Valley Economy

LAO on the Governor's budget

2012-01-23T16:37:00.000-08:00

For all the frustrating aspects of California state government, one entity that I find to be very reliable is the Legislative Analyst Office (LAO). As usual, they have done a good job of responding to the Governor's budget proposal; particularly the proposed "trigger" cuts if voters do not approve a tax initiative that are targeted almost exclusively to education.

I liked this simple statement of fact from Mac Taylor in this Sac Bee post:

Sen. Mark Leno, D-San Francisco, wondered whether the governor's scenario of cutting schools if the taxes fail is avoidable. Leno cited Brown's insistence that he set up his tax plan as such because schools consume so much of the state budget.

Legislative Analyst Mac Taylor stopped him there. "They're 40 percent of the budget, not 90 percent. You don't have to do 90 percent schools. You can do a lesser amount. It's just that obviously there are tradeoffs."

In their formal response, the LAO gives the legislature some good advice on page 23:

Alternatively,given the potentially unintended consequences of the trigger as well as the major disruptions caused by midyear reductions, the Legislature could consider building a budget without midyear cuts. In this case, the Legislature could focus on a funding level it could afford despite the revenue uncertainties and then use any ballot-measure revenue as one-time investments in 2012-13 to pay down existing Proposition 98 obligations.

If you have heard me speaking in the past week, you know how much I really dislike the Governor's trigger cut proposal. It is completely different than the recent trigger cuts in this years budget. This year's trigger cuts were based on uncertain tax receipts in the short-run - something outside the control of voters or legislators - and were an understandable consequence of the deep cutting in this year's budget. The amount of the cut depended on the level of tax receipts, were of smaller magnitude, and distributed across programs.

This "trigger" cut is much different, and that is why I have not hesitated to use stronger language than normal when describing them (even politically-loaded terms like hostage or ransom). Compared to the recent "trigger cuts", this cut is more than double the size, is all or nothing (as opposed to a sliding scale based on tax receipts), falls almost completely on one piece of the budget, and depends on an tax increase election on a very complicated Fall ballot. It is an ugly political threat, and would set a terrible precedent if successful.

I am pleased to see the LAO pointing out the problems with this approach, and hope the legislature rejects the proposal. If it remains this way, I won't be voting for the Governor's tax initiative, and will take a serious look at Molly Munger's proposal as an alternative (even though the tax increase is too large in my opinion and I generally don't like dedicated revenue proposals.).

Our latest economic outlook: A continuation of the "2% recovery" but finally a little growth in the Valley

2012-01-20T00:53:00.000-08:00

Here is a link to a summary of our latest quarterly forecast.

More positive economic data at the end of 2011 has raised hopes for the economy, but continued weakness in the housing market, weaker demand for exports, and contracting government spending will prevent the recovery from gathering further momentum according to the Business Forecasting Center at the University of the Pacific. The forecast projects real gross state product will grow at an average 2% rate for both 2012 and 2013, similar to the first two years of the recovery. In 2014 and beyond, growth will increase above 3% as housing and construction finally begin making a positive contribution to the recovery...

I just made $100 in "recreation related" expenditures in the Delta. Why didn't I have any fun?

2012-01-11T16:50:00.000-08:00

Made a run out at noon to CVS and to grab lunch. Picked up some shaving supplies, toiletries, and a few groceries and stopped for a sandwich. According to the PPIC, I just supported recreation-related employment.  I didn't see any recreation products in the store (unless you count the family planning section), but I saw a lot of food. But the experts at the PPIC classify all this routine local retail and restaurant jobs as "recreation-related".

For example, the description of the Delta secondary zone on page 26 notes: "relatively few jobs (1%) in agriculture forestry, or fishing... recreation-related activities (food and lodging establishments, marinas, other arts and recreation activities, and retail trade) account for 22 percent of employment in the secondary zone." If you break down that 22% (which the PPIC does not, but consult the DPC Economic Sustiainbility Plan or BLS, BEA, EDD and other govt sources), you will learn that roughly 10 percentage points is retail (the mall, groceries, etc.) and almost another 10 percentage points is restaurants (majority fast food), and marinas are too small to show up as a sector in most tabulations but are part of arts and recreation, of which the entire sector is smaller than agriculture.

As noted in chapter 2 of the peer-reviewed Economic Sustainability Plan; the data clearly shows arts and recreation has the lowest relative employment concentration in the Delta (primary + secondary zone combined) of any of the 21 economic sub-sectors defined by the government's NAICS system.  The notion advanced in the PPIC report that the legal Delta has a recreation oriented economy is false, it is wishful thinking and shameless pandering to the fictional narrative advanced by water export and habitat restorations interests.  If you combine the small real recreation sector with the mall and McDonalds selling to locals, it looks big.  The irony is that all that growth in so-called "recreation related" jobs that impresses the PPIC experts is generated by those housing developments in the Delta that they hate.

Figure 6 illustrating recreation jobs in this new PPIC/Davis report is a wonderful example of how to mislead with graphs, and you will find no comparable groupings or graphs in any PPIC/Davis water reports on other regions.  According to Figure 6, Recreation is more important than construction and manufacturing combined (goods producing non-farm), bigger than government employment, bigger than healthcare. Who knew?

To be fair, later on in the report, they have a more reasonable estimate of Delta recreation that is significantly lower than their underestimated impact of agriculture (see previous post on that).

There is more... especially on infrastructure and levees and salinity ... but I have to stop now and do other things.

[Edited for clarity on 1/12]

Farm proprietors (farmers) and Farm workers (employees): Comparing Kern and San Joaquin Counties (and a lesson in basic economic data prompted by an error from the PPIC experts)

2012-01-11T14:38:00.000-08:00

Kern County (highly dependent on Delta water) generates about 20% more agricultural revenue than the 5 Delta Counties combined. However, there are 4 times more farm proprietors in the 5 Delta Counties than Kern (about 9,000 vs 2,250 according to BEA which is based on tax returns).
Comparing Kern County to San Joaquin County (by far the biggest Delta ag county) in the 2007 Census of Agriculture reveals that Kern County has 2,117 farms that average 1,116 acres. In contrast, San Joaquin County has 3,624 farms that average 204 acres. Ag receipts in Kern are about $4 billion a year, roughly double the $2 billion in San Joaquin. Kern County has nearly 3 times as many agricultural employees than San Joaquin County (45,000 vs 15,000), but about half the number of farm proprietors.

Although their rhetoric is over the top, it does show that there is some truth behind Delta partisans portrayal of themselves as small family farms versus big "corporate" farms.

The prompt for this is my effort to figure out why the jobs multipliers for Delta agriculture (about 10 per $1 million) in the new PPIC/Davis report are so much smaller than what they have used for Westlands and Kern (ranging from 20 - 50 jobs per $1 million). This inconsistency without explanation is pretty amazing, and in reading their technical appendix it is clear that they still don't get some of these basics about self-employment, jobs and impact modeling even after the embarrasing series of botched drought impact reports in 2009. For example, this incredible statement in the new Delta report (technical appendix, page 16) regarding their results "scenarios may overstate the level of employment in crop production, because IMPLAN's ratios of jobs to revenues are somewhat higher than those measured by other sources." They go on to compare IMPLAN employment data to California EDD jobs data and note (correctly) that IMPLAN is almost 50% higher. But these jobs data are apples and oranges. IMPLAN employment data includes self-employment (i.e. farm proprietors) and the EDD data does not. This is fundamental, and as noted above there are about 9,000 farm proprietors in Delta counties plus some self-employment in ag. services and that completely accounts for the discrepancy they noted. Nothing wrong with the data at all.

Apparantly, this is the reason they do not to adjust the production functions for agriculture in the Delta like they have done in other studies for the rest of the Valley, and even worse to argue that you are probably overstating the results is terribly wrong. Their employment multipliers of about 10 per $1 million are way too low, and they are greatly understating the Delta ag impacts.

A few months ago, they wrote in ARE update, "In general, one million dollars in lost farm revenue translates into a range of 15 to 28 direct agricultural jobs lost." I agree with that statement, but as noted above their Delta impacts are 10 and they are arguing that they are probably overstated. Unbelievable.

The Scenario Modeled in the New PPIC Delta Report Doesn't Look Anything Like the BDCP or the Delta Plan.

2012-01-10T18:21:00.000-08:00

Before anyone reads the summary of the new PPIC report and concludes that Delta residents don't have much to fear in the BDCP or the Delta Plan, they should understand exactly what the PPIC has modeled.  When it comes to the big issues of water quality and habitat, it looks more like the recommendations of the Delta Protection Commission's Economic Sustainability Plan than the BDCP.

1. They assume water exports through a dual conveyance system will average 4.9 maf per year (see page 36 and 40) matching the 1980-2000 period. This is barely any increase over the constraints on through Delta pumping under the Biop. So, yes, under those operating assumptions dual conveyance would have a relatively small impact on Delta water quality. But does anyone really think that exporters will pay billions for conveyance that delivers 4.9 maf? My understanding is exporters have made it pretty clear that they won't, and draft BDCP documents and the superficial discussions of finance suggest substantially higher exports of 6 maf or possibly more.  On page 40 they do note that some exporters are seeking 6 maf, but that is not what they modeled in their report.

2. The baseline habitat resoration they are modeling doesn't include most of the tidal marsh or really any of the costly elements of the proposed BDCP or Delta Plan except for the Yolo Bypass enhancements. The picture is at the right.  Does it look like BDCP or even any of the other PPIC Delta reports? In Table 1, note that there is no loss for habitat conversion in all of San Joaquin County (the majority of Delta ag) and virtually none for Solano County (the Cache slough area).

So if there is no water quality degradation and no tidal marsh, the economic costs to the Delta can be manageable. That is exactly what the DPC Economic Sustainability Plan recommends, and if you added a south San Joaquin bypass around Paradise Cut to the picture at right, it would pretty closely match the ESP recommendation for habitat.  But that is not what the BDCP, DWR, other PPIC reports, and the Delta Plan are talking about.

PPIC should be more clear about what they are modeling, because the language they use in their summary makes it sound as if they find current policy proposals (which are BDCP and Delta Plan) have only a 1% impact on the Delta economy (15% in the primary zone). That's not true, unless these plans have undergone some dramatic recent changes.

It should also be noted that some significant infrastructure related impacts aren't considered. But I will leave that and discussion of more technical economic issues for another time and forum, and after I have had more time to digest what they have done. Some of it is pretty good, and not much different than our own work. This post is an initial impression from a quick read.

First Take on Brown's Budget Proposal: Are School Trigger Cuts Ransom?

2012-01-05T22:38:00.000-08:00

Interesting afternoon and press conference surrounding the Governor's new budget proposal. The headline on the budget is nearly $5 billion in mid-year "trigger" cuts to education if the Governor's proposed tax initiative doesn't pass in November. In response to questions about tying his tax proposal to large education cuts, called "ransom" by Dan Schnur, the education cuts were defended by Brown because "that is where the money is."

Looks more like ransom to me and I don't like the tactic. If that is where the money is, because that is where he put the funding increases in his budget. In the base budget that assumes the tax increases pass, K-12 education is most of the increased funding, nearly $5 billion, almost the same amount cut mid-year if the tax initiative were not to pass. Education may be the biggest budget item, about 40%, but it is 90% of the trigger cuts tied to the tax vote. I would rather see the budget keep education funding flat and not assume the tax increase.

My amateur political science guess is that part of the reason for this structure is to convince proponents of some of the other tax initiative proposals to pull their competing initiatives off the ballot; in addition to the fact that the ransom strategy might be effective in getting people to vote. It will work on my wife and probably will work on me too since my kids will be lobbying me to. And this tax proposal is marginally better and smaller than the tax extensions he was pushing last year that I opposed.

I have to wonder about the seriousness of ransom threat. As a practical matter, I don't really see how a mid-year budget cut of this magnitude could be implemented, and really don't envy school administrators that have to budget and plan for this. This mid-year cut (or perhaps better described as taking back the increase) of $5 billion is orders of magnitude larger than the worst case scenario envisioned this year, and is almost 10% of education spending. If I were writing a school budget, I would base it on pretty flat spending with a large reserve rather than count on a 10% increase, but that could be difficult to do if it is in the budget and there are a lot of pressing needs.

The economic and revenue forecasts underlying the budget seem pretty reasonable so I wouldn't count on budget help there, although there are probably more forecasters who will view it as overly pessimistic than too optimistic.

Friday Update: It didn't take long for Chris Thornburg to call the revenue forecast "bizarrely low" today consistent with the paragraph above predicting that some economists will see the forecast as too conservative. I don't see it that way, but Chris makes a good argument for stronger growth.

High-Speed Rail is Criticized for Counting Construction Jobs the Same Way as Metropolitan Water District

2011-12-22T16:46:00.000-08:00

This article in the San Jose Mercury News was interesting (.) High-Speed Rail backers have been claiming it will create 1 million jobs, by adding up all the person-years of employment into one number.

California high-speed rail jobs estimate too good to be true
Though California's high-speed train faces an intensifying backlash over its $99 billion price tag, political leaders from Washington to Sacramento justify the cost by touting another huge number: 1 million jobs the rail line is supposed to create.

But like so many of the promises made to voters who approved the bullet train, those job estimates appear too good to be true...

"Job-years and jobs are like apples and Twinkies, they're not even in the same food group," said Elizabeth Alexis, a Palo Alto analyst who testified before Congress about the project last week. "It's not accurate, and it's misleading...

Government agencies routinely calculate temporary construction jobs by the year, but it's unusual for public officials to lump all those estimates together. For instance, the White House tells recipients of stimulus funds not to count workers multiple times like officials have done on the rail project...

What's more, officials have not taken into account the potential job losses from the railroad, which will displace many businesses along the train route, including several along the Caltrain corridor between San Francisco and San Jose. And within the last month, the California Legislative Analyst's Office said other state programs could cut jobs so the state can afford the $20 billion debt to pay its portion of the rail line

The Mercury News could write a virtually idential article about the Metropolitan Water District study that estimates building isolated conveyance will create 133,000 jobs. The issues are the same. From the MWD home page:

Construction of Tunnel for State Water Supplies Could Create Nearly 130,000 Jobs in California

The results of a report estimate that nearly 130,000 jobs would be created by the construction and operation of two conveyance system options to deliver water to Californians. The Metropolitan Water District of Southern California commissioned The Brattle Group to conduct this independent research on behalf of the Delta Habitat Conservation and Conveyance Program (DHCCP).

Personally, I am glad to see the bad press on this. I have been complaining about the increasing trend towards reporting person-years of employment as jobs for quite a while. I would like to see it eradicated.

Stockton, other Valley cities, at the bottom of yet another economic ranking. Few Corporate HQs in the Valley.

2011-12-19T22:29:00.000-08:00

The Wall Street Journal's "Marketwatch" ranked Stockton last of the 102 largest metro areas in the U.S. in a ranking of "Best Cities for Business." Inland California metro areas occupied the bottom 4 spots on the ranking: 102. Stockton, 101. Riverside, 100. Fresno, 99. Sacramento. I hate these type of rankings, and have made fun of the Forbes "miserable city" rankings, including poking them for not posting their entire list so we can see what cities' are "least miserable."

The Marketwatch ranking is a little better, it at least publishes the whole list from top to bottom, and measures something much more specific. It also includes some information on corporate headquarters that I have wondered and speculated about in the Valley, but never seen the data compiled. I have often commented on the lack of a corporate, private sector presence in Sacramento compared to other places I have lived, and have also observed that many (most?) of the farming and food processing companies so important to the Valley are not headquartered here or owned locally.

The Marketwatch rankings include company rankings (S&P 500 headquaters, Forbes large private company hq, Russell 2000, etc.) and economic rankings (the usual suspects such as unemployment, job growth, etc.) The Valley cities actually fared worse in the corporate rankings than the economic rankings. [Detrioit, Dayton and Toledo Ohio were last in the economic rankings.] Here are some interesting facts regarding the corporate presence in inland California according to Marketwatch.

Riverside has the distinction of being the largest city in the U.S. without a Fortune 500 or S&P 500 company within its borders. (Riverside/San Bernadino is the 13th largest MSA in the U.S. with a population of 4.2 million.)
Sacramento is the second-largest city, behind Riverside, with no S&P 500 or Fortune 500 firm. (Sacramento is the 24th largest MSA in the country, population of 2.1 million.)
Fresno, the Central Valley's largest metro area, has no Fortune 500, S&P 500 nor Forbes private firms, and it is the largest city in the U.S. without a Russell 2000 company.
Modesto is the comparative, corporate stalwart in the Valley, and the smallest of the Valley metro areas in the ranking. Still, it isn't exactly impressive. Marketwatch says, "Modesto does boast a decent lineup of Forbes private firms — Save Mart Supermarkets, E&J Gallo Winery and Foster Farms — but has no Fortune 500, S&P 500 or Russell 2000 companies."
Fresno was last in the overall company rankings, followed by McAllen TX, Stockton, Bakersfield, and Sacramento.

Governor Brown should have attended the Delta Stewardship Council meeting last Thursday

2011-12-19T21:17:00.000-08:00

Last Thursday, Governor Brown was at a climate change conference in San Francisco. According to the Sacramento Bee, he said regarding a potential peripheral canal/tunnel, ""It will cost money," he said. "But if we don't do that, and the levees collapse in one of these extreme events, we could run out of fresh water." Yesterday, in a statement in support of BDCP he said, "We shouldn’t wait for a natural disaster to force our hand... This agreement takes us in the right direction to protect California’s water supply." Governor Brown is clearly worried about earthquakes and floods in the Delta and their implication for water exports.

If he were at the DSC meeting last Thursday, he would have heard Bob Gilbert, a reknowned geotechnical engineer and risk management expert from the University of Texas. Dr. Gilbert was on the peer review team for the DRMS study a few years ago, and chaired the recent peer review for the Delta Protection Commission's Economic Sustainability Plan. He made these comments:

"seismic risk to the water supply really is not that significant."
"If you look at the consequences... the net present value over a 100 year window of water supply losses is about $2 billion ... does not in any way justify spending $10 billion on conveyance."
"reliability of water supply due to earthquakes is not a big threat"

(Note: the basis for the comments are the DRMS studies, quotes are from my meeting notes and may not be exact)

Dr. Gilbert was there to review the Economic Sustainability Plan, and I should note that the context of these remarks was not criticizing BDCP, he was criticizing the DPC's Economic Sustainability Plan claim that seismic levee upgrades would improve water supply reliability. But it is interesting that much of the criticism was based on the fact that the seismic risk isn't that big (expected annual loss of $20 million a year if you believe the DRMS earthquake probabilities), and the bigger water supply risks are environmental rulings and water quality.

In my remarks, I chimed in with a few additional relatively unknown findings from DRMS:

Water export interruptions are only 20% of the economic cost from a large Delta earthquake that floods 10-30 islands. (See earlier post on this here.)
Water export interruptions are less than 2% of the economic cost from Delta flood events.
Water export interruptions cause 0% of the loss of life from Delta earthquakes and floods.

This is why DRMS found levee investments have the highest benefit-cost ratio of all Delta risk reduction strategies (yes it's true, although DWR did not report the benefit-cost ratios), because levee improvements protect all the economic risks (energy, transportation, property, farmland, human life, recreation, water quality and water conveyance among others). In contrast, the isolated conveyance strategy spends an enormous amount of money protecting against a relatively small portion of risk.

Governor Brown needs a better understanding of the risks from natural disaster in the Delta. On an encouraging note, this KPBS report on the climate change conference suggests he is unbiased and knows he still has more to learn about the issue,

The governor said under California law he's not allowed to say which proposal he supports until the report is released.
"In addition, I haven't really read the damn thing. And so I don't have a bias because I don't know what the hell it is," joked Brown.

Westlands has lowest fallowing in a decade in 2011 while Mendota sets unemployment record (according to CA EDD)

2011-12-12T19:43:00.000-08:00

Thanks to this year's abundant precipitation, Westlands' 2011 crop report shows harvested acres increased by 139,000 acres compared to 2009 (and about 70,000 acres higher than 2010). This is the highest level of harvested acres reported by Westlands Water District since 2000. Cotton increased by more than 70,000 acres with lower increases in wheat, onions, garlic, lettuce, almonds, and pistachios. The increaed production undoubtedly provided an economic boost to the area.

Despite the increased farm production, according to California EDD, Mendota's unemployment rate averaged a record 42.3% in the first 10 months of 2011, but don't expect any news reports on this shocking statistic despite the fact that unemployment is 4.5 percentage points higher than the 38.7% recorded during the 1st 10 months of 2009 in the peak of the water/unemployment media frenzy.

Of course, I don't believe this estimate now any more than I believed it in 2009. Unemployment has almost certainly dropped in Mendota. I have explained before why this EDD methodology for estimating unemployment in small towns; especially farming towns; is enormously flawed and should be ignored. Maybe now a few more people will believe it.

For a more reliable estimate from a valid survey, the Census Bureau's 2006-2010 ACS estimated Mendota unemployment averaged 21.6% over that 5 year period. My rough guess is that it is probably around 25% this year, and was around 30% during 2009.

This is probably one too many posts on this topic. Sorry for the redundancy, but with Westlands crops data and the latest 5-year ACS estimate of Mendota unemployment released this month, it seemed worth an update.

Should we raise income taxes for schools?

2011-11-30T13:00:00.000-08:00

I am generally not a proponent of further increasing California income taxes, but this article in the Sacramento Bee about a potential new initiative that would raise income taxes for education and a little research I did over the holiday on school funding has made me more sympathetic to the idea.

I have told many people that I like everything about our move to California almost 4 years ago except the schools and its impact on my children's education. Some of it has to do with standards, expectations and educational philosophies (schools do so much less to challenge stronger students here than I would like, even before the budget cuts), but I am increasingly convinced that most of it has to do with funding.

I depressed myself over the weekend by researching per pupil spending at schools in the area and comparing them to the district we moved from in Maryland and the one's where my wife and I grew up in Maine and Ohio respectively. It is embarrasing when relatives visit over Thanksgiving and your kids are trying to help with fundraisers that are trying to keep a school library open part time, while your nieces and nephews are engaged in all sorts of extra-curriculars and enrichment opportunities that your children's school doesn't even offer.

I found that typical per student spending in the region averages around $7,500 per student. For the district we moved from in Maryland, the comparable spending was $13,000 per student and for the school districts my wife and I attended it is currently around $10,500 per student. The educational offerrings and environment in the Maryland and the Ohio/Maine schools we experienced were pretty comparable, teacher salaries were the main reason for the difference between the $13k and $10.5k spending. California teacher salaries, taxes and cost of living are more compariable to Maryland, but are those schools in Maryland really 73% better than California for spending 73% more per student?

California schools still teach the fundamentals, and I am sure that my kids would not be anywhere near 73% better educated if we had stayed in Maryland. A lot of the differences are in the non-essentials, but that doesn't mean they don't have value. I have found California schools to be comparatively joyless places, shockingly devoid of foreign language, music, art, and GT programs at middle and elementary levels. School lunches are worse, transportation scarcely exists, typical facilities are worse, class sizes are larger, the school day is even 30 minutes shorter than we are accustomed to, and the school year is probably going to get shorter, again. PE and football is noticably better here, and my kids are less stressed out about school which is nice sometimes (too much homework or stress over a 3rd grader failing a quiz has never been a problem here).

Although teacher salaries are higher than the national average, the data shows education salaries are among the only public employee salaries in California that are not extremely out of line with national norms. (For example, we have fewer police per capita primarily because we pay police so much more, whereas we have fewer teachers per student primarily because we fund education so poorly).

