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?

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.

So it goes. Today’s political debate so often consists of empty slogans and name calling, with little no real discussion of the issues. Minds seem to be made up. Few people want any new information that challenges their views.

We were hired to assess the claims that AB32 would generate net-positive economic growth. The California Air Resources Board has said that AB32, the bill that would require California to reduce carbon emission back to 1990 levels, would create 10,000 jobs by 2020. To do this, we reviewed a few articles that supported the claims. We reviewed the evidence from some countries that are ahead of us in green house gas regulation. Finally, we reviewed the peer-review academic literature. We performed no primary research. We documented our conclusions.

We did not take a political stance as to the desirability of AB32. Assessing the risks of global warming is beyond our expertise. Deciding the appropriate expenses to incur to insure against those risks was beyond the scope of the project. Our research was specific and clear. Given that both advocates and opponents of greenhouse gas regulation claim that the opposing position will costs jobs, it was inevitable that some would be unhappy with our results.

So, what did we find? First, please recognize that the claim that AB32 would create net-positive economic growth is the same as saying something better than-a-free-lunch exists.

If that sounds too good to be true, it is. Evidence and theory indicate that some costs are unavoidable if we are to limit carbon emissions. That is: There is no free lunch, much less a better-than-free lunch. We also found that a refunded carbon tax minimizes costs. This is a tax where the tax is refunded against some other tax that distorts economic incentives. Income taxes are thought to distort incentives, and they would be an excellent candidate for the refund. This type of tax is widely accepted among economists as an efficient method of reducing an activity associated with negative externalities. If you want less of something, tax it.

As you move away from a pure rebated tax, costs tend to go up, particularly with command and control type regulation. In some cases, costs can be quite high, and we provided some examples. We concluded that command and control regulation, a significant component of AB32, could be very costly for California.

The debate over carbon emission regulation is a necessary debate. We should be discussing the risks associated with global warming. We should be discussing the appropriate amount to spend to insure against those risks. We should be discussing the most efficient ways to insure against those risks. Our work helps inform that debate, if anyone is listening.

California’s 2010 first-quarter exports were up 44 percent from the prior year, following a 29 percent year-on-year increase in 2009 quarter four.  Both non-manufacturing and manufacturing exports were strong.  (Manufacturing represents 87 percent of California’s exports).  Manufacturing exports were 35.3 percent greater last quarter than the previous year, while non-manufacturing exports were up a whopping 155 percent. 

China is a not insignificant destination for California exports, representing eight percent of California’s trade outflows, and exports to China are growing smartly.  California’s first-quarter exports to China were up 77 percent over the previous year.  This follows a 69 percent year-on-year rise in 2009 quarter 4.

While neither trade nor manufacturing create massive numbers of jobs, they do have large multipliers and they have both seen impressive improvements in the last six months.  We expect these gains will continue.  However, trade and manufacturing’s economic impacts are more of a boost to GDP than jobs, as these sectors are technology intensive.

California’s April jobs grew at 1.6 percent, annualized, from March. However, if we remove Agriculture and Government, this growth rate falls to zero percent. California’s April year-on-year growth improved from March, but still declined by 2.3 percent.

The reason for the unchanged April private non-farm job level is that gains in Leisure and Hospitality, Personal/Repair/Maintenance Services, and Professional/Technical Services were offset by declines in Construction, Manufacturing, Trade, Transport/Warehousing/Utilities, and Education/Healthcare.

The driver behind the Government increase was Federal, obviously due largely to the U.S. Census effort. The Census effort may be partly responsible for the increase in Labor Force we have seen across the county in recent months.

We are unfortunately still waiting for a California Employment Situation that we can get excited about.

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.

The year-on-year job growth rate continued improving, that is to say the declines are not as big, extending a trend that started in January 2010. Improvements in the year-on-year job growth rates since January have been fairly consistent. The problem is that we started from losses of seven percent. Last year’s seven percent job losses were likely to be the worst in the California’s job market history. The year-on-year growth rate declines were 3.7 percent in February, and 3.1 percent in March.

Month-on-month job growth, the more volatile measure, jumped 570 basis points from December 2009 to January 2010. After the January gains, the month-on-month measure slowed to barely positive numbers in February and March.

The question of recovery is in the air, and with the March California jobs report we might hope to claim that we are past the worse of the recession. However, even though the job growth decline is improving, the level of jobs is still falling relative to last year. If the rate of improvement in the year-on-year job growth rate continues, we would not arrive at positive job growth until August 2010. As well, the unemployment rate will continue to remain high for some time.

A negative risk factor is the public sector. Despite the fact that the state has a very large structural budget deficit, public sector job losses have been much smaller than for the private sector thus far in this cycle. Public sector jobs could be the other shoe to drop. If this did happen, it would lengthen and weaken the return to growth.

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.

“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.