Hacker News new | comments | show | ask | jobs | submit login
California Finds Economic Gloom Starting to Lift (nytimes.com)
27 points by 001sky 1758 days ago | hide | past | web | 50 comments | favorite

The housing & job reports feel right and are welcome news.

But did the NYTimes just point to California's current budget as a sign of our State's "economic stability"?

They quote that the "California Legislative Analyst’s Office projecting . . . . [that] California might post a $1 billion surplus in 2014"

That is such an irresponsible thing to publish - a "surplus" makes it sound like the government is totally on top of the situation here and a model for success.

The reality is that CA would be going off the @!@W$! rails right now in 2012 if voters hadn't just passed Prop 30.

Prop 30 was an EMERGENCY, retroactive (from Jan 1 2012), and "short-term" (7 year) tax on high income earners + a moderate increase in sales tax which is going to raise $6B a YEAR to pull CA's ass out of the fire.

So while the gloom may be lifting, I remain pessimistic that our state gov't has any long-term solutions to their continued budgetary missteps.

Few seem to want to hear it, but the housing 'recovery' is based strictly on a Fed that provides perpetual QE to hold down interest rates forever. Not to mention they've removed trillions in junk mortgages from the market, leaving them one of the world's largest land owners. That has also made it easier for the banks to go back to bad real estate policies, since those toxic mortgages have been effectively bailed off their balance sheets. It is currently the Fed's stated intention to create another housing bubble (in their terms they want to inflate asset values, har har), and they're working very hard at it. A large portion of California's supposed improvement is based on rising property values, making home owners feel better off again.

It's all fantasy land economically. Mortgage rates at 3.4% is obscene based on any historical norm. When those rates revert to an average (or worse) as they must, the housing market will tank. The opposite reaction that the Fed's extreme intervention will invite, is going to cause massive destruction just like the last housing bubble they brewed. They learned nothing from their past mistakes.

"perpetual QE"

It's hard to cast 2007 to date as perpetual and the end goal is not to keep interest rates down, but inflation.

fed has said this will policy position will go forward for the 'forseable future' or some-such

In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.


Yes, by which point they hope that they won't need to keep interest rates down.

In fact, this statement and others made at the time are an attempt to get additional traction with expectations about future interest rates.

they hope...

-- nuff said.

Sorry, that just seems like a throwaway comment.

They have to get traction somehow. Because of the inability to lower short terms rates any further, QE was introduced. As that failed to have enough of an affect they decided to assure the market that that they won't revert to business as usual at the first sign that things are springing back. Setting this expectation is necessary for them to get any traction with the market.

Of course, if you think the slow recovery we're experiencing is going to falter or halt, then they might well be pursuing such policies for a long time. If it comes to that politics is likely to intervene in a large way.

Its not a throwaway comment because you're confusing analysis with non analysis.

2007-2012 = 5 years

2007-2015 = 8 years

It goes without saying that these are not equal. or equivalent. etc. If you google "fed" and "forseable future" you will get a variety of reports discussing the recent movements and QE decisions from 9/12 (at various levels of sohistication). So to sum, the notion of "perpetual" (or: open-ended) QE is closer to realtity than what you suggest (the finite 5 years of QE, etc). [1]

TLDR: we are in a period of "open-ended" QE

edits: clarity


[1] The fed hasn't gone further explicitly because "further" is not "foreseeable" with any credibility. Policy parameters = f('hope') is not what they get paid for, or why they are entrusted with power. etc.

I still want to nitpick on 'perpetual'. Not in any conceivable usage, but in the context of that post.

"Few seem to want to hear it, but the housing 'recovery' is based strictly on a Fed that provides perpetual QE to hold down interest rates forever. ..."

That's a much stronger statement than saying it's open-ended. Maybe I should have let it slide as a little hyperbole, however I disagree with overall thrust of the comment.

Plus, the Fed's current policy is only open-ended in the sense that the recovery is not guaranteed because nothing is guaranteed. On our current trajectory it's not looking too bad. A lot slower than we'd like, but there is progress.