Enough complaining. It is a beautiful, sunny California day outside. UOP music ensembles are playing holiday music out on the quad. Time to go out and smell some roses.

Negative Equity Improving

2011-11-30T11:36:00.000-08:00

The real estate market won't normalize until virtually all of the negative equity mortgages are resolved in one way or another; foreclosure, short sale, mortgage modification, or more gradually by paying down balances, possible home price appreciation, inflation, etc.  I think the negative equity and delinquency rate data available from financial firms like CoreLogic is more interesting and informative than foreclosure filings.

Today, the Stockton Record reports CoreLogic estimate of Negative Equity for the Stockton MSA in 2011Q3 is 51.1% down from 53.3% in 2011Q2. Going back into our archives, I see that this has come down 14 percentage points from 2010Q1 when it was reported at 65%. That's quite a lot of progress.

For the 50 largest metro areas, you can download more detailed data directly from CoreLogic and there are some interesting comparisons in the region.  Stockton looks similar to Las Vegas, negative equity is dropping slower in Sacramento, the East Bay and Phoenix.

Sacramento was 44.8% negative equity in 2010Q1, and dropped to 40.1% in 2011 Q3.
East Bay dropped from 34% to 29% over the same 6 quarters.
Phoenix dropped  57.5% to 51.9%, Riverside decreased from 53.5% to 43.7%.
Las Vegas dropped from an incredible 74.7% in 2010Q1 to 61% in 2011Q3, similar to Stockton but higher overall.

Here is the depressing part. At the current pace of decline in negative equity mortages, it would take 10 years to eliminate them in Sacramento and Phoenix, and about 5 years for places like Stockton and Las Vegas that seem to be reducing negative equity mortgages at a faster rate. It shouldn't take that long to have a more normal market since not all mortgages are severely underwater and at high-risk for default in the short-term and will resolve over time.

Progress is good, but the road to recovery remains very long.

Cost-Benefit Analysis and the Co-Equal Goals

2011-11-28T12:48:00.000-08:00

Cost-benefit analysis is the scientifically accepted approach to weighing the merits of complex public works projects like a $12+ billion isolated water conveyance facility in the Delta or several billion dollars invested in creating tidal marsh and other habitat in the Delta.

The Delta Reform Act creates a very different framework for evaluating Delta plans, the co-equal goals of water supply reliability and protecting, restoring and enhancing the Delta ecosystem. Cost-benefit analysis is inconsistent with the co-equal goals, because the co-equal goals single out two of the many types of societal benefits produced by the Delta and requires they be placed ahead of others, whereas cost-benefit analysis measures and considers all potential benefits in a consistent way. The economic considerations that are left out of the co-equal goals are considerable, and in total greatly exceed the value of water supply reliability (as demonstrated by DWR's own DRMS risk analysis for those who read beyond the executive summary).

I have been calling for a cost-benefit analysis of these projects since I first got involved in Delta water issues over 3 years ago, and have been encouraged to see it promoted recently from some seemingly unlikely sources, the 5 Delta Counties Coalition as well as a large group of mostly local environmental groups. I say "unlikely sources" because one might intuitively think that a cost-benefit analysis would show the overwhelming economic value of Delta conveyance to the larger southern California economy, and therefore it would be a tool to show why the local opposition should lose to further the greater economic good.

If a good cost-benefit analysis were to show that were truly the case and not just a political campaign, I would switch my position of opposition to large, isolated conveyance facility in the face of the overwhelming statewide economic interest. The fact that such an analysis does not exist (even one sponsored by water exporters) despite the enormous spending on research and planning for the Delta is pretty interesting. Even more interesting is that the California Resources Agency has apparantly responded to the Delta Counties' request for formal cost-benefit analysis by stating they aren't going to do it because it is not required by law. That's a pretty weak excuse in my opinion, since they are supposed to act in the best interests of the State and say they are committed to a science-driven process. It seems to me those guiding principles would compel one to conduct the scientifically accepted analysis that determines whether a project is in the best interest of the state. Even if the law does not require you to follow the result (for good reasons in some cases such as impacts on disadvantaged communities), the analysis would still be incredibly informative.

I have quieted down on this point this year as I have come to accept the co-equal goals as law and have been working on the Delta Protection Commission's Economic Sustainability Plan. I think the co-equal goal framework could lead to a good outcome if the constraint on the pursuit of the co-equal goals is taken seriously. ("The coequal goals shall be achieved in a manner that protects and enhances the unique cultural, recreational, natural resource, and agricultural values of the Delta as an evolving place.") The intent of the Economic Sustainability Plan is to be consistent with the co-equal goal framework, not cost-benefit analysis. (Although I think there is plenty of evidence to suggest it the ESP would prove superior to BDCP type plan on benefit-cost criteria, that was not the focus.)

Since the BDCP and Stewardship Council have been avoiding the question of cost-benefit analysis for a long time, I was really surprised that the Stewardship Council newsletter summary of the Delta Science Program's independent review of the ESP focused on the following quote from the review panel chair, “This report provides a good starting point to conduct a comprehensive cost-benefit analysis, but its recommendations are not well supported because the report is not itself a cost-benefit analysis.”

I agree with the criticism, but it is not a valid reason for the Stewardship Council to reject the recommendations in the ESP. The ESP is guided by the co-equal goals, not a cost-benefit framework. As discussed above, those two analytical frameworks are incompatible. The Science Program review panel stated that we addressed the co-equal goals later in the review in response to the direct question.

Overall, the independent review of the ESP was positive. More on that later.

[Update: I originally misused the term ISB (Independent Science Board) in the above paragraphs and confusing the Delta Science Program with the ISB. The Delta Science Program convened a panel of independent experts to review the ESP. Those experts are not the ISB which is a standing board of academic scientists. I have edited the post to fix it, and my apology for the original mix up.]

Indalex Aluminum Plant in Modesto Stripped by "Recyclers"

2011-11-27T13:04:00.000-08:00

Time to wake up the blog. Tales of foreclosure homes being stripped of appliances, fixtures, anything of value have been commonplace in the Valley for years. However, the story of the bankrupt Indalex Aluminum Plant brings a whole new dimension to the Valley "recycling" industry.

Here are some snips from articles and commentary in the Modesto Bee, and a photo of the plant after the roof collapsed due to scavengers removing steel support beams.

Jeff Jardine Commentary (Nov. 19)

I don't think the demolition of the former Indalex building in north Modesto is what anyone envisioned when coining the slogan "Recycle — It's Good for the Environment."

Really, who thought you could tear apart a structure and turn it in for California Redemption Value, like an empty Pepsi bottle?

Under any circumstances, it's embarrassing to the community. The blatant theft continues, with women taking lunches to their husbands or boyfriends at noon.

The images of Indalex exude a post-apocalyptic ambience like you'd see in "Mad Max" or any other doomsday flick. At the very least, it reminds me of an episode of M*A*S*H in which Radar O'Reilly mailed home a Jeep piece by piece.

Except these folk are stealing an entire building in broad daylight, and without fear of arrest, retribution or lawsuit. They aren't even sneaky about it. No need to work nights.

They've stolen so much metal that a large part of the roof caved in last week. The place is extremely hazardous both structurally and environmentally.

Yes, the economy is dreadful, unemployment is sky high and they have families to feed. But theft is theft, and it doesn't matter whether they're stripping an abandoned building, pilfering the copper wiring from the heating/AC units atop the United Way, which happened last year, or stealing it from taxpayer-owned parks, which happened last month.

But is it stealing if no one owns the property? Victimless crime? Sheriff's hands tied as scavengers strip abandoned plant (October 11)

A dozen or so scrap metal scavengers "go to work" every day at an abandoned north Modesto industrial building, ripping the place apart to harvest the tin, iron, steel and other recyclables for quick cash. No one stops them.

Because nobody admits owning the 9-acre property, law enforcement officials say there is no victim, so no one can be prosecuted...

"I started scrapping here maybe eight months ago," said Michael Bennett, who uses a blow torch to melt metal pieces off the walls and roof. "I do it to feed my family. I've got two kids."

Bennett said the first guys who ripped into the building got rich removing perhaps $100,000 worth of copper.
Far less profitable metalsremain, but plenty of folks willingly help themselves to what's left.

"We have an average of 10 to 15 guys a day coming out here," said Rueben Zuiderduin, an articulate young man who said he is a trained chef. "The only reason I'm doing this is because I'm out of work."

Zuiderduin labored with a torch much of Monday to dismantle an iron grate, which he reportedly sold for a disappointing $69. During the last month, he said he hasn't made more than $1,000 off Indalex scrap.

None of the dismantlers were hiding their activities when The Bee visited the site.

Some reported earning an OK living off the building, and they don't think they're doing anything wrong.

"I'm scrapping it out for my Uncle Sam," said one shirtless man who wouldn't reveal his name. "If Uncle Sam sent people here to demolish this place, they'd be in full hazmat suits and it would cost a fortune."

After spending the day ripping apart the building's siding or other metal pieces, the man said he trucks his cargo to "any number of scrap metal places" that pay him $100 to $150 for his haul.

"I treat it like a job. I come in during the morning, work all day, haul off, cash in and go home," the man said. "Nothing here is free. It takes a lot of work to do this."

Zuiderduin also sees his efforts as noble.

"It's a hazardous eyesore, and nobody's doing anything about it but us," Zuiderduin said. "Everybody is happy we're doing this. The companies across the way, the police and the sheriff are fine with this."

He's wrong about that.

Stanislaus County Sheriff Adam Christianson said he has met with angry owners of neighboring properties about the demolition at Indalex, but there's little he can do. "They're taking property that doesn't belong to them. That's a crime, but without a victim, I cannot arrest them and the district attorney cannot prosecute them," Christianson explained

Roof Collapses (November 16)

Metal scavengers hauled off steel support beams, causing the roof to collapse at an abandoned industrial building in north Modesto. But that hasn't stopped the unauthorized dismantling of the 125,000-square-foot Indalex aluminum manufacturing plant.

While the toxic chemicals, contaminated air and treacherous footing hasn't deterred looters, firefighters and ambulance crews are being ordered to stay outside...

The scavengers are unrepentant about helping themselves to anything of value there.

"It feeds the family," said HectorBonilla, 24, of Modesto, who has been a "recycler" for about four years.

Bonilla said he has been cutting up and collecting tin at Indalex for a week. The two loads he sold Tuesday to scrap metal dealers earned him $400. He anticipated making $200 on Wednesday.

Indalex Plant Catches Fire Again (November 23)

Modesto fire crews responded to a blaze at the large, debris-filled shell of the old aluminum manufacturing plant at about 3:45 p.m. Wednesday. When they arrived, a 20-foot by 20-foot former paint booth inside what used to be the building was ablaze.

Modesto Regional Fire Authority Division Chief Sean Slamon said when crews arrived some 30 unauthorized metal scavengers were still working at the site, despite the nearby flames. Stanislaus County sheriff's officers had to disperse the people dismantling the plant.

Water Export Disruption is only 20% of the Economic Cost of a Big Delta Earthquake according to Department of Water Resources' DRMS studies

2011-10-18T20:44:00.000-07:00

I doubt any of the presenters at the event Metropolitan Water District is hosting tomorrow on the risk of an earthquake to water supplies plan to mention the numbers in the headline, most probably aren't even aware. I didn't make it up, it comes directly from the Department of Water Resources' DRMS reports. I had noticed in the phase 1 report that it looked like most of the cost was in-Delta rather than water exports, but it wasn't until DRMS phase 2 was released that it became obvious. Below is a table from DRMS phase 2 that breaks out some of the costs due to a big seismic event that would flood multiple islands.

"Statewide costs" are defined as the cost of water export disruptions and costs due to damage to the 3 state highways crossing the Delta. Even in the big earthquake scenarios that flood 10+ islands, only 3/8 of total costs are statewide, and the majority, 5/8 are in-Delta costs (i.e. losses to property, infrastructure, farm production, local water supplies and transportation, etc.) even if you don't count any state highway related losses as in-Delta losses. 51.5% of 38% is actually 19.57% of total costs from water exports, so I had to round up to get the 20% figure in the headline.

This finding that came out of the DRMS studies (and it was actually in phase 1 too) really makes one wonder why the Department of Water Resources is so focused on isolated conveyance as the answer to the seismic risk in the Delta. DWR is pushing plans to spend $13 billion on an isolated conveyance that protects 20% of the costs of the big earthquake, and does nothing for the other 80%.

Wouldn't any rational person staring at these numbers wonder why that risk reduction strategies are so focused on 20% of the cost, and virtually ignore the other 80%. If it makes sense to spend $13 billion protecting 1/5 of the cost, doesn't it make sense to at least consider what benefit might result from spending $13 billion (or even $2-4 billion) on seismically-resistant levee upgrades that would protect 100% of the costs, not to mention all the potential loss of lives from the big earthquake flood scenario.

That is what the Delta Protection Commission's Economic Sustainability Plan's levee recommendations say, the best risk reduction strategy is to spend a few billion dollars improving levees beyond PL 84-99 to be seismically resistant. Even if the DPC ESP has understated the cost as some have claimed,* the DRMS risk numbers suggest it would still be worthwhile to invest enormously in the levees.

I could write about 20 posts on the interesting things one can glean from DRMS phase 2, and I may eventually get around to it. (another thing that is obvious when you start to deconstruct the results is that improving Delta levees to PL 84-99 with improved emergency response clearly offers the most risk reduction bang for the buck according to DRMS phase 2 tables).

If it actually used better scenarios, the updated tunnel conveyance and cost instead of the surface canal, and analyzed the "building blocks" individually, DRMS Phase 2 would be by far the most useful Delta study of all. It is, after all, a cost-benefit analysis. The Stewardship Council's ISB should do a peer review of Phase 2 like they did Phase 1, as the panel would probably call for analysis of better scenarios.

* regarding levee upgrade costs, the DPC ESP estimates a seismically-resistant upgrade of most Delta levees would be $1-2 billion above the PL 84-99 upgrade cost (which is estimated to be under a billion). I have received some informal comments that it could be as much as double this, but even if that were the case, it doesn't change the basic argument.

New Ways of Thinking About the Delta

2011-10-18T10:49:00.000-07:00

I am unable to attend the Delta Conservancy/Water Education Foundation/Water Contractor sponsored "Changing Our Perspective" Event today.

With no disrespect intended to "Dialogue Mapping," I will suggest (again) that the obvious missing perspective from all the Delta discussions is Cost-Benefit Analysis.

More data on economic recovery in the 2 Californias

2011-09-30T10:42:00.000-07:00

Although the data lags 6 months, the BLS County Employment and Wages report is one of my favorites because it is real, full population level data from tax records, as opposed to sample based estimates like in the monthly job reports that can be volatile and unreliable for counties and smaller geographies.

The latest release of data from March 2011 detailing tax filings from the 322 largest counties in the U.S., the release states,

Employment declined in 53 of the large counties from March 2010 to
March 2011. Sacramento, Calif., had the largest over-the-year
percentage decrease in employment (-1.6 percent)... Montgomery, Ala., and
Atlantic, N.J., tied for the second largest employment decrease,
followed by San Joaquin, Calif.,

On the other end of the spectrum, Santa Clara County (Silicon Valley) has been posting double digit gains in average wages for the past year. In this report, Santa Clara had the 2nd highest wage growth of 322 counties at 12.4% (the past few reports they have been number 1, so I guess they are slacking off).

Overall, job growth in Silicon Valley has been strong but not growing anything like the income/wage data, and local unemployment is still above the national average. There is an enormous boom going on in technology and information, but so far it doesn't seem to be spilling over much into hospitality, construction, retail, and the lower paying, lower skilled service areas - even in the hottest local economy in the state.

Does Water Efficiency Create More Jobs Than Conveyance?

2011-09-28T21:55:00.000-07:00

From Tranforming Water: Water Efficiency as Stimulus and Long-Term Investment, a report done by David Mitchell at M.Cubed (with co-authors) who has done consulting work with David Sunding and the water contractors in the past.

Our consultant team modeled a wide range of water/energy efficiency program possibilities, across all water‐using sectors and involving indoor, outdoor, and water system efficiencies. This modeling clearly confirms that economic stimulus benefits could be broadly distributed throughout the national economy:

1. The economic output benefits range between $2.5 and $2.8 million per million dollars of direct investment.

2. GDP benefits range between $1.3 and $1.5 million per million dollars of direct investment.

3. Employment potential ranges between 15 and 22 jobs per million dollars of direct investment.

Thus, direct investment on the order of $10 billion in water/energy efficiency programs can boost U.S. GDP by $13 to $15 billion and employment by 150,000 to 220,000 jobs and could save between 6.5 and 10 trillion gallons of water, with resulting energy reductions as well.

Yesterday, David Sunding presented the employment effects of conveyance, about 10 jobs per $1 million invested, and estimated operations and maintenance of conveyance would create about 7 jobs per million spent.

Comparing 15-22 jobs per million dollars from efficiency investments to 7-10 jobs per million invested in conveyance, it looks like efficiency delivers double the job stimulus bang per buck as new conveyance.

Whether it is building canals, low flow shower heads, schools, stadiums or anything; the problem with the one-sided job creation stimulus studies is that there is always an alternative use of the dollar, a cost to getting the dollar from someone else's pocket, and they are almost always presented without proper context.  It is something of an occupational hazard as an applied economist, we are all guilty of it to various extents.

On a positive, somewhat tangential note, I was very pleased to hear Jerry Meral announce at yesterday's BDCP meeting (in response to questions) that David Sunding is going to be working on more comprehensive analysis of BDCP effects. Previously, I had heard that the contractors weren't interested in any real economics, so this is an interesting development and we will see if we get the real cost-benefit analysis that is desperately needed.

Hopefully, he is allowed to properly define the alternative scenarios, rather than letting the water contractors frame the questions.  Nobody knows all the aspects of California water economics better than David, and he is generally pretty careful with the numbers even when the contractors are paying the bills. To improve and create trust in the final product, Dr. Meral ought to form an advisory group (or another workgroup) to help ensure that David can frame the analysis correctly, define the alternatives fairly, and that the results are released no matter how it turns out.

BDCP Planning Creates 3,550 jobs in California

2011-09-28T21:10:00.000-07:00

Understandably, lot's of people asked me what I thought of David Sunding's surprise (to me) presentation at yesterday's BDCP meeting on the employment impacts of building conveyance.

Obviously, I thought he was overly conservative. He should also count the $250 million the water contractors will have spent on consultants and planning. I pumped this spending through the IMPLAN model today, and it calculated the creation of 3,550 mostly high-paying jobs in California. (I should say job-years, since the new way of reporting results in these booster studies is to report a single job that lasts 5 years as 5 jobs. High-speed rail is especially bad about this.) And that isn't even counting all the millions spent on lawsuits that will be on the way creating even more jobs. Even if BDCP fails to build anything, it has been a consulting jobs bonanza for the Sacramento area. More plans, more lawsuits, more jobs!

Despite the sarcasm, I don't actually have a problem with the content of this presentation. The "conveyance will create thousands of jobs" study was inevitable, and I would rather see it from him than another source that would blow it out of proportion and not properly point out the limitations and caveats.

I suppose I need to get busy calculating all the jobs created from building levees now...

Which of the PPIC Delta alternatives is most like the Economic Sustainability Plan?

2011-09-14T22:09:00.000-07:00

Critics are calling the Economic Sustainability Plan a status quo plan. That isn't right, but I understand how it can be misperceived since it is starting with the Delta economy and it's goal is to determine the best future for the Delta (that is consistent with the state's "co-equal goals" of water supply reliability and ecosystem restoration).

For California water wonks, it might be easier to see the ESP's recommendation through the familiar framework developed by the PPIC. I recommend everyone go back and read chapter 8, Evaluating Delta Alternatives, of the 2007 Envisioning Futures PPIC report on the Delta. Before reading further in this post, open up chapter 8 in another window, and go to Table 8-2, pages 166-167.

Make 2 adjustments to Table 8-2 for things that have changed since 2007. First, go to alternatives 4 and 5, cross out costs of $2-3 billion and replace it with $12-15 billion since the estimated costs of isolated conveyance alternatives has gone way up since 2007. Second, due to the co-equal goals being state law, you can rule out alternatives 7 and 8, because the water supply is way too unreliable for current law.

With those 2 adjustments, any reasonable person viewing the Delta problem and accepting this framework has to go back and take a much harder look at alternative 2: Fortress Delta (Dutch Standard), as well as alternative 6.

The recommendation in the ESP is not status quo (that is alternative 1). It is most similar to alternative 2 with some significant environmental enhancements that should total less than an additional $1b (think BDCP with less tidal marsh and some compromise solutions on flood/fish bypasses).

When you go to Table 8-3, you see alternative 2 was primarily rejected due to "great expense." We are arguing that you could get an environmentally improved version of alternative 2 for an economically feasible $5b or less, as opposed to the current focus on an infeasible $15b isolated conveyance plan with really risky outcomes for both the Delta and the environment.

You could also argue that the 2009 Delta Reform Act also requires you to add a column to the PPIC framework for the Delta as a place/economy. That additional adjustment further strengthens our case.

No Bananas in the Delta? MC Hammer shows DWR experts are wrong

2011-09-13T22:06:00.000-07:00

MC Hammer, the rap-pop icon, is among the biggest celebrities of the over half million people that live in the Delta. He lives on a few acres near Tracy, and he sometimes blogs and tweets about his beloved banana plants. On the A&E reality show "Hammer Time", you can see his bananas, and he also takes his dad and kids fishing in the Delta.

I mention this because I have been working my way through lots of correspondence on the DPC Economic Sustainability Plan. The Department of Water Resources wins the detail prize with 58 pages of single spaced comments.

In one surprisingly lengthy section of comments, DWR staff makes a very big deal out of the fact that we have included bananas in our appendix list of the 80 different crops in the Delta recorded in our database in an apparant attempt to discredit us and make us look silly. They are unaware of bananas in the Delta and say they have been studying the area for years. So, I had our analyst track down and confirm our less than 1 acre "crop" of bananas, and he tracked it to a location off 205 near Tracy. It isn't MC Hammer, but apparantly we have some very small scale commercial growing of banana plants, perhaps to serve hobbyists like MC Hammer, or perhaps someone is trying to appeal to the growing number of locavores who crave tropical fruit. All we know is someone is making pesticide filings for very small amounts of bananas, that it has no bearing on our results at all, and our crop data is more detailed than DWR.

But thanks to DWR picking through all the fine print, I now have learned some new Delta trivia and have the opportunity to be inspired to write this post by MC Hammer's own banana blogging (hat tip to VQ).

I love these trees (plants)...they multiply themselves continously. Each of these groups started off as one plant. The more you cut them back, the taller and stronger they grow....

In life, it is the moments that we are cut back, that we should look forward to new growth in our lives. Bigger, better, stronger and multiplying ourselves by sharing what we have learned with others....

--Hammertime

Update on the Economic Sustainability Plan for the Delta

2011-08-17T22:11:00.000-07:00

A 15 page draft executive summary of the Economic Sustainability Plan is now available as part of the August 9 draft. The previous drafts did not have an executive summary because the draft was too incomplete and preliminary.

The August 9 draft makes some adjustments to the recommendations in the second draft, all of which are included in the executive summary. The individual chapters can be downloaded here, including chapter 4 on levees and flood risk that is getting the most current attention. There are four public meetings around the Delta over the next two weeks if you want to hear more and make comments.

