Is Leverage a Reason to Vote For or Against the Water Bond?

Leveraging additional non-bond revenues is an argument being made in favor of the water bond. This is from ACWA materials.

Q: What other funding would be leveraged if the bond is approved by voters?
A: The $11.14 billion bond measure would leverage an additional $30 billion in local and federal matching funds, for a total of $40 billion in investments in the state’s water system.

In finance, leverage means taking on risk and usually means large amounts of debt. When all goes well, leverage leads to enormous returns, but also creates exposure to huge losses. In the midst of a miserable recession largely largely caused by excessive financial leverage, it doesn't seem like a good promotional term.

As bond proponents are using it, leverage seems to really mean gaining access to more of "other people's money." For example, the bond might provide the funds needed to secure federal matching funds to build a dam at Temperance Flat. If you are ACWA, that's a wonderful leveraging of additional subsidies, but for ordinary taxpayers it isn't so wonderful.

Local taxpayers, state taxpayers, and federal taxpayers are the same people. From a voter's perspective, this argument for the water bond is investing $1 out of your left pocket to "leverage" the removal of $3 from your right pocket.

The leverage argument means a vote for the water bond is a vote for increasing the federal debt in addition to the state debt. Maybe bond opponents should argue that the water bond hurts national security and will take funds from the military and put our soldiers at risk. More likely it will be tax increases. They should make the bond proponents explain exactly where all those "leveraged" federal and local dollars are going to come from.

It is going to be a long year pointing out all the bad economics in this water bond campaign. This isn't even the main argument, just me complaining about an annoying term that suggests it is a magical deal where we pay for $1 of investment and get $3 additional dollars of investment free.

Huber's Peripheral Canal Bill Dies in Committee

It was clear that Rep. Huber's AB 1534 bill had no chance of passing out of committee. (AB 1534 required a legistlative vote of approval before constructing the peripheral canal, and required the LAO to perform a fiscal analysis of the peripheral canal.) The failure of the committee to 2nd a motion to vote on the bill is annoying and cowardly, but politically understandable and entirely predictable.

Since she first introduced it last fall, I was hoping that Rep. Huber might break this bill apart so that the legislative vote would not derail the study piece. Similar to the delta flow study required in the water package, I thought there should be a requirement for a rigorous cost-benefit analysis of the peripheral canal (whatever variation the BDCP settles upon) following the standards of the Federal Office of Management and Budget.


I think an LAO fiscal analysis is a good suggestion as well, although not the same as a cost-benefit analysis and fiscal impact is not necessarily the key issue. Is a bill really necessary to get the LAO's input?

Random thoughts on yesterday's Michael Pollan lecture

Michael Pollan made a presentation at Pacific last night, Earth Day. I admit that I have never made time to read any of his books, but I feel a connection to his work. After all, both of us have written things that have drawn the ire of Harris Ranch. More importantly, my wife, many of our friends and relatives are big fans, so I feel like I know his books from all the conversations he has sparked in our household. I was grateful for the opportunity to hear from him in person.

Unlike Cal Poly, Pacific thought it was O.K. to give Pollan an "unchallenged forum" for his lecture. I learned last night that one of Pollan's articles ("Power Steer" from the New York Times Magazine) is on the reading list of our first-year seminar. After reviewing the common reading list of the "What is a Good Society?" first-year seminar, I was impressed to learn that every student at Pacific reads Garret Hardin's classic "Tragedy of the Commons" in their first year among other classic articles. (I am far removed from teaching freshman seminars here, but wish I had taken such a class myself as a first-year undergraduate.)

So, what did I think of his talk? I mostly agree with him, although I am not as critical of industrial agriculture as he is. I don't particularly care for some of his measures of productive efficiency that play well with the audience. His fossil fuel piece has good points but is a little deceptive and overdone in parts. For example, those fossil fuel calories aren't just substituting for direct "sun" energy, but they are often substituting for human energy in the form of labor. What is the source of that human energy/calories? How many farm worker health problems are those fossil fuels preventing? I was also surprised he didn't talk about ethanol, which is a HUGE issue related to his themes about corn and energy.