I do not think it is unreasonable to expect the recovery to be complete to the Fed's satisfaction (with respect to their QE promise) in three or four years. (I'm not saying we'll have unemployment, for example, where it was in 2007 anytime that soon). If you add on a further period of QE to let them meet the commitment they have made, then I grant that is a long time but it is not forever.

"Policy parameters = f('hope') is not what they get paid for, or why they are entrusted with power. "

I was being a little flowery with 'hope', is all. They do have to act on what they believe are the facts and what they believe will happen, whether or not I call it 'hope'. However, what the Fed is supposed to do is look after inflation and unemployment. They've been very assiduous about the former while neglecting the latter for some time now and are finally allowing the idea that inflation could go a little higher than 2%.

In the spirit of fair play, I'll accept that both positions were literally not true. Still, there is a thesis/antithesis/sythethis that is worth spelling out for HN'ers folowing along.

Infinite QE = False

Determinant QE = False


Open-ended QE =~ True

Wait, wat, why?

The reason: The only way the Fed gets to where it wants is with (at a minimum) a credible threat of perpetual QE. The fed is trying to play the house at a casino. It does not want a high-roller doubling down all-in on Black at infinite repitition. That game goes to whoever lasts the longest at the table. The threat of perpetual QE needs to be credible to keep this type of speculation off the table. Only when it is clear that this has gone (ie, such bets are irrational on fundamentals) will it change its position.

So, in that sense, we should expect to see a reversion in policy that will make QE finite. But that is different than saying that bets should be placed in as if we were in an environment of (tractably) finite QE (that would be bad advice--per above). So to get to the state-space where your notion is true, you have to go through the state-space where the notion you dis-agree with is true. But these are sequential, and the time that you are correct is iff and after the time that the other notion is correct first. And we are in that latter state-space now.

So housing prices are being supported by QE; QE is open-ended for the forseable future; At some stage this will revert but the half-life on a 30 year mortage is 15 yrs and we will have at least 8 years of QE so at least some (half or likely more) of the value of the housing market is (arguably but) correctely attributed to QE.

I think this is a fair/useful elucidation, but YMMV.

That's a pretty fair description and I hate to disagree with it but I have to, a little. ;)

Yes, they need a credible threat, but the threat is merely that they'll continue with this policy a little past the inflection point instead of right up to it. And, at least to me, the inflection point doesn't seem all that far off.

I think 8 years is a better upper bound than a lower one.

A surplus of $1 billion means nothing for California's $100+ billion in debt and unfunded liabilities. We would need a billion surplus every year for hundreds of years.

http://www.nytimes.com/2012/09/21/us/california-debt-higher-... http://www.usgovernmentspending.com/california_state_spendin...

That's a surplus after all the debt service payments (ie bond interest), and unfunded liabilities aren't all due immediately. Some are unfunded because they're pay-as-you-go, and so they don't need to be fully funded in the present.

Suppose you have an income, a year's worth of savings in the bank, and a mortgage with 20 years left on the term. You don't lie awake at night worrying about 19 years' worth of unfunded liability, even though you don't currently have the money to pay it off. In fact, right now is a good time to have debt or even issue more because interest rates are at historic lows.

Well, I don't know California's interest rate on those loans, but if it's lower than inflation, you'll inevitably win. Also, if the economy keeps growing, 100 billion in a hundred years will be a lot easier to come up with than it is today. Think of Dr Evil asking for 1 million dollars.


Just looked it up. Just shy of a 2 trillion dollar Gross State Product? 100 billion is a big number, but 5% debt is not that bad. (the state) Going into debt during the good times is stupid, going into debt in recession is probably smart.

Not to mention that debt interest is taking up twice as much of the general fund as a decade ago.

"California's current debt burden is 7.8 percent of the state's general fund budget of $88.5 billion for the current fiscal year that ends in June 2012. That 7.8 percent is more than double the 3.4 percent of fiscal 2003-04."


