Welcome 60 Minutes Viewers

Since this blog had record visitors when Hannity covered the Farmers vs. the Delta Smelt story in September, it seems 60 Minutes may generate even more hits. I just watched 60 Minutes, and was pretty shocked by how one sided their "Running Dry" report was tonight. Better than Hannity, but not much.

In some ways it is worse, because when you watch Hannity with the pitch fork/tea party mob behind him, the average person realizes they are getting news with a slant. With 60 minutes and their style of presentation, it appears more balanced.

I don't have time to recite the problems with this report in detail, but follow this link to my post after the Hannity report (which will in turn link you to a good commentary from EDF).

At least he didn't say 40,000 lost jobs ...

I suppose I should be happy that this commentary at least cites the latest numbers from UC-Davis, even if they continue to be too high. The errors of fact and logic in this piece from the Bakersfield Californian are typical, and they need to be corrected.

It attributes all the losses to the Smelt restrictions, when reality it is mostly drought and at most 25% endangered species restrictions. In fact, the experts at UC-Berkeley have estimated agricultural losses due to the Delta Smelt of only $48.4 million in an average year (more in a drought like the current period). Water exporters even paid for the study.

Then, the commentary goes on to suggest that the $20 billion state budget deficit is somehow connected to the loss of $100-200 million in crops this year, and to ignore the fact that unemployment in these towns that regularly exceeds 30% unemployment with full water supplies.

This blog must be sounding like a broken record, but I continue to be amazed at the scale of the exagerrations that continue to lead water exporter arguments.

Californians lost 21,000 jobs and California's economy lost $703 million in agricultural revenue due to pumping restrictions in 2009, according to experts at the University of California. Unemployment in some towns exceeds 40 percent. California faces a $21 billion budget shortfall through June 2011, according to the California Legislative Analyst's Office. California needs to strengthen its economy, not let it be impoverished by further water restrictions.

Is Hawaii our future?

I am increasingly worried about public education in California at all levels. This story from Hawaii caught my attention over the weekend. I was not aware that the cutting had been this drastic there.

Five days less school looks likely for much of CA next year (this is frustrating, because we should be figuring out how to add days, not subtract), but at least it isn't as bad as Hawaii.

Hawaii now has the shortest school year in the nation after the state and the teachers’ union agreed to shutter schools for 17 days a year, leaving 171,000 students without class on most Fridays.

Unemployment Friday

California's unemployment rate dropped to 12.3% from 12.5%.

Non-farm jobs were down 10,000, but October was revised up a little, so it continues to look like jobs are going sideways and trying to find a bottom statewide. New unemployment claims have not come down enough for me to think we have bottomed yet, and I suspect there is still some negative months ahead.

That may be my Northern California bias though. After a quick browse of the MSA data, it looks like Southern California is outperforming Northern California at the moment. Southern California slipped into recession before No Cal (especially the Bay Area), and it may be the first to recover.

Stimulus funds for drilling wells

Stimulus funds drill wells while California water vanishes

Glad to see the absurdity of this finally get some coverage in today's AP story. I couldn't believe my eyes last summer when I saw federal funds going to drill deeper wells.

Dr. Doom with a scary warning

No not Jeff Mount (CA water's Dr. Doom), I'm talking about Nouriel Roubini, the bearish economist who famously predicted the Great Recession (plenty of economists called a recession, but Roubini stands out among the few who got the magnitude correct).

Roubini thinks the political environment could be setting us up for a double dip, drawing parallels to 1937. I don't think this is going to happen, but I wouldn't completely rule out Roubini's double dip scenario and recent history tells us we should pay attention to Dr. Doom's warnings.

Today we look at the links between the current economic conditions and those of the 1930s, another era where the threats of sovereign defaults and inflation worries loomed large. A lengthy recent analysis by RGE’s Mikka Pineda identifies striking similarities in U.S. inflation attitudes between the mid-1930s, when the U.S. began to show signs of recovery from the Depression, and 2009. Americans during the Great Depression voiced the same concerns about excess bank reserves, budget deficits, competitive devaluations and commodities speculation as they do today. Even dissenting arguments followed the same script in both eras. The eerie resemblance in the psychological and economic backdrop of the mid-1930s and 2009—both historic junctures when recovery was thought to have begun—raises concerns that the U.S. could be on the edge of a double-dip.

A stroll through the archives of TIME magazine and The New York Times reveals other similarities in the reactions of Americans today to fiscal and monetary easing and the reactions of their forebears of the mid-1930s. When the U.S. economy began to recover from the Great Depression, widespread fear of credit inflation, currency inflation and public debt inflation drove the Federal Reserve Board to hike reserve requirements by 50% and prompted Congress to slash spending. A premature retraction of economic stimulus, among other things, pushed the U.S. back into recession. In terms of GDP growth, there was a brief recession lasting only about a year from autumn 1937. Business leaders at the time called it a mere “business recession” to whittle down excess capacity and high inventories built up in response to rising commodity prices. To everyone else, particularly those laborers considered “excess capacity,” the economy's fragile recovery took a big step back. Deflation took hold of the country for another two years and unemployment spiked to 20% and didn't drop below 15% until 1940. Property prices and stock markets languished below their pre-1929 levels until World War II shocked production back to life.

Today the U.S. is experiencing a similar situation with hawks calling for the immediate exit from both loose fiscal and monetary policy even amid high unemployment. Though past is not prologue, learning from past mistakes can make a considerable difference.

Costco Rescues City From the Fire Department

I don't think bigbox stores like Costco and Wal-Mart are evil like some environmentalists that want them banned or regulated. At the same time, it is crazy to hail big box stores as some sort of economic development score like we are hearing from Lodi in this morning's Record.

"This is something that we've worked very hard on," said City Councilman Larry Hansen, one of the loudest voices in the city's plea for new sales tax dollars. "It's an absolute home run to have Costco built."

Elsewhere in today's Record, we hear more about how Fire Department overtime and generous labor contracts continue to drive Stockton (not unlike other CA cities) towards bankruptcy.

Yes, the headline on this post is unfair and rude - after all Lodi and Stockton aren't even the same city. Yet, these articles reminded me of some of the things that are screwed up in California government.

Local governments dependent on sales tax value car dealerships and big box stores above all else, and a firefighter is arguably the most highly sought after and among the best paying jobs in the Central Valley. I don't think this system is built for long-term economic success in the 21st century.

My bias is that I grew up in a town (in Ohio) with top-notch schools well funded by local property and income taxes, and we had a volunteer fire department. The sales tax went to the state, and some folks complained that we didn't have enough local shopping. Although my family was lucky never to need the fire dept. or emergency reponse, I suspect that service would have been better without the volunteer f.d. If we wanted, we could have chosen to improve our fire services by raising local taxes or cutting school funding.

I now live in an area with sub-standard schools funded by the state, good shopping opportunities relative to the local income base, and top-notch, well-funded fire departments that get their revenue from local sources. I wonder if these differences reflect different values and preferences in the communities, or are just a result of the different funding schemes for state and local government. It would be interesting to see what the local communities would value the most if both school and fire budgets were made at the local level.

Paul Samuelson has died

Paul Samuelson, the great MIT economist, died over the weekend. His textbook was the first Economics book I ever read.

I was "born" as an economist in my first semester of College in 1988 when I lugged a copy of Samuelson's famous textbook everywhere I went (and was mocked about the omnipresent book by my friends). It was Introduction to Macroeconomics, and thanks to Samuelson's book and a wonderful old lion of a Professor (Sidney Wertimer at Hamilton College who died a few years ago), I found my professional calling.

My freshman year of college is when I discovered economics and beer. I regret that I sold Samuleson's book for beer money at the end of the year, but fortunately economics prevailed over beer in the long-run.

Updated Drought and Delta Smelt employment impacts

Our updated report on water deliveries and employment is now available here.

California Water Myth #1: Delta Smelt Cost 40,000 Jobs

On Tuesday, the PPIC will release it's new report "California Water Myths" with a big event in downtown Sacramento. I have been very critical of PPIC's past water studies, but I think this one could be better and will reserve judgement until I see it.

I certainly hope the claim that "40,000 jobs have been lost for a 2-inch bait fish" is high on the list, if not at the top since it is usually the first "fact" cited by those who want to pump more water from the Delta. Congressman Radinovich was the latest to repeat this thoroughly discredited projection, but he is not alone.

There are now 3 University studies of Delta Smelt employment impacts (2 of which have been done at the request of water exporters). The lost job estimates are: 720 (Berkeley); 2,000(Pacific); and 5,000 (Davis). The number they keep referencing is 20x larger than the median estimate, and even 8x larger than the serially exagerrated UC-Davis job projections. [Update 12/9: The low Berkeley estimate is for an average water year and is not directly comparable. They say job losses would be higher in dry years like in the current year analyzed in the other 2 studies, and 0 in wet years.]