There are a few elements of the plan that are still under development for the September/final draft. The most significant adjustment will be in the Legacy Community chapter which is getting reorganized with new content including better graphical illustration of concepts. We are also fine tuning some parts of the data analysis in the agriculture chapter and developing a visual concept of what the recreation strategy could mean for a detailed area in the Delta. None of these will change the broad recommendations in the plan, but will add detail and support.

Should the Government Sell REOs in bulk?

2011-08-11T23:30:00.000-07:00

The Obama administration seems to be coming up with a plan to accelerate that trend by packaging foreclosed properties together and selling them off in bulk to investment groups who will rent them out.

I don't completely understand the logic behind the plan, and in defense of the administration, it is an RFI (Request for Information) which suggests they are still figuring out the details themselves. It is supposed to help make rents more affordable, and although it might help speed properties into the rental market a little faster, I don't think it will do anything to help rents in the long run. I think it is mostly about trying to help the GSEs unload their REO property, and my cynical side fears that it is a plan pushed by big private equity investors to get them access to the nice returns that can be had picking up foreclosure properties around here as rentals. Will this be good for taxpayers by cutting the losses for Fannie/Freddie/FHA on their foreclosures? Maybe. I can't see how bulk sales will bring higher prices for the homes for the GSEs, but it may cut their transaction and holding costs on the properties so they net more in the end. That's a big if.

My first impression is that this is a bad idea for hard hit areas like the Valley. Lots of these homes are going to the rental market anyway, some by local investors and we also have out of towners with local agents buying investment property for them. Others are selling to local families that are buying affordable foreclosure homes, and that is the silver lining in this whole mess. Why would we want to reduce that opportunity for locals and pass it on to some hedge fund in New York just because there is a chance that Fannie/Freddie can cut their loss by a whisker. In the long-run we end up with even more out of town landlords.

I might be a little more supportive of it if the investors who acquired property in this advantageous way were required to include a reasonable and fair, lease-to-own option for the tenants.

And of course, we shouldn't give up on more effective loan modification plans. For the few folks I know who have been successful with this, the modification effectively turn the homeowners into renters of their current homes but without the damage and displacement of the foreclosure process on families or neighborhoods.

These are just my initial thoughts and it will be interesting to see the feedback to the RFI and the eventual plan. I doubt this will be the last post on this topic.

July 2011 California and Metro Forecast

2011-08-04T17:26:00.000-07:00

With the weekend, I forgot to post that we released our July 2011 California and Metro Forecast last Friday. It was interpreted as gloomy, which it is, but it is actually moderately optimistic compared to some of the other forecasts for the Central Valley, particularly Sacramento, and the deepening pessimism about the national economy. Click here to see the summary.

I remember last fall being amazed that the 10-year U.S. treasury bond was yielding a mere 2.5% during a supposed recovery, and what that said about the general lack of confidence in the recovery. That didn't last long, and the yield has been a still low 3-3.5% for most of the year. Today, it closed at 2.4%. I'm not ready to predict another recession, but it is a safe bet that the October 2011 forecast will be lower.

Economic Sustainability Plan Update

2011-07-26T21:31:00.000-07:00

The latest version of the Economic Sustainability Plan was posted last Thursday afternoon, and will be presented to the Delta Protection Commission (DPC) this Thursday in Stockton. I am the principal, but have had a lot of help. A few notes:

This is the first complete draft. It includes actions, strategies, and recommendations in the final chapter which is posted on the DPC website. All the chapters can be downloaded individually. The recommendations are only a few pages, but too long to repost here.

At this point, it is important to remember that the conclusions and recommendations have not been approved by the DPC. They are consultant recommendations based on our research, interpretation of the evidence, and mandate to develop a plan that enhances and ensures economic sustainability for the Delta while also being consistent with the co-equal goals of the Stewardship Council's Delta Plan. Since the document currently stands at 244 pages (despite moving a lot of material to appendices that will be posted soon), the last two chapters will ultimately be revised into a summary version of the Economic Sustainability Plan.

ACWA misses "de" quote

2011-07-26T21:30:00.000-07:00

Delete the "de" from modest and the result is most.

A recent ACWA report about the draft Economic Sustainability Plan from the Delta Protection Commission had the following incorrect quote. "Most agricultural impacts could be offset by recreation economy gains." The concluding chapter of the draft plan actually states, "Modest agricultural impacts could be offset by recreation economy gains."

Those two letters changes the meaning of the sentence quite a bit. Maybe it is my turn to write a scathing letter to John Laird.

(The last sentence is a joke. If you knew the pain I have endured this month for a would/could mistake that was quickly corrected, you might find it funny.)

Stockton water-technology start up moves to Milwaukee

2011-07-22T11:57:00.000-07:00

From the inbox. It is rare that an obscure article in the Milwaukee Business Journal touches so many different issues important to my job and this blog. Check it out while I scream in frustration.

Water technology company plans Milwaukee plant

A California water-technology company is planning to establish a manufacturing facility and offices in Milwaukee that could create up to 300 jobs.

American Micro Detection Systems Inc., Stockton, Calif., is looking for a Milwaukee site for a $7.5-million, 2,000-square-foot manufacturing, testing, assembly and shipping facility, said Robert Keville, chairman, president and CEO...

The company, established in 2003, manufactures equipment that tests water, oil and other fluids for impurities and heavy metals...

Keville said he has not chosen a site. He said he wants the building to be near one of the two places where the University of Wisconsin-Milwaukee is establishing its School of Freshwater Sciences...

Keville said the city of Milwaukee has offered forgivable loans to the project and the state of Wisconsin is offering tax credits...

Keville said Milwaukee is attractive because its local companies can supply the services AMDS needs and because of the efforts to brand that area as a worldwide hub of companies whose products involve water.

“It’s in its infancy,” Keville said, “but it is only going to grow. Lake Michigan isn’t going to get any cleaner by itself.”

Meeusen said AMDS’s planned move to Milwaukee is further proof for skeptics that Milwaukee can become a international seat of water technology companies.

“If we were located on Lake Superior, we would call it Lake Pretty Good,” he said. “We just never believe that we are anything, and I find that very frustrating. The fact of the matter is Milwaukee is a water hub.”

Rental Housing in San Joaquin County

2011-07-06T14:37:00.000-07:00

The Business Forecasting Center recently published a brief report on the rental housing market in San Joaquin County. Despite the collapse in home prices that has made purchasing homes very affordable, we found rental housing in the area is still quite expensive and hard to find.

I am pleased that the report has sparked a local discussion of an important issue that isn't getting enough attention in this crazy housing market. See these articles from the Stockton Record Sunday and today.

Reed Fuji: High Rents Tied to Building Choices

Michael Fitzgerald: More Could, Should be Done to Revive S.J. Rental Sector.

The 4th of July and Delta Levees

2011-07-01T13:43:00.000-07:00

[Youtube video of Delta fireworks removed for faster blog loading.]

Should Delta levees be upgraded and then repaired if they fail? Should significant areas of open-water caused by permanently flooded islands be part of the Delta’s future? It is a reasonable question and as one who believes in the value of cost/benefit analysis, I like the set-up of the levee decision analysis paper from Suddeth, Mount and Lund of UC-Davis. Unfortunately, their conclusion that the majority of Delta levees aren’t worth the investment or recovery is way too strong given the relatively low assumed values of land, infrastructure and the variety of things that they have not measured, including recreation impacts. Luckily, the editor of the SF Estuary journal appears to have forced them to include more sensitivity analysis results before publishing their paper, a result I consider better than outright rejection in this case since we can see more scenario results from a paper that was already influential.

This picture from their paper emerged from a scenario with better land and infrastructure values, and is enough to move the conversation forward. The key result is the 6 central Delta islands that would be converted to open water over time.

Jeff Mount, a member of the Stewardship Council’s independent science board, apparently agrees, since he put the same map forward in a letter to the Stewardship Council. In my view, their earlier analysis did establish something useful: the discussion of do not resuscitate lists can be narrowed down to these six islands, plus maybe 2 or 3 very small islands scattered around the Delta like Deadhorse or Fay. (Note: If they considered the new Stockton Water Supply project, Empire Tract (#16) would be removed and it would be a five island open water area.)

In the Economic Sustainability Plan, I directed our team to take a serious look at this future open water configuration. Given the absence of key infrastructure in this area, few residents, and low-value agriculture, these islands certainly rank the highest on the candidate list of places we might allow to be converted to open water. On the downside, there are concerns about the impacts on levees on surrounding islands, water quality concerns related to increasing organic material for municipal and industrial water intakes.

I thought recreation would be the wild card, and have been a little surprised at the almost universally negative response from recreationists, owners of recreation related businesses in the Delta, and recreation experts who have been studying the area for years.

One of the first things I heard was, “It will ruin the 4th of July.” I am usually out of town on the 4th, and didn't know Barron Hilton has been hosting a large fireworks show off Mandeville Tip since 1958 near his duck club on Venice Island. This location is directly in the middle of this open water scenario. It is the biggest weekend of the year for Delta recreation.

The next thing I learned is that this area is the most popular area for boating, and that about half of Delta marinas surround the immediate area and in most cases would be potentially negatively impacted by the loss of wind/wave protection and the necessary levee improvements on adjacent islands. I didn’t go to all the recreation focus groups, but my understanding is that it got a very negative reaction from boaters and marina owners who anticipated high waves and winds would drive them elsewhere, possibly out of the Delta all together. Since this is the most popular area for boating and boating is by far the most important recreational activity to the Delta economy, it seems this plan could have harmful negative economic effects that aren’t considered in the Suddeth et. al. models. Few people seemed to think that sailing or other recreational opportunities would fill the void.

The last thing I learned is that it could be bad for hunting. I spoke with one farmer who grew low-value crops in this area, and I asked why he didn’t grow different crops. He explained that corn prices have in fact made growing corn high value, but the real answer was that in the Delta there are farmers, farmers who also hunt, and avid hunters who do some farming when it isn’t duck season. He considered himself in the latter category, and insisted he would grow corn if it were 10 cents a bushel, always has, because it leads to good duck hunting and that is the top priority. It seems there is more underlying the value of land than just the value of crops.

So, how much is all that worth? I don’t know for sure, but it is a potentially big deal, especially if it really is as negative for boating as our initial feedback suggests. We have learned that levees that protect low value agriculture may be supporting high-value recreation.

Personally, I would like there to be less talk about Delta recreation/tourism as a driver of income and jobs, and more talk about it just being unique and fun. That’s worth something, but it isn’t anywhere in the computer models about Delta levee decisions. Perhaps it should be.

Have a safe and happy 4th everyone!

[Youtube video of crazy Delta jet skier removed for faster blog loading.]

Impacts of Isolated Conveyance on Delta Agriculture: Update

2011-06-21T20:05:00.000-07:00

I have been too busy to follow much of anything for a few days, but a concern has been raised to me that the $200 million agriculture loss from isolated conveyance reported in the post below and a newspaper article is an exagerration because it reflects a heavy pumping scenario, not what is actually proposed in the current BDCP. This is a good point, and I agree that a "would" should have been a "could" or presented as a range and I take responsibility for that slip. It will be corrected in presentations later this week, similar to what is written below.

If forced to use a single number, I am using an estimated impact of agricultural revenue losses of $50 million. How is it supported? The models that have been developed for the report estimate annual losses ranging from $27m under current south Delta salinity standards (0.7 EC) to $64m under proposed (1.0 EC) salinity standards currently under consideration by the SWRCB (I note that these numbers are revised modeling results with lower numbers than I was provided to include in the 1st draft). In addition, the footprint of the tunnel conveyance is 8,000 acres which will be primarily farmland in a zone that currently averages $2,075 per acre. Assuming some of it takes out non-farmland, a reasonable estimate is another $8m to $16m from the footprint. That gives you a reasonable estimate of revenue losses of isolated conveyance to Delta agriculture (assuming it is operated as proposed in the draft BDCP) of $35m to $80m. Thus, I am comfortable using $50m as a discussion number, and have rewritten the summary of this results as:

"If operated as proposed in the draft BDCP, isolated conveyance would decrease Delta agricultural production by about $50 million, and would have a negative impact on tourism development and the rural quality of life. If a large isolated conveyance were operated to maximize water supplies, south Delta salinity could triple and agricultural production losses could increase to $200 million. The higher scenario illustrates the risk of a large capacity conveyance to the Delta since there will be financial and political pressure to increase exports to high levels."

I also emphasize that it is a draft, results continue to be refined, but that the impacts are in fact very consistent with those Prof. Howitt estimated in 2007; $70m loss, up to $200m in high scenarios. Not much difference in this number, but the adjectives we use and our overall view of the situation is very different.

I don't intend to post every little update and revision to this report as it progresses through drafts, but felt this clarification was needed now given a concern that has been raised.

Update: There was a typo in the original post, the upper level of salinity loss is $64m but was originally reported as $54m.

First Administrative Draft of the Economic Sustainability Plan for the Delta

2011-06-16T19:04:00.000-07:00

[Update Note: This is a description of preliminary results from a first, incomplete draft. For up to date information on the most recent complete drafts of the plan, visit the Delta Protection Commission website. I also deleted a paragraph that listed key contributors, because several of the sub-contractors have been bothered by people associated with the BDCP for their names appearing on this blog that makes critical comments about the BDCP. In hindsight, I shouldn't have deleted the paragraph, but I can't recover it now.]

As some ValleyEcon readers know, I am the PI on the Delta Protection Commission's Economic Sustainability Plan (phase 2). The first administrative draft of the ESP report was posted this afternoon in preparation for a DPC workshop at the Port of Stockton on June 23. This contract was only awarded in March, and a stellar research team has been working hard to get us to this point in under 3 months. It is work in progress, and some portions are incomplete.

...
The initial list of key findings is below:

· Delta agriculture supports 13,700 jobs, $1.1 billion in value-added, and nearly $2.8 billion in economic output in the five Delta counties. In addition, Delta agriculture supports nearly 23,000 jobs, over $1.9 billion in value-added, and over $4.6 billion in economic output in the state of California. (chapter 7)

· Delta recreation and tourism supports 2,700 jobs, $152 million in value-added, and nearly $284 million in economic output in the five Delta counties. In addition, Delta recreation and tourism generates over 4,900 jobs, $324 million in value-added, and $600 million in economic output in the state of California. (chapter 8)

· Delta agriculture supports 5 times more jobs, and 7 times more value-added (income) than Delta recreation and tourism. While recreation is an important supporting economic sector and adds to the Delta’s unique quality of life, it is unrealistic to expect that recreation and tourism could replace agriculture as the Delta’s economic driver. (chapters 7 and 8)

· All available indicators for Delta recreation suggest Delta tourism has been flat for one to two decades before the onset of the recession. Regional population growth is an opportunity, but does not by itself guarantee growth in Delta recreation and tourism. Delta boating and fishing increased rapidly in the 1980s and previous decades, but has slowed since. Improved water quality and new investment in recreation facilities and hospitality enterprises are frequently cited as being essential to growing recreation and tourism in the Delta. (chapter 8)

· Improving the visibility and recognition of the Delta as a place will benefit Delta tourism and agriculture. The Delta Protection Commission should complete its feasibility assessment of National Heritage Area designation. (chapter 8)

· Delta levees are critical to economic sustainability. The Delta levee system protects critical water, energy, and transportation infrastructure for the state and regional economy, and supports all aspects of the Delta economy. (chapter 4)

· Delta levees are in better condition than often portrayed, but still need investment. As opposed to frequent reports that cite over a thousand miles of “fragile” levees in need of billions in repairs, there are actually about 370 miles of Delta levees that need roughly $500 million in investment to reach appropriate standards. This goal could be reached with strategic use of existing bond funds. (chapter 4)

· Population trends in the primary zone are relatively flat, but uneven across regions. North Delta population increased over the past decade, whereas South and East areas of the primary zone declined in population. In contrast, the secondary zone population increased 25% between 2000 and 2010. (chapter 2)

· The current capacity of Delta tourism infrastructure and enterprises is insufficient to capture significant income from increased visitation. If the goal of the Delta Plan is to increase Delta tourism, there needs to be greater incentives for investment in tourism businesses, not increased regulation of “covered actions” in the Delta that discourage these investments. (chapter 8)

· Implementing the November/December 2010 draft of the Bay Delta Conservation Plan would be devastating to the Delta economy. It would cause a 30-50% decline in Delta agriculture, and could decrease Delta recreation and tourism. (chapters 7 and 8)

· Large, isolated conveyance would decrease Delta agricultural production by nearly $200 million, and negatively impact Delta tourism. Increased South Delta salinity would cause large decreases in the production of high-value truck crops, and also negatively impact high-value vineyards. Increased salinity would also negatively impact boating, and the large scale industrialization of the Sacramento River with five large new pumping plants and intakes near historic Legacy Communities would have negative impacts on tourism development and the rural quality of life. (chapters 7 and 8)

· The BDCP proposal to create 65,000 acres of tidal marsh habitat would reduce annual agricultural production by a minimum of $84 million, and generate little if any compensating tourist spending. The $84 million annual loss in agricultural production assumes targeted land acquisition to minimize impacts, and annual losses could exceed $100 million if agricultural encroachment is not minimized. (chapter 7)

· Several influential studies of Delta issues have significant errors in economic analysis. The most notable problems are various PPIC reports that have misled decision makers about the Delta economy and inaccurately portray the economics of the peripheral canal and investment decisions in Delta levees. (chapter 5)

DRMS Phase 2 report released

2011-06-15T00:24:00.000-07:00

Interestingly, I just discovered the Department of Water Resources released the Delta Risk Management Strategy (DRMS) Phase 2 report on Monday when searching for a tidbit of information from DRMS Phase 1.

June 13, 2011 - The Department of Water Resources has released the Delta Risk Management Strategy Phase 2 Report and Executive Summary. The Delta Risk Management Strategy (DRMS) Phase 2 report builds on the knowledge gained from the DRMS Phase 1 assessment to evaluate scenarios which could reduce the risks to our State economy. The methods include a selection of improvement strategies considered at the time of the study in 2009; however, today, there are more options in play. The information in the report provides insight to methods that may be used by the Department and others to manage risk.

Among the obvious signs that the study is from 2009 are that it uses a $4.9 billion cost estimate for a peripheral canal that is dated from 2007. The results, and I have not reviewed to see how reliable the calculations are, show that improved levee strategies and isolated conveyance rank very close, and anyone who would interpret the results as saying isolated conveyance is best should realize that any net benefit advantage from isolated conveyance completely disapears if one uses more current cost estimates.

There are many other curious aspects of the report, such as its combining conveyance scenarios with putting highways on piers and armored infrastructure corridors that confuse the issues. At this point, the phase 2 report will probably have little impact on the debate. However, it is hard to use the DRMS Phase 2 results to justify a peripheral canal over upgrading levees in the way that many spun Phase 1.

The timing and low profile of this release is probably the most interesting aspect of it. Very odd. I would be interested in hearing more about that if anyone knows and is willing to share.

Water and Jobs in the San Joaquin Valley, again...

2011-06-07T00:04:00.000-07:00

Since Devin Nunes introduced H.R. 1837, I don't think a day has gone by when someone hasn't asked me to write a letter, op-ed, blog, press release, t.v. show, speak at a meeting/hearing, etc. I've even had people try to make it easy for me by sending ghost-written letters and op-eds for me to approve complete with folksy quotes and flattering self-references (sorry, but I write my own stuff).

I did have an intern call his office a few times to get a source on the 25,000 to 30,000 jobs created claim in the bills press release and promotional materials, but we never got a call back. I think I saw the fisherman respond by pulling their own billion dollar propaganda back out, and it makes me feel as if the debate has taken a few steps backwards to a place I thought we left behind.

I typed up a FAQ style handout for a meeting earlier today, and posted it to our website here. Not much new information, but hopefully this format is useful to the folks asking for something new.

So, what do I think of the bill anyway? I have been interested in all the comments about how Nunes is undermining the BDCP, suggesting that his bill is bad for his own constituents. Yes, he is undermining BDCP, but BDCP isn't shaping up to be a great deal for South Valley agriculture anyway. The costs are much higher and the additional water is much lower than they thought it would be when the originally signed on to look at it. I think South Valley ag. is better off under the current biops (less water than they want, but at least most of it is cheap) than under an unsubsidized BDCP (a little more water, but all the water is a lot more expensive). If that's the case, then the best strategy for them is to try to change the pump operations through legal and political channels.

Unemployment Friday: CA down to 11.9%, but other states dropping faster

2011-05-20T15:30:00.000-07:00

In today's report, some people are trying to make something positive of dropping below the 12% unemployment threshold to 11.9%. They shouldn't get too excited.

What would be exciting is if we were seeing the kind of declines seen in places like Michigan and Nevada. Unemployment used to be higher in Michigan than in California, but it is down to 10.2% there from a peak in the 14s, and Nevada is down to 12.5%, dropping 0.7% in a single month and it also peaked in the 14s. If these trends continue, Nevada may drop below California and leave California with the highest unemployment rate in the U.S. And then we will see a new wave of stories on California's downfall.

However, unemployment rate movement is being driven more by labor force changes than employment growth. Michigan and the auto industry is rebounding, but it's labor force is also shrinking, down 6% over 4 years. So, it is recovering a little better than California, but not as much as the unemployment rate would lead you to believe.

And Nevada. The labor force there has declined by 4% over the past year, and that is what has driven the unemployment rate from 14.9% to 12.5% in a year, although tourism and the casino's are slowly picking up, employment is still down.

So when California's unemployment rate becomes tops in the nation later this year, it is an indicator that our economy stinks and recovery is lackluster. But it also means that people aren't giving up on California's job market (whether by moving or leaving the workforce) at the same pace as Nevada or Michigan.

Within California, some of the big inland areas like Sacramento and Riverside are showing large labor force declines too, but only about half that seen in Nevada. This month's job report mostly reflects the same patterns. Silicon Valley, Disneyland and Hollywood are recovering. The housing market continues to keep inland areas down; although there continues to be signs in the Valley of solid growth in agriculture, transportation/logistics, and food manufacturing; just not enough to overcome the housing and local government crash.

Squatter's Rent/Stimulus

2011-05-15T17:12:00.000-07:00

A J.P. Morgan Chase analyst estimates that the value of "squatter's rent" will total $50 billion in the U.S. That's a significant sum, about 0.4% of total U.S. personal income. (Note: Squatters rent refers to the value of free "rent" enjoyed by those living in homes in foreclosure or seriously delinquent on a mortgage.)

Last spring, I made a similar estimate for San Joaquin County although I called it "squatter stimulus." At that time, I estimated the squatter stimulus was equal to roughly 3% of the County's personal income, based on the 20% of serious delinquency rate on San Joaquin County mortgages at the time, and the estimated rental value of a typical house in the foreclosure process.

In a bit of good news, the serious delinquency rate in San Joaquin County has declined to 15% according to the lastest data I saw. This suggests that the total of households leaving delinquency due to a completed foreclosure, short sale, or mortgage modification is greater than new delinquencies. Before getting too excited about the decline in delinquencies, it is important to realize that a typical historic delinquency rates on mortgages is about 2% (and a lot more of these delinquent mortgages were successfully resolved without foreclosure since a lot of these owners had equity in the homes creating a strong incentive to sell or get current). So we are likely past the peak, but there is still a long, long way to go.

Declining delinquencies also reduce the amount of squatter stimulus in the County, and I suspect it is now about 2% of personal income. Obviously, squatter stimulus is not a sustainable or desirable basis for consumer spending, but it is a factor to note when considering how local consumer spending will evolve in the recovery.