Yes indeed California racked up a lot of debt from 2003 to 2012.

However, with the decreasing shortfalls and expected balanced budgets that debt is no longer increasing and with the projected surpluses it can be paid down.

The debt is a legacy of the past. Great strides have been made in the past few years to get the state's fiscal situation in order.

It isn't the debt by itself that is the problem, it is the debt plus the unfunded liabilities. The pension liability alone is estimated at an additional $500 billion. Plus there is the debt and financial problems of the various cities and counties.

The unfunded liability will last out most another 50 years (when the last of the employees covered by these generous pensions dies). New employees receive far less favorable pensions: either significant reduced defined-benefit pensions, or a switch to defined-contribution pensions. New employees are also subject to higher retirement eligiblity raises and cannot apply as much (if any) vacation time or unused sick days toward increasing their pension-base salary.

The Gross State Product does NOT belong to the State, though.

Regarding the housing numbers, Bernanke is printing $85B per month to buy mortgage-backed securities as part of Operation Twist/QE3. He's pumping the bubble back up; feels good now but the final pop is going to really hurt.


  It’s never been so profitable for US banks to give 
  mortgages. Yet they’ve almost never been so reluctant to do 
  it. So now, the Fed is forcing them.

  Much has been written about the Fed’s announcement of its 
  latest effort to support the US economy with a new round of 
  money creation and mortgage-bond buying—QE3—on Sep. 13. But 
  few have recognized that it amounted to a shot across the 
  bow of some of the biggest financial institutions in the 

  Here’s why. The Fed is aiming its unlimited buying power 
  (since it can literally create money) at the market for 
  mortgage-backed securities (MBS), the pools of mortgages 
  where nearly all American home loans eventually end up. And 
  the one of the largest holders of these MBS are the banks.
Speaking of rails, California is still building a $68 billion train to nowhere. The state will still declare bankruptcy within years, Prop. 30 or no Prop 30. Most of the people entering CA are not YC founders, but rather high school dropouts, and most of the people and companies leaving are net taxpayers.

Further taxes will only increase this exodus. All of Prop 30's projected revenue is based on the fallacious idea that smart, high-earning people are stationary targets. They will leave, just as many companies have left.


> Further taxes will only increase this exodus. All of Prop 30's projected revenue is based on the fallacious idea that smart, high-earning people are stationary targets. They will leave, just as many companies have left.

The fallacy is that will be an exodus of high-earners: http://www.cnbc.com/id/49884352/Super_Rich_Flight_From_Calif...

The assumption is that those earners can produce the same income anywhere they go. While that appeals to Randian ideals, it's simply not the case in reality.

This is like Oracle thinking they can raise the price of something forever due to lock-in. That is true until it suddenly isn't. The wealthy of CA are particularly mobile as movies and software require no natural resources.

All you need is a few people to start defecting. Is it really "Randian" to believe that people will increasingly use the internet/cloud/telecommuting/Skype/Anybots to work remotely?

No, it's nothing like that at all.

It would be foolish to assume that all locations are equivalent when it comes to generating income. The differences in different areas far exceed a 1.3 increase in tax rate.

I thought the train was going between LA and SF? Seems like an ideal distance (350miles/550km) to build a bullet train, right? It's a lot of money and it'll be completed about the time Japan finishes it's 300mph (500kph) maglev, but considering how long it takes to get things done in the US, I guess people should be happy for now. Someday, SF to LA will be about 1hr.


The train will never connect LA and SF.


  The first phase would be a 130-mile stretch from 
  Bakersfield to just south of Chowchilla in central 
  California, at a cost of just over $6 billion; of that, 
  $2.6 billion would come from a $9 billion high-speed rail 
  bond passed by California voters in 2008, and $3.5 billion 
  from federal stimulus money.


  The authority said it chose the relatively remote section 
  in the Central Valley as the first leg to be built, even 
  though few people there are looking to use a railroad, so 
  that construction could begin next year and meet deadlines 
  for using federal money. But critics suggest that the real 
  motivation was to get the spur in place, calculating that 
  future legislatures would not be able to abandon the 
  project before it reached major population centers.