We (Pacific) will release a short report with our latest update of this number on Thursday, and do our part to correct this California Water Myth.

Update 12/8: I just had a chance to skim through the new PPIC California Water Myth report. Much better, although I think this is much too late in arriving and is likely to have little influence. I am still not going to let them off the hook for the 2008 report that endorsed the peripheral canal, because in that study the PPIC didn't practice what it preaches here. For example, where was the cost chart of alternative water supplies in the 2008 study. And why did you ignore all those ecosystem values that you are talking about in this new report? And why did you put peripheral canal is best strategy as the headline and emphasis of your 2008 press release if you think there are no silver bullets.

Basing mortgage modifications completely on income is a bad idea.

I have said all along that the foreclosure prevention plan was the least effective part of Obama's 3 part economic strategy: Stimulus, bank bailout, mortgage modifications.

Loan modifications in this plan are completely determined by income, and making the payment "affordable." This distorts incentives, rewards lying, is unfair in several ways, and does nothing to reduce underwater mortgages (the biggest cause of foreclosures). The cost to live in a house should be connected to the underlying value of the house, it shouldn't be income based like college financial aid.

I prefer mortgage modifications focus on principal reduction, preferably under a shared appreciation set-up so that the party that finances the principal reduction (whether lender or govt. subsidy or some combination) is at least partially repaid if the home is sold in the future. Principal reduction will likely be more expensive or require some heavy handed govt. action on lenders. However, it also will be much more effective preventing foreclosures (thereby improving social welfare) and more fair. Income verification matters for these modifications, but at the end of the process to determine whether you can afford the house/loan as it does for regular mortgages.

There were proposals for this kind of plan last fall, but the administration went with the income approach. Now that it isn't working that well, it isn't too late to try something new. The foreclosure problem isn't going away anytime soon.

A good article in the New York Times highlights some of the issues. Some clips below, but I recommend the whole article.

The banks, and the government, are soon going to have to decide what to do about borrowers who are making the modified payments but have not provided the documents (to prove their income) after repeated efforts to obtain them. Should the banks just take the money and let the preliminary modification turn permanent? Or should they foreclose?Those decisions will affect just how fair the program is seen to be. If the banks allow those who do not submit documents to get by without doing so, it will appear unfair to those who told the truth about their income, and paid more than they might otherwise have been required to pay. If they do not, the wave of foreclosures could devastate more neighborhoods.
The rules now being applied, in some cases clumsily, had a Goldilocks quality; to get a modification a borrower had to need it a lot, but not too much. If the home was “underwater” — worth less than the balance of the loan securing it — but the borrower could still afford the payments, there was to be no modification. If the borrower was in such bad straits that default was likely even with a modification, again that borrower was supposed to be turned down.

"Tunnel Conveyance": Why bore 2 tunnels?

The BDCP unveiled much anticipated new cost estimates for a peripheral canal, and the new proposal for a tunnel conveyance under the Delta. Here is a powerpoint of the proposal.

I am no engineer, but I can intuitively see how there would be big economies of scale in constructing a large capacity surface canal. However, it seems that when you are boring giant tunnels, the marginal cost of increasing the capacity would be relatively high.

Thus, it is interesting to me to see that only a 2 bore parallel tunnel (with the same total 15,000 cfs capacity as the surface canal) was presented. I would be interested in seeing a single bore tunnel proposal. It seems plausible that it the cost of the project would decrease by more than the benefits, if you had only 1 bore. It also seems that a physical constraint on export capacity would also go a long way towards building trust with Delta, Northern California, and environmental interests that freshwater Delta flows would be sustained.

I don't claim to know the answer, I would just like to see the 1 bore option evaluated. I have no doubt that others inside the process have asked the same question, and it will be interesting to see if it is answered.

Many people criticize desalination because of cost and other issues, and these are very legitimate issues. However, one of the advantages of desalination over a peripheral canal for improving water supply reliability is that you can buy desalination capacity in smaller increments rather than a single $10 billion chunk like a peripheral canal. Given the multiple uncertainties involved in all strategies, I think that flexibility is valuable. If tunnels are not wildly more expensive (as this BDCP presentation suggests) maybe it is possible to add alternative conveyance in smaller increments that have less economic and environmental risk.

How foreclosures screw up real estate price data

In my families' 2008 house hunt, it took 10 offers before we finally had an offer accepted.

Many of the offers that didn't work out were attempted short sales or owners who couldn't negotiate on price because of high mortgage balances. Ultimately, several of these properties were foreclosed and are now coming on the market as REOs for substantially less than what I offerred for them originally (I bet those banks wish they would have taken my original offers now.)

For research purposes (and yes a little nosy rubbernecking too), I have taken a peak at a few of these properties after foreclosure to examine the before and after condition of the properties. In many cases, these don't even seem like the same property. The foreclosure process is definitely destructive.

The nicest of these properties just came back on the market in Stockton for $100k less than I offerred 18 months ago. However, the entire kitchen (even the cabinets) were stripped from the house (this was its nicest feature as it was a very expensive custom kitchen), a new AC unit was stolen, some landscaping features are gone or dead, the pool is disgusting and green, and I probably missed some other stuff. I would estimate that about $100,000 of damage (maybe more) was done to the property in the foreclosure process in the past year. That property will sell at a big discount, and it will distort any type of quality adjusted price index.

What a mess. I mean that both as a citizen seeing destruction to the community and as an economist trying to make sense of the real estate data.

Nice neighbors

This article in the Hanford Sentinel was interesting. Imagine your neighbor sells his surface water rights for millions, because they plan to make up for it by overdrafting the aquifer under your property. Phillip Erro is angry, and has a proposed solution. I don't think this is the ultimate solution, but it is a first step towards the agriculture community recognizing that some regulation of groundwater is necessary.

Fresno County farmer Philip Erro is circulating a petition asking Kings County supervisors to pass an ordinance prohibiting anybody from pumping ground water after selling their surface water rights.The target of Erro's petition is no mystery: Sandridge Partners, a Bay Area business partnership with 50,000 acres of farmland in western Kings County. Earlier this year, Sandridge sold $73 million in state water rights to the Mojave Water Agency in San Bernardino County...

Sandridge plans to pool ground water supplies from its land and adjacent property to make up for the 14,000-acre-foot allotment it sold to the Mojave Water Agency, according to Sandridge partner John Vidovich.Erro, dependent on those ground water supplies, wants Kings County to make it harder for somebody else to do what Sandridge did."Without that ordinance, there's no penalty for the landowner to sell surface rights ... and deplete the ground water, too," Erro said.

NUMMI closure effects on San Joaquin County

I think Mike Locke has the employment impacts of the NUMMI plant closure on San Joaquin County about right in this Stockton Record article. We built in an additional 1% increase (3,000 more unemployed) in the County unemployment rate by Spring 2010 into our September forecast and will do the same in our December update. Locke's estimates are roughly the same.

Although NUMMI plant is in the East Bay, it has a proportionally larger impact on the Northern San Joaquin Valley than the Bay Area. The recession does not end in the northern San Joaquin Valley until NUMMI closes in March 2010.

Michael Locke, president and chief executive of the San Joaquin Partnership, said up to 3,200 county residents - about 1 percent of the civilian work force - could lose their jobs with NUMMI's closure.
"We have 1,200 employees employed in nine manufacturing plants here in San Joaquin who are component manufacturers," he said Wednesday. "At this stage, we believe all of them will close with the closure of NUMMI.
Also, there are more than 800 direct NUMMI employees living in the county, including an estimated 300 in Tracy, 200 in Stockton and 200 in Manteca.
Finally, Locke said there are another 1,200 area residents employed by other vendors and service providers, which as Valley Mountain Express, a Manteca trucking company that moves auto parts from various NUMMI suppliers to the Fremont assembly plant.
"As that business is eliminated, they're significantly impacted," he said.

Olive Oil Boom Coming to the Valley?

The AP reports on the Valley's small, but fast growing olive oil industry. In an earlier post, I noted how olives made their first appearance on the San Joaquin County crop report this year and are poised to grow. According to this forecast, they will grow a lot.

I don't know much about the industry, but I have my doubts that the grower interest in olives has much to do with it being "water sipping" and I'm not sure that there are tremendous water gains to be had here compared to nuts and grapes. I suspect a lot of the interest is driven by the mechanical harvesting innovation, and a desire for an alternative to planting even more almonds and grapes. [Update: I am told olives require 2 feet of irrigation water compared to 3 to 4 feet for most Valley crops. I still don't think water is the primary motivation, but if water prices were higher and transfers more common, olives would look even more attractive.]