From the San Francisco Chronicle on squatter's rent:

"Squatter's rent," or the increase to income from withheld mortgage payments, will be an estimated $50 billion this year, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The extra cash could represent a boost to spending that's equal to about half the estimated savings generated by cuts to payroll withholding in December's bipartisan tax plan.

"We've had a lot of government transfers to the household sector; this is a transfer from the business sector to households," Feroli said. "It's a shock absorber that has helped the consumer ride out the storm."

Delta Tourism article in Sac Bee

2011-05-10T22:56:00.000-07:00

Overall, this is a good article and I generally agree with the main points in the article in the report. Public access to the water in the Delta could/should be greatly improved, and there is a lot of growth potential for recreation in the Delta.

But there is an incorrect number in the article that could be misintepreted. The Sac Bee article states.

Mandated by 2009 water reform legislation, the report says visitor spending in the Delta generates $784 million annually and supports 15,000 jobs. There is potential for much more if only there were more trails, campsites and waterfront access.

Here is what the report actually says.

Economic Activity in the Delta. The purchase of equipment and supplies for day outings helps support local economies.

Visitor spending in the Delta and Suisun Marsh counties’ recreation, art, and entertainment sectors is about $784 million annually, generating almost $388.7 million in earnings and supporting over 15,000 jobs.

Did you notice the subtle difference?   It's easy to see how this was misinterpreted by the reporter.  I think it would be by most people.

I have no idea why this number is even in the State Parks report. The numbers are correct, but have little to do with the Delta.  It is the total of arts, entertainment, and recreation in the 5 counties that include the Delta. I checked the numbers, and about 20% of the total is the Sacramento Kings NBA team. The arena in Natomas may be in a flood zone, but it isn't in the Delta. The next biggest things are 6 Flags amusement park in Vallejo, and scores of golf courses, fitness clubs, bowling centers, and arts related organizations. Marinas are the biggest Delta-related piece of this and employ about 300 people in the 5 counties, mostly in the Delta.

The impact of tourism and recreation in the Delta is a very hard thing to measure, and it will be important to get the number right for some of the current and upcoming policy discussions surrounding the Delta.  I am part of a group that is developing a more reliable estimate, and will share that once we have it. A very rough ballpark would be $250 to $500 million, and the largest and fastest growing component of that spending is gasoline.

Even defining Delta tourism and recreation is tougher than you might think. "Sesame Street Live: Elmo's Healthy Heroes" is coming to the Stockton Arena this month and is in the legal Delta.  Would you count it?

Scranton, PA is America's Least Miserable City

2011-05-05T17:19:00.000-07:00

Given all the local commotion about the Forbes miserable city list, I assigned a student intern to compile the data Forbes used and reverse engineer the list. Recall that Stockton topped the list that is reviled in the Valley with and Modesto, Sacramento and Merced also rating in the top 5 of Forbes misery.

Forbes didn't publish the full ratings or data, just the cities at the top of the misery chart. We wanted to see the other end of the list, the least miserable places. Our intern, Jesse Neumann, was successful in replicating 8 of the 10 indicators - we couldn't figure out how they measured losing sports teams and political corruption - but we were still able to match the ranking very well. We found the full ranking to be entertaining and insightful, and my friend in university PR thought it was interesting enough to put together a news release (see below).

Click through the link at the bottom if you want to see the full rankings in Jesse's report and see where your hometown ranks. (Note to Sacramentans: Sacramento actually fared a little better, down to 8th most miserable in our version, primarily because we didn't have the sports indicator so the Kings steady losing wasn't dragging you down.)

America’s Least Miserable Cities: Scranton, Pennsylvania is America’s least miserable city according to a replication of the Forbes magazine misery index (May 5, 2011) -

Earlier this year, Stockton was named the most miserable city in the United States by Forbes Magazine and was followed closely behind by Sacramento and Modesto. But what is the least miserable city in the United States according to Forbes?

Well, it's Scranton, Pa., according to a replication of the Forbes magazine miserable cities rating done by the University of the Pacific's Business Forecasting Center.

Forbes has rated Stockton, California America's most miserable city 2 of the past 3 years, but did not publish the full rankings of metropolitan statistical areas (MSAs). For the 100 largest MSAs in the U.S., the Business Forecasting Center compiled the data for 8 of the 10 indicators used by Forbes, and was able to closely match the published Forbes misery rankings.

"We were interested in what cities were on the other end of the list," said Jeff Michael, director of the Business Forecasting Center (BFC).

"I'm graduating soon, and I wanted to know where I should go to escape my misery," added BFC student researcher Jesse Neumann.

Scranton, the setting of the hit television series "The Office," was a surprise to the BFC researchers. Scranton stood out in the misery rankings for having the smallest decrease in home values, and exceptionally low foreclosure rates. "With home prices in Scranton so low for so long, who needs a mortgage?" Michael said.

Despite being the most and least miserable cities, the BFC researchers observed that Scranton and Stockton had some things in common. Both metro areas began the decade with nearly identical populations. The 2000 Census recorded the Scranton MSA population at 560,625 and the Stockton MSA at 563,598. Over the next ten years, Scranton added 3,006 people, a 0.5% growth rate. In contrast, Stockton grew by 121,708 people, a 21.6% rate.

"It seems that people are attracted to misery as Forbes defines it," Neumann observed.

After working with the data, it became apparent to the researchers that Forbes was missing a few obvious indicators. "Surprisingly, the Forbes ranking did not use a single indicator of income or wealth, or any measure of people moving out of the area," Michael said.

As an experiment, the researchers replaced four of the most problematic Forbes indicators. Specifically, they removed: 1) political corruption, 2) sports team records, 3) sales tax rate, and 4) 3-year change in home values. They replaced these indicators with 1) net domestic migration, 2) median household income, 3) property taxes, 4) housing affordability index. "Sales taxes are often used by cities to shift the misery of taxes on visitors, whereas the misery of property taxes falls entirely on residents," Michael said. The unemployment rate, foreclosure rate, crime rate, average commute time, weather, and income taxes were kept in the revised index.

In the experimental misery index, Miami was most miserable, followed by Detroit. Stockton was third, followed by Chicago, Los Angeles, and Memphis. Three of the four least miserable cities in the experimental index were in Utah.

According to the Business Forecasting Center researchers, the exercise confirmed the arbitrary and meaningless nature of these types of magazine rankings.

"Unfortunately, the Forbes ranking is causing real harm to these so-called miserable cities," Michael said. "They should publish the full ranking and data so people can better make their own judgment about the reliability of the misery rating. Until that happens, we will continue to replicate their full rankings as closely as possible."

Forbes ranked the 200 largest MSAs, whereas the BFC only compiled data for the 100 largest MSAs. Thus, smaller areas on the Forbes list such as Merced, Calif., do not appear in the replicated rankings. In addition, the BFC team was unable to replicate two indicators in the original Forbes ranking due to missing data or an unclear methodology: political corruption and winning sports teams.

The full report is available at: http://forecast.pacific.edu/articles/BFCForbesRevisit.pdf

Water Won't Wash Away Valley's Recession: Two Years Later

2011-05-01T04:00:00.000-07:00

Two years ago, on May 1, 2009, the Sacramento Bee published an op-ed I wrote titled "Water Won't Wash Away Valley's Recession." The Fresno Bee reprinted it a few days later. Today, water supplies are very high and unemployment rates throughout the Valley are higher than they were in 2009, suggesting that the title of the piece was correct.

I have never received such a strong reaction to something I have written. The reaction (mostly positive but occasionaly ugly) changed the economics of water issues from being what I considered a hobby to an ever growing part of my real job.

The article was my response to the Latino Water Coaliton march of April 2009, and the scores of articles in the media at that time which were misrepresenting the facts and distracting our leaders from a much larger economic crisis. [On a non-water note. Wouldn't it have been nice if Valley Congressional leaders banded together to demand stronger foreclosure prevention programs from the Obama administration back in Jan-Apr 2009 when they finalized their economic recovery plan. Foreclosures were supposed to be the third "prong" of their recovery program, and we got relatvely strong programs to support the other two areas, 1) banks, and 2) stimulus; and weak, underfunded, ineffective foreclosure prevention programs. Too bad the foreclosure prevention component didn't have stronger advocates back then.]

I have reposted the original op-ed below. I think it is interesting to read again after everything that has happened over the past 2 years, and the points are still relevant. It is the first part that received most of the attention, but I have always been equally if not more concerned about the last part.

Water Won't Wash Away Valley Recession

(originally pubished, May 1, 2009 in Sacramento Bee)

What is causing unemployment in the San Joaquin Valley? According to water contractors and their political supporters, a "regulatory drought" has eliminated water-dependent farm jobs, and they point to high unemployment rates in farming communities as proof. Their solution is to suspend the Endangered Species Act and build a multibillion-dollar peripheral canal around the Delta.

However, the facts don't support the water contractors' view. The latest payroll data through March finds that farm jobs have grown faster than any other sector of the economy in the past 12 months, even outpacing health care. In fact, farm jobs have been growing throughout the three-year drought. Compared with 2006, farm jobs have increased 5 percent in California, while private nonfarm jobs have decreased 5 percent.

The same is true in Fresno County, home to communities such as Mendota that have been the focus of water exporters' news releases.

In Fresno County, farm payrolls increased 3.2 percent in the past 12 months, compared with a 3.4 percent decrease in private, nonfarm payrolls.

Since the drought began three years ago, Fresno County farm payrolls have increased by 12 percent, while nonfarm employment has crashed, led by a loss of more than 7,000 construction jobs.

In light of these statistics, how can water exporters, politicians and others claim that rising unemployment in the Valley is a result of water shortages for farms rather than the broader recession? The foreclosure crisis is at the heart of the recession, and the Central Valley has the highest foreclosure rates in the United States. Homebuilding has shut down, and service sectors have cratered, costing many former farmworkers their higher paying, nonseasonal jobs.

Water contractors point to 40 percent unemployment in Mendota as evidence of the water crisis. These unemployment estimates for towns aren't a current survey, but are crude extrapolations from the 2000 Census, the last time any real data were compiled for these areas.

The 2000 census gives a good picture of the prosperity that increased water pumping would bring to Mendota's hard-working residents. Delta water exports were above average in 2000, and local farm employment was at a nine-year peak. Despite this, the 2000 census found unemployment in Mendota exceeded 32 percent, highest of the state's 494 towns.

Per-capita income was below $8,000, the lowest level in the state, nearly 20 percent lower than Mexico and many developing nations in Africa, Eastern Europe and South America. Not surprisingly, water contractors don't issue news releases about unemployment when they have water.

In fact, growers have been complaining about shortages in recent years, even as Mendota's unemployment estimate was 25 to 30 percent.

There will be substantially fewer seasonal farm jobs this year as thousands of acres are idled, and this will further increase the pain of the recession in farming areas south of the Delta water pumps. As these impacts appear, it is important to consider them over the entire three-year span of the drought, rather than treat agriculture's recent unsustainable peak as normal.

In the early years of the drought, agriculture expanded in response to a commodity bubble that more than doubled crop prices, farm profits, and farmland values in a span of a few years. Much of the increase is attributed to permanent crops in desert regions with interruptible junior water rights. Between 2006 and 2008, more than 50,000 acres of new almond orchards were planted, mostly south of the Delta pumps, while a nut glut led to a price collapse for all growers. Similarly, California's enormous dairy industry expanded rapidly, and now taxpayers are spending millions to buy surplus milk and prop up prices in an oversupplied market.

Taxpayers are the forgotten stakeholders in the various Delta planning processes. With no one protecting taxpayer interests, it's no surprise that Delta Vision recommended the most costly options to the governor. The Bay Delta Conservation Plan does not plan to make a cost estimate of their plan until after it is complete.

Recent state tax increases are hurting families, businesses and private sector job creation, while California has the lowest bond rating of any state. Water contractors think the state should borrow billions for their cause, crowding out investments in education, energy, transportation and other critical areas that will support the high-paying jobs of the future.

Their plan would also have adverse impacts on Delta agriculture, recreation and tourism, commercial fishing and the jobs supported by these industries.

Delta Vision, water contractors and now the Bay Delta Conservation Plan are primarily making economic arguments for their plans. While spending millions on engineering studies and public relations, the state is not sponsoring any serious research to comprehensively evaluate economic effects of the water plan.

California's overburdened taxpayers deserve better.

New Metropolitan Water District Presentation on Delta Costs

2011-04-27T00:44:00.000-07:00

I was looking for recent MWD cost analysis on a canal, and found this Powerpoint presentation from a MWD committee meeting that was today.  At the risk of reading too much into a Powerpoint without hearing the presentation, I found several parts very interesting compared to what I saw from MWD last year.
1. I have not seen any water contractors talking about incremental (marginal) costs of Delta conveyance before (see slide 36). That is a very positive development. Note that the incremental, capital only costs of a tunnel are a whopping $518/af. Based on the other slides, it is reasonable to add another 10-15% on top of that for operating and mitigation costs, and $250-$300 per af (according to the slide) to move the water from the pumps. That puts the incremental cost of the water provided by the Delta conveyance to MWD at $800-$900 per af. They may be willing to pay that, but it is definitely pushing the limits, and they won't be able to pitch in more money for habitat or cross-subsidize ag. users at those levels.

2. MWD is only allocating proportional costs to itself, thus these would be the same costs that would apply to agricultural contractors. It's hard to see how ag could pay these costs.

3. The presentation makes the small tunnels look pretty bad, especially the cut and fill idea.  As a non-engineer, I wonder why 2 tunnels are necessary for 3,000 or 6,000 cfs?  That would be a question I would ask if I were sitting in the room instead of reading Powerpoint on the internet, as I have heard conflicting information on this.

4. Will the BDCP backtrack to the original East surface canal because of the tunnel costs?  I would expect that question to be on the mind of any MWD board members watching this presentation, especially when they start seeing the costs displayed in incremental/marginal terms instead of average costs.

Update 4:10 P.M.:

I have gotten a half dozen email comments from smart people today on this post.  Use the comments, don't send me email. That way everyone can benefit from your wisdom.

Cost-Benefit Analysis, Rep. McClintock, and the PPIC

2011-04-24T20:00:00.000-07:00

Some readers have asked for elaboration on the McClintock/PPIC comparison in the last post. Tom McClintock wrote this in a recent article in the Sacramento Bee.

as chairman of the House Subcommittee on Water and Power I have announced that all projects – including the Auburn dam – will first be evaluated under a uniform cost-benefit analysis that establishes the amortized cost of construction, and annual operations and maintenance balanced against the value of water, hydroelectricity, recreational leases and flood control protection afforded by these projects.

I like that McClintock is focused on cost-benefit analysis, and I especially like that he is emphasizing the importance of a uniform approach to it. However, his description of cost-benefit analysis is not correct. Cost-benefit analysis does not amortize costs into the future and compare them to future benefits. This approach ignores the time to build, and is problematic when benefits are not smooth. The correct way to do cost-benefit analysis is to estimate the full path of costs and benefits and discount them back to a single present value. This is fundamental. Consult any textbook, government guideline for confirmation. Even Wikipedia has it right,

Benefits and costs are often expressed in money terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their “present value.”

If a project has a short build time and a smooth time series of costs and benefits, it isn't a big difference mathematically. However, if it is a big project with a long build time before benefits appear and those benefits aren't smooth over time (i.e. dams, peripheral canal around the Delta), the error heavily biases the analysis towards making the investment.

So why does McClintock have me thinking about the influential PPIC water reports?

There are two key analysis by the PPIC/Davis group, both originally published in the 2008 Comparing Futures report. In the one analysis, they evaluate whether a peripheral canal should be built around the Delta, a project long desired by water exporters. In the other analysis, they evaluate whether Delta levees should be upgraded or repaired after a flood, investments strongly supported by Delta interests.

The PPIC/Davis team does not apply a uniform approach to evaluating these investment decisions.

When it comes to Delta levee investments, they use the correct present value framework and even account for the lack of benefits during the construction period. I have no problem with the framework they utilize here.   They conclude that in most cases, investing in and repairing levees is not economically efficient. Their conclusions depend on the values they assign to benefits, costs, and flood probabilities, and those have values have been challenged by many, but that is outside this discussion of the framework.

When it comes to evaluating the peripheral canal, the PPIC/Davis group uses the incorrect, McClintock style approach that amortizes costs forward to the future for comparison to future benefits. It is a much easier standard. The approach ignores a 10-25 year build period when costs are incurred and no benefits are received. And then, they choose a very distant future year to evaluate benefits (they say 2050, but their 2050 water demand looks more like 2080 or 2100) when benefits of a canal are estimated to be very high, ignoring the fact that benefits will be much smaller at first.

I can forgive Congressman McClintock and staff for not knowing the difference. After all, ordinary voters are familiar with amortization, not discounted present value; and he is talking about a concept and not making calculations. But the PPIC group certainly should know the difference, are making influential calculations, should apply a uniform approach.  Instead, they set up an inconsistent framework to evaluate these two investment alternatives, and thereby severely biased their analysis in favor of a peripheral canal before they even input a single number into the models.

Is this splitting hairs? Is it a big deal quantitatively?

Consider a simple example, based on current cost estimates for alternative conveyance, and benefits of a conveyance as calculated in the 2008 PPIC report.

Assumptions: 50 year analysis period, 5% real interest rate, peripheral conveyance costs $15 billion and takes 15 years to build so $1 billion in costs in years 1-15, operating costs $200 million annually from years 16-50, benefits of the conveyance are $2 billion 50 years from now, increasing by $50 million per year to reflect the growing demand and growing risk of through-delta water supply interuptions from flood. In other words, I set the benefits at $350 million in year 16, and increased them in a linear fashion to $2 billion 50 years from now.

Results:

Incorrect PPIC/McClintock analysis: Amortized capital costs are $817 million + $200 million operating costs = $1.017 billion in costs in year 50. Benefits in year 50 are $2 billion.  Costs are about 50% of benefits. Build it.

Correct Cost-Benefit analysis (present discount value): Present value of costs = $12.937 billion. Present value of benefits = $7.402 billion. Costs are about 175% of benefits. Do not build.

That is a very large difference, and it shows the substantial bias introduced by the PPIC/Davis team's incorrect approach. Of course, you can legitimately argue about the assumed numbers in the example, the point is to show that the error is potentially very important quantitatively in addition to showing bias.

In summary, the PPIC's analysis of a peripheral canal uses an incorrect framework that is heavily biased towards supporting a peripheral canal. Importantly, the framework is inconsistent with the much tougher standard they framework they use for evaluating Delta levee investments. The inconsistency demonstrates substantial bias towards the agenda of Delta water exporters and against in-Delta interests.

Postscript: Several other posts on this blog demonstrate the PPIC bias in other ways, most notably in the parameters selected for their model (water recycling costs 3x too high, desalination costs 2x too high, vastly understating conservation gains and overstating population growth, etc.)   In this post from over a year ago, I stated

The economic analysis in Comparing Futures suffers from 3 fatal flaws.
1. Grossly overstates future urban water demand and the cost of alternative water supplies.
2. Does not value environmental services or even the market values of recreation and fishing.
3. Ignores established scientific methods for evaluating investments over time which skews their analysis to favor big capital projects like canals.

The post went on to talk about the first 2 flaws, but left an explanation of the last flaw for a future post. This post finally gets around to it, 15 months late. I thank Rep. McClintock for providing the inspiration.

Some Observations on Water

2011-04-20T17:28:00.000-07:00

It's been over a month since I posted anything significant on water. Time has been short. There is plenty to blog about so here are a few quick observations.

1. Tom McClintock keeps talking about benefit-cost analysis. It's interesting to compare McClintock's approach to BCA to the PPIC/Davis way of evaluating investments in conveyance vs. levees. They are both wrong, but at least McClintock is consistent.

2. The hearing in Fresno was actually not as one sided as I expected (perhaps my expectations have just gotten so low).  There were lots of references to our jobs reports, and it is always nice to see people using the information.

3. Westlands is now saying the 2009 water shortage impacts on Valley agriculture were equal to or smaller than estimates I have made.  Yes, it's true. I saw it in comments from Tom Birmingham and two declarations they submitted to Judge Wanger in the salmon case before they decided to drop their request for an injunction against the salmon biop since the issue is moot at the moment. Maybe they should hire me for some consulting.

4. The good, bad, and confusing in the Stewardship Council draft plans deserve comment. But they issue a new draft plan before I can finish reading the last one.
5. I have been learning about Delta levees. I have been quiet on this subject since I am not an engineer. But if Jay Lund can do economics, maybe I can talk about levees.

One example of what I have learned can be seen by comparing Figure 12 in the executive summary of the DRMS report to DWR's Flood Safe maps from 2008. This is important because that bright red island seen near Stockton in DRMS Figure 12 (>7% annual flood probability) is the same island outside the 200-year flood protection according to DWR's Flood Safe Assessment. For those of you not from Stockton, that island is known as Brookside, was developed 20 years ago, has the most modern levees in the Delta, and is where most of the million dollar homes are in the city.  It looks like this one mistake skews the DRMS cost assessment by over a billion dollars (they are assuming an island with billions in real estate and business sales floods every 10-15 years).

6. I'm trying to control an overwhelming urge to scream/blog every time Tom Philp posts something.  I got over it with Michael Boccadero and Mike Wade comments, so let's hope it works for Philp too.

7. I wonder what the Pacific Legal Foundation (PLF) thinks about Delta lawyers winning "takings" cases against the Department of Water Resources.

Depressing (deceptive?) Fact of the Day

2011-04-20T14:18:00.000-07:00

From today's Sac Bee article on folks lining up to work for McDonalds.

McDonald's and other fast-food chains, once a first job for teenagers, appear to be turning into an employer of more adults: The average age of a fast-food worker is 29.5, up from 22 in 2000, according to the U.S. Census Bureau.

An optimistic view of this is that perhaps fast food jobs have gotten better, higher pay and benefits, and are therefore retaining workers. But, I took a quick look at the data and saw no evidence that relative fast food wages had grown.

So, I am inclined to think that the pessimistic angle in the article is right, it's a sign of a lousy economy. Look of the picture of the 59 year old man interviewing for a job at McDonalds after a "long ride in auto sales."

New California and Metro Forecast Released

2011-04-19T09:40:00.000-07:00

The quarterly update to our 5 year state and northern California metro forecast has been released. The short-term forecast for the state and most metro areas besides Sacramento has slightly improved, but the longer range forecast is little changed.
* California recovers pre-recession job levels in 2015
* double digit unemployment through the end of 2013
* Bay area leading recovery, while Sacramento is at the end.

For more details, see the forecast webpage.

Mendota High Wins State Chess Championship

2011-04-05T15:41:00.000-07:00

Congratulations to Mendota High students for this tremendous achievement.
http://www.fresnobee.com/2011/04/04/2337255/mendota-high-students-win-state.html#

It isn't just chess players with achievement, as the Mendota school district has boosted it's API score by about 100 points since 2006.

2010 Census data show a population of 11,019 in Mendota City, a 39.6% increase over the 2000 Census, and four times faster than the 10% growth in the state of California, and more than double the 16.4% growth rate of Fresno County. Mendota's housing vacancy rate was 5.2% in the 2010 Census, less than the 8.3% vacancy rate in Fresno County and the 8.0% vacancy rate in California.

These are all very remarkable achievements and surprising statistics given the economic challenges Mendota has been facing and the multitude of press reports that have suggested that this town has dried up and blown away because of the Delta Smelt.

