Oregon’s voters will soon give their judgment on Measures 66 and 67, measures that will raise income and corporate taxes in the recession-ravaged state – with unemployment at 11.1 percent, the eighth highest in the nation. Besides leaving the state with the highest marginal rate in the country, tied with Hawaii, more insidiously measure 67 will impose a minimum tax based on sales, not profits, implying an infinite marginal tax rate for low-profit companies.

This is not good news for businesses and citizens of Oregon. In a report titled Tax Policy and the Oregon Economy: The Effects of Measures 66 and 67, Two Cascade Policy Institute economists, Eric Fruits and Randall Pozdena, thoroughly review the literature on the impacts of tax increases on jobs and domestic migration, and they rigorously analyze the measures’ impact on Oregon jobs and migration.

They estimate the new measures through 2018, will cost Oregon employment losses of “approximately 47,000.”

Finally, Fruits and Pozdena examine the impacts of measures 66 and 67 on migration. They find that adoption of measures 66 and 67 will result in the loss of approximately 80,000 Oregon tax filers with a loss of $5.6 billion in adjusted gross income.

These results have to be taken as the minimum impacts. Fruits and Pozdena are careful researchers. They do nothing that is not completely defensible. Consequently, because of statistical issues, some of the potential impacts, particularly those of measure 67’s minimum tax based on sales are almost surely under measured.

Clearly Oregon , where many residents look down on the increasingly bedraggled Golden State seems anxious to follow California’s decline trajectory. We all know how that story ends: high unemployment, domestic out-migration, declining jobs, declining opportunity, and a vanishing middleclass.

I am not alone in seeing the warning signs.

The PEW Center on the States issued a report in November 2009 titled Beyond California: States in Fiscal Peril. PEW created an index using foreclosure rates, job losses, state revenues, budget gaps supermajority requirements, and money-management practices. The index resulted in values ranging from 6, Wyoming, to 30 California. Higher values are bad here, and the closer to California’s 30, the more a state is at risk of California-style fiscal problems. Oregon, with a value of 26 is listed as one of nine states that the PEW researchers consider at high risk.

Then there’s Small Business & Entrepreneurship Council’s recently released Small Business Survival Index. They use a much larger set of variables to create their index of public policy climates for entrepreneurship, a total of 39 indicators covering tax policy, regulation, crime rates, costs, and more. This index results in values ranging from 25.7 for South Dakota to 84 for the District of Columbia. As with the previous index, high numbers are bad. California, with a score of 77.7 is the second worst state, behind only New Jersey. Oregon’s score is 65.2, the 38th among states, and dangerously close to California’s score.

Northrop Grumman Corp started California’s New Year by announcing it is moving its headquarters to the Washington D.C. area. Unfortunately, they are neither the first nor the last major corporation to leave Southern California. It is a trend, one that may not last much longer, though since aren’t that many major corporations still headquartered in greater Los Angeles.

For decades, Southern California was the center of the aerospace world, a basic part of the Southern California’s DNA. Now, once Northrop leaves, there will be no major aerospace companies still headquartered in Southern California.

Aerospace is not the only industry abandoning Southern California. The region was once host to financial giants, like Bank of America, Security Pacific Bank, Countrywide, and First Interstate. Today, there are none. California was once a major automobile manufacturing state, with a dozen plants. Even the entertainment industry is slowly shifting away from its Hollywood roots.

When you lose corporate headquarters, you lose more than jobs. You lose the tax base, the leadership, the philanthropic giving, and the intangibles. Corporate headquarters are usually very good citizens.

Many local political leaders ignore this business’ exodus, or make excuses. The decline of the U.S. defense spending, aerospace spending in particular, is often given as a reason for the decline. But the last decade was not a bad one for defense; the industry thrived, just not in Southern California.

The reasons for this exodus are both simpler and less flattering than those usually given. One big reason is selfishness. California’s decline chose to consume, and not to produce. Wealthy, aging, Baby Boomers control the state. In the cause of “quality of life,” or “the environment,” they have succeeded in limiting opportunity for everyone else.

The other big reason for decline lies with governments, state and local, that now exist to serve themselves and not their citizens. The level of government goods and services, even infrastructure and basics, has declined, but state spending, adjusted for inflation and population, has continued to soar. The difference has been going into public employee’s pockets, through higher salaries, benefits, and generous retirement programs.

Remarkably, no Southern California economic sector is in ascendancy. Unemployment remains well above the national average, particularly in the middle class Inland Empire. The growth in bankruptcies has been about twice that of the United States. The state is becoming less equitable, the divide between those who have and those who do not have constantly growing, the middle class declining.

Southern California is starting to look a lot like a third-world economy, service based, inequitable, serving a wealthy, mostly aging few, with little opportunity for younger workers and a large underclass. Changing the region’s prospects will be very difficult. Nothing short of a major generational change in leadership is likely to change the current sad trajectory.