Whatever the reason, I look forward to enjoying high quality, local olive oils that I can afford. I saw a great presentation from Corto Olive here in San Joaquin County, and have bought the Sacramento Valley based California Olive Ranch products in the grocery before. I think those are the two biggest operations now, and it will be interesting to see how many more enter the market over time.

In the past 10 years, roughly 7.5 million trees have been tightly planted on 12,500 acres, an experiment growers hope will make California olive oil cheaper and fresher than that of their competitors. State officials estimate that in another decade there will be 100,000 acres of hedgerow trees producing 20 million gallons of oil to help sate Americans' 75 million gallons-a-year thirst — 99.99 percent of it now imported.
"There's a promising future ahead for this crop," says Dan Flynn, head of the Olive Research Center at UC-Davis. "With the growth in olive plantings, California could emerge as a world leader in a relatively short period of time. It might take 20 years, but that's how long it took with the other crops."
The "other crops" are almonds and canning tomatoes, once the domain of Spain and Italy but now controlled by California growers, who have the economic advantage of producing on large-scale farms.
California's oil boom results from a convergence of events that coincided with the new plantings: a chronic drought prompting farmers to seek water-sipping crops, consumers' shift toward fresh foods, their focus on heart-healthy oils, and recent findings that some oil imported as "extra virgin" might be of a lesser quality — if it's olive oil at all.

Unemployment Friday

California Unemployment Rate is Up to 12.5%, but payroll report shows gain.

Don't get excited about the 26,000 gain in CA non-farm payrolls. It comes on the heels of a downward revision of 25,000 for September. Thus, we are still stuck at 14.2 million non-farm jobs, a 1 million decrease from peak. It is better described as a sideways move, and I still think we have a few more negative months in our future before we see consistent job growth. Sideways is still good news and suggests that we are getting close to the bottom.

In contrast, the household survey (used to calculate the unemployment rate) shows a different pattern. A huge decrease in employment for October after a small decrease in September. Thus, we are up to 12.5% unemployment, a level I didn't anticipate we would reach until this winter.

In the metros, Sacramento appears to be the worst performer - driven primarily by weakness in consumer driven sectors such as retail and hospitality.

Modesto had a strikingly large seasonal jump in unemployment, all the way up to 16.6%, whereas Stockton's report is not as bad. Fresno did not have a great month either. Some drought effects are now showing up in farm and food manufacturing, as well as budget cut impacts at schools, Fresno State and local governments.

In the Bay area, there are signs that the worst may be over for the tech. sector, and the Bay area looks like it could have a better than average recovery, after a very steep decline over the past 12 months. With unemployment still around 12% in Silicon Valley, it is a long, long climb back to normal.

Sometimes the legislature corrects its mistakes

Door closed on California tax credit for new homes

Say goodbye, finally, to hopes of extending that $10,000 tax credit for buyers of new unoccupied homes in California.
It's all but dead for this year, says one lobbyist who patrols the state Legislature on behalf of home builders.
"We were disappointed neither of those bills panned out this year," said Allison Barnett of the California Building Industry Association

I have posted about why this is a bad idea in the past. Most recently here.

There are positive things govt we can and should do to cushion the housing market and builders in the short-run and long-run: 1) aggressive actions to stop preventable foreclosures, and 2) cutting excessive impact fees that greatly increase the cost of construction and long-run cost of living for CA residents.

Sticking Up For Sacramento Regional Sanitation District

Phil Isenberg is off the mark in today's Sac Bee when he suggests that we just blame the water exporters "by tradition," and rails on the Sacramento Sewer District for whining about the cost of upgrading their wastewater treatment plant. As a Sacramento resident and former mayor, he should at least acknowledge the cost of these upgrades on poor people in Sacramento area and should consider the effect on local jobs and prosperity.

Yes, there are many stressors on the Delta (pumps, wastewater, etc.) and it would be great if we fixed all of them. And yes, I agree with polluter pays and beneficiary pays. But we won't address everything and perhaps we shouldn't, because the costs of the "solutions" (i.e. peripheral canal, wastewater treatment plant upgrades, less agricultural production, recycling water) are large.

It is a question of costs vs benefits, and who should pay.

We have been hearing constantly about the costs of reduced pumping on farmers and farmworkers. Those costs are real, but typically exagerrated as I have pointed out repeatedly.

Have we have treated the South Valley ag unfairly as Isenberg suggests? Let's see.
1. Taxpayers built them a water delivery system. They were supposed to pay the government back without interest (no interest is a huge subsidy). They haven't paid.
2. There is an enormous pollution, drainage problem that results from this irrigation. They won't clean up their pollution, and think that taxpayers should pay to clean up their mess.
3. Now they want new dams for their water supply, and they want taxpayers to cover the cost again through state general obligation bonds.
4. They refuse conservation mandates or groundwater regulation. They can't afford it.
5. Downstream diversions (through the pumps) are proven to cause serious damage to the Delta, but farmers don't think we should reduce those deliveries because of the cost to them.

Do you see beneficiary pays here? What about polluter pays? Are they complaining about the costs to them?

Now, let's look at Sacramento Sewer.
1. They have a wastewater treatment system. Their ratepayers paid for it. They repay their bonds with interest.
2. I'm no wastewater expert, but I am told that their secondary treatment satisfies all water pollution regulations at the moment (that could change). They could treat wastewater to a higher level, and it would be helpful to the Delta if they did (how helpful? we don't know.). If the peripheral canal is built to help exporters, the state's largest freshwater supply intakes will surround the Sacramento wastewater outflow and it will then certainly require the highest level of treatment. There will be large costs to the upgrades (up to a billion in capital costs, and lots of electricity/operating costs thereafter). The beneficiaries of that investment is the Delta environment, but also the downstream exporters who will get much better quality water as a result which will reduce their downstream water treatment costs. So who should pay? Isenberg says Sacramento ratepayers should pay (the polluters) and to suggest that downstream beneficiaries pay is whining.

I am NOT saying that Sac Sewer shouldn't clean up or that they should not be responsible for any costs.

We need to balance the costs with the benefits for all options. And we need to apply polluter pay and beneficiary pays principals for all options.

But Isenberg applies these standards inconsistently. His Delta Vision report never even mentioned increasing water prices and ending water subsidies as one of their strategies when it should be the #1 California water strategy. Apparantly, he favors continued subsidies for agricultural water exporters.

On the other hand, what does Isenberg have to say to a poor family in Sacramento whose sewer bill could now consume 10% of their income? Stop whining!

Reminds me of Phil Gramm, McCain's economic advisor who resigned after saying "we are a nation of whiners", and it's only a "mental recession."

[This post has been edited from the original. I accidently hit the publish button instead of save draft and the original had many more errors and typos than usual. It even fell short of blog standards.]

Good article on immigration and farm jobs.

Just read Philip Martin's thoughtful article on immigration and farm jobs in the UC-Davis ARE Update.

the U.S. farm labor market resembles a revolving door,absorbing newcomers from abroad and retaining them for less than a decade.
The National Agricultural Worker Survey (NAWS) found that a sixth of farm workers are newcomers, or living in the United States less than a year, equivalent to 100% turnover every six years.

I am not sure what is the best immigration policy. I do believe that immigrants in the Valley (legal or not) will benefit most when economic development efforts in the Valley focus on creating non-farm jobs (their future), and improving the quality of farm jobs (so that they may retain workers longer).

Those who have done well under the status quo (primarily landowners) will continue to push an economic development agenda emphasising reliable flows of of subsidized water and reliable flows of cheap labor through the "revolving door." Since the west side of the Valley is the poorest place in the U.S., it would seem that this agenda has been an economic development failure and a new approach is needed.

One Year of ValleyEcon Blog

It was one year ago today that I made my first Blog post. Since then, I have made 180 posts, one roughly every 2 days.

When I started, there were about 5 hits a day. Now, the blog gets about 30 visits on a typical weekday and is growing slowly. There are a small number of frequent visitors who are very interested in water posts, visitors from state and federal government who seem equally interested in water and economic outlook posts, and google search hits that span all topics but are very interested in housing/foreclosure posts.

The highest number of visitors was the evening a few months ago when Sean Hannity broadcast live from the Central Valley, which apparantly led to a huge spike in people around the world Googling Delta Smelt, some of which landed on this blog.

Although this is a general blog about regional economic issues, the most popular posts (in terms of number of hits) are about Delta water issues and the peripheral canal, so the blog has evolved where about 50% of posts are about water.

So, what was the topic of the inaugaural post on November 12, 2008? The PPIC study on the Delta, and my critique of it. I wish that events over the past year would have made this old post irrelevant, but that isn't the case.