Sacramento has biggest job loss of 327 largest U.S. counties in 2010 Q3

2011-03-29T21:38:00.000-07:00

Could the employment situation in Sacramento be even worse than we thought? The 3rd quarter 2010 data from the QCEW (Quarterly Census of Employment and Wages, source: unemployment insurance filings) says yes. A quote from today's news release from the BLS.

Employment declined in 149 of the large counties from September 2009 to September 2010. Sacramento, Calif., had the largest over-the-year percentage decrease in employment (-3.7 percent) in the nation... San Joaquin, Calif., experienced the second largest employment decrease, followed by Marion, Fla., East Baton Rouge, La., and Pinellas,Fla

Things don't get much better when adding in the other 3 counties in the Sacramento Metro area, as Yolo and El Dorado also posted job losses that were greater than a slight gain in Placer.

The bottom line is that the Sacramento metro lost over 23,000 jobs from Sept 09 to Sept 10 according to the QCEW, more than double the 11,000 decline in the reported by California EDD over the same period. Unlike EDD, the QCEW actually shows significant state government employment declines in Sacramento, in addition to large drops in the financial sector and local governments. The QCEW data is not sample based and considered more reliable than the EDD monthly reports (but it comes out 6 months later).

As noted in the quote, San Joaquin County was the 2nd worst over this period, but the reported losses were similar to those reported in the EDD reports so it wasn't a surprise and isn't worse than we thought.

To summarize, this new data reaffirms the story that we have been telling for over a year, Sacramento has the worst performing economy in the state, and it may be even worse than originally estimated.

Employment Friday?

2011-03-25T14:25:00.000-07:00

It may be time to finally change the title of this monthly post from "Unemployment Friday" to "Employment Friday"....unless you live in the Sacramento Area.

Statewide, non-farm payrolls boomed by 96,500 in February following a flat reading for January. The surprisingly strong performance means non-farm payrolls have surpassed the 14 million mark for the first time since June 2009 and have gained an impressive total of 208,000 jobs in the 5 months since bottoming out in September 2010.

I am unconvinced that this is a sustainable pace as the sizable gains in construction and information will likely receed in coming months. In addition, the household survey (used to calculate the unemployment rate) shows much weaker employment growth. Employment in the household survey is only up 40,000 off the bottom and slight decrease in the statewide unemployment rate has as much or more to do with the decreasing labor force than significant gains in employment.

Nevertheless, there is enough good news in this report to confidently declare that the entire state is out of the recession with the notable exception of Sacramento. Yes, even Northern San Joaquin Valley areas such as Stockton and Modesto; and the Inland Empire are showing signs of recovery in the private sector even as they are being battered by local government cuts.

Our next state and metro forecast update will be in April.

Will Tom Philp use the Bay Bridge - Delta Conveyance analogy for financing conveyance?

2011-03-10T20:17:00.000-08:00

Tom Philp, executive strategist for the Metropolitan Water District, compares the Bay Bridge replacement to Delta Conveyance when discussing the sizing of Delta conveyance. I think it is a much more interesting and relevant analogy for the issue of finance, but I doubt we will see the Bay Bridge toll analogy from MWD when it comes to finance.

First, here is information on Bay Area Bridget tolls from the Bay Area Toll Authority.

In fiscal year 2009-10, approximately 123 million vehicles crossed the seven state-owned toll bridges in the Bay Area, generating approximately $466 million in total toll revenues — including $130 million in base toll revenues, $112 million in Regional Measure 2 revenues and $224 million in seismic retrofit surcharge revenues.

The base toll revenues are used first to cover the ongoing operations, toll facilities maintenance and administration of the bridges. Remaining toll revenues fund debt service on Regional Measure 1 project financing and various transit and traffic-relieving capital projects that serve the bridge corridors.

Regional Measure 2 funds are used to fund the Regional Measure 2 projects. (blogger note: Measure 2 projects are almost all transit subsidies)

The seismic surcharge toll revenues are used to fund a multibillion-dollar seismic retrofit program to strengthen and reinforce bridge structures and roadways on all of the seven state-owned Bay Area bridges, including replacing the eastern span of the San Francisco-Oakland Bay Bridge.

It looks like at least 25% of the bridge toll revenues go to subsidize non-bridge transit, and the bridge tolls also cover 100% of the construction, maintenance of the bridges and their seismic retrofits.

Motorists clearly value the services of the bridge enough to fully pay it's cost + a whole bunch of congestion and pollution reducing mitigation projects (it looks like about 50 cents for every $1 they spend on the bridges). Compare that to Delta conveyance where there are serious questions as to whether the water project customers are willing to pay the construction and operations costs of Delta conveyance, let alone mitigation.

Since Philp is interested in sizing, it is worth noting that the toll revenue is sufficient to pay for a bridge with even more lanes, yet they decided it was better to pay for fewer lanes and subsidize transit. If we were to think about sizing/finance of Delta conveyance similar to the Bay Bridge we would be talking about charging MWD's customers enough to pay for 2 tunnels; but only build one tunnel and use the rest of the money to subsidize urban water conservation, water recycling plants, storm water capture, etc.

Here is Philp's analogy on sizing projects (in fairness, he admits it isn't the best analogy, but for other reasons).

When Caltrans decided that the eastern span of the Bay Bridge needed replacing because of earthquake concerns, there was no debate about how big to build it. The old bridge was five lanes. The new bridge will be five lanes. There was no discussion about intentionally constricting it to, say, promote carpools or public transit or to save on construction costs. Size/capacity was never an issue.

The facts on Bay Bridge finance seem to show that Philp is wrong. They could have made the bridge bigger, but they didn't and are using bridge tolls to promote public transit.

ACWA and Tom McClintock Call for Cost-Benefit Analysis of Water Projects

2011-03-03T23:23:00.000-08:00

I don't think I've seen two public calls for cost-benefit analysis of water projects all year. While browsing Aquafornia tonight, I see 2 posts asking for cost-benefit analysis in a single day. Even more amazing, it is coming from sources that I usually criticize: ACWA and Rep. Tom McClintock. Tremendous.

I have given ACWA a hard time in many posts on this blog, especially for their PR efforts like their "National Geographic" magazine, and when they staged their own water=jobs march on Sacramento back in 2009.

Back to the point. I was delighted by this excerpt in ACWA Executive Director Tim Quinn's comment letter to the Delta Stewardship Council.

The Delta Plan needs to include an assessment of the fiscal costs and economic impacts of the proposed actions...To the extent possible, the Plan and EIR should also disclose potential impacts (favorable and unfavorable) of each alternative on local, regional, and statewide economic stability. The plan should promote actions that, to the greatest degree feasible, encourage local and regional solutions.

Tim Quinn has a background in Economics and I think he knows what this means. He certainly has incentives to be careful to keep his member agencies out of financial trouble and reasons to be concerned. Maybe he can orchestrate an ACWA march to the next Stewardship Council with signs that say Cost-Benefit analysis now! I would grab a sign. Jokes aside, this is encouraging. It's time for more economics and less PR.

On to Tom McClintock. This paragraph in Rep McClintock's opening statement for the HouseWater and Power Subcommittee meeting was a surprisingly rational departure from the over-the-top political rhetoric.

We will seek to inventory all of our potential water and power resources, establish and apply a uniform cost-benefit analysis to prioritize financing for those projects that produce the greatest benefits at the lowest costs, and to restore the “beneficiary pays” doctrine that assures those who benefit from these projects pay for these projects, protecting general taxpayers of one community from being plundered for projects that exclusively benefit another.

Wow, I completely agree with an entire paragraph from a Tom McClintock speech. Unlike Tim Quinn and ACWA, I wonder if Rep. McClintock really knows/wants what he is asking for here. Real cost-benefit analysis of water projects could favor efficiency (aka "scarcity" mentality) over dams and the "abundance" agenda he is promoting.

Importing Poverty: Immigration and the Changing Face of Rural America by Philip Martin

2011-03-02T15:26:00.000-08:00

I strongly recommend Philip Martin's book, Importing Poverty: Immigration and the Changing Face of Rural America, (2009, Yale University Press). I just finished reading it, and believe it has a lot to say about the path to more sustainable and prosperous future for the Valley Economy. Martin takes a dynamic approach to the issue of farm labor, and discusses the challenges of integration and how the farm labor treadmill creates long-term economic development challenges for the economy of the Central Valley.

Martin discusses the potential and the need for greater mechanization to keep American agriculture competitive and raise wages in the agriculture sector. He is critical of past attempts at immigration reform and much of the agriculture industry's arguments for legalizing the status quo of a revolving door of cheap, foreign, unskilled labor. In the final chapter, he discusses AgJobs, the controversial immigration reform proposal endorsed by the agriculture industry and farm workers.

The AgJobs proposal would provide a path to legalization (green card) for immigrants who worked in agriculture for five years, fulfilling the desire of farmworker advocates for a path to legalization and the agriculture industry's desire for a low-cost foreign workforce by continuously replenishing the 1.4 million guest farm workers holding "blue cards". In a sense, it legalizes the current farm labor treadmill. In previous posts, I have criticized the deceptive way the agriculture industry has promoted the bill, but stopped short of completely opposing it.

Martin proposes an improvement to the AgJobs proposal to "regularize and rationalize" the farm labor market. Employers would pay a payroll tax on the wages of "blue card" holders with the funds dedicated to two purposes: 1) mechanization research and development and 2) bonus payments for guest workers who choose to return to their home country at the end of five years instead of receiving a U.S. green card. This would smooth the transition of the agriculture industry to a more capital and less labor-intensive future, reduce the flow, and resulting integration problem, of new low-skilled immigrants to rural communities, and should improve the situation of hard-working immigrant farm workers. It is more costly for farmers than the current AgJobs proposal (especially in the short-run), but it is more fair and less costly on taxpayer and rural communities in the long-run.

Martin is an agricultural economics professor at UC-Davis, and I wish his ideas and research were receiving more discussion in the Valley. I believe labor (not water) is the most crucial long-run agricultural issue in the Valley economy, and I would like to see more UC agricultural economists dedicate more resources to researching and searching for solutions in this area.

Are PPIC water reports improving?

2011-02-24T06:30:00.000-08:00

Two reporters called me yesterday on the eve of the release of yet another PPIC report on California water. I had not seen the new report, but did make some critical comments about the economics in their previous work. If any of those comments make it in the papers, it might raise some questions about what I meant.

First, the new report was released last night, and I have now had a chance to briefly review the executive summary, and it looks significantly better on initial impression. There isn't a lot of economics, although it calls for public funding for a number of initiatives with fees, but has no analysis of cost-effectiveness or how high those fees might have to be. The comments about realigning state agencies and "triage" for endangered species will probably get the most attention. Notably, the 16 page executive summary doesn't contain their usual statement that a peripheral canal is the best solution for the Delta and emphasizes urban conservation much more than usual. [Update 8 AM: I have now read 2 news reports with quotes from the press briefing and I may have been premature with this quick positive reaction.]

Let's hope they are improving, because the PPIC team has already done enough damage, and should think about some "reconciliation" of their own work. As I have discussed elsewhere, PPIC badly botched the economics in their 2008 analysis of the peripheral canal, and are largely responsible for establishing unrealistic expectations for the financial viability of a canal and a BDCP type plan. The financing stalemate plaguing BDCP and the Stewardship Council is not just interest groups maneuvering for the most favorable terms, but is caused by real questions of whether the isolated conveyance projects fundamentally provide enough value to beneficiaries to justify their construction costs.

Members of the PPIC also contributed to the water/jobs hysteria, although they have made some efforts to correct those mistakes. Finally, their previous reports have had a pro-exporter and anti-Delta bias (especially the Water Myths report that incredibly argued that CVP farmers were not subsidized, and conspicuously left Delta interests out of their "no villians" section), but this seems better.

As a final note, this quote from the executive summary amused me:

The lack of a strong state technical and scientific program
is allowing advocacy-funded “combat science” to take center stage

First, who says state funded isn't advocacy-funded. Second, hasn't the PPIC owned "center stage" among researchers in this debate. Do you know any other researchers that routinely hold press briefings and media events when they release a paper? Is their work less advocacy-funded and less combative than others. What are they complaining about?

As I get around to reading the details of the report, I will try to post more detailed comments. My impression could change for the better or worse.

Do Foreclosure Rates Measure Urban Misery?

2011-02-23T21:12:00.000-08:00

With Forbes adding foreclosure rates to their misery index this year, I have taken a look at this list. There has been plenty of attention to the top of the foreclosure lists (Central Valley, Vegas, Florida always rank high), but not much to the bottom.

If ranking high in foreclosures is an indicator of misery, then I guess ranking low in foreclosures must be a measure of healthy, vibrant metro areas. Take a look at the metro areas with the lowest foreclosure rates in this ranking of foreclosure rates from Realty Trac. Among the best performers are such dynamic metro areas as: Fayetteville, NC; El Paso, TX; Huntington, WV; and Utica-Rome NY.

Joe Grindstaff misquotes the Draft Delta Plan 3 out of 4 times

2011-02-16T00:07:00.000-08:00

I thought the Draft Delta Plan was a snooze until someone pointed me to Joe Grindstaff's cover memo. I guess Joe thought the plan was a snooze too and he needed to liven it up some, since 3 of the 4 key findings he quoted from the draft plan were not actual quotes from the plan.

Perhaps I am nit picking here, but quotation marks are serious business, especially when you are the official voice summarizing a critical 51 page policy document to the press and general public.

Unlike most people, I read the draft plan first, and Grindstaff's memo later. I didn't think the memo reflected the content of the draft that accurately, and went back to the draft to see how I could have missed the emphasis on these key findings. Here is the summary in Grindstaff's cover memo, and if you search the draft plan document, only his third quote actually appears in the draft plan.

I want to point out four key preliminary staff draft findings in this document:

1. “California’s total water supply is oversubscribed. California regularly uses more water annually than is provided by nature.” This reality makes the management of our limited surface water supplies and the Delta even more critical. When water exports from the Delta are reduced, the unintended consequence is increased demand on an already overused and unsustainable groundwater system.

2. “California’s water supply is increasingly volatile.” Precipitation and runoff patterns are changing, increasing uncertainty for water supply and quality, flood management, and ecosystem functions.” We must adapt our management practices in order to protect ourselves against present and future risk and if we are to achieve the coequal goals.

3. “Even with substantial ecosystem restoration efforts, some native species may not survive.” Best available science indicates that some stressors are beyond our control and the system may have already changed so much that some species may never be able to recover.

4. “There is no comprehensive state or regional emergency response plan for the Delta.” In spite of all the analysis that says that we have greater risk than New Orleans, all we have at the state and regional level are plans to develop plans.

Sure enough, Grindstaff's quotes that aren't quotes were reprinted verbatim in many press accounts as the key findings in the draft plan.

There must have been 20 or more findings in the draft which were presented without any ordering or emphasis, so choosing 4 findings for the cover memo (which is all many people will read) already risks introducing personal bias, and needs to be done carefully. Even if I ignore the misquotes, Grindstaff's selections seem to have some bias. First, the draft report has findings in 4 chapters, and the only chapter Grindstaff ignored is the one that describes the importance of Delta as a place, whereas water supply issues get two spots (and are the most misrepresented).

It is interesting that the only ecosystem finding he quotes is the one that is intended to dampen expectations for ecosystem restoration and was the last finding in the list in this section. No mention of Delta flow requirements. At least he quoted this one accurately.

The first two regarding water supply aren't actually in the draft report. The words "oversubscribed" and "volatile" do not actually appear anywhere in the document. The commentary shows bias too, suggesting that reducing Delta exports won't do any good because it will just increase ground water overdraft. I might point out that the opposite wasn't exactly true either, building the water projects and increasing delta pumping didn't stop groundwater overdraft. He could have pointed out that reduced Delta exports in recent years did lead to much more urban water conservation than people expected with little cost to the urban economy, and that it also stimulated increased agriculture to agriculture water transfers and increased efficiencies. But these would be good results from reducing exports, and he is just emphasizing the negative (although he didn't mention field fallowing which is a negative too).

When it comes to the Delta, Grindstaff chooses to emphasize that it is a disaster in the making while ignoring that the fact that it is a place as emphasized in the water legislation. He even throws in a New Orleans comparison, even though you won't find the word "New Orleans" anywhere in the draft plan either.

Grindstaff's cover memo would be just fine if it were a blog post like this commenting on the plan, but it is a summary coming from an official spokesman, the Council's executive officer. He has a lot of control over the information that the Delta Stewardship Council members receive (not to mention the press and the public), and they need to be able to rely on him to represent it accurately.

As the Delta plan progresses to detail important and controversial measures such as the details of any proposed conveyance and financing plans, it will be important for Grindstaff and the Stewardship Council to be more careful and accurate if they want to maintain trust and credibility.

[Update: Joe Grindstaff left a comment with an explanation. Click through to the comments to see it.]

[Update 2, 2/23: I am surprised, but this is by far the most viewed post in the history of this blog. I am also a bit sad since this is less substantive than most posts. I guess the blog would be more popular if I talked less about economics and more about individuals and media spin.]

A new term for subsidy

2011-02-10T11:24:00.000-08:00

The latest Sac Bee op-ed promoting a peripheral canal (written by an infrastructure construction firm) contains a remarkable sentence.

At a time when public dollars are at a premium, all funding options should be on the table, including incentives for encouraging private investment.

Huh? Public dollars are at a premium...so we need "incentives". That doesn't sound like it will cost taxpayers any money does it, but I haven't seen too many incentives that aren't taxpayer subsidies.

I also think they missed the mark on this statement.

It's safe to say the biggest roadblocks facing any potential solutions to the Delta's problems aren't related to engineering. We have the technical know-how. It's governance.

The roadblock isn't governance, it's finance. The water package put in a governance structure that will easily lead to their dual conveyance solution if they can figure out a way to pay for it.

If this project cost one or two billion it would be built, and we could afford to operate it in the environmentally friendly way that has been so alluring to many environmentalists. If that was the case, I would support it.

But it costs a heck of a lot more than that ($15 billion is the latest I have heard), and there are very good reasons to question whether the benefits (both private and public) exceed the costs. There may be more cost-effective ways to cope with the risks, and those who would benefit from these projects have been known to exagerrate the calamities that could result, while ignoring the very real calamities that will result from redirecting billions of public dollars in this direction. Despite hundreds of millions on research and consultants, the one obvious research project you don't see is a cost-benefit analysis on the proposed conveyance. Why not?

All the evidence I have seen suggests that paying for this tunnel is going to require forgetting about one of the co-equal goals, the environment, an enormous taxpayer subsidy, and very likely both taxpayer subsidies and relaxed environmental protections.

Recent events have shown taxpayers are pretty disgusted with "bailouts." So, policy makers should be sure that any incentives in the form of public financing have terms at least as stringent as those given to Wall Street and GM, including reasonable interest rates and payback periods, and a taxpayer equity stake in the enterprises.

(minor edits Thursday at 10 P.M.)

The Redevelopment Debate

2011-02-09T13:01:00.000-08:00

Lots of interesting debate on redevelopment agencies.

This website summarizes the arguments of redevelopment agencies and local governments. (See http://www.protectourlocaleconomy.com/get_the_facts)

Some economists interested in local economic development, including Chris Thornburg at Beacon whom I usually agree with, look for a middle way here.
http://www.sacbee.com/2011/02/08/3384812/find-compromise-in-redevelopment.html

The LAO (Legislative Analyst's Office) comes out in favor of the Governor's proposal to eliminate redevelopment here. http://www.lao.ca.gov/analysis/2011/realignment/redevelopment_020911.aspx

Based on an objective review of the facts and evidence, the LAO provides the most convincing argument.

However, in the context that it has been proposed for the 2010 budget, it is a bit of a Sacramento money grab and I would rather see it as part of a larger, more comprehensive tax package. One of the things I would most like to see in California is for local governments to do a sales/income tax swap with the state. We have too many shopping centers and not enough housing in California, and current tax policy causes local governments (who control land use) to favor retail development (which they see as profitable) over residential development (which they see as costs). I would also like to see changes to property taxes, although prop. 13 is a problem here. The dependence of local governments on sales tax is a highly negative influence in California, and many of the worst abuses of redevelopment funding are connected to the zero-sum game of local governments competing for each others retail sales.

I'm glad to see the redevelopment proposal out on the table. It will probably be killed by the lobbying pushback, but it is now seriously in the debate on California tax reform.

Is it time to challenge the Forbes' Miserable Cities List

2011-02-08T10:06:00.000-08:00

Stockton is back on top of the Forbes' Misery Index, but now it has company. The Index expanded to 200 metro areas, tweaked the formula by adding some housing market indicators, and now the heart of the Central Valley occupies 4 of the top 5 spots. Modesto and Merced are new to the rankings and joined the top 5, and Sacramento moved "up" from 17 to 5. Welcome to the misery club, valley neighbors.

The Sacramento Bee quoted me a few times in a story, including this...

"That misery index is a slap to the face," said Michael, whose campus is in Stockton. "We've been dealing with it in Stockton for years, and it's a contrived thing."

I am not one to sugar coat the problems with the valley economy. The data is indeed the data. However, the Forbes index is now starting to do real harm, and I have a few issues with the indicators they selected. A few small adjustments would change the list a lot, and I think make it better. Here are some suggestions...

Economic Indicators:

There is no measure of income, which is a major oversight, it should be first on the list. Median household income in the Stockton area is about equal to the national average.

In addition to economic well-being, the unemployment rate also measures demographic attributes such as age and race that are strongly correlated with labor force participation. Hard-working Valley folks are less likely to drop out of the workforce and this impacts the unemployment rate. Indeed, the labor force has kept growing in the Valley as the unemployment rate rises, whereas it has fallen off due to discouraged workers in other areas.

Housing Indicators:

The Valley was crushed by the inclusion of housing market indicators this year, 3-year change in home values and foreclosure rates. Are these the right indicators? No, they are redundent and highly correlated.

If these indicators were included 3 years ago, the Valley would have fared well, since we were at the top of the price appreciation lists. That is why this is a stupid indicator, the size of the drop just measures the size of the bubble - as does foreclosure rates - and it would have provided a false positive signal a few years ago. I would not completely eliminate these, the real estate roller coaster certainly has certainly created misery, but our housing indicators should measure both leval and change.

There should be a measure of the current level of housing costs, not just the rate of change. Perhaps something like the Wells-Fargo Housing Affordability Index which compares housing costs to incomes. Back in 2005-06, Stockton was one of the least affordable places in the country. Now it is about average, a little above average in fact.

Taxes:

Forbes' includes the top income and sales tax rates in it's index. Why are they ignoring property tax rates, the other big tax relied upon by state and local governments? Property tax rates are lower in California than many of Forbes' preferred locales, and sales tax is a tool areas use to extract taxes from visitors (ask Florida and Nevada).

It would be good to have a measure of overall tax burden, taxes as a % of personal income in addition to the top rates. The high marginal rates are a problem in California, and I don't have an issue with highlighting them, but two measures of top tax rates are repetitive. I would take out one of the tax rate measures (or perhaps combine the top rates into some type of index), and add a measure of overall tax burden.

Other Indicators:

Forbes also includes weather, crime, traffic congestion, political corruption, and sports teams records on their indicator list. I don't have a problem with this, especially weather, crime and traffic. I do suggest adding some indicators of the youth and vitality of a region.

I would definitely add the average age. We should penalize cities for being old and miserable. The Valley would do well here.

I wonder about adding a measure of diversity. It definitely adds vitality and richness to a city, but I am not sure how to measure it and whether it would make the index look like a liberal, pc, college professor creation.