  “What they are hoping is that this will be to high-speed 
  rail what Vietnam was to foreign policy: that once you’re   
  in there, you have to get in deeper,” said Richard White, a 
  professor of history at Stanford University. “The most 
  logical outcome to me is we are going to have a white 
  elephant in the San Joaquin Valley.”

  There is no plan on how to finance the project once the 
  bond and federal money is exhausted, beyond a hope of 
  private investment and public money during flusher times. 
  ... Beyond that, several experts suggested that the train 
  would never attract the promised ridership, in no small 
  part because unlike, say, the Amtrak Northeast Corridor, 
  the bullet train would go into cities that do not have 
  particularly extensive public transit networks, forcing 
  people to rent cars once they arrived. Low ridership would 
  undercut the economic and environmental benefits that are 
  part of the argument for the project.

What will it connect after all $68 billion dollars is spent? Don't millions of people already fly between LA and SF? HSR is 50 year old technology that has been proven to work in several countrues. People in CA seem hell bent on building more roads.

One of the main excuses why it won't work seems to be because no one thought it was important to build better mass transit.

Btw, I was in SF last summer. BART and the trolley seemed sufficient.

The point of the comment, I believe, was that it is unlikely that the railway will ever actually connect LA and Frisco b/c current levels of public funding are insufficient to build out the entire length. The full project will require significant private funding, which is unlikely.

It the current stretch that is funded, i.e., Bakersfield, there is essentially no public transportation other than the occasional bus.

Of course it will all be built. People are just playing politics.

The California budget crises were created by the rule that required a 2/3 supermajority vote in both legislative houses to pass a budget that raised taxes. That rule was used by the minority Republicans during the recession to hold the state hostage to slash and burn government programs across the state. The rule was rescinded by voters in 2010 after they got sick of the insanity. Voters also just gave the Democrats a supermajority in the legislature. We will now have unimpeded Democratic rule.

You can't create a crisis simply by refusing to raise taxes (which were already near the highest in the nation). There was obviously massive spending going on without the revenue to pay for it. How about blaming the spenders?

You can't create a crisis simply by refusing to raise taxes (which were already near the highest in the nation).

Sure you can. Spending increases are very predicable, and generally increase with the size of the governed populace. There is a limit to how much efficiency you can extract from technology and procedural changes when there are legal (and especially constitutional) restrictions on what you can do and how you can do it.

The Republican minority repeatedly attempted not only to prevent spending increases, but to reduce budget revenue to 1960s levels, i.e., to the level of spending when the state's population was roughly half its current size. The only success they had was in reducing budgets for (very successful) social programs and drug rehabilitation.

Just as spending rises predictably, so does revenue along with GDP. Taxe rates haven't gone down, so all you need to do is grow spending at a reasonable rate. California didn't grow spending reasonably or responsibly. As tax revenue spiked during the dot com and real estate boom, spending went up commensurately, and beyond.

Tax rates didn't go down but tax revenue dropped dramatically during the recession.

They didn't drop dramatically, they flattened, or reverted to the mean after a decade of excessive growth based on the real estate bubble. This graph is from budget summary:


If there was one iota of spending restraint in the lead up to the recession, California wouldn't be in a crisis.

I found Romney's comparison of California to Greece mostly fair. Saying that California is like a balmy Mediterranean country with a rich culture and history is not pejorative. That it has giant public sector workforces and fiscal problems is perhaps a pejorative comparison, but one that is avowed by the color of the ink on California's balance sheet.

That claim of Romney's was one of the most annoying things in the campaign, because he is smart and educated enough to know it's bullshit. If California is so awful, why did he move back to his home in La Jolla? Greece wishes it had California's economy. Don't fall for such empty soundbites, the comparison doesn't stand up to even shallow analysis.

First, a 6x difference of GDP points out that they're in the same range of size. Further, it has about a third of the population of California, making its people about half as wealthy. Ballpark confirmed.