We are all still waiting for the PPIC authors to show their pro-peripheral canal conclusion is robust to more realistic data assumptions and they have had plenty of time to rerun the models now. [Note: Even their original analysis didn't show a peripheral canal was the best strategy, just that it was the cheapest under a set of unrealistic assumptions. The key unrealistic assumptions are that desalination and water recycling technology will go backwards rather than improve over they next 40 years, and that CA population will grow much faster than projected. These aren't the only problems, the list of errors keeps growing.]

Mother Jones' Dustbowl Article

The brief bio of Javier Vaca in this Mother Jones article about the drought is a pretty good summary of the Valley's poverty problem.

When I meet Javier Vaca.. he's been walking for three days. The skinny 18-year-old is being carried along in a procession of 7,000 farmworkers and farmers as it crosses California's Central Valley... He's been told only one thing that matters: Marching 50 miles might earn him a job.
When the housing boom imploded last year, he lost a $14-an-hour construction job, a job that had allowed this son of farmworkers to drop out of high school, buy a car, and rent an apartment for his young wife and baby in Fresno. It took him a month to find more work, this time picking peaches at less than half his previous wage. Then the worst drought in more than a decade hit, a court order to protect an endangered fish cut off water to the valley's farmers... Vaca now works one day a week while his family survives on welfare and food stamps.

Vaca's story is all too common in the Valley. There are many problems for the local economy illustrated by Vaca's story and I will list them in my view of their order of importance.

1. High school dropout, teen age parent.
2. Construction industry has collapsed.
3. Farm jobs pay miserably (1/2 the rate of construction labor) are physically demanding, and provide only seasonal work and a life of poverty even when water is plentiful.
4. Water shortages (drought and environmental causes) have reduced the number of farm jobs in the Valley by 2-3% this year (less than the overall decline in non-farm employment in CA and the U.S. this year).

This article hits all the key points, but in my view, still leaves the misleading impression that more water is the solution.

Later in the article, it also visits a new build neighborhood in Mendota where half the houses are foreclosed, vacant, and being vandalized and stripped of fixtures. Then it visits an alley in the same town where people are illegally living in garages, a situation that isn't new at all in this area that was the poorest in the U.S. before the drought, and in even worse shape now.

I wish people would see the human toll of the collapse of the construction industry in the same way as the "dust bowls" human toll. It has caused far far more unemployment, hunger and lost wages than this drought, yet many view it as something that has just hurt property flippers and greedy real estate developers. Articles like this make it sound like construction has merely slipped back to a normal level after an unsustanable frothy period. In fact, the industry that has completely dried up in an unprecendented, historic collapse. And unlike places like Florida, there isn't much of a housing glut here, just a foreclosure crisis. Decent, affordable housing is still quite hard to find, and we could use more of it (especially multi-family homes).

Home building is down 90% in the Valley and has eliminated about 50,000 jobs, and water shortages have cut agriculture production about 3% in value and cost less than 10,000 jobs.

So, yes water is a problem and creating hardships, but there are lots of human tragedies here.

What the Valley needs most in the short-run (and what would benefit Javier Vaca the most) is a real solution to the foreclosure crisis and construction crisis. If construction could even return to 25% of its previous level, it would generate far more jobs and income than turning on the pumps.

What the Valley needs most in the long-run is improved education and workforce skills to match the needs of a 21st century economy. Another thing the Valley needs to support a 21st century economy is better environmental quality, that means less air pollution and rivers that actually contain water and fish. And it needs a healthy agriculture sector, but not necessarily a bigger agriculture sector.

Stockton is in a fightin' mood

I enjoy Michael Fitzgerald's writing at the Stockton Record. This recent article does a good job of capturing the local sentiment that the city is always getting screwed over by the state. The sudden prison hospital announcement (not 1 but 2!) and the Governator's celebration of the water package in Stockton (after ignoring the region through the whole debate) brought those feelings to a head. This city is riled up. Fitzgerald says its time for Stockton to fight.

In a staggering display of insensitivity, the governor of California last week chose Stockton as the spot in which to get goose bumps over passage of the state water package.

"Part of this package," gushed Arnold Schwarzenegger, "is to ... build a canal around the Delta. ... That was great news this morning."
Pause for applause. No applause...

May I suggest why? It's not the cynical subversion of the legislative process...

It's not the Quisling collaboration of certain big environmental groups...

It's not the 1950s plan for dams and canals...

It's the presumption that this region is such an afterthought that it really doesn't matter whether its residents swallow the transparent greenwashing and legislative charade meant to conceal this late-model Owens Valley water grab.

Same with prison officials…Without public hearing, they sent out a formal Notice of Decision...

Given all that, plus the prison system's history of shamelessly broken promises, I'm surprised they could keep a straight face. They must inject themselves with Botox.

I'll make a prediction about the other giant project involving this area, high-speed rail. I predict if that system ever gets built, the powers that be will renege on their promise to beef up traditional rail over the Altamont.
They'll shrug helplessly and say they have no choice: there's a budget crisis, a court order, unforeseeable new circumstances, a flat tire, their dog ate it...

But there is a point in all these endeavors when the fight moves into the courts. That, my friends, is a different kettle of smelt.

The law levels the playing field, more or less. Then beware, ye backroom boys; ye who rigged the political process; ye who funded the biased study; ye Astroturf; ye to whom the environmental impact report was no more than formality…

Maybe the city needs to imitate the water exporters get Burson-Marsteller and a comedian to get their message out.

[My apologies to Mr. Fitzgerald for chopping up his essay. click here to read the whole thing.]

Can anyone at state universities count jobs?

Since I have been so critical of inflated job loss estimates from UC-Davis and Sacramento State, I couldn't help noticing the news that California State University reported that federal stimulus saved 24,000 jobs in the CSU system this year.

Someone in the university system should have objected to reporting the numbers because "they don't make sense," California's stimulus watchdog official said Friday.
CSU reported late last week that federal stimulus dollars let them retain about 26,000 full-time-equivalent positions. That's more than half of CSU's work force, and it's more jobs than the state of Texas and 44 other states reported saving with stimulus money.
"If I were them, and I followed instructions to a T, and I came up with a number like that, I would have said, 'Whoa,' " said Laura Chick, the state's inspector general for Recovery Act funds. "Then I would have been on the phone saying, 'These numbers don't look right.' "

Someone also should have said "these numbers don't look right" when Sac State estimated over 1 million lost jobs from small business regulations, and UC Davis estimated 80,000 lost jobs from reduced water deliveries.

Fortunately, the people of California have an alternative to public universities for both their education and their job counting.

Legislature Passes Water Package

The $11 Billion general obligation bond is disapointing, and I expect there is a high probability that it will be defeated by voters next fall. Even if the state was in better fiscal health, I would still be oppossed to the bond as a matter of policy. The vast majority of the costs in this bond (whether dams or environmental mitigation costs) should be paid by water users, not general taxpayers.

Passing the bond is approving a government subsidy for consuming a scarce resource whose supply causes environmental damage. The subsidy keeps prices artficially low and discourages conservation. Similar subsidies for Central Valley Project water are largely to blame for the mess we are in now.

If anything water consumption should be taxed, not subsidized. Forcing water exporters to pay environmental mitigation costs in addition to the cost of the supply infrastructure is essentially equivalent to a proper tax.

My thoughts on the governance package are complex and incomplete, and I am unsure of the details of the final package. I can say that I am disapointed in the process, the make-up of the 7 member Delta council, and I am very disapointed that the peripheral canal is still not being subjected to a proper cost-benefit analysis. It isn't mine or anyone elses preferred bill, that's part of political compromise. Is it an improvement on the status quo? I don't know.

Nature Conservancy revises answer on Delta water exports

In a post from January, I pointed out that the Nature Conservancy was making the absurd claim that ending Delta water exports would be bad for the environment as part of their justification for endorsing a peripheral canal. This quote was on their website.

Nature.org: Why not just stop exporting water from the Delta?
Anthony Saracino: Completely eliminating water exports from the Delta would force millions of people to draw their water from other sources, and that could cause even greater harm to the natural environment that Californians treasure

If you click the link in this old post, you will see that TNC has changed their answer. I have no idea when they made the change or why, but it now says.

Nature.org: Why not just stop exporting water from the Delta?
Anthony Saracino: Completely eliminating water exports from the Delta will hurt California. Farming plays an integral $3.6B role in California’s economy. And, even with better water conservation and efficiency, southern California is decades away from deriving sufficient water from other sources.

At least this response is more honest, it is a pure economic argument for building a peripheral canal. Of course, that is a strange argument for an environmental group. Unless you are TNC and have already received state grants for conserving land in the Delta and a peripheral canal project would likely generate a lot more of these public environmental mitigation funds.