The problem with free insurance against failure is that it encourages excessive risk taking. This is the much-talked-about moral hazard problem, and it was a serious contributor to how we got to September 2008 in the first place. Since then, we’ve merged big bad financial institutions with big good financial institutions to create even larger financial firms. This has to stop.

Why would a firm grow to the size we observe?

Often, the firms’ managers tell us they merge to diversify. It is not true. Research I did with Bill English while I was at the Fed showed that large banks really didn’t diversify after they merged. They merged with firms much like themselves in similar markets.

Besides, the argument for diversification is flawed on its face. Financial theory is clear. The investor can diversify more efficiently than the firm can diversify on the investor's behalf.

Firms also claim that they are merging to obtain economies of scale. That is not true either. A reasonably large literature is available on economies of scale. This literature is clear. Economies of scale are fully exploited when firms are much smaller than the ones that are currently considered Too Big To Fail. Indeed, diseconomies may exist at the size of our largest financial firms.

Are there other reasons firms might want to become the size we see? Sure, but the participants are not likely to advertise those reasons. Firms constantly strive for market power, and size can help them achieve that market power. Of course, when firms have market power, the consumer loses.

Firms might also merge to get the free Too Big To Fail insurance. That is clearly not in the best interest of anyone except the insured firm.

The two most believable reasons that firms become Too Big To Fail are counter to the public’s interest. That’s worth repeating more forcefully. Firms that are Too Big To Fail serve no public interest. Since the public is funding the insurance, it needs to go.

Washington’s response has been counterproductive. The preferred model seems to be fewer and even larger firms subject to more government regulation. This makes no sense. There is no evidence that regulation prevents financial collapse. The firms that were involved in last September’s nightmare were all heavily regulated. Indeed, they are among the most heavily regulated firms in the world, and we still saw the most devastating financial collapse since 1929.

Additional consolidation and regulation is not only counterproductive, it approaches criminal insanity. It guarantees that we will see something like September 2009 again.

We can only speculate as to why policy makers are responding to the financial crisis by increasing regulation of a consolidated financial sector. The most generous speculation is that fewer larger firms are easier to regulate effectively. Easier, maybe, but not more effectively.

We would all be better off if there were no firms that were Too Big To Fail. So, let’s provide a strong incentive for them to voluntarily split themselves up into little, more efficient pieces. The easiest way to do this is to apply an onerous tax on any firm considered Too Big To Fail.

This would be equivalent to overpricing the Too Big To Fail insurance. If the insurance is overpriced, no one will buy it. Instead, they will divide themselves up into several smaller, hopefully more specialized, firms.

Implementing such a tax would be very easy to do, and it would be far cheaper than the alternatives. We need to get on with it before another crisis comes our way.

Originally published on New Geography

So now what will Oregon do with a suddenly excess population? California, at least, can say its émigrés will over time reduce unemployment and reduce out-of-whack property prices. The immediate net benefits for Oregon are harder to discern.

California's massive economic collapse — which has resulted in 926,700 job losses from July 2007 through June 2009 and an unemployment rate of 11.6 percent — is now becoming Oregon's problem. As Californians, largely for lifestyle and cost reasons, head north across the border, they have helped swell the state's ranks of both unemployed and, perhaps equally important, underemployed.

Our analysis of California migrants has shown a gradual reduction in their earning over what they were earning in the Golden State. There are also less quantifiable impacts. Portland, a city attractive to many unemployed and underemployed younger Californians, could well be becoming the "slacker" capital of the world.

There's another major problem with the continuing California migration. Along with young people, newcomers to the state also include large numbers of the retired and semi-retired. These people generally have little interest in economic growth, whether for long-time state residents or their fellow, often younger émigrés. Instead what they bring with them are political attitudes which could slow down the state's economic recovery.

Some might call this the California disease. This refers to a chronic inability to make hard decisions as well as a general disregard for business and economic activity. California's inability to plan or create new public infrastructure affects every part of California's economy. California was once a leader in building infrastructure, but that was in Pat Brown's administration, in the 1960s before Reagan, when California last planned a major infrastructure project.

There are consequences to California's inability to deal with infrastructure. Its freeways are parking lots. Its water problems are threatening the viability of the central valley agriculture, one of the key drivers of the state's economy. Its electrical system is so bad that every summer brings the fear of interruptions in the supply of electricity. Its universities are in decline. Its prisons are overcrowded to the point that federal courts are demanding the release of 25 percent of the State's prisoners.

Another symptom of California's disease is regulation and red tape that increases the uncertainty for any project, and raises the cost. California projects can be in planning for years, and at the end of that planning process they may still be denied. The long delays are expensive. And as many would be California developers will tell you, the uncertainty is a strong detriment to economic activity and development.

We also see symptoms of California's disease in tax policy. Even though California no longer has the United States highest income tax rate, with a top income tax rate of 10.3 percent, sales taxes that can reach 10.25 percent, and a 33.9 cents-per-gallon gas tax its total taxes are among the highest in the United States.

California's regulatory climate also reflects the disease. Even as the State endures its most brutal recession in decades, it persists in unilaterally imposing new regulation making the State less competitive with competing states.