Summary of Suggested Changes:

Out: 3-year decline in home prices, sales tax rate, political corruption, sports records.

In: Median household income, housing affordability, overall tax burden, age.

Keep: Unemployment rate, Foreclosure rate, income tax rate, weather, crime, commuting time.

In the past, I tried to ignore this Forbes list (tough since everyone asks me about it), but I am now sufficiently annoyed that I think I will assign a student intern to compiling some alternative indicators and creating our own version of a misery index. We have problems, and certainly Stockton won't rank high, but I wonder who would be number 1 and what cities would move up and down if we made these changes.

Have a suggestion for indicators that should go in or out? Please put it in the comments or email us at
forecast@pacific.edu.

Update: Greg Basso fights back.

DeltaFusion, a unique cultural and theatrical event. Finale is July 23 in Stockton

2011-01-31T21:19:00.000-08:00

I heard about the DeltaFusion project about a month ago, and am pleased to see they have received some modest support ($10,000) from the National Endowment of the Arts. Congratulations to the University of the Pacific's Theatre Arts and Visual Arts program for this making this unique community, artistic, cultural, educational event happen.

The National Endowment for the Arts (NEA) has recently awarded a grant of $10,000 to the University in support of DeltaFusion. The project, conceived by Theatre Arts Chair Cathie McClellan and Visual Arts Chair Brett DeBoer, will use visual and performing arts as a means to celebrate the cultural heritage of the city of Stockton and San Joaquin County, one of the most culturally diverse areas in the country.

DeltaFusion is taking place June 20 through July 23, 2011, and the final event will be a parade and performance on Saturday, July 23, the anniversary of the incorporation of Stockton as a city.

Professor McClellan conceived the idea for DeltaFusion after being inspired by Aquatopia—a summer program she participated in several years ago led by Pacific's Visual Arts department. Aquatopia combined art and science to raise awareness of the ecosystem of the California watershed....

"We are excited to be able to offer DeltaFusion as a way to show how the Arts can be used to encourage acceptance of diversity, enhance community, and invigorate public discussion of contemporary issues," said Dr. Joanna Albala, Director of Research Initiatives & Strategic Partnerships for the College of the Pacific...

DeltaFusion will be a 5-week session of workshops in which participants will develop a performance that centers on the history of the delta, the industries that took root here, and the immigrant populations who arrived to work in those industries. Participants will create and use large-scale puppets to tell the story...

DeltaFusion will include master puppeteers from the Minneapolis organization In the Heart of the Beast Puppet and Mask Theatre (HOBT) who will share their expertise and assist with making the giant puppets that will be the centerpiece of the performance. HOBT uses puppet and mask theatre to promote social and cultural awareness...

The DeltaFusion parade will begin at Pixie Woods and end at Victory Park. The performance will follow on the grounds of the Haggin Museum, which has been an active partner in the DeltaFusion project. Other partners include Rob and Ria Kroff from KUDOS Children's Theatre Company, the Stockton Arts Commission, and the Cultural Heritage Council of San Joaquin County.

Do farmers really plant almonds because water is expensive?

2011-01-27T16:40:00.000-08:00

Matt Jenkins' reporting on agriculture and water is generally good, but I have to quibble with his recent article that uncritically repeats the claim/theory that high water prices caused farmers to plant almonds. He does note the paradox of scarce water causing one to plant permanent crops, so one wonders why Mr. Jenkins wasn't more skeptical of the argument.

Almonds plantings have increased rapidly following the price of almonds and expansion of demand for the crop. Almond plantings started growing long before water became scarce, and almond plantings have also grown in areas where water prices have not increased. In fact, I suspect if water was a factor, it might have been that west siders had thought their water supplies had gotten more secure a few years back.

If input prices/scarcity had something to do with the move towards almonds over cotton and vegetables in the past decade, I wouldn't be surprised if labor costs/scarcity were as important as water. We also had low long-term interest rates that made capital investments like planting orchards more profitable. I would also advance the theory that cows don't eat cotton, and the growth of the Valley's dairy industry and rising prices for animal feed may also have something to do with shifts out of cotton. I don't have any studies to prove these, but they seem like more plausible stories behind crop shifts than expensive water.

My favorite quote in the article was the suggestion that banks were taking on big risks loaning to agriculture.

"Listen, any banker who stays in this ag thing ought to have their head examined," Borba says, and laughs."

I'm glad Matt had a good quote from an actual banker "You can't take a brush and paint the whole San Joaquin Valley with one color,". I talk to Valley bankers enough to know that they all would like to make more ag loans as they are their best performing assets by far.

To be fair, a lot of Mr. Jenkins' new article is very good, much better and more in depth than typical journalism on the topic. The discussion of how tomato production shifted around is excellent, much better than 60 minutes playing ridiculous sound bites of Westland farm owners predicting that the price of pizza and spaghetti sauce was going to shoot up because of the Delta Smelt.

I must also complement him for not repeating the still too common claims that the 2009 idled 500,000 acres, cost billions of dollars and tens of thousands of jobs. It looks like he got these numbers from the Pacific/Davis report on our webpage (I talked to Matt back in 2009 about the then differing estimates, so it is good to see he has been following the numbers and using the most recent stuff).

In 2009 ... farmers were forced to idle, or "fallow," about a quarter-million acres of cropland because of drought and pumping restrictions, which cost them somewhere around $350 million in losses.

P.S. I have an issue with the title of the article too, "Where Westlands water flows, California’s agriculture follows". It's just plain wrong, but I know enough about journalism to know that Mr. Jenkins didn't write the title.

She's Not a Ghost, She's the Next American Idol

2011-01-27T13:21:00.000-08:00

I was watching American Idol with the kids last night, and greatly enjoyed the performance of Thia Megia from Mountain House, CA.

Why is this mentioned on the Valley Economy blog?

Mountain House, California has the distinction of having the highest foreclosure rate (see Table 2 here) in America's foreclosure capital, the Stockton MSA (San Joaquin County). Mountain House is exactly the type of new build, exurban, high foreclosure community in the Valley that the media keeps calling ghost towns. Seemingly every month, we deal with another sensational press story, or have to listen to another "expert" from Wall Street or Silicon Valley suggest we should write off these areas or even bulldoze them.

But Ghost Towns are empty places that reflect the past, the foreclosure towns of the Valley are still very much filled with people, especially young people like Thia, who represent the future of America. I hope Thia goes far in American Idol (she does have the talent to do it!), and I hope she gets a hometown visit. Perhaps then the media will see that places like Mountain House (and Lathrop, and Weston Ranch) aren't empty ghost towns, but are still places that are very much alive, especially with young students like Thia. They are struggling places, but they are places that do have a future, and they are still the home of America's future.

I'm sure Thia just wants a chance to sing and fulfill her dreams, not be the face of the Valley's maligned foreclosure towns (I saw her facebook page identifies the Bay area as home, and I'm sure her Facebook page gets zillions more hits than the Valley Economy blog). Unfortunately, these towns in the Valley have an image problem, and Thia could help turn that around. Go Thia!

C'mon Jerry, Voters are Grown-Ups

2011-01-27T12:47:00.000-08:00

I am getting tired of Jerry Brown saying he didn't release a budget that doesn't assume voters approve extending the current taxes, because he didn't want to appear to be threatening voters. I have read numerous quotes similar to this passage in today's Sacramento Bee.

Brown said the proposed reductions are only half as bad as will be required if voters do not extend tax increases. He invited Republican lawmakers resistant to such a measure to describe an "all-cuts" alternative, asking, "Is it really fair and honest to keep that secret?"

Brown, fearful of being seen as threatening to voters, won't release such a document himself.

"It's so horrible that we don't like to release it," he said.

Rather than an "all cuts" budget, I would call it a "current law" budget. Current law is that the tax increases expire, and I think it is dishonest not to propose a budget under those circumstances. I have a hard time calling his budget more honest than his predecessors (as some seem to be) when it is also based on a highly uncertain revenue assumption.

Would Brown's "current law" or "all cuts" budget really reflect what he would really do if the revenues don't materialize? Or will it be crafted in such a way to create dramatic headline cuts in the most politically popular programs that will scare voters into supporting the tax increases. If it is honestly reflects what he believes are the best choices and is prepared to do in the absence of revenues, then it isn't threatening anyone even if some people find it scary. And why is he saying that it is Republicans burden to propose an "all cuts" budget. If the tax increases are voted down, it will still be Democrats creating the budget by majority vote. The relevant alternative for voters to consider is what Democrats would cut or protect in that instance. If Democrats put together an honest "all cuts" budget, then I think Republicans should not stand in the way of putting tax increases to voters.

I would also like to see a smaller, alternative set of tax increases put before voters as a substitute for extending the current package. I don't particularly like the tax package that is expiring as it is regressive and further pushes up California's high marginal rates on a low tax base. As an example, I would prefer to see us expanding the sales tax base (reducing the number of items exempted from sales tax, especially amusements like golf and movie tickets), and applying an oil severance tax. All these exemptions have powerful lobbies, and are tough to get through the legislature, but I bet the public might support them if framed as an alternative to the current higher sales and income tax rates on everyone.

Picking Up the Pace

2011-01-27T11:41:00.000-08:00

I'm getting some complaints about the slowing pace of posts. Finally have a bit of a lull, so I'll try to put up a few posts today before the next wave of work hits. I keep getting asked what I think of the Governor's budget as well as more requests for water posts so I will try to hit those topics.

I have been giving a lot of talks about the economy up and down the Valley these past few weeks (Sacramento, Stockton, and Fresno), so come on out and ask me questions in person.

We also released an updated forecast, click here to access the summary. It is marginally better than our October forecast, especially for 2011.

A Hint for the Mortgage Bankers Association: 95230 is Farmington, the name is a clue to your puzzling data on city neighborhoods

2011-01-07T13:01:00.000-08:00

The Mortgage Bankers Association just released a report getting lots of press called "A Study of Real Estate Markets in Declining Cities." Because Stockton is a featured case study in the report, I just wasted much of morning reviewing this junk. It has many obvious problems on my initial pass through the report, but I will just point out this one that tickled my funny bone.

One point that the MBA report overly emphasizes is the disparity in the rates of depreciation within declining metro areas. It makes this point by pulling out a few select zipcodes in the Stockton metro area (San Joaquin County) to show the disparities in values. He only identifies the zipcodes by numbers, not names of the areas, but those of us who live and work here recognize the zipcodes include Tracy, northwest Stockton, and 95230. I have to admit, I had to look up 95230 because I don't see that one too often.

The author is amazed at the difference between 95230, "where the value of the stock has increased by over 115 percent since 2000 and has only given back 10 percent since its peak in 2005" and uses this as evidence of widely varying outcomes within neighborhoods in the Stockton MSA. In fact, I have noticed just the opposite, there is remarkably little variation in the percent depreciation by zipcode, and the variation that does exist is generally driven by the amount of new (built 2002-2007) construction in the zipcode sold at initially inflated prices.

In an ideal world, the author (Dr. Follian) would have taken a field trip to the area and visited a few of these zipcodes before selecting a small sample for analysis. He would have learned that his featured zipcode does not include a single stoplight, although there is one 4-way stop pictured below. (Visiting bankers should be sure to click on the image and view the whole downtown Farmington panorama)

{Image deleted because it was messing up the loading of the blog. Go to Google Maps, type in Farmington, CA to see an image of downtown.]

The zipcode basically straddles Highway 4 from this stop sign in Farmington into the foothills before Copperopolis, beautiful country and one of my favorite drives in the area. Dr. Follian would enjoy the drive, and would also learn that he should probably discard this zipcode from a study of real estate markets in "cities" for the MBA. The zipcode covers a vast area and has a population below 1,000.

Despite the snarky comments, I don't really fault him for not coming here. As an economic researcher I spend a lot of time analyzing data in areas I infrequently or never visit (particularly Los Angeles). However, when one notices a large anomaly in the local data, there is usually a simple explanation to be found on Google Maps or in the old days just by picking up the phone.

If mortgage bankers want better analysis of the San Joaquin County real estate market, I recommend the Regional Analysts we published on the subject in May 2010 or December 2008. Please don't stop lending here because of the flawed analysis in your Association's report. Mortgage bankers have done enough damage to this area, and it seems to me that they don't understand the local housing market any better today than in 2003 to 2006 when their risky loans fueled the Stockton bubble.

House Natural Resources Committee New Webpage

2011-01-06T15:56:00.000-08:00

A blog reader emailed me this link to the brand new House of Representatives Natural Resources Committee webpage. This bullet was under "Get the Facts."

The lack of water has caused 500,000 acres of farm land to dry up – a land mass equivalent to the size of the State of Rhode Island. Also, according to a May 2009 report by U.C. Davis, the water restrictions have left nearly 40,000 people unemployed.

If it were an old webpage, I would be more forgiving, but since it is a new webpage it ought to have the most recent information.

The updated estimates in this joint Pacific/Davis September 2010 report are that the pumping restrictions generated a loss of 60,000 to 130,000 acres, and between 1,392 and 2,973 jobs.

Don't be surprised if/when new studies by reputable researchers (not by me or the Davis folks) addressing this question with more rigorous, econometric models find that even these updated employment loss estimates are too high. That shouldn't be surprising to economists familiar with the differences between input-output and econometric models.

California Population is 37.25 million according to Census 2010

2010-12-21T16:48:00.000-08:00

Today's Census 2010 results have enormous implications for policy analysis in California. Most of the news will focus on redistricting and political implications, but the biggest impact could come through the effect on major policy analysis.

Since the last Census in 2000, a chasm has opened up between the annual population estimates for California issued by the Department of Finance (DOF) and the Census Bureau. The gap stood at about 1.5 million people, and was driven by differences in how the two demographic projections measure migration. Wonky types in the state have been debating this for years and have been waiting for today's once per decade enumeration to settle the dispute. Among researchers in the state, the majority such as Steve Levy's Center for the Continuing Study of the California Economy, state agencies, and the PPIC have projections that follow the Department of Finance; whereas our Center and others have believed annual Census Bureau estimates to be more accurate and have based our projections on these. (The difference is based on migration rates which Census estimates with addresses on IRS tax returns, whereas DOF primarily uses drivers license data.)

Since so many of our projects rely in part on population projections, I am pleased that the Census 2010 results released today closely match the projections we have been using. On a practical level, it saves a lot of work adjusting and reestimating models, and means we won't have to back track from conclusions drawn from them.

While some will moan that these estimates are bad for California since we won't gain Congressional clout, it is actually a win for California policy analysis to get away from the overly-high DOF population estimates. The DOF estimates and projections are being used to justify big public spending proposals such as a peripheral canal, dams, high-speed rail and more. Let's hope the Census numbers will finally get all the various analysts to revise down their demand projections to more realistic levels, and take a second look at these projects and see if they still make sense with fewer people to both use the services and pay the bill.

The first to fix their models should be the PPIC/Davis water wonks. As I pointed out over 2 years ago, they were exagerrating the already overstated CA DOF projections.

Census Bureau finds Mendota unemployment is 16%

2010-12-20T20:40:00.000-08:00

A few days ago, the Census Bureau released data on the economic characteristics of small towns for the first time since the 2000 Census. The data come from the American Community Survey which has replaced the long-form in the Decennial Census, and reports a 5-year average value from a year-round survey conducted between 2005-2009.

It reports the Mendota unemployment rate at 16%, link here. This will no doubt come as a shock to people following California water issues who have been hearing about 40% unemployment in this town for the past two years, but it is not surprising to those of us who have been explaining that 40% is a bogus number, crudely extrapolated from 2000 Census results that measured Mendota unemployment at a stunning 32%. While Census is now reporting a much smaller unemployment rate, the reported income levels in Mendota remain miserable, under $9,000 per capita in the new release with over 50% of children living below the poverty line.

Why did the Census estimate of unemployment drop from 32% in 2000 to 16% for 2005-2009? It results from an improvement in methodology to a year-round sample, not an improvement in the Mendota economy. The Census' new ACS is a year-round survey, whereas the old decennial Census figures were a snapshot of conditions on April 1. April 1 is at the tail end of the high-unemployment season in Valley farming areas, just before conditions begin improving with the season. The EDD unemployment estimates people have been citing have been inflated because they were based on an April 1 unemployment proportion, and then applying this to data year round. It therefore exagerrates unemployment estimates in Mendota and all farming communities during the rest of the year.

As I have stated repeatedly, the only valid current unemployment rates are at the County level. The official, monthly County level unemployment estimates from EDD/BLS match very well with what the Census Bureau reported from 2005-2009. For example, Fresno County unemployment averaged 10.2% from 2005 to 2009, and the new Census 5-year average is 10%. However, California EDD estimates for small farm towns are wildly off due to the crude methodology. (EDD staff have told me privately that the crude technique was created because a local area unemployment estimate was needed to distribute federal funds, the local area estimates were never intended to be used for policy purposes, and the estimates come with a warning about the untested method.) The error is now apparant since California EDD has reported average Mendota unemployment from 2005 to 2009 at 29% with their crude formula during the same period the Census measures 16% with a real local survey. As discussed above, the EDD estimate is wrong because it applies a seasonally high unemployment proportion from April 1 to all months to make a crude guestimate of unemployment rates from County data. EDD will eventually revise their city level estimates to the new Census data, and their reported unemployment rate for Mendota will drop remarkably. They should be sure to revise it backward to 2005 so that there isn't any misinterpretation that the recent rains caused unemployment to drop.

This post should not be used to minimize the problems with unemployment and poverty in Mendota. It is a large and disturbing problem, but it is also a chronic problem not something created by environmentalists.

Financing a Big Delta Tunnel will Require Big Water Exports

2010-12-16T00:12:00.000-08:00

For the past two years, I have said that "beneficiary pays" financing of the peripheral canal only pencils out if it increases water deliveries to record levels. After reviewing Wednesday's state and federal BDCP updates and subsequent news stories, it is becoming more obvious that this is true.

These quotes from Mike Taugher's article are particularly revealing.

"We need to know that the yield of the project that is going to be proposed is at a level that is cost-effective for us," said Jim Beck, general manager for the Kern County Water Agency...

Still, the state report suggested that water districts in the San Francisco Bay Area, San Joaquin Valley and Southern California could receive 5.4 million to 5.9 million acre-feet a year on average under the plan. The federal report said it appeared that the plan could result in more than 5.2 million acre-feet a year.

That's an improvement over the 4.7 million acre-feet that can be delivered on average with new restrictions in the Delta but less than the 6 million acre-feet a year delivered from 2000 to 2007.

"If it's under 5.9 ... it will require our water users to re-evaluate whether BDCP meets their water supply objectives," Beck said.

Some back of the envelope calculations reveal that the exporters' concerns are very valid.  At $13 billion and over $80 million annual operations costs, the annual costs of operating the 15,000 cfs tunnel for exporters will be about $900 million per year.  As Taugher reports above, the BDCP highlights report reveals that conveyance is only expected to increase diversions between 0.7 and 1.2 million acre feet. Thus, the each additional af of water delivered because of the canal will cost about $900 per af. And that only gets the water to Tracy, delivery from there to end users and treatment for urban users further increases costs.  That is well beyond the ability of agricultural users to pay, and it makes conservation, recycling and desal. look a lot cheaper to urban users.

Of course, most of this is fixed costs, so if deliveries were increased by 2 maf or more, the unit costs drop quickly.  This is a simplistic calculation worthy of no more than blog publication, but it is nonetheless revealing. (I am aware that the project adds value not just through additional water, but by increasing reliability or the risk of disruptions...but conservation, water recycling and desal. provide equally if not more reliable water.) It is rather obvious that the pressure to increase deliveries beyond whatever limits will be agreed upon in the BDCP will be enormous. And if it doesn't happen, it is likely that agricultural water exporters will be unable to meet their financial requirements and there will be calls for billion dollar taxpayer subsidies or a lot more costs will be dumped on Socal urban users than they expected.

Why, after 4 years, can't a 100 page document on the BDCP take its financial analysis one baby step forward? Some real economic analysis early in the process would have helped create more realistic expectations on the part of participants and greatly increased the probability of reaching a solution. (I also note that Met's new water plan says they are only planning on a $2.3 billion contribution to the Delta plan. Is that realistic? Who do they think is going to come up with the other $10.7 billion the BDCP allocates to water exporters?)

This is part of the reason I have been so critical for so long of the economic analysis in the 2008 PPIC study that exagerrated the willingness of exporters to pay for a canal as well as the costs of "doing nothing". In doing so, they gave a lot of people false expectations about the financial viability of a BDCP type plan. I am disapointed in the way the federal document seems to cite the 2008 PPIC report as the sole, infallible source of Delta analysis. Indeed, my pastor typically cites more non-Bible sources in his Sunday sermons than the federal government cites non-PPIC/Davis sources on the Delta.  The PPIC report does not follow the federal governments own guidelines for cost-benefit analysis for infrastructure, and exagerrates the costs of alternative water supplies among other problems.  According to PPIC, water exporters should be willing to pay for a $20 billion canal AND ecosystem improvements. So, either these exporters are lying or PPIC's calculations were wrong. I believe it is the latter.

(lightly edited from original at 8 am)

Tax Deal Changes the 2011 Outlook

2010-12-08T14:04:00.000-08:00

I am surprised at the size of the tax deal, particulary the 2% payroll tax holiday for 2011. Combined with the accelerated depreciation component, that is over $200 billion in unanticipated stimulus for 2011 (most of the other components of the deal were anticipated or relatively small). That's a big deal.

In October, we significantly revised down our forecast for 2011 and 2012, in large part due to anticipating contractionary government policies. In the Valley, we would probably benefit more if some of these federal dollars were spent on infrastructure and further props to education and health and human services funding as in the original stimulus. Still, the payroll tax is a substantial injection of funds into the wallets of households, particularly middle-class and upper middle-class households.

The big winners are people like me. The Making Work Pay Credit in the original stimulus maxed out at $800 for married households and phased out at higher incomes, so that people like me received virtually nothing. With the 2% 2011 payroll tax holiday, a married couple with 2 wage earners and household income in the mid-$100s is looking at an unanticipated $3,000 increase in our disposable income in 2011. What should we do with it? (It will probably go towards a needed new car I have been postponing.)

A similar married household with $40,000 in wages will see a $800 reduction, the same as the credit in the 2009 stimulus bill, and lower wage earners will see even less.

Of course, this is all paid for by adding it on to the national debt, and it is going to be hard for Congress to put the payroll tax back where it was before. That creates a number of risks. There is no free lunch.

But our forecast for 2011 is brightening a little, and with it my mood for the holidays.

Sacramento Bee on Wastewater Rates

2010-12-06T15:09:00.000-08:00

Like a good reporter, Matt Weiser is skeptical of SRCSD claims about the magnitude of increasing wastewater rates in last week's Sacramento Bee. However, if the Bee is looking for government agencies being dishonest about Sacramento wastewater rates, they should also investigate the claims of the regulator, the Central Valley Regional Water Quality Control Board.

The Sac Bee article about SRCSD begins

A letter hitting most residential mailboxes in the capital region this week offers startling information: It soon may cost three times more to flush your toilet.

That is, if you agree with the numbers

The article goes on to suggest that rates may not actually increase by $40, it looks like they could increase by 2.5 times instead of triple ($30 per month more rather than $40 per month), although there is a lot of uncertainty at this stage. I agree with this, it probably won't be as bad as SRCSD is saying, although their scenario is not wildly exaggerated (SRCSD would have to start weaving tales of thousands of homeless Sacramentans to approach the exaggerations routinely made by water exporters about regulatory costs).