[Update 11/3: I should point out making an economic argument isn't the same as making a good economi argument. I used to support TNC back when they were apolitical and just conserved land, now they seem to have gotten themselves caught up in conflicts of interest.]

Well Done Rep. Huber

From Capitol Weekly:

Raising the stakes in the discussion over state water policy, a Sacramento-area lawmaker introduced legislation Thursday that would block the construction of a Peripheral Canal unless it was expressly authorized by the Legislature.

The special-session bill by Assemblywoman Alyson Huber, D-El Dorado Hills, also requires the Legislature's nonpartisan fiscal adviser, the Legislative Analyst, to put together an economic feasibility study of the potential project.

"I am very concerned about the direction in which the water discussions are heading. I am authoring the bill to make sure we get answers to very important questions," Huber said.

Cost estimates of $6 billion to $12 billion for the huge public works project have been provided by its supporters, but Huber said lawmakers need an independent, nonpartisan analysis to decide the issue.

No, the PPIC study does not even come close to cutting it as an adequate analysis to decide the issue. (Click on the peripheral canal tab to find some posts about that study.)

I have been consistently critical of the Department of Water Resources and the Bay Delta Conservation Plan for not conducting a benefit-cost study of the peripheral canal, and seemingly having no interest or intention in conducting one. It is absolutely irresponsible to consider a project this expensive, and this controversial without a cost-benefit or feasibility analysis. Since DWR is not acting responsibly, it is correct for the legislature to require their authorization.

Although I am perceived by some as a peripheral canal opponent, my position is that I could be convinced to support it by an honest, well-executed cost-benefit study. The evidence I have seen to date makes me skeptical that a peripheral canal is worth the cost (which we still don't know except that it keeps going up), so I am inclined to oppose it until there is a sound argument for it. To date, canal advocates have been pushing deeply flawed research, and making distorted and dishonest economic arguments. If the economic case is so compelling, it should not be necessary to exaggerate it.

California BIA makes a silly argument for extending tax credit.

I am generally sympathetic to many of the building industry's political causes (e.g. lower impact fees and regulation), but their push to renew the new homebuyer tax credit is just silly. Even if it did stimulate new home purchases, I think this tax credit is bad policy. However, the construction industry's own data don't even show that it stimulates new home purchases. That won't stop them from claiming that it does to argue for another $100 million government handout. Here is the new press release announcing the latest data from CIRB.

They find new home permits dropped a whopping 1% between August and September. If you look at their report, you will see that seasonally-adjusted permits actually increased (in other words it is normal for permits to drop a little between August and September).

Since the discontinuation of the popular homebuyer tax credit, we have seen a significant drop in traffic these past few months which continues to drag down new-home construction, and in turn, job creation,” said Liz Snow, CBIA’s President and CEO.

The tax credit program only lasted for four months due to its growing popularity, but we saw a significant increase in traffic during that time, which led to an increase in job-generating new-home construction,” said Snow. “Extending the program would help continue that positive momentum and would help reinvigorate the overall economy.”

This report also notes that they have revised down their new home permit forecast to 37,700 for 2009. Before this new home tax credit was passed in February (it was in place March through June), CIRB was forecasting well over 50,000 permits for 2009. For every month of 2009, permits have been in the 30,000 annual pace range, and there is no difference for the months the tax credit has been in place. I don't see how you can spin this data as showing the tax credit was successful. The new home buyer tax credit was a pure handout, although it lasted longer than originally expected because home sales were so low.

I should also note that new home construction has been one of our most accurate forecasts for the year. We have been forecasting 32-36,000 since the beginning of the year, whereas most forecasters (including CIRB and UCLA) were predicting permits/starts between 50k and 70k.

Stockton needs to get behind the prison hospital.

I don't completely understand the local opposition to the prison hospital project for Stockton.

We have local leaders sending public money to entertainment venues, and then oppose a high-wage export industry (supplying health care to the state prison system). They want the public to subsidize higher-class entertainment, but are opposed to a higher paying job that might attract their doctor away. This is a very harsh statement towards some community leaders that I generally like and support, but I have to wonder about their motives here. Are they thinking about making Stockton a better place for everyone or just themselves?

We are in a cyclical construction depression that is going to last for a few more years until homebuilding picks up. This is a $1 billion construction project slated for 2010-2012. It's huge and perfectly timed. Once it opens, it will bring 2,500-3,000 jobs that pay much higher than the average wage in the region, and an annual payroll of nearly $300 million per year.

The concerns of the local chamber of commerce and some elected officials are that the prison hospital will attract health care workers from local hospitals, and exacerbate a shortage of doctors and health care workers in the San Joaquin Valley. In addition, there are concerns that the inmate population would attract families needing social services to the area.

Those concerns are valid, but I think they are small compared to the benefits, and we have several years to plan and address them. In this recession, there are thousands of people training for healthcare jobs right now because "experts" like me keep telling them that is where the future jobs are. With housing prices down and California amenities, we can attract that workforce to Stockton with jobs.

Stockton has thrown public money at restaurants, entertainment and minor league sports; enterprises that look nice but mostly create low wage jobs (or at worse, just move them around town shifting local entertainment spending from one neighborhood to another). We need to do more to create the income and employment base that demands those amenities, and to create a critical mass of higher education, higher income citizens that will make it easier to attract better jobs.

If we don't have the skilled workforce for the hospital now, then let's train them or recruit high education, high income folks to move here. Those who are only interested in low skills jobs shouldn't worry. The hospital will create plenty of burger flipper, janitorial, and laundry jobs too.

Update (10/30): I should add that I do understand why local leaders are upset that the only facilities the state seems to place in Stockton/San Joaquin County are prisons. For example, Stockton is the largest metropolitan area in California without a state university (and is probably the largest metro area in the U.S. without a public college or university, someone should check this). If the state had invested appropriately in education in the area, the skilled labor stress of this hospital on the region would be of little concern.

Aral Sea Restoration

This weekend's AP story on restoration of the Aral Sea in the former Soviet Union is interesting.

The Aral Sea was once the world's fourth-largest body of fresh water, covering an area the size of Ireland. But then the nations around it became part of the Soviet Union. With their passion for planned economics and giant, nature-reversing projects, the communists diverted the rivers that fed the inland sea and used them to irrigate vast cotton fields. ...

The payoff was a bonanza of cotton to supply the Soviet market as well as Cuba and the communist countries of Europe. The fishermen paid the price.

At times, I have compared the Valley's vast irrigation projects to soviet-style central planning. Can we learn from Kazakhstan?

Public Employee Pensions: People are angry, or are they?

Today, I met with 3 different small groups of businessmen (yes, they were all men). In every meeting, the cost of public employee pensions and salaries was raised as a huge issue. Public safety workers (police, fire, and prison guards) are often singled out. One meeting was at a golf club, and one of the attendees was pointing out retired cops he knew walking to the tee.

This is by far the most common concern that I hear when I talk economics in the community, and it is coming up more and more. Anger and frustration in the business community seems to be growing. I get requests to talk to government officials about the issue with comments like they will listen to you, but not to us/business.

I agree that there is a big problem with public pensions, and would like to see a shift to defined contribution (401k style) plans (with social security particpation like private sector employees). Salaries are less clear, state and local public salaries seem to be very high in some areas and low in others.

Given that background, I was surprised by the numbers in this widely publicized poll. Clearly, my business audiences are not a random sample of California citizens.

Aguanomics on the farm jobs debate.

Today, Aguanomics has a lengthy post on the debate between myself and UC-Davis researchers regarding the number of farm jobs lost in the drought. If you are interested in this debate, I recommend you read it.

I appreciate David's effort to clarify this issue, as it has caused much confusion.

Unemployment Friday: 1 million lost job threshold reached

Don't get too excited about California's 0.1% decrease in unemployment. We are at 12.2% and we are forecasting the peak at 12.6% next winter spring. The pattern is going to be 0.2 up, 0.1 down over the next 6 months.

On the payroll side, September had a 39,300 drop in non-farm payrolls. Last months loss of less than 10,000 was a positive surprise and this month was a negative surprise. With this decline, we have now surpassed 1 million lost jobs for this recession. The peak was 15.202 million jobs in July 2007, and we are now at 14.200 million 26 months later. We are forecasting a bottom of 14.138 million this winter, so about 60,000 additional lost jobs over the next few months if we are correct.

As it is every month, the headline in this jobs report is the continuing depression in the Construction industry. The second headline is that this report gives us our first good read on cutbacks in public schools and local governments. After construction, this was the largest decline.

In the Valley, school systems have opened 2009 with about 1,000 fewer employees in each of San Joaquin, Stanislaus, and Fresno Counties. Sacramento metro area education jobs did not decline. I think this data is still a little noisy and there may be some revisions in the coming months.