Despite these quibbles, I completely agree with his main action points - the top one of which is to kill the farm bill and our current subsidy program.

As an econ nerd, the most thought-provoking part for me was his discussion of Earl Butz, the prominent Purdue agricultural economist who was Nixon's Secretary of Agriculture. I wasn't expecting an agricultural economist to play a villian role in his speech.

As an interested and informed semi-outsider to agricultural economics, I have some thoughts and frustrations about where this field is going. (I am basically 1 graduate course away from being able to say I have a specialization in ag econ, and almost went down this career track, but haven't attended conferences or read the journals in a decade.) In an unusual act of restraint for this blog, I just deleted some speculation on this subject from the post. I have no doubt agricultural economists themselves have thought about these issues a lot more critically and with much better information than I have.

It's a conversation to have over a beer. My first question is why are almost all the labor and development economists in UC ag econ focused on international issues rather than the Valley?* I offer a free beer to any academic agricultural economist who wants to talk about this and more the next time they are in Stockton, or perhaps as they are passing through on their way to/from the south Valley.

*The notable exception to this is Philip Martin at UC-Davis whose work has helped me understand a lot about the Valley. But I want more of this, and Martin got his Ph.D. in 1975, so I'm guessing this department hasn't hired a regional labor, economic development specialist in three decades!

New Forecast Released

The Business Forecasting Center's April 2010 California and Metro Forecast has been released.

Below are some highlights from the California forecast. You can see more about the 10 metro areas we track (or become a subscriber!) by clicking here.

Highlights of the April 2010 Forecast

California’s recession ended in late 2009. The state is in the early stages of a slow five year recovery back to more normal economic conditions.

California unemployment is currently peaking at 12.6%, and will remain above 12% through the end of 2010, and above 10% through all of 2011.

Payroll jobs bottomed out this winter nearly 1.4 million jobs below their 15.2 million job peak in Summer 2007.

It will take more than 4 years for jobs to recover the 9% decline. During the seven years of zero net job growth from 2007 to 2014, the state’s population will have grown by 2.5 million people keeping unemployment above 8% through most of 2014.

Growth in real gross state product will average a modest 3% over the next four years.

Construction has lost 400,000 jobs, by far the worst sector through the recession. This cyclical sector will eventually bounce back, and should experience more than 10% job growth in 2012 and 2013.

With the notable exception of the NUMMI closure, manufacturing is leading the early stages of the recovery. Next year could bring the first annual increase in California manufacturing employment in a decade.

Construction continues to lead job losses in percentage terms, declining another 12% (78,000) between 2009 and 2010.

Retail jobs have bottomed out after a more than 10% decline, but will remain flat over the next year.

Professional and Scientific Services did not start losing jobs until the second half of the recession, but these critical, high-paying areas declined rapidly in 2009. We expect strong growth in this area as the recovery gains strength in late 2010 and 2011.

State and local governments, including public schools, will drive most remaining job loss as the private sector slowly recovers.

Housing starts bottomed in 2009 at a record low 37,000 units. Although housing starts will recover to 56,000 units in 2010, this is still the 2nd lowest level in 50 years. By 2013, housing starts will be back to normal levels exceeding 150,000 units as foreclosures finally ebb and existing home prices recover to close the gap with construction costs.

Retail sales are growing again, but will not recover their 2007 level until 2011.

California Government Staffing and Salaries

The California Budget Project (CBP) recently released a report on government employees in California, "Professors and Prison Guards". I found it interesting and informative, the facts are correct. Their finding that corrections employment is growing rapidly are important.

In general, the CBP points out that government employee ratios in California are about 10% lower than the rest of the US, and that the California tax burden is near other states as a % of personal income. However, they don't provide any useful information on employee compensation, so it is an incomplete and slightly deceptive treatment of this important topic.

