

The Truth about California: It's actually saving the rest of the USA - ENOTTY
http://www.marketwatch.com/story/the-truth-about-california-2010-11-22

======
ggchappell
Interesting article.

One statement struck me as odd:

> Most of the states that have grown faster than California during that time
> are farm states, riding an incredible boom in agriculture prices.

I suppose there is nothing wrong with this statement, strictly speaking.
However, it suggests that CA is _not_ a "farm state". But it certainly is. CA
is the number-one agricultural producer of all the 50 states. It's a clear
number one in crops, and number two (after TX) in livestock.

~~~
j_baker
I would imagine that the other states' economies depend much more on
agriculture than California's does though. Thus, California has a lot of
farmers, but it doesn't get as much from a surge in agriculture prices like
the others do.

~~~
waterlesscloud
California %2 is agriculture. Texas is 0.8.

~~~
j_baker
Really? That's actually somewhat surprising to me. Still, I don't really think
of Texas as a farm state either. I'm thinking more along the lines of the
Midwestern states like Kansas or Nebraska.

~~~
akgerber
Texas has two of America's six largest cities in addition to all of its
agricultural land. North Dakota has a city of less than 100,000. So its
hinterland is a little more important.

~~~
masklinn
The original article was about growth, so absolute size is not relevant to the
argument.

------
karzeem
Most criticisms of California target public sector backwardness, so it's not a
refutation of that to point to the strength of the state's private sector. And
"CA's private sector is strong, ergo it hasn't been harmed by the government"
is a circular argument.

This is an argument over the precise extent to which bad policies are bad.
Seems more useful to discuss what genuinely good policy looks like.

~~~
boucher
The argument that California's policies must be bad, regardless of the fact
that they've produced the strongest private sector in the country, is equally
fallacious.

~~~
dhbanes
Maybe I am mistaken, but it seems to me that California's private sector is
strong despite its backward government, not as a result of it. California is
an extremely desirable place to live. This attracts business owners and highly
qualified employees alike. I would be interested to hear which of California's
policies you believe play a significant role in the success of its resident
businesses.

~~~
_delirium
> I would be interested to hear which of California's policies you believe
> play a significant role in the success of its resident businesses.

Its large subsidies for higher education played a significant role imo,
especially during the era (up through the early 1990s or so) when they were
larger. The state used to fund the UC and Cal State systems with a larger
subsidy than today's (much larger if you account for population growth), and
also indirectly supported the state's private universities, by providing very
generous scholarships to CA high-school students with good grades, if they
chose to attend any in-state university, public or private (the old CalGrants
program, which still exists in name, but with much reduced scope).

The "ton of taxpayer money spent on higher education" policy doesn't _fully_
account for the highly qualified employee base and large number of university-
research spinoffs and collaborations, but I think it probably accounts for
some of it. Interestingly, Texas is another example, despite otherwise being
more small-government than California: it imposed an oil-and-gas extraction
tax in the early 20th century, with a significant portion of the revenues
legally required to go to the state-university trust fund, which in part
accounts for the strength of the UT and Texas A&M systems, and the high-tech
concentration in Austin.

------
JSig
The author has a serious chip on his shoulder. Lots of politicking in this
article that distract from the point being made.

Take a look at what the market thinks of the chances for a California default.

[http://www.economist.com/blogs/dailychart/2010/11/credit-
def...](http://www.economist.com/blogs/dailychart/2010/11/credit-default-
swaps_spreads)

As of a week ago, "The state with the biggest budget problems, California, is
seen as slightly less likely to default than Spain but slightly more so than
Italy."

Note that Spain is a total mess with an unemployment rate around 20%.

It's hard to default when your can print your own currency. I think the
California bond holders will never take a haircut. The US will just print more
dollars.

~~~
pyre

      > Take a look at what the market thinks of the chances
      > for a California default.
    

This assumes that 'the market' is a rational actor. But it's proven time and
again that it isn't.

~~~
bjnortier_hn
The question around the [ir]rationality of markets is irrelevant. Markets
determine the cost of borrowing. If California wants to lower the cost of
debt, or maintain the current (low) cost, it must value the opinion of the
markets.

The calculation of the author, with state debt costing $6billion a year,
assumes a constant cost of borrowing into the future! Investors have been
selling municipal debt in the past two weeks, which will result in higher
borrowing costs [1]. The same thing happened and is happening with the PIIGS,
where those in power have been complacent about their ability to service debt
because of the assumption of constant debt servicing costs.