In the article, Central Valley Regional Water Quality Control Board staff also complain that the flyer didn't describe the environmental benefits from the upgrade. That's a fair comment, but after reviewing many documents the Regional Board's staff uses to justify the upgrade, they are also guilty of producing one-sided analysis that fail to properly analyze the economic impact of their rulings on communities they regulate.  Even more bothersome is the way they misrepresent the small amounts of information they do present to justify the costs of upgraded treatment.

1. The board's staff compares current rates in communities that they have already required to upgrade their plants to the projected rates in Sacramento. It is an inexcusable apples to oranges comparison.  Many of the communities for which they cite current rates have recently approved large wastewater rate increases to pay for plant upgrades that have yet to affect current rates. I am most familiar with Stockton which the regional board notes has monthly fees of $22.75. However, Stockton just approved a large rate increase to pay for an upgraded plant that will nearly double wastewater costs between now and 2015 to around $40 per month. Lodi is similar although they are already halfway through the 5-year process of roughly doubling rates.

2. The board's states in reports and correspondence with Senator Steinberg and others that "other communities that have completed the plant upgrades and are operating the upgraded systems without irreparable economic harm." Really?  That is a pretty strong assertion for which they provide no evidence, and have conducted no assessment.

It is almost certainly a false statement.  We have yet to see the full impacts of higher rates in most areas so any conclusion to this effect would be premature.  As one current example of a place where high wastewater rates have already hit, the City of Placerville just voted to increase sales taxes to subsidize increased wastewater rates that were hitting low-income residents hard.  While this has allowed them to off-load some of the costs on non-residents and reduce the regressive effect of the rate increase, their wastewater costs are now being paid from a revenue source that typically supports general fund services like police, fire, parks and libraries who will now be unable to use sales tax increases to offset cuts to these vital services.

3. Most annoying to me, the Regional Board staff misrepresents Pacific's economic impact reports (most notably on page 39 of this report). They do not cite the main result of the study, an annual employment loss of 976 jobs and annual income loss of $246 million over the next 30 years. Strangely, the only thing they report is a conservative assumption that we made to facillitate the calculations, "increased wastewater rates will not be significant enough to affect the location, operation or investment decisions of businesses, and that lost corporate income flows outside the region." This is presented in a way to suggest that we disagree with the local building industry. They left off the fact that we had clearly labeled this assumption as conservative and a reason why our impact estimate could be too low.

I was surprised that they also cited our other reports on the effects of Delta problems on other stakeholders (Valley farms and salmon fishing), specifically citing the losses to income and employment that have been sufferred. I would be pleased by that if they had reported the Sacramento impacts in the same way, but they don't. If they did, it would show that the negative impacts on Sacramento for the proposed permit are actually larger. [Note: I called CVRWQCB staff last week and offerred to explain how to properly report and interpret the results to our study and brief their board, but the call was not returned.]

I am not saying that Sacramento shouldn't make some upgrades to their wastewater treatment. Maybe they should go as far as the Regional Board proposes, I can't say. But neither can the Regional Board without making an honest, good faith effort to properly report and assess the economic impacts on both Sacramento and other cities affected by their previous rulings.

Valley Mayors on High-Speed Rail

2010-12-02T18:38:00.000-08:00

I have resisted stepping into the high-speed rail issue, despite the tempting targets of the thinly documented but often repeated claim that HSR will create 450,000 permanent jobs, and optimistic ridership projections.

If we are going to do it, we need to be smart about it (such as taking another look at the Altamont vs. Pacheco pass decision). Being smart about it is also the point of the op-ed by north Valley mayors, including Stockton's Ann Johnston, in today's Sacramento Bee.

California is challenged with building a technological wonder rivaling the economic and social impacts of the Transcontinental Railroad. Instead, the California High-Speed Rail Authority appears set on building a rail line to nowhere that only provides critics with 66.4 miles worth of reasons to attack the project.

The staff proposal runs from the rural region of Borden with a couple of hundred people south of Madera to Corcoran – population 25,000, including 13,000 inmates.

Will State Leaders Ever Get Real About Peripheral Canal Costs?

2010-11-21T23:04:00.000-08:00

The Director of the California Department of Fish and Game touts the peripheral canal in today's Sac Bee without mentioning costs.

A few days ago, Natural Resources Agency Secretary Lester Snow sends a press release about the BDCP without mentioning costs. The release says the new BDCP reports "will also identify issues that require further resolution, including additional scientific analysis to improve upon water operations for Delta fisheries, ecological metrics to measure progress, and ongoing development of an adaptive management plan." No cost or financing on that list either.

How can you be a state agency head in November 2010 and push a $13+ billion public works project without even mentioning cost?

Fresno Bee Illegal Immigration Series

2010-11-16T12:38:00.000-08:00

The Fresno Bee is running a week-long series on illegal immigration titled, In Denial.

So far, I think it's good. Each day has a feature story, and two shorter supporting stories. The biggest economic topics: budgets, jobs, visas, consumers are in the days to come and should make for good blog material.

If you haven't seen it, here is the link.

Would BDCP staff accept "dots" instead of dollars in their paychecks?

2010-11-16T11:29:00.000-08:00

For a process that makes all sorts of high-minded statements about being guided by science, the flim-flam that passes for economics in BDCP is stunning. Here is the summary of the cost assessment in the BDCP options evaluation. (table E-2, page 13 of executive summary). Options 3 and 4 include isolated conveyance, a peripheral canal/tunnel. 4 dots is the highest ranking, 3 dots second highest, 2 dots is third highest, and 1 dot is the lowest ranking.

I thought the canal/tunnel had high costs, but according to BDCP, it is the choice that minimizes costs.

How did they do it? A look at the methods document is revealing. Instead of adding up dollars, they used unique rating scales for each cost category, thereby converting dollars to "dots" with an arbitrary, subjective scale. Here is an example of the scale they used (from page 2-59 of the assessment).

Construction Costs Rating Scale:
High Rating = cost less than $1 billion
Moderate Rating = cost likely $1 to 3 billion
Low Rating = cost likely $3 to 5 billion
Very Low Rating = cost likely greater than $5 billion

Reduced Downstream Water Treament Costs Rating Scale:
High = greater than $2 billion
Moderate = $1.5 to 2.0 billion
Low = $1.0 to 1.5 billion
Very Low = less than $1 billion

Apparantly, BDCP analysts reject the notion of assessing all costs with a consistent, uniform measure (dollars) that happens to be the same units that those costs will be paid in the real world. They reject the idea of using the units utilized by all credible economic assessments and budget analyses. Instead, it is better to slice the costs up into categories, apply arbitrary and inconsistent rating scales to each category, qualitatively assess the results, and then assign them a ranking.

It reminds me of those Wall Street geniuses who divided up and rebundled all those sub-prime mortgages into securities that magically made all the risk go away.

What a bold scheme. A cost category that is unfavorable to your preferred outcome can be assigned $2 billion between increments, whereas a category that is favorable to your preferred outcome can be arbitrarily assigned $0.5 billion per unit on the rating scale. Even better, we can assign all costs exceeding an arbitrary threshold to the lowest/highest rating. Thus, if the canal ends up costing more than $5 billion, say $8 billion, $13 billion, it doesn't matter at all, since everything above $5 billion is in the same rating class.

I wonder if this clever financial innovation can be used when it is time to pay back the bonds issued to finance the BDCP. If Wall Street bond buyers need a demonstration project to ensure it works, I recommend we use BDCP staff salaries as a pilot program, and issue paychecks in dots instead of dollars. We can redeem the "dots" for 25 cents on the dollar, using the same arbitrary "exchange rate" used in the BDCP options analysis. Also, mirroring the options evaluation, anyone earning more than a $100,000 per year will receive a fixed $25,000 payment since all salaries over the threshold are in the "very high" category and treated the same.

There are even more issues with the cost analysis, from the relevant cost categories that were eliminated, the double counting of issues already assessed for other criteria (cost is one of only 17 criterion used), to the comparison of "economic impacts" with direct costs as if they are the same thing.

Yes, I know the options evaluation was done in 2007, but it remains a critically important assessment. This is the analysis that was used to conclude isolated conveyance was the "most promising" option, a statement that BDCP participants had to accept to be included in the process. It is the analysis that was used to justify the singular focus on isolated conveyance from the beginning.

If (when?) BDCP fails, it will most likely be due to excessive costs and the lack of a real financing plans. Blame will be placed on the recession and other unknowns, but these assessments reveal that BDCP never treated costs or economics seriously from the beginning.

On second thought, I've got to try this with my wife. "Honey, as you can see in Figure 3, for your new car, a cost over $20,000 gets a high cost rating, but for my new car the scale shows that it has to go over $80,000 to get rated as high cost. Using this scientific scale, it is clearly optimum for us to get a BMW for me and a KIA for you. You might think it's unfair, but this is the same process used by the largest, and most complex habitat conservation plan in history that is committed to scientific rigor. Trust me."

Sacramento Wastewater Treatment Plant: Updated Impact Report

2010-11-10T16:45:00.000-08:00

We have updated our assessment of the cost of upgrading the Sacramento Wastewater Treatment Plant as would be required by the tentative discharge permit under consideration by the Central Valley Regional Water Quality Control Board. Over the next 30 years, the report finds that meeting the requirements of the draft permit would reduce Sacramento area incomes by an annual average of $246 million and reduce employment by 976 jobs in an average year. While the construction and operation of the advanced treatment facility will create some jobs and income, these gains are more than offset by the negative impacts of a 140% to 210% increase in wastewater bills and fees on Sacramento households and businesses.

Link to full report. The executive summary is below.

Ecological problems in the Sacramento-San Joaquin Delta have raised concerns about the discharge from the Sacramento Regional County Sanitation District (SRCSD) wastewater treatment plant that serves most of Sacramento County and West Sacramento in Yolo County. The Central Valley Regional Water Quality Control Board recently released a Tentative NPDES Discharge Permit that would require over $2 billion in upgrades to the Sacramento Regional Wastewater Treatment Plant. This report evaluates the economic costs to the Sacramento region of complying with tentative permit. All costs and economic impacts in this report are measured in 2009 dollars.

The project would require nitrification, denitrification, microfiltration, and UV disinfection. The capital cost is estimated at $2.083 billion, and operation and maintenance of the completed facility is estimated at $77 million per year. We project that the project will require SRCSD to generate an additional $239 million annually through increased rates and fees. SRCSD is projecting even higher rate increases, because they anticipate larger debt coverage requirements to maintain their bond rating and continued slow growth in their service area. The range of potential rate and fee increases is as follows:

• The typical Sacramento household wastewater treatment bill would increase between $28 and $42 per month ($336 to $504 annually) from their current level of $20 per month.
• Government, commercial and industrial users would also face proportional wastewater treatment cost increases between 150% and 200%.
• New development wastewater treatment impact fees would increase from $7,450 to between $15,000 and $35,000 per ESD (equivalent single family dwelling). In-fill development impact fees would increase from $2,800 to between $6,000 and $13,000 per ESD.

In addition to higher bills, the total economic impact of the project was assessed by estimating the negative effects of reduced disposable income on consumer spending, the negative effects of reduced construction activity, and the positive effects of building and operating the wastewater plant. Considering all the effects, the average annual economic impacts over the 30 year analysis period on the Sacramento Region are:

• Annual income loss of $246 million.
• Annual employment loss of 976 jobs.

This is a conservative assessment of regional impacts. SRCSD estimates rate increases will be even larger than our projections. We also assume increased impact fees will only have a small effect on the amount of new development over 30 years, and only reduce the average output of the construction industry by an amount equivalent to the increased fee payments. While the impact on development over 30 years will be relatively small, the effect will be greatest in the near term, pushing back the date at which many development projects become financially feasible for several years and delaying Sacramento’s recovery from the recession. The report assumes no effect on local electricity costs, although the project will generate a substantial increase in SMUD’s electricity demand. We assume increased wastewater treatment rates will not be significant enough to affect the location, operation or investment decisions of businesses, and that lost corporate income flows outside the region. Due to these conservative assumptions, the negative impacts could be larger than we estimate. On the other hand, the negative impacts could be smaller than we estimate if less advanced, lower cost treatment options suggested by Central Valley Regional Water Quality Control Board consultants were developed in more detail and proven to satisfy regulatory requirements as well as the scale and site requirements of the SRCSD plant.

The results of this study inform planning and regulatory decisions regarding the San Joaquin-Sacramento Delta, and can be compared to analysis we have conducted on other aspects of the Delta issue. In a recent analysis conducted in cooperation with UC-Davis researchers, we estimate that reduced agricultural water supplies due to Delta pumping restrictions to protect endangered species result in an income loss of $72 million and the loss of 1,400 jobs in the San Joaquin Valley. We have also estimated that the closure of the salmon fishery in 2008 and 2009 created an annual loss in California of about 1,800 jobs and $120 million in income. Our initial analysis of Sacramento wastewater treatment upgrades was limited to nutrient reduction, and we estimated an average loss of 390 jobs and $94 million in income. The $246 million estimate of lost income from the Tentative NPDES Discharge Permit for Sacramento are more than double the loss estimated in these other cases, whereas the job loss is lower since sewer impacts are distributed across hundreds of thousands of households rather than being concentrated on a low-wage industry such as agriculture.

Our Katrina? More like our Dennis.

2010-11-02T18:31:00.000-07:00

Tom Philp, executive strategist for the Metropolitan Water District, is the latest to compare a seismic-induced Delta flood to Katrina.

Katrina is a bad numerical comparison, but the exploitation of the greatest American tragedy since 911 to push his employers' business agenda is offensive.  Are Tom Philp and Met comparing dead grass in an LA lawn to Americans dying in the Superdome?

His post emphasizes water supply, and does not mention the potential loss of life or property in the Delta region which is the only loss that is comparable to Katrina (in type not magnitude).  The tunnel solution he pushes in the post does nothing to protect against Katrina-type losses (lives or property in the Delta), it would just protect some of the exporters water supply. In fact, the agenda Philp is pushing explicitly recommends letting large chunks of the Delta be lost in Katrina-type floods because fixing the levees is too expensive. While I don't advocate unlimited spending on Delta levees, if there is anyone who has a legitimate case to invoke Katrina to support their Delta cause, it would be the people living in the Delta who want more public investment to upgrade levees.

On to the numbers, Katrina killed nearly 2,000 people, and caused $125 billion in direct property losses.  I have read the studies Philp and others reference, and it looks to me like the comparable property damage and fatalities of the big Delta earthquake scenario is about 1-2% of Katrina. It might get to 3-4% if you added in crop losses. It would be a tragedy, but in the low range on this NOAA list of the 96 largest U.S. weather disasters over the past 30 years.  A catastrophe for sure, but a manageble one.

Yes, I know the state's study says there could be as much as $40 billion in losses from a Delta earthquake. But that number includes the value of lost services (such as what people are willing to pay to keep their lawns green), estimated multiplier effects from crops not grown, etc.  A comparable number for Katrina would include losses for all sorts of business transactions that did not take place as a result, plus multiplier effects.  A comparable total from Katrina would easily be in the trillions and still increasing five years later.

In the future, I hope Philp uses more correct and relevant comparisons to California natural disasters. From this chart, the Valley freezes, the 1995 floods, and wildfire outbreaks that occur every few years would be most comparable. The linked chart doesn't include earthquakes, but I believe this Delta quake scenario is a lot less costly than the 1989 and 1995 California earthquakes too, so the freezes and wildfires seem the best comparisons.

At least he used a question mark.

Is this headline in California's future?

2010-10-28T10:50:00.000-07:00

$9 billion project now tunnel to nowhere
New Jersey governor says state too broke

Trenton, N.J. (AP) - The biggest public works project in the U.S. - a $9 billion-plus train tunnel connecting New Jersey and New York City - is dead in its tracks...
It also leaves New Jersey with nothing but a $600 million hole in the side of the hill.

(headline on page 6 of today's Stockton Record, no link available)

The obvious comparison is the $10+ billion Delta water supply tunnel envisioned in the deceptively titled Bay Delta Conservation Plan (BDCP) that still doesn't have a credible financing plan or economic analysis to justify the cost.

Governor Christie is much admired by Meg Whitman and was out here campaigning for her. He is also discussed as a potential Republican nominee for President. California (both its government and its households) is a lot more "broke" than New Jersey, and has a weaker economic outlook.

The apparant refusal of BDCP to even analyze lower cost alternatives, including but not limited to a smaller tunnel, is simply bad government. [Afternoon update: I am encouraged that the new FAQs posted by the BDCP state clearly that they in fact are evaluating, smaller tunnel options. I had heard otherwise, but perhaps that is just what certain interest groups are urging them to do.]

Unemployment Friday

2010-10-22T14:31:00.000-07:00

Another month passes, at California unemployment is still stuck at 12.4%. As reported earlier this week in our new forecast, we now expect unemployment to remain at or above 12% through the first half of 2011, and not drop below 10% until the end of 2013. Yes, that is more than 3 years from now. At 13.808 million, California payroll jobs reached a new low for this cycle, and is now 250,000 jobs below where we were when the recession "officially ended" in June 2009, and 1.4 million below the 2007 peak. Most losses are now in local governments and schools, although construction also has yet to end its 4 year slide.

The bright spot continues to be San Jose, the only place in Northern California that is clearly in recovery mode. It is being totally driven by the bounce back in the computer/tech sector, with both computer manufacturing and computer system design jobs up 5% over a year ago. Temp. employment services (likely related to the computer bus.) and private universities are also posting strong numbers. With unemployment in San Jose still topping 11%, it will be a while before their renewed growth starts spilling over to the rest of the region in a big way.

San Francisco also posted its first solid monthly report since I can remember. SF has been the biggest disapointment through the first year of recovery, as I had expected it to show a pattern more like San Jose. Scientific and professional services in the San Francisco area are finally showing the gains we have been anticipating. Don't get too excited, SF only gained 1,000 jobs back this month, and is still way down from a year ago. It will take more than one good report to clearly show a new trend.

It is in the Valley where the reports turn uglier, and it isn't surprising given the dependence of these areas on government and construction, and the relative absence of technology, R&D, and other areas fueling growth. Sacramento and Stockton took another significant step back this week, and unemployment rates across the Central Valley are all over a full percentage point above last year's level.

Delta Stewardship Council Should Ignore the Water Contractors' Protest Against the Environmental Water Caucus

2010-10-21T18:01:00.000-07:00

I just read the letter the state and federal water contractors wrote to the Delta Stewardship Council urging them to ignore the Environmental Water Caucus (EWC). I found the second sentence in the letter especially interesting, and completely misleading.

There is no need for the Council to revisit that which was reviewed by the Delta Vision process and has been evaluated carefully by credible independent analysts in recent years... (note: the analysts they refer to repeatedly in their letter is the PPIC and the 2008 Comparing Futures report)

Much has changed, and there are an abundance of good reasons to revisit these old reports.

1. No one was talking about tunnels in either Delta Vision or PPIC, and the estimated costs of building the alternative conveyance have roughly doubled since these reports were done.

2. Those reports did not evaluate the type of proposal EWC is making. In particular, PPIC compared a scenario of No Exports (with wildly exagerrated costs from water shortages) to a large surface canal. There was no evaluation of a small tunnel vs. a large tunnel as many reasonable and credible people are now suggesting. And even the BDCP "discussion document" says the loss in water exports if we do not build alternative conveyance in 2050 is about 1.5 maf, not the worst case, disaster scenario of 0 exports (-6 maf) modeled by the PPIC. PPIC did not account for water conservation or anything close to what is being discussed by EWC or BDCP.

I should also note an unsubstantiated claim in the contractors' letter about the economic contribution of westside farmland. "These lands develop about $12 billion in economic value for California annually."

Really? I challenge the water contractors to provide a reference for that ridiculous claim.  $12 billion is 3 times the entire GDP of Kings County ($4 billion of which $1.5 billion, 38%, is government/military spending.  For comparison, the GDP of Sacramento is only 23% govt/military). Maybe they shouldn't be so quick to point out when people ignore gross vs. net water conservation when they are triple and quadruple counting dollars, and failing to differentiate between revenue/output and value/income.

Finally, do they have any references other than the 2008 PPIC report? As noted above, the PPIC did not analyze $10+ billion tunnels, or an alternative scenario that looks anything like the EWC vision. Furthermore, the 2008 PPIC has plenty of its own exagerrations that tip their analysis in favor of a canal. For example, I wouldn't call a report that completely leaves out the commercial value of the salmon fishery, and uses phony projections of the state's future population as "careful."  Regardless of its weaknesses, that report is severely outdated now, to the point of being irrelevant. We have a lot of new information, the scenarios have changed, and I am willing to bet that even the PPIC folks would have a hard time arguing against the need for some substantially updated analysis after nearly 2.5 years of new developments.

In fairness to the PPIC people, it must be frustrating to be so selectively cited, and their report isn't all bad. For example, the contractors don't mention that their recommendation of new conveyance also hinged on the contractors paying a lot more for Delta restoration than currently proposed in BDCP discussion documents, they recommend water exports even with a canal quite a bit lower than the contractors want, and a number of these researchers were involved in the Delta flow requirements report for the SWRCB that the contractors like to disparage as irrelevant.

(A few minor edits on 10/22)

New Economic Forecast Released

2010-10-21T09:45:00.000-07:00

Like most forecasters, we have been busy marking down our outlook. It's not pretty, especially in the Central Valley. Summary pasted below. Summary tables, more highlights and subscription information at this link.

CALIFORNIA AND METRO FORECAST: October 2010

California Double Digit Unemployment Will Last Through 2013

Sacramento has the weakest 2011 outlook.

(Stockton, Calif.) October 21, 2010 – The faltering recovery will keep California’s unemployment rate above 10% for three more years according to the Business Forecasting Center at the University of the Pacific. This quarterly forecast is a significant downward revision in the 2011 and 2012 outlook, and reflects a slowing national economy.

In the Central Valley, which is disproportionately impacted by continued weakness in construction and state budget cuts, unemployment rates are projected to plateau at their current high levels for nearly two years. Homebuilding remains at record lows in the Valley, and cuts to schools and local governments are offsetting any gains from improved conditions in agriculture.

Sacramento has the weakest outlook for the next 12 months, with no job growth projected between 2010 and 2011. Sacramento unemployment will exceed the state average for 2011, the first time this has occurred in over two decades of consistent data. By 2013, Sacramento and Stockton will be leading a strong recovery in the Central Valley, but the next two years will be extremely challenging for the region.

San Jose continues to be the only area in Northern California that is clearly recovering. We project 3% job growth for San Jose in 2011 and 2012, and this strength will eventually spill over to its lagging neighbors. Unemployment in all the Bay Area metros should drop below 10% by the end of 2011.

State of Debt

2010-10-20T17:56:00.000-07:00

The LAO reports on the $15 billion and climbing shortfall in the state's Unemployment Insurance Trust Fund. The entire shortfall has accumulated since January 2009, and hundreds of millions of dollars in interest payments will soon become due.

In other cheery news, the Treasurer's Debt Affordability Report was released detailing the $89 billion in current taxpayer-backed debt with an additional $50 billion authorized but unissued to date. The report also details "Yields on the State’s 30-year tax-exempt GO bonds ranged from a low of 4.82 percent to a high of 6.10 percent. Compared to AAA-rated tax-exempt GO interest rates, these translate to spreads of 87 to 172 basis points." That means the state is paying about an extra 1% on its debt due to its lousy credit rating. That's a lot of extra interest, that could be used for other purposes. The report also details the state's debt burden is the 2nd highest in the country after New York.