This is the peak harvest month, and farm employment in the Valley continues to show virtually no change from a year ago, despite the water crisis. Without doubt, there are isolated areas of farm unemployment and reduced hours for some workers (due to both reduced planting and increased competition for jobs from unemployed construction and service workers).

Should I ask Harris Ranch for a donation?

Harris Ranch is threatening to withdraw a $500,000 donation from Cal Poly because they are upset over a speaking invitation to Michael Pollan and some of the views of their faculty.

Although the Michael Pollan complaint is getting headlines, this second complaint in the long letter from the Harris Ranch CEO to the Cal Poly President got my attention too.

My second issue is of still greater concern, and has provided me with both displeasure and outright anger towards the university. In a recent (09/14/09) phone conversation Mike Smith had with Rob Rutherford in the Animal Science Department, ... Mr. Rutherford then had the audacity to offer Mike an entirely unsolicited opinion that water should have NEVER been provided to farmers on the west side of the San Joaquin Valley. As Harris Ranch operates one of the largest farms in this region, Mr. Rutherford implies that Harris Ranch should not be farming! He went on to offer that this acreage should be converted back to the native forages once found there.

I think whether water should have ever been provided to west side farmers like Harris Ranch is an interesting academic question. Maybe their donation can fund a study and panel discussion that takes up that question.

How much public money do furloughs save?

This article in the Sac Bee says furlough savings are "illusory" in many cases.

Except for very limited, short-term uses; I really dislike furloughs. They are hell on morale, drive away the best workers who have better opportunities, and often don't save as much as one thinks. There are long term costs on the quality and cost of an organization's workforce (in addition to morale, a cost example is that furloughed employees tend to bank up vacation time and cash it in later at a higher salary level). When you have large or long-term budget issues, I think layoffs are a preferable way to reduce payroll costs.

At 3 furlough days per month for an extended period, the state has definitely crossed the line for where furloughs make sense.

Beacon Economics Rips Sacramento State Study on Regulatory Costs

Recently, Dean Sanjay Varshney of Sacramento State has made a big splash with a new bi-annual economic forecast for Sacramento and some high profile consulting reports on economic policies. I like competition and have refrained from commenting on his new Sac State forecast or any of his consulting reports... until now.

On Monday, the Sacramento Bee ran an op-ed by Chris Thornburg and Jon Haveman from Beacon Economics that ripped Varshney's new report on the cost of regulations on small business in California. Varshney claims regulations cost the California economy $500 billion per year. Beacon says,

Disturbingly, this result is one of the worse examples of schlock science we've ever seen. And chillingly, it is being held up by a number of state leaders... This is truly bad analysis, and it matters because it once again points to the urgent need to have policy research vetted through third parties for methodological soundness and intellectual honesty... The state must make it a priority to base policy decisions on rigorous research rather than pseudoanalysis that twists or flat-out ignores the truth.

Ouch. That's about as harsh as it gets without resorting to personal attacks. However, I actually sent Thornburg and Haveman an email with the title, "You guys are too kind." I wasn't commenting on their manners, but the fact that their op-ed only explained half of the problem with the Sac State study.

The Sac State study has 2 parts: 1. a regression estimating Gross State Product as a function of indicators from Forbes magazine and 2. enters the loss in GSP estimated from this regression into an input-output model (IMPLAN) to get multiplier effects. The Beacon op-ed accurately explains the problem with the first part, but not the second (probably due to word limits or an attempt to keep it simple). The error in the 2nd part may be even worse. This is one of the worst abuses of IMPLAN I have ever seen.

IMPLAN is a very useful input-output economic model. I use it all the time. However, it is also the most misused model in economic research. Because it is relatively cheap and easy to use (as far as economic modeling software goes), there are a lot of people out there doing bad consulting with it. IMPLAN studies often double count impacts and fail to make proper adjustments when the modeling or data assumptions don't hold. Many credible academics won't even use input-output models at all because of these notorious pitfalls. In this case, it is simply inappropriate to use IMPLAN at all since the first step of Varshney and Associates regression is econometrically (I use the term loosely here) estimating a macro output variable (GSP) directly. Even if you trust the first part of their study (and you shouldn't), the 2nd stage is simply double and triple counting the effects of the first stage.

I think if we had a Middle Ages style plague that killed 20% of the state's population, the impact would probably be less than Varshney's $500 billion estimate of regulatory effects. Yes, regulations are costly, but exagerrated studies like these are very destructive to real policy debates. The KQED blog gives a little of the back story on the study here.

This is the 2nd time in a few months that Varshney and Associates have issued a report with exagerrated costs of regulations. A few months ago, they released this report commisioned by a small business group stating that AB 32 (greenhouse gas reduction policy) will cost the California economy over 1.1 million jobs (more than have been lost in the current recession, except the AB 32 effect is permanent). I agree with them that AB 32 regulation will have costs on the CA economy, but Varshney's job loss and cost numbers are unbelievably large and come from poor research methods (I'll spare you the details here).

I have nothing personal against Dean Varshney, but I hope his public policy consulting business fails. Like a good businessman, he knows what his clients want to hear and delivers, but these reports are very misleading. I recommend his clients give me a call. I am confident our Center can produce a better study for a lower price. You may not get the number you want, but it will stand up much better to review.

Postscript:
In an earlier post, I scored Beacon Economics the winner in a debate with the Milkin Institute over manufacturing jobs.

Update (Oct. 15):
In a complete coincidence, 12 hours after I posted this, Dean Varshney walked into my office at Pacific and introduced himself. He was on campus for another meeting, and just wanted to take a moment to meet me and suggest that we might collaborate on a project in the future. He was very nice and obviously had no idea that I just posted this criticism. I was surprised and felt a little guilty inside, so I briefly said nice to meet you too and exchanged small talk. In hindsight, I probably should have politely told him that I think he is working on interesting and important topics, but his research has serious problems.

I like him, and I have heard from others that he is a good business school Dean. Like many successful executives, he appears to be very good at building relationships and creating opportunities. That said, his economic research products need a lot of help. On the other hand, I'm pretty good at the research, but need to work on public relations. Maybe we would make good business partners :)

The Valley's #1 Economic Problem

From a coffee with the Mayor meeting on economic development in Stockton.

When the subject of unemployment came up, Johnston asked Mike Locke of San Joaquin Partnership, an economic development group, to describe the group's attempt to recruit a retail distribution center.
Locke said Stockton was competing with Phoenix for a facility that was to employee some 900 people as Macy's Inc. expanded its online operations.
"We lost that project because of what they defined as a rough workforce," he said.

This is not just a Stockton problem, but a problem for the entire San Joaquin Valley.

The region has generally been unsuccesful in attracting private industry outside the agriculture sector. If you spend any time with local economic developers, you know the primary reason is that companies are scared off by the workforce indicators such as literacy and education levels. Although some California problems such as costs and regulation also cause problems, workforce skills are typically the biggest negative factor.

These aren't high-tech companies, but semi-skilled employers like light manufacturing, distribution centers, customer service centers, etc. and are exactly what the Valley needs. I think some of these companies get too scared off by the numbers, and will be able to find the workers they need here.

If environmental investments are pork, what are dams?

Some California legislators are attempting to reduce the proposed $12 billion water bond by cutting investments in the environment while protecting money for new dams (so much for the co-equal goals of environment and water supply).

“There was an awful lot of environmental pork in there, we thought,” said Tom Berryhill, R-Modesto.

Berryhill may be right about this, but it isn't that clear that supporters of environmental investment are motivated by steering public dollars to their districts and political supporters. However, the dams he wants is most definitely bringing home the bacon to his Valley farm supporters.

If we strip all the pork from the water bonds, is there anything left?

Mortgage Assistance for the Unemployed

Proposals for the government to provide temporary assistance making mortgage payments to the unemployed are gaining some traction.

In earlier posts on this blog, I have argued that the primary driver of foreclosures is negative equity (aka underwater) and that foreclosure prevention efforts are likely to be ineffective unless they involve principal reduction in some way (such as shared appreciation mortgages, where homeowners would share any appreciation at the time of a future sale with the government or lender who provided principal reduction in the past). Although there are reports that more lenders are now including principal reduction as part of modifications, it doesn't seem that principal reduction is politically viable as public policy.

The new proposals are based on the idea that preventable foreclosures have a "double trigger." 1. Homeowners must be underwater on their mortgage, and 2. a triggering event that reduces income such as job loss. Details vary, but the idea is that the unemployed would get a voucher towards their mortgage payment that is proportional to the loss in income or based on formula connected to the local real estate market conditions.

