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The Truth about California: It's actually saving the rest of the USA (marketwatch.com)
154 points by ENOTTY on Nov 29, 2010 | hide | past | web | favorite | 56 comments

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.

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.

California %2 is agriculture. Texas is 0.8.

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.

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.

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

Keep in mind that "agriculture" includes livestock. Also, the climate of the southern US is well suited for cotton. Beyond that, corn is grown pretty much everywhere.

I can see where they might not think of CA that way as it is not the only game in town and the whole water situation might come into play at some point.

It should be noted that at least one "farm state" (ND) is becoming much more of an oil state in recent years. It looks like this will continue as they just discovered another reserve that is bigger than the current one.

If you have some free money, building rental housing in northwest ND is a very safe bet.

//edited because of odd autocorrect

Agricultural products are also a big export for the US.

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.

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.

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.

> 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.

You didn't ask this question of me, but I would add the unenforceablity of non-competes. E.g. it's hard to see how Shockley -> Fairchild -> A Hundred Flowers would have happened in another state.

True, though for a lot of state policies, people seem to generally agree that they're bad, just not on whether they're bad enough to justify the pain of changing them.

The policies, good or bad, coexist with the country's strongest private sector, but that doesn't mean they caused it.

I would even say that the reverse is possible. That because of it's extremely strong private sector, the state was able to afford these bad policies.

I'm pretty sure that this is not true, I'm just emphasizing your point of not reading into it that much. Pretty much any theory you want could be proved from two seemingly related pieces of data.(broad generalization I know.)

The argument that California's policies produced the strongest private sector in the country is equally fallacious.

I'm pretty sure I agree... I think you're saying that it would be fallacious to attribute california's strong private sector by association alone. (ie., california has a strong private sector, therefore, california's government must not be harming the private sector is fallacious).

It's an open question. California's private sector may actually enable bad government. Some of this is just geography - california has some huge advantages (quality of life) that means people will put up with a lot to live here.

As for government... well, one thing the state gov't did a long time ago was fund an extremely strong system of public universities, a move that continues to pay huge dividends, both in terms of educating large numbers of native-born californians as well as drawing in highly productive people from the rest of the world. I think that to some extent, california is coasting on past investments here, since the amount the state contributes to UC has been declining.

But it would take a lot to wrest high tech away from a region that has stanford, berkeley, and UCSF. So to some extent, you could say california gets away with some very bad decisions because it also made some very good decisions.

Most of the pain of California's bad policies have not yet been felt. Things are easy when you're spending but they get harder when you have to pay people back. Also rich people and corporations are leaving the state and poor people, mainly Mexican immigrants, are moving in. So along with a completely unsustainable budget, the largest tax contributers are decreasing and the largest tax recipients are increasing.

California cannot survive without some combination of:

-Huge Spending cuts

-Huge Tax increases (which, if overdone, may result in less tax revenue.)

-Federal Gov't bailout.

You can play cause and effect all you want, but basic arithmetic is really all that matters.

  > Also rich people and corporations are leaving the state
  > and poor people, mainly Mexican immigrants, are moving
  > in.
My take-away from the blog post is that most of the hand-waving about California comes down to people making generalized statements like this, but when pressed to come up with actual data, they start to squirm and weasel out of making a more fact-based statement.

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.


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.

I will not argue against the case that the US will print more dollars, because I think that will happen, but will they print enough to refloat California's obligations without specific funds being allocated by Congress for a bailout. The Republicans control enough votes to determine whether this happens or not, and it would appear that the political benefits to them could outweigh the damage in the near term.

One of Spain's big impediments to getting themselves out of their economic mess is that they're on the Euro. In ways similar to the varying economic situations in US states. http://www.nytimes.com/2010/11/29/opinion/29krugman.html

  > 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.

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=...

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

"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.

"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!

"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.

