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.