Now, in the later stage of the recession, more foreclosures are caused by lengthy unemployment.  Out of work families are running out of cash, and banks are running out of options.

The distinction between the causes is important.  In order to solve a problem we must know what caused it.  In the current situation, the only way to prevent foreclosures in a meaningful, long lasting way is for the economy to create jobs.  Unfortunately, this is not happening.  California’s unemployment rate remains well above 12.0 percent and is not likely to decline in the near future.

Government programs to prevent foreclosure will only stall the inevitable.  Without job growth foreclosures will remain a problem for California and Ventura County.  For these reasons we expect foreclosures to remain high in 2010.  It is very likely that foreclosures in 2010 will exceed those of 2009.

There is a long history of these types of stories. When faced with budget cuts, governments usually seem to react by cutting services. So, you see libraries closing, police forces cut back, road maintenance deferred and the like. I used to suspect that this was a way of threatening citizens, in order to get them to approve higher taxes, and that could be true in some situations, I don’t think it explains the frequency of service cutbacks that we observe.

I think of governments as having three options: They could reduce transfers. They could cut public employee salaries. They could cut services.

There are a few problems with reducing transfers. One is that demand for transfer payments actually go up at the very time that governments are most likely to be financially challenged. It is also easy to believe that people working in government, elected or not, may be particularly altruistic and believe deeply that government has a responsibility to reduce inequality. Even if we take the cynical view that people in government are in it only for power, that power would be threatened by, say, videos of someone’s grandmother eating cat food, because some transfer was reduced or eliminated. All this makes it unlikely that transfer payments will be cut, or if they are cut, they are cut from programs that impact non-voters and don’t generate videos, something like mental healthcare for children.

There has been a bit of press lately about how well paid government employees are relative to private workers. It seems to be true that—even after adjustment for education, experience, and the like—public employees earn more in both salaries and benefits than comparable private-sector workers, although individual workers I meet vehemently deny this. If it is true that government employees earn more than their private-sector counterparts, it would seem easy to cut the salary, but we don’t see this. That seems to be because public unions are well funded and they use that funding for political power. No elected official is anxious to take on the public workers’ unions.

So, we’re left with cutting government services. This is unfortunate because it is very difficult to imagine an economic model that would give us the result that any optimizing entity, when faced with a contracting budget constraint, would move to a corner solution, or cut only one of the three options. Most optimizing models would result in cutting each, probably by different amounts.

It is also unfortunate that they are cutting K-12 education. Our system is already a failure, and cutting funds will make it worse. There is strong evidence that differences in education explain much of the recent increase in income inequality. Reducing the quality of K-12 education will increase income inequality. It seems unfair to add this burden to a generation that we are leaving so financially burdened.

“We’ve actually walked through this horrible recession with our economic base unscathed,” said Stephen Levy of the Center for Continuing Study of the California Economy.

“The core of the California economy is still in place,” said Chris Thornberg of Beacon Economics in Los Angeles.

With all due respect, I think these respected economists are being a bit optimistic. I’d go so far as to say that California is wounded, maybe by friendly fire, but wounded all the same.

Here are the initial three paragraphs from another article this weekend:

While his forklift crews removed tons of chip-production machinery from a shuttered factory in Hayward, trucker George Lawson bemoaned the fact that his company has been ripping out a lot of industrial equipment these days and shipping it – and the associated jobs – out of California.

“I call it my wrong-way business,” said Lawson, 56, president of Lawson Drayage, a Hayward firm that specializes “in moving things of unusual size, weight and dimension.”

Lawson is the third-generation head of a family business he runs with his brother, Robert.  As one of a handful of truckers with the equipment and know-how to move heavy machinery, Lawson has a bird’s-eye view of the region’s industrial landscape.

This is anecdotal of course, but it is consistent with data. California’s domestic migration has been negative for years now. California’s share of United States jobs has also been declining. It peaked in 1990 at about 12.5 percent, fell dramatically, crawled back up to over 11 percent, and was stagnant there for several years. It has been declining the past few years and is currently a bit below 11 percent.

The 1990’s recovery in California jobs was because of the dot.com bubble, and it was only the housing bubble that kept California’s share of United States jobs around 11 percent over the past decade. I’d say that bubbles have been California’s economic base for the past 20 years. Let’s hope the foundations of the next one are not already in place. Absent a bubble, California’s economy is likely to lag the United States economy.