I'm pretty sure the reason you hear 'skeptics' hoot every time it snows is because 'alarmists' hoot every time it gets hot. The celebration of colder weather is probably equal parts mocking sarcasm and genuine belief that cold weather means the end of global warming.

To me, it's always been a way of saying 'you can't have it both ways'. But then, I don't know what people are thinking when they say these things, so that's just my opinion showing through.

This is perhaps true for a few; I've mocked the "every single instance of bad weather of any kind is due to global warming" folks myself.

That said, most of the "It's snowing! So much for global warming!" BS is far from a sarcastic comment on that behavior.

Dang, shouldn't have baited the "skeptics".

Oh, well.

Shouldn't have baited, period.

Didn't really mean to bait the "skeptics". I just forgot how many of them there are, here, as I really was reminded of the behavior.

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.

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.

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.

> 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.

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:


"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."

From the article:

"But how big are these costs in California? The non-partisan Legislative Analysts’ Office in Sacramento estimates there’s a $136 billion gap in the state pension and benefits system. It may work out to more or less. But that’s the actuarial figure at the moment."

I said "until the end". If you only read 80% of the article, you would think CA was an oasis of economic growth with a model government. If I were trying to persuade people that things aren't so bad in CA, I would start with the most glaring problem and perhaps offer reasons why it isn't a problem, or state how the problem will be overcome.

Sure that $136B gap is only 1/7 of the CA GDP, but a lot of that GDP is being siphoned by the Fed's gap, too.

Well, wait --

ignores companies like Facebook opening datacenters out of state

The bulk of Facebook's employees don't work in datacenters, and (as another poster noted), big companies do this for redundancy and to reduce latency -- not because of some ill will against the state.

a growing number of people leaving the state (I'm one of them)

Sounds anecdotal to me, and I've noticed nothing but a surge of out-of-state license plates in the past few months -- but given a population of some 40 million, I don't think a "growing number" of people leaving is a huge problem. It's the economy, not strictly the population number.

California doesn't appear to be serious about [owing money].

No more or less than any other state.

Sounds anecdotal to me

More people leave California than arrive: http://articles.ocregister.com/2010-09-05/finance/24551853_1...

My main point was that while silicon valley might be booming, the rest of the state isn't. The article doesn't address that fact.

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.

>akin to what happened to Lehman Brothers

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

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.

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.

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."

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.



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

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.

But California's economy is 50% larger than Texas', according to http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP. Since economists mostly talk about debt to GDP ratio, doesn't that make Texas considerably worse off?

Texas has a two-year budget cycle, and the $25 billion deficit figure that's been batted around the internet is speculative since the official numbers won't be known until January.

Are there any reasons to think that the speculative number will be off by more than a billion or two? If the real deficit is actually 23 or 27 billion, I don't think that really affects the comparison too much.

('Oh, Texas's deficit is actually $24.23 billion and not $24.24 billion? Well, obviously that invalidates all the comparisons to California! Let's discuss something else.')

People seem to be getting a bit heated on this topic. I was just trying to point out that the number was an estimate, and that it was for a two year period. If we take a low-high range of $23 - 27B, then that is $11.5 - 13.5B/year, which is significantly different than the $25B that is being implied for a one year budget.

Personally, I think all the California vs. Texas debates are a childish extension of blue state vs. red state political bickering. Nobody in the US is better off if either state has financial problems.

What is the margin of error? For example, if Texas debt is between 10 and 30 billion, then we can't comment. But if it is between 20 and 30, then I think we can reasonably say that Texas debt to GDP is worse.

"paragon of small government"

You must be thinking of a different Texas than I live in. :P

Even if the $25B deficit pans out in the end, and aside from the other differences between the states (including the counter-intuitive one that Texas has been less hard-hit during this downturn), you still end up with a situation where states face major budgetary crises at every downturn because revenue only balances spending near the height of economic booms.

That's a budgetary policy problem even when it's not unique to California. And for California, it's turning out rather badly.

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