Cardoza Refinance Bill Deserves Serious Consideration

Dennis Cardoza has introduced a new mortgage modification bill, HR 6218 http://in.reuters.com/article/idUSTRE68N33220100928. 

Cardoza's bill would allow refinancing at current fixed rates for all mortgages without any principal reduction.  His plan is very similar to that proposed by serious economists like Glenn Hubbard and Chris Mayer of Columbia University, and I heard Mark Zandi endorsed it too.  These aren't bleeding-heart liberals advocating bailout plans for the irresponsible, but serious economic thinkers who more typically advise Republicans.  They understand the magnitude of the problem and realize that we need to do something big.

As discussed in older posts, my preferred policy alternative for reducing foreclosures would combine principal reduction with a new shared appreciation mortgage in which homeowners would share any future gain on their homes with those who financed the principal reduction.  This has been promoted by a number of economists for the last two years, but principal reduction hasn't been able to garner a lot of serious political backing (although it would help if Valley reps. like Cardoza were pushing this too).

Although Cardoza's new bill isn't my first policy choice, it has two key characteristics that I really like.

1.  It's big and it's simple.  This is an enormous problem, and it should be clear now that is isn't going to be solved by a bunch of mini-programs.  That is what Washington has been doing for 2 years now.  It is also really simple to understand (which is an advantage over my preferred plan) which is key to getting enough participation to actually solve the problem.

2.  You do not have to be delinquent on your mortgage or unemployed to qualify for help.  Most of the mortgage relief plans in action now require borrowers to be 60 days delinquent or are restricted to the unemployed.  These create perverse incentives for people to default on their mortgage payments and not search as hard for work. 

As Representive Cardoza noted in his Huffington Post essay,

We are long past foreclosing on the subprime mortgages that helped create the meltdown. As the saying goes, we are now cutting into the bone: middle-income families who through no fault of their own are now losing their homes.

I am not quite ready to endorse Cardoza's bill, but I am warming up to it.  It definitely deserves serious consideration, and I hope it gets the debate and consideration it deserves. 

P.S. On a side note, I was quoted in a newspaper article about water and jobs saying, "This valley has incredible problems, but our leaders are completely consumed with this one issue" I will say that Dennis Cardoza has focused a lot more than his Valley colleagues on the critical foreclosure issue, and I am pleased he is listening to the advice of serious people.

New estimates of the economic impacts of reduced water supplies

Richard Howitt and I (with the assistance of his UC-Davis collaborators who worked very quickly and professionally) have completed a joint retrospective assessment of the economic impacts of reduced water supplies to San Joaquin Valley agriculture.  Those of you who followed these estimates last year may find this an unlikely collaboration.  Although we don’t agree on all the details, we do agree that the revised estimates are close enough together that the public discussion around these contentious issues is best served through this joint report that emphasizes similarities rather than differences and criticism.  Both of our estimates have been improved by the collaboration and feedback in addition to newly available data on what actually happened last year. 

When it comes to jobs, our (Pacific's) final estimate for 2009 was a total decline of 5,567 jobs with 1,392 of these attributable to environmental pumping restrictions on Delta water.  The new Davis estimate for 2009 is 7,434 lost jobs with 2,973 due to pumping restrictions.  I appreciate the Davis team's willingness to take another look at this and work together to get better information out there.  Although we were unable to settle on one number and differences remain, I think anyone who reads the report will recognize that the differences represent reasonable differences in professional judgement on a question where it is impossible to get a precise answer.

As this has been a topic of a number of posts on this blog, regular readers will recall that our (Pacific's) initial estimates, issued during Summer 2009, were 6,000 lost jobs with 2,000 due to pumping restrictions.  Although there has not been much of a change in our estimates over time, there are differences in the details and our confidence, source data, and approach to these estimates is much sharper now.

You can download the full report here.  You will find estimates of fallowing, agricultural revenue and income declines in the report, all of which are as important as estimates of job loss that received the most attention in this miserable economy.

(mildly edited 9/29 at 9:47 A.M.)

If Fresno is "awful" and "Looks Like Detroit," I wonder what Meg Whitman thinks of Stockton?

OK, I'll bite on the Fresno/Detroit comparisons following Meg Whitman's comment,  as reported in the article in the Fresno Bee.  I agree that Whitman's comment is being blown out of proportion, but it is a teaching opportunity about the Valley Economy.  My perspective is someone who was born in Michigan, now lives in the Valley, is a professional regional economist, and has spent a fair amount of time in each area over the years.