The idea is that this is very targeted assistance at the most preventable foreclosures. Deeply underwater homeowners (such as those who bought at the peak in the Valley with little down and are probably 50% underwater) are considered inevitable foreclosures.

I agree that this might be a plan that provides the most foreclosure prevention "bang for the buck," but I'm not sure it is the best plan for the economy or that it is equitable. For example, one problem in the real estate downturn is that households are trapped in their homes and less willing and able to relocate to find new employment. Do we want a policy that discourages the unemployed from moving to find employment?

Because I believe that foreclosure prevention is so critical to the Valley economy at the moment, I am inclined to support these proposals despite my reservations and preference for other mechanisms. To learn more, see this policy brief from the Boston Fed, an excerpt is below.

By this logic, the best way to prevent foreclosures is to offer borrowers significant but temporary assistance in paying their mortgages. Such assistance allows borrowers who are suffering adverse life events the chance to “get back on their feet” without having to give up their homes. Unfortunately, most foreclosure proposals today offer borrowers moderate but permanent assistance, through reductions in principal, interest, or both. These reductions are likely to be too small to do much good for many borrowers.

California Bonds

As the largest state in the U.S. with above average income, California should be able to borrow money at lower costs than smaller, poorer states. Instead, California has the lowest bond rating in the U.S. and is paying a premium on our debt. It's inexcusable.

For example, something simple like the recent revenue anticipation notes with maturities next spring are costing CA up to a 1.5% annual interest rate. That may sound cheap, but 6 month U.S. Treasuries are curriently yielding 0.1-0.2% and other states are doing similar borrowing at rates well below 1%. CA is paying similar premiums on long-run debt, and the state's long-run fiscal issues are just as bad as the short-run.

The cost is hundreds of millions of dollars in unnecessary interest payments. I would advise the state not to consider any additional bonds until our bond ratings and interest rates are in line with other states.

This report from Treasurer Bill Lockyer on debt affordability is worth reading.

This year’s report concludes the fiscal earthquake that struck California in 2008 and 2009 will cause debt service to consume a larger piece of the State’s General Fund The portion will grow from the current 6.7 percent to 10 percent or more by the middle of the next decade ... The current debate about how to finance improvements to California’s water infrastructure system provides a timely and pressing case study Some have suggested paying the entire cost with State general obligation bonds, which must be repaid from the General Fund But this report makes clear that further increasing the General Fund’s debt burden, especially in the next three difficult budgets, would require cutting even deeper into crucial services already reeling from billions of dollars in reductions. The case for user funding for most water system improvements is compelling, both as a matter of equity and fiscal prudence.

From Grossly Exagerrated to Too High

In our report on water impacts on San Joaquin Valley unemployment, I harshly criticized the estimates from UC-Davis calling their estimate of 35,000 lost jobs (which was revised down from earlier estimates as high as 90,000) "grossly exagerrated." I am happy that this criticism prompted Dr. Howitt at UC-Davis to take another look at their earlier work. The result is this new report that pegs lost jobs from water shortages at 21,000 of which they attribute 5,000 to environmental restrictions for endangered species and 16,000 to drought.

I still think this estimate is much too high, but it is a substantial improvement over the earlier numbers. Importantly, this new report acknowledges a major error in the earlier estimates. I give Dr. Howitt and his team a lot of credit for acknowledging that and doing something about it quickly.

Without getting too mired in econo-babble, let me try to briefly explain why this number is too high. If you apply the lost revenue (or fallowed acreage or other plausible drought impact) into a basic economic impact model, you will get an estimate of 10,000 to 12,000 lost jobs from water shortages (this includes multiplier or ripple effects). Dr. Howitt and I agree on this. There are many reasons why an economist could argue that this estimate is too high or too low and adjust the model or results.

The new UC-Davis study ignores or dismisses reasons to lower the estimate, and makes 4 adjustments to the model to increase the estimates up to 21,000. I believe the evidence and arguments for downward adjustments are much stronger, and that is why our report adjusted the lost job estimate down to 6,000.

I think the best way to evaluate these estimates is simply to look at the current jobs data and determine which is most plausible. When looking at this data, it is important to recognize seasonality. Both of our studies' lost jobs estimates are an annual average. Thus, my 6,000 estimate is more likely 4,000 in winter and 8,000 during the peak harvest season; and Dr. Howitt's 21,000 would be something like 15,000 in winter and 30,000 now.

There is widespread agreement that almost all the drought impacts on agriculture are concentrated in Fresno, Kings, and Kern counties. The latest official payroll data for August show these 3 counties have lost a total of 22,000 fewer jobs than a year ago across all sectors of the economy (farm jobs are down by about 1,000).

Thus, the implication of the latest UC-Davis estimates is that these 3 counties would be showing NO job loss (or possibly a gain) if full water deliveries were made. In the midst of the "great recession" and foreclosure crisis, do you think it is plausible that these counties would be virtually the only place in America to gain jobs this year if only they had full water supply?

UC tackles water crisis ... and misinforms the public

I just perused the latest report from UC President Mark Yudof, "YOUR University of California." Most of the issue highlights the expertise the UC system brings to the state's water debate. With such an impressive set of scholars across institutions, it is unfortunate that a small group of UC-Davis faculty are dominating the public discussion. This newsletter had some interesting sound bites from the UC-Davis crew.

Under the bold headline, Economic Devastation, is the following.

Water shortages in the Central Valley could mean up to $960 million in lost income and a loss of 16,150 to 23,000 jobs, according to UC Davis' latest provisional estimates.

I am happy to see these "provisional estimates" are getting closer to reality, and if they cut another 10,000 from their job loss estimates they will finally have it about right. However, this is nothing for the UC President to brag about, as UC-Davis has done a very poor job of informing the public on this issue. Their earlier, incorrect estimates of 35,000 to 90,000 jobs continue to be cited repeatedly and have done much to fuel hysteria, pollute and politicize the public discussion. It is our report from the University of the Pacific that pointed out the errors, provided more realistic estimates of 6,000 lost jobs, informed and calmed the rhetoric of some of the water export interests, and sent the UC-Davis team back to the drawing board.

Later in the magazine, we hear from Peter Moyle, a renowned fisheries biologist, straying away from natural science and into political science.

The best thing for fish and the environment would be to stop pumping and water diversions, according to a 2008 research report. "We figure that's not going to happen," said Moyle, co-author of the Public Policy Institute of California report that calls for the construction of a peripheral canal and for allowing some Delta islands to flood permanently.

The influential PPIC/UC-Davis report is a political document in scientific clothes. Its authors love to throw around the word "scientific" thinking when they discuss it, even though they did not practice it in their research. In this review of the report, I pointed out a few of the ways they distorted the economics to favor the peripheral canal, choosing values for key water cost and demand drivers that contradict their own previous work on the subject. However, even those efforts were not enough to prove the peripheral canal is the best option, so they just state an opinion that the canal is the best choice because helping the environment is too expensive. They are clearly endorsing the canal on the grounds of political feasibility (note the comment in the quote above that they figure reduced water exports are not going to happen). Unfortunately, the authors are scientists (many of whom have received considerable research $$ from those who would benefit from a canal), and their canal endorsement is seen as a independent, impartial, and scientific. [To be fair to Dr. Moyle, he didn't do the economic analysis in the report, and surely trusted that it was being done correctly. I only call him out because he is the one quoted in this UC newsletter. However, I am baffled that that he signed off on the canal recommendation since the PPIC could only justify it by assuming that fish aren't worth very much.]

I hope we hear more from other UC experts in the future. For example, David Sunding of UC-Berkeley is making good sense in this excerpt from the magazine.

Historically, California has dealt with increased water demand by creating more supply through canals, dams and reservoirs, said David Sunding, a professor of agricultural and resource economics at UC Berkeley and co-director of the Berkeley Water Center.
"We're really reaching the limit of that," he said. "What's happening in the Delta is a measure of that. The ecosystem is really collapsing."
...Sunding, whose expertise is water supply, pricing and efficiency, said setting up a marketplace to sell water rights could alleviate supply problems.

Latest Metro Forecast Released

The Business Forecasting Center has released our latest economic forecast for California and 9 Northern California Metro Areas.

The worst news is in the Northern San Joaquin Valley (Stockton, Modesto, Merced). These areas were the first in the recession as they were first into the foreclosure crisis. Now, they look to be the last places to get out, in part due to the impacts of the NUMMI closure in Fremont this winter. Stockton and Modesto unemployment is forecast to peak around 18%, and Merced will most likely touch 20% this winter.

For the state of California (we released a summary of the state forecast last week), we see unemployment peaking at 12.6% in the first half of 2010. This is a little higher than the 12.1-12.3% peak we were forecasting in winter and spring. The most recent estimate released last Friday by CA EDD was 12.1%, so it looks like we were right to lift up our unemployment forecast slightly despite the many recent headlines that the recession is over.