Now on to debt: Greece owes some money. It's a nation. California owes some money; it's a state. And, the US owes money. If California were to serve in full its debt, and arrange that it no longer had to incur debt to pay its employees, or raise greater taxes to do so, I would say it became solvent--however, if the day after the United States Treasury defaulted on its multi-trillion dollar debt, California would find itself in trouble all the same. So, really, California also owes a share of the US government debt.

Is the similarity enough for California to emulate Greece should the latter emerge triumphant from this shitstorm? I don't know. But it's enough for a metaphor about the current problem.

I think it is a stretch to say that a country that is half as wealthy as CA is in the same ballpark. To flip this around, if you made half of my salary, I would not say that your salary is in the same ballpark as mine.

I like your point on US debt, but the US is in a unique position in that it can print money if needed. Because the odds of a default are so infinitesimally small, I don't think it warrants any discussion when considering the fate of CA's financial issues.

Greece is in trouble because it entered the EU, lost control of it's currency, and as a consequence, cannot attempt to use inflation to minimize their debt. To make matters worse, their economy is a train wreck (professional guilds, rampant tax dodging, heavy reliance on government programs) making growth in the face of austerity nearly impossible. CA has neither of these problems (A dynamic, innovative economy and a strong federal government to rely on for assistance (as compared to the relatively weak-willed EU)).

In parts:

The size of the ballpark depends on the ball game. As far as heights, if yours were half of mine we would not be playing in the same league, let alone in the same ballpark at the same time. But wealth's utility falls off very quickly (cf. log-utility), and to this day Greece is a member of the OECD.

Greek is in trouble. There's no denying that. California, not so much. Still in some. But the worst may have passed already, because it's better grounded: on sovereign US soil, that strong federal government you mentioned. It's a state in a good federation, whereas Greece is in a bad (weak-willed = opt-in) federation.

Note that the State of California's GDP is more than 6x that of Greece, while only holding roughly half the absolute amount of debt Greece does.

If California got back from the federal government all the federal taxes paid by its citizens, California would have a surplus every year despite its outsized pension obligations. Instead, large chunks of California-source taxes that should come back to the state for spending on education, MediCal, etc., go to Red states to shore up the Red states' miserly education and medical care budgets.

Watch as the Democrats (now dominating the State Legislature) take all the credit for this.

It's probably true enough that improved private activity in the state has had little to do with any recent public policy changes -- at least, I can't think of any recent state level actions that seemed remarkably stimulative.

But insofar as there's been an attempt to wrap California's negative trajectory around the neck of the Democratic party like an albatross -- as the article says, it's been compared to Greece and all but written off as a symbol of socialist blue state excess -- it might be fair enough to let its recovery do some buoying.

And I'm not sure why they wouldn't deserve some credit for the improvement in state/public finances.

Not sure if you are implying that somehow they came into power just now-- Jerry Brown has been governor for almost two years now.

As of the latest elections, Democrats have a supermajority in both houses of the state legislature, allowing them to do anything they want (including raise taxes) without Republican approval. Until now, many of California's problems have been blamed by the Democrats on Republican obstructionism. The last time any party had such a supermajority was in 1933, when it was the Republicans. The last time the Democrats did was in 1883.

It will be more interesting to see what they do when they no longer have the Republicans to blame for doing what they do do and specifically what they do not do.

It is one thing to bemoan that the other side is in your way, it is a completely different ball game when you don't have them to blame.

Now dominating the state legislature?

The Dems have dominated the state legislature since 1959 except for 69 to 71 when the Republicans took control of both houses and a brief period from 94-96 when the Republicans controlled the Assembly.

The Democrats can pretty much take credit for everything good and bad.

What he probably means is that California requires a supermajority to raise taxes. After the last election, the Democrats have that in both houses now.

Well, yes - they are politicians, after all.

Applications are open for YC Winter 2018

Guidelines | FAQ | Support | API | Security | Lists | Bookmarklet | DMCA | Apply to YC | Contact