First, about the numbers.  The Bee makes valid comparisons of economic conditions inside the city limits, but does not compare the greater metro areas.  This is deceptive, as one of the key differences between Fresno and Detroit are the surrounding areas.  The city of Detroit is indeed very bad, but its suburbs and surrounding small towns are much more prosperous, and more people in the Detroit area live outside the city limits than inside.  The Detroit metro area includes over 4.4 million people, and only 900,000 live in the city (about 20%).  In the Fresno metro area, half the population lives inside the city limits and a lot of the surrounding areas are actually poorer (some areas are more affluent like Clovis).  So, if you compare the statistics for the larger metro area, the Detroit area has significantly higher income than Fresno.

Detroit is indeed a sad case of one of America's greatest and most affluent cities that has been sliding substantially backwards.  The Detroit situation is similar to a lot of old industrial cities in the Eastern U.S. some of which are struggling (Cleveland), others that are prospering (Baltimore), but all have a poor, high crime, shrinking population, urban core city as families left for the suburbs.

Next, some quotes from the article.  I actually liked and agreed with this comment from the Whitman campaign.

"Meg knows that Fresno cannot be left behind as it has been in the past when the economic situation around the state gets better but Fresno doesn't respond as quickly," campaign spokeswoman Andrea Jones Rivera said in an e-mail.

The comments attributed to former California Secretary of State Bill Jones were less on target.

And former California Secretary of State Bill Jones said that Detroit and Fresno are in similar situations where they are overly dependent on one industry -- in Detroit, the automobile industry, and in Fresno, agriculture -- that has been hit hard.

Jones is correct that Fresno needs to diversify its economy to reduce dependance on agriculture, but the woes of the Fresno and Central Valley economy have much more to do with the housing collapse and construction industry than agriculture.

Which raises my final point, alluded to in the title. What about Stockton and Modesto? Unemployment in these cities is even higher than Fresno, when historically it has actually been lower. What is Meg Whitman's answer for the Northern San Joaquin Valley (and Sacramento and the Sacramento Valley) which was hit earlier and arguably harder by the recession.

While most of the outrage about her comment is calling Fresno awful, I am left wondering why she answers every question and comment about the Central Valley in the context of Fresno. I am interested in how Meg Whitman has balance her time and concern in the Valley between Stockton and Fresno. For example, how many trips has she made to Stockton compared to Fresno? I would be interested to see the numbers, maybe the Record should call the campaign and find out.

Update 9/29: To be fair, I noticed that Whitman said companies should be putting call centers in "Fresno or Stockton" instead of Phoenix in the last night's debate.  While I don't think call centers will be the Valley's savior, I was pleased to her mentioning both Fresno and Stockton, and to her acknowledging that fixing the Valley's economic woes is much more than an agriculture issue (or green jobs).  Perhaps I have been too critical of her.

Unemployment Friday

This report was truly dismal.  California's unemployment rate ticked up .1%, but most importantly private payrolls actually declined by 25,000!  That is not supposed to happen when you are supposedly a full year into a recovery.  Including government, total payroll jobs declined by 33,500.  Private sector job growth has been pathetic recently, but it has not been negative.  Truly awful.  And it is a broad based malaise that spans virtually all sectors and all metro areas.  The state has now given back all of the modest job growth posted in the first half of the year.  Even the areas like Orange County and San Jose that were showing life in the first half of the year have lost their momentum.  The story is virtually the same everywhere, the private sector has been moving sideways at best for nearly a year, and now public sector employment is eroding.

I am not in the double-dip camp yet.  I would estimate the probability for the U.S. to sink back into recession is 20-25%, but for California it could be 50%.

Stockton Cuts Impact Fees

Stockton has substantially cut impact fees on nonresidential construction projects, and downtown development.  I generally agree with the proposal and hope the conversations continue about adjusting residential development fees and how to make overall city finances less dependent on impact fees in the long-run. 

I am a little concerned that city leaders are thinking of this as a short-term stimulus program rather than a necessary long-term adjustment that will support a healthier economy.

U.S. Chamber of Commerce Attack Ad on Barbara Boxer

Wow, I just saw this ad from the U.S. Chamber of Commerce.  I interact and sometimes give speeches to Central Valley Chamber of Commerce groups, and I can assure you that Chamber members here in the Valley are a lot more thoughtful than this ad.  Plenty of them care about the environment, like fish, and they know what is really driving unemployment in the Valley (see the previous post about the $6.4 billion annual decline in private construction). 