For those folks who like to compare forecasts, our unemployment forecast continues to be higher than UCLA.

Click here for more information and details about the latest forecast.

Congratulations to San Joaquin County Agriculture.

San Joaquin County Agricultural output increased 6% from 2007 to 2008 according to the latest county crop report. Between 2007 and 2008, vegetable acreage was down and so was the production of nursery products (housing collapse reduces landscaping needs), but field crops and fruit and nut gained. Walnuts had a record year. Early reports for 2009 are that tomato acreage is way up, so vegetables may reverse a declining trend this year.

One of the more interesting pieces of information is processing olives showing up for the first time at 3,300 acres and about $10 million in output. That's small, but this will be an interesting area to watch in the coming years as Corto Olive is trying to grow an olive oil industry in the Valley.

Finally, it is interesting to see the 6% gain for San Joaquin County is the same as the 6% gain in Fresno County highlighted in a post a few months ago.

Westland Irrigators: Delta Smelt Restrictions Cost 2,000 jobs

I haven't seen the statement, but this brief story in the Hanford Sentinel suggests that the west Valley farmers have finally got the Smelt jobs impact about right, 2,000 jobs. That number is very close to my estimate, so I am pleased to see this story.

Now if the local politicians and media can just adopt this reasonable number, we could have a productive discussion about solutions. Unfortunately, the local pols and media continue to throw around inflated job loss estimates estimates to fuel public hysteria. Very recently, the Governor has blamed 35,000 jobs on the Smelt, and some state representatives and others saying 90,000 jobs. Those are the inflated claims that the Interior Department are responding too in their statement that says it isn't the Smelt.

Officials at the San Luis & Delta-Mendota Water Authority issued a statement today claiming that 100,000 acres went unplanted and 2,000 jobs have been lost on the Westside because of federal pumping cutbacks to protect the endangered Delta smelt fish.

The statement refutes a document released Thursday by the U.S. Department of the Interior that claims that it’s “not true” that “water shortages and high unemployment rates in California’s Central Valley are the result of a manmade, 'regulatory’ drought, as opposed to natural conditions.”

Welcome Hannity Viewers!

This blog received a record number of hits last night spiking at 6:30 and 9:30 P.M., with most hits landing on Delta Smelt pages from Google searches. Let's call it the Hannity effect.

Here are some links for Hannity viewers looking for a more fair and balanced perspective.

Spreck Rosecrans, Economic Analyst from the Environmental Defense Fund with a new post on "Now the Rest of the Story from Fox News."

Our recent report, "Fish or Foreclosure?", which identifies the real cause of unemployment in the Valley and shows how the jobs information circulated by Hannity is very misleading.

EU Farmers Spray Milk to Protest Low Prices

There have been many farmer protests in the Central Valley this summer, mostly about water on the west side, but dairy is the most widespread problem in the Valley right now. It would be interesting to see what kind of reaction a protest like this Belgian demonstration would get around here.





The Dairy crisis is a global problem, and it will ultimately be solved by cutting capacity. The question is where and how this will take place. Link to the AP story that has the photo and more details.

CA unemployment to peak at 12.6%

Click here for the Readers Digest version of our latest California economic forecast.

We expect CA unemployment to peak at 12.6% in the Q2 2010, and the "bottom" of the recession in California to be next quarter (Q4 2010), lagging a few months behind the U.S.

The metro forecast will be released next week.

I agree with the Governor on out-of-state renewable energy

33% renewable is a very ambitious goal for electricity, and I don't see any good reason to restrict out-of-state supplies. From the Sac Bee:

The governor supports a requirement in the legislation that by 2020 at least 33 percent of all electrical power delivered to Californians come from solar, wind, geothermal, biomass or small-scale hydroelectric sources.
But Schwarzenegger dislikes provisions that would limit the amount of energy utilities could purchase from out-of-California providers. The governor and GOP legislators have said the restriction could sharply increase energy rates.
Matt David, Schwarzenegger's communications director, said the governor plans to veto the bills unless lawmakers return to remove the out-of-state restrictions.

Looking Forward to 2009 household income data.

The Census Bureau releases 2008 household income data (link to Wall Street Journal article). It is ugly, and remember that this only reflects the first relatively mild year of the recession. Of course, we had high inflation 2007-08 (remember $5 gas) and that impacts these real figures.

Median household income, adjusted for inflation, fell 3.6% last year to $50,303, the steepest year-over-year drop in forty years.

Although this is national data, some parts foreshadow what we can expect to see when the local data for the Valley is released.

The largest decline, 5.6%, was among Hispanics, a reflection of disappearing construction and service jobs.

Short Sale Incentives

It sounds like the Treasury is going to add short-sale incentives to the current program of loan modification incentives. This could have a large impact on the Valley, where so many people are underwater in their mortgages and either can not qualify or don't have a good incentive to participate in the current loan modification programs.

I won't comment on whether this is a good or bad idea until the details are released next month. Having unsuccessfully made offers on 2 or 3 short sales last year, I feel confident that Realtors will benefit from this. Will homeowners, lenders, and the economy in general benefit? It's too early to say.

From Housing Wire:

He (FHA commissioner David Stevens) said the program will simplify the process of pursuing short sales and deeds-in-lieu, which will encourage more servicers and borrowers to participate in the program. The program will standardize the process, documentation and short performance timeframes.
“These options eliminate the need for potentially lengthy and expensive foreclosure proceedings, preserve the physical condition and value of the property by reducing the time a property is vacant, and allows the homeowners to transition with dignity to more affordable housing,” Stevens added.

Pro-market vs. Pro-business

Click here for wisdom from Luigi Zingales of the University of Chicago (via Greg Mankiw's blog).

This is not the first time that I have recommended Zingales on this blog. The last link on this post from 10 months ago is to Zingales, and the entire post is still highly relevant since we still have a foreclosure crisis on our hands with no effective policy.

Although it is about Wall Street and Finance, Zingles' general point about not confusing a pro-business agenda with a pro-capitalism, pro-market agenda is very relevant to the water debate currently raging in California.

A Note on Today's U.S. Employment Report

One of the surprises in the California employment report for July released two weeks ago was that the loss in state and local government jobs remained relatively low. I attributed this to "seasonal noise" during summer school vacations and that it would take a few months to get a good read on the employment effects of state and local fiscal woes.

This morning, the U.S. jobs report for August was released. There weren't many surprises in it, with another net loss of 217,000 jobs and the U.S. unemployment rate moving up to 9.7%.

However, there was interesting information in the revisions to the June and July estimates (these figures are revised as more data becomes available). The June and July estimates for state and local government payrolls were revised down by 54,000, a huge revision for a single sector. I expect a significant share of this is from California, and it is something to look for when the state data is released in a few weeks.

Mark it down: I agree with Westlands

Since it is rare that I agree with Tom Birmingham and the Westlands Water District, it is worth noting that I agree with the statement they released today regarding accusations of "water hoarding" from Bill Jennings and the CSPA.

If Westlands could build on this reasonable statement by stopping their own "misleading and irresponsible claims," (which are often repeated in the mainstream press and by government officials) it would go a long way towards raising the dialogue on the water issue.

If you want to become less informed about the California Water Crisis in under 2 minutes, watch this video posted today on the Steve Poizner for Governor website. See the Aguanomics blog for some commentary on Poizner's water policy from a libertarian perspective. [Yes, there are many very conservative, pro-market reasons to support the environmentalists on this issue which isn't always the case.]

In this video, you won't even see the Delta on the map or even mentioned. Nor does it mention a drought. He only says canals and pumps that are "shut down" (not true) due to court orders. There is a strange comment about someone in San Francisco who could "make it all go away." I guess there is a rain goddess there.

As for the 3 "human impacts."

1. 35,000 unemployed people? I need to send him a copy of our latest report. [Note: His website is totally silent on the housing crisis.]

2. Food shortage? It is true food isn't growing in some fallowed areas, but the California tomato crop is estimated to set a record this year, the overproduction of milk has caused a crisis in the dairy industry, and almond orchards are being torn out because of low prices. Not usually signs of a shortage.

3. Our wallets? Higher food prices will cost us money according to the video. Maybe a little, but it will be small change compared to the tax and water fee increases we will be burdened with for years to recover the costs of the multi-billion dollar water infrastructure plan.

There is a chance that the peripheral canal and other infrastructure spending might be worth it. However, none of the advocates of this giant, multi-billion dollar spending program are calling for cost-benefit analysis. In fact, they never even mention what it will cost. Does it matter? If you made this Water 101 video, I guess it is obvious what needs to be done.