[1]
[http://search.ft.com/search?queryText=muni&ftsearchType=...](http://search.ft.com/search?queryText=muni&ftsearchType=type_news)

November 25, 2010 US muni bond funds lose another $2.3bn November 18, 2010 US
muni bond funds see record outflows November 16, 2010 US muni bonds see
biggest drop since 2008

------
Semiapies
_"Californians are so productive that every year they send billions of dollars
in surplus dollars to the rest of America. Year after year they have sent
vastly more in federal taxes than they ever get back in federal spending."_

So many seemingly educated Americans can't tell - or artfully avoid telling -
the difference between state and federal taxation and spending. Also, here's
the dirty secret: people in other states don't really "get back" any of that
federal money unless they work at federal facilities, including military
bases, common in the states accused of getting more federal money than they
give. If they're _really_ lucky, they might get that money at a remove or two
if they work in lower-end service jobs near a military base.

But then, that whole thing is a strawman. Some random idiot might be saying
Californians are all lazy good-fer-nuthin's, but everyone else isn't talking
about Californians, but an unsustainable state government.

" _California’s a basket case? The state has one of the highest living
standards in the country..._ "

I'm rather horribly reminded of global warming "skeptics" who hoot every time
it snows.

~~~
lr
"Also, here's the dirty secret: people in other states don't really "get back"
any of that federal money unless they work at federal facilities,..."

People in these states don't drive on federally-funded roads, or have anything
to do with anything else that receives federal dollars? Right-wingers are keen
on talking about trickle-down when it comes to tax cuts, but mention nothing
of the multiplier effect of the spending habits of the people who earn money
which comes directly from the federal government. So yes, people in those
states "get back" big from federal spending!

~~~
Semiapies
_"People in these states don't drive on federally-funded roads"_

They don't pay federal gas taxes, either? You might do better picking
something better than federal road spending when trying to defend California,
incidentally.

But that's the problem you face when you try to reduce distinctly different
things like federal and state spending to "But California really has a
surplus, honest!"

" _Right-wingers are keen on talking about trickle-down_ "

So? They're also big on "starve the beast" deficit spending, but that hasn't
worked in California, either.

ETA: Suggestion - disengage from your partisan reflexes. Think. Remember than
the Republican Party in California has been as much of a contributor to the
problem as the Democratic one, at least in proportion to how much power they
have had, if that helps.

California's in trouble. It'll certainly survive and improve, but the spending
cuts and tax hikes that they'll have to have this time (or if they sweat and
bluff it through a few more years, the _next_ time there's an economic
downturn) will be far from fun.

------
webXL
The gist seems to be that despite numerous stories predicting its demise,
California:

\- is wealthy and talented

\- has more (people, VC, etc.) than it did in 1999

\- has been funding the rest of the country in federal transfers (he calls
them bailouts, therefore you can't complain if CA asks for one)

\- has a small budget deficit relative to its budget

It leaves out $138B of unfunded liabilities for state employees until the end,
and ignores companies like Facebook opening datacenters out of state, a
growing number of people _leaving_ the state (I'm one of them), and its awful
credit rating.

Unfortunately if I owe the bank money, I can't tell them how good of an
investment I was up until 2008 and expect them to give me a pass. I need to
figure out a way to come up with the money. California doesn't appear to be
serious about that.

~~~
Locke1689
_and ignores companies like Facebook opening datacenters out of state_

Explain this to me. It seems obvious that companies would open datacenters
outside of just California. What would be more obvious to me would be placing
them close to 1) backbone hubs and 2) cheap electrical power.

~~~
webXL
Well that's fine, but don't tout that your state is an engine of economic
growth when the companies you mention decide to "offshore" major chunks of
their operations. Figure out a way to keep them in state, or generate some
kind of equivalent growth, maybe even outside silicon valley.

~~~
sagarm
> don't tout that your state is an engine of economic growth when the
> companies you mention decide to "offshore" major chunks of their operations

You're clearly implying here that Californian companies are placing
datacenters outside California because of state policies, which is simply
incorrect.

While it makes sense to put one datacenter somewhere in the vicinity of
California, datacenters should be geographically distributed. It's also common
to place datacenters near rivers for cheap cooling, but good sites are
relatively rare. Now consider competitive bidding from cities, cheap power,
and wanting to locate datacenters near users. Basically, state policies have a
relatively small impact.

~~~
webXL
I conceded that point about the datacenters, but we both know that a lot of
tech companies in California offshore their manufacturing, call centers, etc.
Get some of that to stay with state policies.