Here is the data for 2008 from the Quarterly Census of Employment and Wages (avg. weekly wage, note if you took CA out of the US averages the gaps would be even higher)

Private Workers:
California $975, US $873, +11.6%.

State Government Workers:
CA $1,131, US $923, +22.5% (Education +18.4%, Non-education +25.6%)

Local Government Workers:
CA $1,030, US $813, +26.7% (Education +14%, Non-education +44.5%)

If the government workforce was increased by 10% to bring the ratios up to the US average, and government salaries lowered by an average of 10%, total government employee costs would be about the same. Government workers in California would still enjoy wage premiums equal to or above the private sector.

If you break down the government payrolls, you see that the premium for education workers is smaller than other government workers. A very large share of local, non-education salaries are public safety. Also, it is important to note that this data does not include employer pension contributions.

Perhaps we should consider shifting to a system of more, lower paid government employees over fewer, higher paid employees. With more employees, we might be able to reduce permit processing times, more cops on the streets, smaller classes, etc.

I understand that this issue is very complicated in practice. Whether and to what extent current public labor negotiations around the state utilize layoffs, furloughs, and compensation decreases is very important to the state's long-run cost of government and competitiveness, as well as the level of government services we enjoy as citizens.

Unemployment Friday

Another month and another sideways step for the California job market.

Unemployment ticks up to 12.6% and payroll jobs increase 4,000 statewide, following an increase of 3000 last month; virtually no change. This marks 5 months of flat payrolls in California (the self-cancelling down and up of December and January just reflect a less than stellar holiday season). With 162,000 jobs added in March nationally (the first month of solid nationwide job growth), I was hopeful for a stronger showing in California, but not surprised by the underwhelming growth.

Monthly job growth in California needs to be consistently above 10,000 to keep up with population, and will have to consistently exceed 20,000 to start chipping away at unemployment. If not in April, we should start posting 10,000+ gains every month in May, 20,000+ gains in the fall, and 30,000+ gains in 2011.

In the metro areas, San Jose is showing some modest job growth connected to the rebound in the tech sector. Other areas are following the state pattern. The effects of the NUMMI closure will not be apparant until the next report.

Three Quotes from the Sunday Bee

From the cover story on unsustainable pensions,

Currently, 15 percent to 30 percent of local governments' annual payroll goes into their pension system – a quarter or so for every dollar spent on paychecks...contribution rates will expand to about 30 percent or 40 percent of payroll in most places.

My employer pays 10% of employees' salary to a defined contribution retirement plan, and we contribute 5% of our salaries. That is very generous for the private sector, but much less than the cost of these public pensions. We should go beyond tinkering with the formulas, and switch from defined benefit to defined contribution programs in the public sector.

From "State Tax Credit For Homebuyers Will Pay For Itself" by the President of the California Building Industry Association

Studies show that each new home built generates three full-time jobs, and that each new homeowner immediately adds $16,000 in various tax revenues back to the state... The state will get back more in return than it is putting up for the program...
Respected economists recognize that improving the fate of the housing industry is a key to jump-starting the overall economy.

This article is a classic example of how advocates can take pieces out of respectable economic studies, and distort them into pushing for positions the respected economists who produce those studies would never support. This short-term tax credit for homes at best moves building around a little in time, but will do nothing to change total home building activity over the next 2-3 years, and will definitely not "pay for itself." So, yes building a new home does create jobs and tax revenues and this sector is key to the economic recovery. Respected economists agree with those statements and also agree (unanimous among the half dozen or so I've chatted with about this bill) that the California home buyer tax credit is a give away.

From the article on a pistachio processor's lawsuit accusing billionaires Lynda and Stewart Resnick of illegally profiting from the Kern Water Bank they control,

"We've done more for the pistachio than anyone ever since it was planted in the Garden of Eden," she (Lynda Resnick) said. "My husband should be canonized for all the work he's done."

