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.