Reason has some more evidence why the article is bunk:

[http://reason.com/blog/2010/11/29/is-californias-decline-
jus...](http://reason.com/blog/2010/11/29/is-californias-decline-just-mo)

------
rubypay
Fiscal facts aren't all that matters. Investors' perceptions can also have an
impact--if California is perceived to be in trouble, investors demand higher
premiums on bonds, and the costs for California to borrow money increase. This
can lead to a detrimental cycle of destruction, akin to what happened to
Lehman Brothers.

~~~
VladRussian
>akin to what happened to Lehman Brothers

there is also, more probable for a state, scenario of AIG/etc... - federal
government stepping in.

------
redteddy23
I thought it was a case of referenda being used to demand things be done but
the voters not actually wanting to have to pay for them.

------
fleitz
The point about the State of California heading towards bankruptcy is not
affected by either its tax rate compared to other states or the amount of
venture capital dollars it sucks up. The primary driver for the state going
bankrupt is its expected income vs. its expected expenses. Venture funding in
California has little affect on its tax base as most profitable startups are
incorporated in Delaware or have their revenue generators incorporated
offshore.

Yes, they'll be good revenues from the employees but no windfall should be
expected. (i.e. the state should not expect abnormal returns because of in
state venture capital investment)

My point is that when you take look at expected income vs. expected
expenditures you can expect to see the state go further and further into debt.
It's anyone guess as to whether that will lead to filing for bankruptcy or
not, but the direction the state's fiscal health is heading is clear.

Regarding the state's fiscal picture this article largely addresses a straw
man. No one is arguing that the state will go bankrupt because it's tax rate
is wildly out of whack, or because it is not getting enough venture capital
funding.

People are arguing that the state will go bankrupt because the state already
has a fair amount of debt relative to GDP, it runs large current accounts
deficits relative to GDP, and has large unfunded pension mandates. This
article addresses none of these points.

------
sabat
IANAE (I am not an economist), but here's an observation from a born-and-bred
Californian: whenever the economy is bad, the state budget takes it on the
chin. California is big -- bigger than a lot of people realize. I mean this in
terms of geography _and_ population. So it seems to me that national problems
are magnified here in our microcosm.

Once the economy picks up, the state problems ease.

 _Tangential anecdote_ : I was at a JBoss conference a few years ago, talking
with a guy from the company who'd never been to California before. I mentioned
that I had just driven back here -- I'd been snowboarding over the weekend. He
gives me a dubious look, and says, "You don't have snow in California."

~~~
j_baker
Here's what strikes me as funny: California's budget crunch is $25 billion.
Texas (a paragon of small government) is facing a deficit of... $25 billion.
The fact that both states have similar deficits would seem to back your
argument that this has more to do with the economy than budgetary policy.

[http://www.dallasnews.com/sharedcontent/dws/news/politics/st...](http://www.dallasnews.com/sharedcontent/dws/news/politics/state/stories/110410dntextxxgr.20cde75.html)

[http://articles.sfgate.com/2010-11-11/news/24826042_1_budget...](http://articles.sfgate.com/2010-11-11/news/24826042_1_budget-
deficit-deficit-estimate-deficit-balloons)

~~~
ataggart
The debt (read: accumulated past deficits) isn't the only, or even main,
issue; rather it's the _future_ liabilities that are killers.

For example, California has unfunded pension liabilities of over $500 billion
[1]. To put that number in perspective, it's almost seven times greater than
all the outstanding voter-approved state general obligation bonds in
California.

[1] <http://www.stanford.edu/group/siepr/cgi->
bin/siepr/?q=/system/files/shared/GoingforBroke_pb.pdf

~~~
jerf
This is the core of the problem. My problem with this article is that you can
apply the same arguments and paint a picture where the US itself has a rosy
economic future. But the problem isn't even merely today, November 29th, 2010,
it's the scope of the future obligations we've taken on. It's not that the US
or California has necessarily _that_ exceptional of a debt load _right this
second_ , it's that the money we might be using to service it is already
nominally allocated to other "untouchable" projects.

That's the big change; entitlements (and pensions as a subset of those worth
calling out specially). To do an article about how glorious the California
future is and to criticize not just the arguments but the motivations of those
saying there are problems, but for neither the word nor the concept of
entitlements to show up is just constructing a straw man and cherry-picking
the budget numbers.

For that matter reading the article straight you might be mystified about why
California has very recently resorted to the very legally-dubious IOU-money-
but-not-quite-money scheme. If it was even half as rosy as this guy is arguing
that shouldn't have been even close to necessary, but in the real world, it
was.