I wonder if a church will bestow sainthood on Mr. Resnick after his passing. If the Great Valley Center has any religious influence, I like his chances. I recently noticed the Beverly Hills residing Mr. Resnick is the most recent recipient of the GVC's most prestigious award "Sequoia - Giant of the Valley", and also that Mrs. Resnick is the headline speaker at the GVC's annual conference next month.

Lodi Teachers Make Concessions

There are a lot of these public employee union negotiations going on in the Valley right now, and the results will impact the direction of the Valley economy in the years to come.

According to the Record, Lodi teachers have tentatively accepted a 2% pay cut for 2010-11 and a wage freeze for 2010-11, and this is anticipated to save some teacher jobs. Unfortunately, this concession isn't enough to avoid 5-7 furlough days over the next few years (which means shorter school years, the wrong direction for CA education.) I know how hard teachers work and that they will be facing larger classes and less support to go along with the reduced pay. It is a hard to accept these concessions, and I compliment the Lodi teachers for doing the right thing for the kids and their teaching colleagues who are facing lay offs.

The even bigger question for Valley cities are negotiations with police and fire unions. Even larger concessions are needed in these areas.

At least my family still loves me

I have heard it from the Latino Water Coalition and Water for Fish within the past few days. I suppose some officials from the Department of Interior or Bureau of Reclamation would tell me that's just an average day for them.

On Saturday morning, I went to a water forum on the Pacific campus to hear Mario Santoyo of the Latino Water Coalition. I was disapointed that Mr. Santoyo's presentation was mostly playing 2 videos. The first featured the infamous sound-bites from Lloyd Carter on local Fresno TV which Mr. Santoyo described as representing "what we are up against." The second video featured images of Mendota food lines, and blamed it on a 2-inch minnow. He did take some questions.

Among the questions was one noting that the Mendota area is the poorest, highest unemployment place in California in high water years; and asked him if he had a solution for the poverty that will remain even if water pumping goes back to the maximum. To my surprise, Mr. Santoyo dodged the question and immediately launched into insulting me to the on campus audience. After misrepresenting the results of our reports on water and farm jobs (we have NEVER said no effect), he said that I was upsetting Pacific alumni such himself and Alan Autry, and ended with the comment "What were you thinking, buddy?"

I don't think he was aware that his "buddy" was in the audience, and he was more reasonable when I introduced myself afterwards. I asked him what was so offensive about citing official government statistics, and pointed out that everything in our reports was factually correct and had stood up to scrutiny much better than the reports he was fond of citing. He said his only problem with me was that I hadn't done my "field research."

Today, the Stockton Record ran a front page story about the short salmon report we posted Friday afternoon. I didn't think it was worth a stand-alone article, let alone front-page news, and if we were looking for publicity I would not have posted it on the afternoon of Good Friday. I was disapointed in Dick Pool's comment "He is trying to have a war between economists," especially since these fishing interests have quoted our reports on farm jobs at length. I guess it is only a public service when we pick on the other side.

It is flatly ridiculous to throw around numbers for the salmon fishery closure that are roughly equivalent to the impact of the NUMMI auto plant shut-down (20-25,000 jobs). Yes there are multiplier effects, but a commercial industry that has less than $20 million in landings in a recent good years doesn't turn into a billion dollar impact with multipliers. Alex Breitler's article emphasizes the substitution effect in his article; people buy something other than salmon when it isn't available. That is true, but the much bigger problem with the Southwick estimate of retail job losses that he didn't mention is the assumption that California salmon's share of local retail sales is equal to it's share of local landings. Salmon may be 12% of the value of California catch in a good year, but I bet it is no more than 1-2% of seafood retail and restaurant sales even in those good years.