In short, California is whistling past the graveyard, hoping that its economy will rebound, "because it always has."

Key symptoms of California disease are forgetting that quality of life begins with a job and negative domestic migration.

With all the influx of Californians, it's not surprising that Oregon shows some signs of California Disease. It recently increased its tax rates so that Oregon highest—income taxpayers face marginal tax rates that match Hawaii's for the highest in the nation. Oregon's land-use planning had been extremely centralized for some time. Indeed, Oregon's land-use planning may be the most centralized in the United States. This makes it harder for communities to control their own destinies, whether they want to grow or not. In Oregon, planners seek control growth but often end up squelching it.

If Oregon does have California's disease, the malady is surely not as advanced as California. The state has lower gasoline taxes and lower property taxes than California. Oregon, in contrast with California, enjoys net positive domestic migration. It is also a good sign that a significant percentage of the people moving to Oregon from California are young folks. While it seems to many that the typical California immigrant Oregon is a wealthy aging baby boomer, the data show that the typical California immigrant is still a young person or 20s or 30s and often married with children. They are people who, if the economy grew, could have something to contribute to the economy as well as the cultural development of the state.

But Oregon's relationship with California remains a double-edged sword. On the one hand, Oregon has benefited from the inflow of cash and skilled workers. On the other hand, Oregon's relationship with California has led to the current situation where Oregon has one of the highest unemployment rates in the United States.

Oregon may be at a crossroads. The State is richly endowed with many of the components of a high quality of life. People want to live in Oregon, and they are moving to Oregon even in hard times. Yet as the population swells, there's no concurrent growth in businesses and employment. Over time, this could pose serious problems. Remember, quality of life begins with a job, preferably a rewarding well-paying job.

Oregon has the potential to benefit with its proximity to California and from California's mistakes. As we see with the immigration of young people, the Golden State can be a source of vigor and economic activity. However, Oregon must avoid making many decisions that led to California's current situation. The costs of California Disease are more than those reflected in the economic statistics. Devastated communities and families, and wasted opportunities, could infect this fair state for years to come.

Joel Kotkin
Bill Watkins

Previously published in the Oregonian

In making the rent/purchase decision many consumers compare the monthly cost of ownership to renting. If the difference between these costs is similar homeownership becomes more attractive. When one accounts for tax credits and potential gains in equity the benefits to homeownership become even greater.

In Ventura County the difference in cash flow requirements between owning and renting has shrunk dramatically due to falling home prices. Median home prices in Ventura County peaked in June 2006 at $620,000. From the peak to May 2009 median home prices have fallen 42.7 percent.

Unlike housing, the rental market has remained fairly stable. In July 2006 the average rent for a 3-bedroom apartment in Ventura County was $1,862. By January 2009 this number had increased to $1,938. This represents a 4.1 percent increase over two and half years.

The bottom line is that Ventura County home prices have fallen dramatically, while rents have risen slightly. So, is it cheaper to buy or rent?

To answer this question we collected data on median home prices and rents. Median home price data come from the California Association of Realtors (CAR). CAR data is widely quoted in newspapers throughout California. The rent data comes from the Dyer Sheehan Group, Inc. Dyer Sheehan is a Ventura city company that specializes in real estate consulting. Every six months they conduct a thorough rental survey. Their latest survey, January 2009, has data for 20,464 apartments in Ventura County. For the purposes of this analysis we use the average monthly rent for 3-bedroom apartments.

To calculate the cost of homeownership the following assumptions were made. A 30-year loan with 20.0 percent down and a 5.0 percent interest rate is used to calculate the mortgage payment. Other costs, such as taxes and insurance, are 1.5 percent of the purchase price. Mortgage insurance is excluded due to the 20.0 percent down payment assumption. The total cost of homeownership is the sum of mortgage payments, taxes, and insurance.

The following table contains the results of our calculations. Note that the median home price has a compositional component. Today, a significant proportion of home sales are distressed properties, such as foreclosures and short sales. This analysis does not address the maintenance cost of home ownership, potential gains or losses in equity, or interest rate tax credits.

The gap in cash flow requirements between owning and renting has shrunk dramatically. On average, the monthly cash-flow requirements are about the same if you rent or buy in Ventura County today. This is welcome news for a battered housing market.

The results also suggest that equilibrium is being restored in the housing market. In general, the difference between owning and renting should be small. When the difference becomes too great, as it did in 2006, the market becomes unstable. Home prices and sales start to decline as the market searches for a new equilibrium between owning and renting.

Does this mean that every renter should run out and buy a home? No. The rent/purchase decision is more complicated than a simple comparison of monthly cash-flow requirements. A home is often a very illiquid investment. Transactions costs—the cost to purchase or sell—are high. Those costs imply a relatively long holding period (investment horizon) is appropriate. Many households’ circumstances may not be compatible with a long holding period.

Kirk M. Lesh
Center for Economic Research and Forecasting
California Lutheran University