The key line is "She voted to cut water to the Central Valley … killing jobs …and driving unemployment as high as 40%." 

I followed their instructions and went to their website to get the "facts."  Here is their documentation sheet.

While it is true that the California EDD has published city unemployment estimates of 40%, the documentation they provide clearly states that the estimate is based on the 2000 Census, a time of abundant water that predates the Smelt order.  Here is an exact quote from the Chambers' documentation (emphasis added),

Monthly city and CDP labor force data are derived by multiplying current estimates of county employment and unemployment by the employment and unemployment shares (ratios) of each city and CDP at the time of the 2000 Census...  The method assumes that the rates of change in employment and unemployment, since 2000, are exactly the same in each city and CDP as at the county level (i.e., that the shares are still accurate).  If this assumption is not true for a specific city or CDP, then the estimates for that area may not represent the current economic conditions.  Since this assumption is untested, caution should be employed when using this data.

I wouldn't describe taking a number out of context to use in an attack ad as employing caution.

They provide no documentation to support their claim that water drove unemployment to 40%.  As I must point out again (apologies to loyal readers who know this already), the 2000 Census found these towns had unemployment exceeding 30% when water supplies were high and we were not in a recession.  Mendota had 32% unemployment - the highest of all 474 California towns even when water supplies were high.  In fact, historical data shows that massive unemployment rates in this area did not occur until after the CVP started delivering Delta water.

I should also note that they list the unemployment rate for towns in Tulare County.  Tulare County does not even receive water from the Delta.  It is also kind of crazy, because the unemployment rate in Tulare County in 2009 (the year they were supposedly devastated by the drought) was LOWER than it was during the entire decade of the 1990s (ok, I'm exagerrating just from 1991 to 1999, 9 out of 10 years, here are the facts http://www.calmis.ca.gov/file/indhist/visa$haw.xls).  Unemployment is at all time highs in most areas, and they are focusing on perhaps the only place where unemployment was actually lower in 2009 than in the 1990s. I am glad Valley unemployment is getting attention, but we have to recognize that it is a chronic, long-term problem in order to come up with real solutions.

I can see that this is going to be a long fall.

San Joaquin Valley Private Building Permits Declined $6.4 Billion over 4 years

Since this weeks economic proposal is to add another $50 billion to U.S. infrastructure spending, here is some perspective using numbers on the private building hole in the San Joaquin Valley (8 counties from Bakersfield/Kern to Stockton/San Joaquin).

Total private building permits issued in 2005 equaled $8.75 billion.  For 2009, the total was $2.3 billion and 2010 in on pace to be the same as 2009.  That's a $6.45 billion decline.  Even if you consider 2005 was a bubble year, $6 billion per year is a very sustainable level in the Valley (about 30% below 2009).

If the San Joaquin Valley received a population weighted share of the $50 billion Obama is proposing (we are a little more than 1% of U.S. pop.), our piece would be about $600 million. 

As someone who spends a lot of time on 99, it isn't hard to envision worthwhile places to spend highway money in the Valley, so this could be a good investment if well managed.  It will reduce some construction unemployment in the area, and put some idle resources to work creating things of lasting value.  However, your expectations for it working economic miracles should be tempered by the fact that it is only $600 million into the $6 billion annual hole in our construction economy ($4 billion if you want to think more in terms of returning to a non-bubble level.).

Sacramento Wastewater Economic Impact Could Be 3 Times Higher

According to the Sac Bee, the Central Valley Regional Water Quality Control Board draft permit requires both microfiltration and the nutrient reduction program.

We knew this was possible, but we did not analyze this scenario in our earlier report since we wanted to stay focused on the ammonia issue and did not want to be accused of exagerrating.  We will update that analysis to fit this draft permit in the next few weeks.  The costs of the microfiltration process are actually higher than the nutrient reduction process, so the total impact will be nearly 3 times what we estimated in our earlier report.

The Bee quotes the SRCSD saying monthly residential rates could go from $20 per month to $62.  Our more conservative estimate would be about $50 per month, but SRCSD is planning on a lot of reserves being required and for this to keep growth very low (thus keeping impact fee revenues way down).  They may be right, I've never tried to sell $2 billion in bonds.  That's a lot of debt, especially for an agency whose current revenues are only about $150 million per year.