In some ways, this Southwick salmon number is even more ridiculous than attributing 80,000 lost jobs to water restrictions for agriculture, a number which greatly exceeded the total job loss for the San Joaquin Valley in the entire Great Recession. Whether the issue is AB 32, water, prisons, sports stadiums, or something else; it is important that policy makers use accurate estimates.

The salmon fisherman don't need an overly inflated job loss estimate to make their case. Judge Wanger's ruling last week against Westlands' request for a restraining order against the latest pumping restrictions demonstrates that clearly.

Salmon Job Losses

I have posted a brief report estimating the employment impacts of the salmon fishery closure here. This excerpt summarizes the result

Recently, some misleading claims of employment loss have been made by supporters of salmon fishing interests citing a report from the consulting firm Southwick Associates. Several Congressional representatives recently used this estimate of 23,000 lost Salmon fishing jobs in a recent letter, and the claim has been repeated several times in the media. This paper discusses the errors in the most recent salmon jobs claims, and makes alternative estimates. We estimate the salmon fishery closures resulted in the loss of 1,823 jobs and $118.4 million in income compared to the level of the salmon fishery in 2004 and 2005.4

I have been very critical of exagerrated agricultural job loss estimates from Delta pumping restrictions. Now that salmon advocates are employing similar tactics, it is appropriate to subject their claims to the same level of scrutiny.

Latino Community Water Forum This Saturday

Hispanics for Political Action of San Joaquin County (HPA), and the Coalition of Mexican American Associations (COMA), in collaboration with the University of the Pacific (UOP), School of International Studies, Inter-American Program are holding an educational forum on the water crisis affecting the Valley on April 3, 2010. The forum will be held in Grace Covell Hall at the University of the Pacific campus in Stockton (there are directional signs at the main entrance). The program begins at 9 A.M. with free breakfast from 8-9 A.M. Here is the line-up of panelists that was sent to me this afternoon by Esther Vasquez. It also sounds as if there might be some interesting late additions to this panel

Welcome Address
Michael Villanueva, President, HPA

Opening Remarks & Introduction of Guests
Esther Vasquez,

Water Bond
Dan Nomellini Jr. Esq
Nomellini, Grilli & McDaniel

Surface Water, Ground Water and Viability of Agriculture in the San Joaquin Valley
Sarge Green, CSU Fresno,
California Water Institute

Impacts of California Water Crisis on Latinos
Mario Santoyo
Latino Water Coalition

SEWD -Who we Are and What do we do.
Jeanette R Thomas,
Stockton East Water District

Agriculture and the Delta
Barbara Barrigan-Parrilla,
Restore the Delta


I was a panelist for the first event in this series, and will be listening in the audience for this one. I am especially pleased that Mr. Santoyo from the Latino Water Coalition (and a Pacific engineering alum) is coming to Stockton to share his perspective on the issue.

More AB 32 Costs: Rep. Niello needs to check math

In today's Sacramento Bee, Rep. Roger Niello defends the highly criticized Varshney/Tootelian estimates of the costs of AB 32 (which are annual cost of $183 billion and 1.1 million jobs for California), saying that they are not out of line with other estimates.

For evidence, he points to CBO analysis of similar proposed U.S. cap-and-trade laws that CBO estimates cost the U.S. economy $1.2 trillion (and California $156 billion) between 2009 and 2018. CBO is a credible estimate, but it is an estimate of cumulative costs over a 10 year period. The Varshney/Tootelian cost estimate is for a single year, and is higher. So, by the numbers Niello is citing, Varshney/Tootelian would appear to be too high by at least a factor of 10.

That is what Professor Sweeney at Stanford has said in his review - that Varshney/Tootelian cost estimates are too high by at least a factor of 10.

I don't disagree with some of Niello's points in his piece, and I have been critical of how some environmentalists have been spinnng the latest AB 32 studies as "good for the economy." But his math is simply wrong here, and the numbers matter. So, I am recinding the favorite legislator award I gave Niello a few posts back for bravely voting against the latest round of homebuyer tax credits.