Not to be outdone by their state government, California's households have proven themselves to be pretty adept at loading on their own debt. The state may have the 2nd highest debt burden in the country (for now), but our private households have the highest per capita debt burden in the U.S. according to the Federal Reserve Bank of New York, $80,000 per capita compared to the U.S. average of about $50,000.(see page 18).

Does Jerry Brown's Water Plan Really Call For a Peripheral Canal?

2010-10-13T18:56:00.000-07:00

This AP headline caught my attention this afternoon "Brown calls for delta canal in Calif. water plan". The article states,

In a plan he released on his website, Brown endorsed building a canal or tunnel around the Sacramento-San Joaquin Delta... Brown previously has said California needs a better system to more efficiently move water, but the Democrat's water plan is his most explicit support of a canal or tunnel to help to deal with the state's current water troubles...

Oddly, the article includes no quotes from Brown or his campaign that clearly endorses a canal. So I went to his website to read the plan to see what it actually says. The canal doesn't come up until the 5th bullet under point 5 of the 7 point plan.

5. Protect and Restore the Delta....
Complete scientific, economic and environmental review of alternative conveyance facilities recommended by the Bay Delta Conservation Plan
6. Invest in California's Water Infrastructure including water storage facilities

California desperately needs investment in its water infrastructure, but given the State's financial condition, we must ensure that investments are cost-effective and funded by the appropriate sources. The beneficiaries - or users - of water infrastructure projects should pay their share of the costs of those projects. The state should invest in infrastructure improvements providing benefits to the general public or the environment. The projects must be cost-effective and make long-term sense. As Governor, I will:
Support infrastructure investments, including water storage projects, that achieve the multiple goals of increasing water supply reliability, protecting the environment and other public benefits, such as wetlands protection and restoration, and flood protection.
Support conveyance and storage investments, such as a peripheral canal or tunnel, that provide a net benefit in ecosystem and water quality conditions and where the beneficiaries pay for the benefits they receive

It doesn't sound like very explicit support to me. It sounds like he is calling for studies "a scientific, economic and environmental review of the BDCP", and offers conditional support if the canal passes some cost-effectiveness and beneficiary pays tests.

Maybe I don't know the full story, but it looks to me like AP botched this story and misrepresented Brown's water plan.

Update 10/14: The front page of the Stockton Record ran the AP story today under the bold headline "Brown Supports Building Canal or Tunnel around the Delta." No doubt that headline just cost him a few votes in Stockton. I see no press release on the Brown website regarding the release of what the AP says is a "new" water plan. Hopefully, the Brown campaign will clarify his position so people know exactly where he stands.

Update 2, 10/14: It seems that most people think this is a clear endorsement. I guess I don't understand how to read politicians' statements although Brown supposedly has a reputation for speaking clearly. I still read this as weak conditional support, that could be withdrawn if the costs are too high and environmental benefits and safeguards are weak.

How much should crop production decline during a drought?

2010-10-05T19:33:00.000-07:00

According to the report I recently published with UC-Davis researchers, crop production in the San Joaquin Valley declined between 2.3% and 2.5% in the 3rd year of a extended drought in which water supplies declined by a much greater percentage. I find the 2.5% decline to be a remarkably low number, half what most experts predicted, and the agriculture industry and water managers certainly deserve credit for their achievement in the face of adversity.

Still, the conventional wisdom is that we have a terribly broken water system, especially for agriculture. Would a truly broken and disfunctional system deliver such results? To those who hold this view, I wonder how much would crop production have to decline in a drought for them to be satisfied with the water system. Would -1% be good enough? 0%?

When the drought is over, agricultural production in the Valley will still be constrained by environmental pumping restrictions brought on by a collapse in fish populations. The highest estimate I have seen of the impact of these pumping restrictions on Valley crop production is a 1% decline. Is that too much to ask given the great environmental damage created by the pumps? What is a reasonable expectation? -0.3%? 0%?

Postscript (10/6): I see that asking reasonable questions like this about Valley agriculture has been called waterboarding and generates comparisons to Nazi's these days.

Realtors' Economic Forecast

2010-10-04T17:31:00.000-07:00

One expects, and typically receives, an optimistic assessment of the economy from the California Association of Realtors. Today's news release accompanying the new CAR housing market forecast contained the most optimistic statement I have seen about the California economy in a long time. According to CAR chief economist Leslie Appleton-Young,

We expect a net jobs increase of approximately 1.4 million jobs in California for the year to come ...

That has to be a misquote. A net gain of 1.4 million jobs would be roughly 10% growth. Surely, she means 140,000, we will see when the details are presented later this week.

More importantly, they are predicting a 2% gain in the median home price from 2010 to 2011 which is pretty modest for CAR and suggests the jobs quote is indeed a mistake. I expect median prices to be flat with some continued declines at the high end of the market that will not affect the median.

Cardoza Refinance Bill Deserves Serious Consideration

2010-09-30T17:32:00.000-07:00

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

2010-09-28T19:48:00.000-07:00

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?

2010-09-23T10:30:00.000-07:00

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

2010-09-17T17:43:00.000-07:00

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

2010-09-15T11:44:00.000-07:00

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

2010-09-10T18:22:00.000-07:00

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

2010-09-07T10:47:00.000-07:00

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

2010-09-03T16:42:00.000-07:00

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.

Thank Goodness For Las Vegas

2010-08-26T15:45:00.000-07:00

First American CoreLogic released its negative equity report today, and for the first time I can remember has published data for more than just the 50 biggest metro areas. That allows us to see how Valley metros are fairing, and the news (unsurprisingly) is not good. Here is the list for California metros with the % of all mortgages with negative equity (the U.S. avg. is 23%), and the rank among 165 largest U.S. metro areas. These rates will come down over time as foreclosures continue

1. Las Vegas, 72.8%
2. Stockton, 62.4%
3. Modesto, 59.6%
4. Vallejo-Fairfield, 57.9%
9. Bakersfield, 52.0%
12. Riverside-San Bernadino, 51.3%
16. Fresno, 46.8%
20. Visalia, 44.8%
26. Sacramento, 43.4%
27. Salinas, 41.6%
35. Oakland-Fremont, 32.4%
37. San Diego, 30.5%
41. Santa Rosa, 29.2%
43. Santa Barbara, 27.0%
50. Los Angeles - Long Beach, 25.3%
63. San Jose, 19.8%
64. Santa Cruz, 19.5%
71. Orange Cty, 18.1%
128. San Francisco, 9.5%

Most of the non-California areas in the Top 20 are Florida (and Phoenix and Reno). Merced isn't large enough to make the list, but you have to wonder if they would have challenged Vegas for the top spot. I am a little surprised by Los Angeles and Orange County, I thought they would have a littley higher negative equity, closer to San Diego's 30%.

Sacramento Wastewater Report

2010-08-23T09:40:00.000-07:00

Today, we released a study of the economic impact of of requiring total nutrient (primarily ammonia) removal from the Sacramento Wastewater Plant. SRCSD estimates the capital cost at $770 million, and it will take about $30 million per year to operate it, including a lot of electricity.  Over a 30 year period from the start of construction, we find that the average annual economic impact on the Sacramento area will be a $94 million loss in income, and a decline of 390 jobs.  The full report is posted on our website, http://forecast.pacific.edu/.

So, is this a lot? A $94 million income loss is a lot, about $65 to $70 per capita each year, but it is not an economic catastrophe. For comparison, Sacramento County's total personal income is about $50 billion, so this amounts to a total income loss of 0.2%.

Given the political debate, a more relevant comparison would be to the cost of the biological opinions on agriculture in the San Joaquin Valley. We will release an updated estimate of this loss in a few weeks that shows pretty clearly that the lost agricultural income from environmental restrictions on pumping is actually lower than the loss in income from removing ammonia from Sacramento wastewater.  (The ag. cost is more concentrated on a smaller area, and does create more employment loss.)

Another current Sacramento comparison would be the 3 day per month state worker furlough program that is estimated to be reduce Sacramento incomes by $600 million per year. So, the effect of nutrient reduction would be about 1/6 the current furloughs, or like having 6 permanent furlough days per year (every other month) for state workers (of course, just like the agriculture example above, the effects of wastewater charges would be broadly distributed across households than furloughs).

Another way to think of it is a regressive tax increase.  Unlike many utility bills (e.g. cable tv, phone, electricity), households are unable to reduce this cost by changing behavior or forgoing services. I am sure many households are willing and able to pay another $120 to $180 per year on their wastewater bill to help the Delta.  Lower income households (and over half of Sacramento households have incomes below $50,000) will find it a tough burden, and likely have a different opinion.

So should Sacramento be required to incur the cost for more advanced treatment? I don't know. That depends on the environmental benefits, and the emerging science in this area. Cost is only one part of the decision.

Unemployment Friday

2010-08-20T16:52:00.000-07:00

The California unemployment rate holds steady at a miserable 12.3%. That's not a surprise. We expect it to stay 12% or higher for the remainder of this year, before declining in 2011.

Payroll jobs declined by 9,400, mostly due to Census lay-offs. Taking out government losses, private payrolls inched up by 13,700, continuing a pattern of painfully slow private job growth. For the past year, our forecast has been that private job growth would start picking up now, and we would see monthly private sector job gains of about 25,000 in the 3rd quarter. Given the recent string of weaker than expected economic reports at the national level, I expected this to come in much lower than our forecast (which we will be revising down next month).

The metro areas are hard to read this month, because they are all dominated by a loss in local government jobs. Local government jobs include schools, and they always decline a lot now due to summer break, not to mention the new fiscal year affects for local governments. So, there is a lot of noise in this data, and it will be hard to get a good feel for the depth of this effect until Sept/Oct. On the more postive side, construction job loss seems to have bottomed out now in most areas, although we have yet to see growth.

Taking a longer view, 6-12 mos., the best performing metro areas are clearly Orange County (hospitality rebounding well, as is health care and professional services), San Jose (computers, tech rebounding well), followed by San Diego and LA. Inland areas are lagging badly, and SF and the East Bay have not had a great year either.

I will be looking at this data and the outlook a lot in September/October, and will have more to say about it this fall. Turning my focus back to water for the next 2 weeks.

Cardoza fired up over foreclosures

2010-08-17T12:40:00.000-07:00

I am happy to see Dennis Cardoza being so critical of the Obama administration about foreclosures. Here is a link to his op-ed in the Fresno Bee, and he also wrote a letter to the President among other actions (including proposing to slash the HUD travel budget). I won't comment on his political tactics or specific proposals, but the first step is to move the issue to the top of the agenda.

As I have pointed out repeatedly, Obama's efforts on foreclosure mitigation have been the weakest part of his economic recovery agenda since the beginning.

I have given Valley Congressional Reps a hard time about expressing so much outrage over water when the foreclosure mess is at least 10x more important to their economic woes. That was the point of the Fish or Foreclosure report we published about a year ago. So, I am glad to see Rep. Cardoza getting more vocal (to his credit he has paid more attention to this issue than his colleagues since the beginning) on this issue, and would like to see some of his neighboring reps. co-signing these letters.

Democrats' State Budget Proposal

2010-08-15T19:53:00.000-07:00

While I was away, the Democrats finally made a budget proposal. There is a lot to it, and I haven't been able to analyze it in detail. Here are my preliminary thoughts on a few parts of the proposal.

1. "Tax Swap": The proposal to increase income tax rates and decrease the sales tax is the headline, but it is not much of a budget solution. They also propose a sizable increase to the VLF (vehicle license fee), and that is what generates the net tax increase. I support the income-sales tax swap, and I am less enthusiastic about the VLF increase, but there may be no better alternative here. As the Democrats emphasize, both the income tax and VLF have the advantage of being deductible from federal income taxes, but they have been overplaying the size of the federal subsidy. (Sales taxes may not get the federal subsidy, but they are subsidized by visitor spending, and there is a macro case to be made for taxing consumption instead of income).

As I have pointed out in other posts, I would rather see the income/sales tax swap made with local governments, as I think the local government dependence on sales tax creates a lot of negative incentives to subsidize retail and encourage sprawl.

2. Assume the rosier LAO revenue forecast, a $1.4 billion solution. I think this is unwise, the number comes from the LAOs May analysis of the Governor's proposed budget.  This came right as some a brief blip of positive economic data in April/May increased optimisim about the economy (remember Dow 11,000!), and most of the data in the past 3 months has been less positive.

Both the LAO and our Center are part of about 8 California forecasts compiled and compared by Arizona State. Last I checked (about 6 weeks ago), LAO had the most optimistic forecast (we were the 2nd or 3rd most optmistic).  I really respect the LAO analysts, but I suspect that they, like most forecasters, have revised down their outlook since May.  I think the older DOF revenue estimates in the Governor's budget are more realistic at this point.

3.  Federal Government Assistance, $4.1 billion. Even with the recent $26 billion boost in federal funding for education/health, there is unlikely to be more than $3 billion coming from Washington.

Bottom Line: Although there are aspects to the proposal that I like, I think the Democrat's proposal is $3 billion or more short of being balanced even if they get their revenue additions passed with the Governor's signature. Deeper cuts will be needed, and we may not have a budget until after the election.

On Vacation

2010-08-05T07:34:00.000-07:00

I will be on vacation until August 16, so no new posts for a while.

Unfortunately, I am confident there will still be no state budget, continuing water wars, high unemployment, and a foreclosure crisis when I return. It seems there are a few bits of better news starting to appear, but perhaps my spirits are being lifted by vacation.

Governor Vetoes Farm Worker Overtime Bill

2010-07-29T12:01:00.000-07:00

Sen. Florez is right, the differential labor laws for agriculture are discrimination, and it is a shame that the Governor turned down this opportunity to right a historic injustice.

Echoing the farm bureau's position, the Governor says the veto is justified because agriculture is "different." However, the biggest difference in agriculture labor from other industries is its history of poverty and exploitation, not the characteristics cited here as excuses not to modernize the industry. Seasonality, weather, thin profit margins describe many industries, some more than farming which has faired relatively well in the recession.

The Governor touts the importance of leadership when he wants California to go beyond other states in cutting greenhouse gases, but when it comes to farm worker rights, he hides behind the fact that other states exempt agriculture from labor rules. He should adopt his global warming attitude on this issue, position California as a leader, and as the state with the most labor-intensive agriculture industry we can clearly lead the way in securing equal rights for farm workers in the entire United States.

Yes, I am a mainstream economist, and I agree that this bill will do more than just take money from the pockets of farm owners and put it in the pockets of farm workers. There will be side-effects such as adjustments to work schedules, incentives for mechanization and other efforts to reduce the increased labor costs created by the bill. However, some of these side-effects are actually good for the Valley Economy in the long-run and do not overly concern me.

If this is too costly and burdensome for agricultural businesses, then California labor laws are too costly and burdensome for all businesses. Once standards are aligned, farmers are free to work with other businesses for relief from the rules.

See a post from a few weeks ago for more comments.

The Cost of AB 32 vs Delta Levee Failure

2010-07-20T13:34:00.000-07:00

Quiz: Choose the smaller amount of money?
A. $4 billion to $34 billion
B. $0 to $1.6 billion

If you answered that A is a smaller number, Congratulations! You can get a job analyzing environmental policy for the state of California.   If you answered B is lower, you might be pretty upset since A is clearly 20 times larger. But in California environmental policy, the amount of costs don't matter, it is the issue.

If we are talking about global warming, any cost to reduce greenhouse gases is modest and small.
If we are talking about water supply, any disruption has catastrophic costs.

An open letter from economists released yesterday calls the cost of AB 32 on California "modest." The Air Resources Board has also called the cost small. So what is small? According to the ARBs latest analysis that most economists think is the best standard, the annual cost in 2020 will range between $4 billion and $34 billion.

What about the scenario of the Delta earthquake that floods 30 islands, etc? We are always told that this would be catastrophic for the California economy, a "$40 billion disaster."  According to the analysis from URS corporation done for the Department of Water Resources (look at figure 6a if you want 1 picture), the range of expected 25 year cumulative costs is between $0 and $40 billion. The midpoint (50% exceedance probability) looks to be $15 billion cumulative over 25 years.    On an annual basis, the midpoint is $0.6 billion with a range from $0 to $1.6 billion.

Obviously, it isn't a perfect comparison, one event is the estimated cost of doing something (AB 32), whereas the other is the estimated cost if we do nothing in the Delta.  There are other key differences too.

Still, the differences between the adjectives that are used is very revealing. AB 32 is small and modest, whereas not "fixing" the Delta in the way preferred by water exporters will cause "catastrophe", the economy to "run dry", and cut off the economys "lifeblood."

(last sentence deleted due to error. ARB/AB 32 is not funded by the state General Fund)

Department of Water Resources Says Economic Impact Study Costs $450,000

2010-07-15T18:24:00.000-07:00

Is this a joke? From a Hanford Sentinel article on Juan Arambula's (now co-sponsored by Fran Pavley) bill regarding the sale of agricultural surface water to cities outside the San Joaquin Valley.

Assemblyman Danny Gilmore, R-Hanford, was one who didn't jump on the bandwagon. Gilmore said he sympathized with Arambula. But Gilmore didn't support the cost of putting the bill into action during a state budget crisis. The state Department of Water Resources estimated it would cost $2.3 million a year to oversee the groundwater monitoring and another $450,000 annually to do the economic impact studies.

I can't comment on the groundwater monitoring, but I would bid about $15,000 for our Center to do the economic impact work, and I know consultants who would do it for $3,000 to $5,000. Heck, I'll do it for free just because I would like to see this bill pass. Clearly, Arambula's bill reveals true motives even more than I initially realized.

I am truly stunned by this $450,000 annual cost for economic impact studies of a very small number of proposed transfers. If this kind of work really paid that well, I would have a house in Aspen. Seriously.

The irony is that the water exporters would actually like to use my assessments of water supply economic impacts in this case. My estimates of water shortage economic impacts have tended to be lower than their estimates and therefore would be more supportive of water transfers.

I suspect the truth is that DWR doesn't want the bill to pass and doesn't want to do te analysis, so they made up some crazy cost figures to give legislators an excuse to oppose it. Of course, DWR has been incurring the cost to assess the economic impact of the drought, and update it every month for their drought updates. If they can't bear the cost of assessing Vidovich's "man made drought", then they should immediately stop assessing the impacts of the current drought since it is too costly. [As a side note, I find it interesting that DWR is now doing the economic impact estimates themselves now rather than quoting the UC-Davis estimates or citing joint modeling projects with UC-Davis as in their previous updates.]

Update: 7/18

The Fresno Bee ran a story on this bill today as well. It appears that the sellers are required to pay for the economic assessment, not DWR. Still, their cost assessment is odd.

Assembly Bill 2776 requires water users wishing to make long-term transfers of surface water to pay for an evaluation detailing the economic, social and environmental effects of the sale. Also, users would not be allowed to replace the water with ground water unless the underground basin is strictly monitored.

New Forecast Released

2010-07-15T16:59:00.000-07:00

We released our most recent economic forecast today. Click here for more information, including how to subscribe!

The Highlights of the California outlook are below. It has not changed much over the past year. I'll discuss the metro areas tomorrow when the EDD releases new data tomorrow - yes, tomorrow is unemployment Friday!

Highlights of the July 2010 California Forecast

• California remains in the sluggish, early stages of a long, slow five year recovery.

• California unemployment peaked at 12.6% in the first quarter of 2010, and will remain at or above 12% through the end of 2010, and above 10% through all of 2011.

• Payroll jobs bottomed out this winter nearly 1.35 million jobs below their 15.2 million job peak in Summer 2007. Although California will add 250,000 jobs over the next 12 months, this is less than one-fifth the total lost. Jobs will not recover their pre-recession peak until the 1st quarter of 2015.

• After 7.5 years of zero net job growth from 2007 through 2014, the state’s population will have grown by over 2.4 million people, keeping unemployment above 8% through most of 2014.

• Growth in real gross state product will average a modest 3.1% over the next four years.

• Construction has lost 390,000 jobs, by far the most battered sector through the recession, and will lose another 10,000 jobs by year-end. This cyclical sector will eventually bounce back, and should experience almost 11% job growth during 2012 and 2013.

• With the NUMMI closure in the past, manufacturing is growing again. Next year could bring the first annual increase in California manufacturing employment in a decade.

• Retail jobs have bottomed out after declining more than 10%, and are projected to rebound by 47,000 jobs (3%) over the next 12 to 18 months.

• Professional and Scientific Service jobs are projected to increase by 55,000 (5.5%) over the next year after a steep decline in 2009.

• State and local governments, including public schools, will drive most remaining job loss and shed 36,000 jobs over the next year.

• Housing starts bottomed in 2009 at a record low 36,000 units. Although housing starts will recover to 45,000 units in 2010, this is still the 2nd lowest level in 50 years. By 2014, 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.

Farm Worker Overtime Bill Goes to Governor

2010-07-07T10:45:00.000-07:00

It will be very interesting to see whether Governor Schwarzenneger signs SB1121, a bill that would apply the same overtime rules to farm workers that apply to other workers in California. Except for agriculture, California law requires 1.5x regular pay for hours beyond 8 in a day, and 40 in a week. In agriculture, overtime does not apply until 10 hours in a day, and 60 in a week.

Opponents argue that the bill will hurt farm workers, because employers will reduce hours (using larger crews) to avoid paying overtime. I have no doubt that some of this will occur, especially when there is a lot of unemployed labor like there is now, but I don't think that farmers will be able to or want to completely avoid overtime. Thus, the law will increase the total income and reduce poverty in farm workers in the Valley, and will decrease the net income of farms in the Valley. This will be true in total, even if some workers experience a reduction in hours and income and farmers make adjustments to minimize the cost of the law.

The change will probably accelerate the current trends toward less labor intensive production through mechanization, crop choice, advanced irrigation, etc. But this change will not occur overnight, it will occur over years and decades. It will reduce agricultural jobs, but it should increase average wages either through overtime pay or by increasing the productivity of workers in higher-skill, more capital intensive positions. In the long-run, the Valley Economy will be better off if the wage level and quality of agricultural jobs increase, even if the number of farm jobs decreases as a result.

I have listened to the agriculture industry's arguments of why they are different and should be exempted, and I find it unconvincing. Lots of industries have these same characteristics of seasonality, competition from cheaper states/countries, and are family owned businesses with thin profit margins.

I appreciate the economic argument that minimum wage, overtime and other labor regulations can reduce jobs and increase unemployment, although the argument is often over-simplified and exagerrated. It is true that you can't legislate higher average incomes and regional prosperity, and too much government redistribution can reduce total income and prosperity.

There is a case to be made for California to be more like other states and loosen up it's labor-friendly employment regulations, but if it does, it should do so for all industries. Why not reduce overtime rules for industries with higher base pay or have a sliding scale? Shouldn't we be more worried about the international competitiveness of high-wage industries that aren't tied to the land? I can think of other industries and occupations that might have a better argument for exemptions from minimum wage and overtime rules than agriculture.

Although I certainly see the potential downsides, I am in favor of the farmworker overtime bill and hope the Governor signs it. My support is primarily based on equity, and I think it will encourage some long-run changes in the industry and culture that are good for the Valley economy.

If California farmers feel this puts them at a competitive disadvantage with other states, I recommend that they lobby to remove agricultural exemptions at the federal level. If they feel that it makes them less competitive with other countries and increases the costs of business too high, then I recommend they join with other business interests in California and lobby to change state law for all industries.