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.

Back to the State Fair

EEEK, The Terminator is wrecking San Joaquin County agriculture with his evil plot to take the water out of the Delta with his giant canal!

I somehow missed this exhibit during my first visit to the state fair with my kids (insert joke about no deep fried food stands nearby here). I have been resisting their begging for a return trip, but now I have a reason to go back. Whatever your view of the water issue, you have to admit it's kind of funny (and bold) for a fair exhibit.

Update 9/7: We went back to the fair and I saw it in person. It's a great exhibit, but the political message is actually kind of subdued (despite the big robot).

Markets Work

Parched state on track for bumper tomato crop

Despite the water shortage, California farms are on target to produce a record-crushing crop of processing tomatoes, which are used to make everything from ketchup to tomato soup.
The U.S. Department of Agriculture on Monday estimated the 2009 crop at more than 27 billion pounds, beating by at least 2.5 billion pounds the record set in 1999.
Water scarcity drove reductions in tomato acreage in some parts of the Central Valley, such as western Fresno County. But record high prices drove comparatively water-rich farmers elsewhere in the state to increase plantings.
Tomato acreage in San Joaquin County, for instance, rose at least 38 percent this year, to more than 44,000 acres, according to the report. Statewide, processing tomato acreage increased by roughly 31,000 acres, to at least 308,000 acres.