California’s Achilles Heel: The High Cost to Do Business
The High Cost of Doing Business also Kills Green Jobs
Did you read the op-ed by TJ Rogers in the WSJ today? He describes the real choice we have here in California and elsewhere between growth and the environment. It’s not a throw the baby out so we can keep the bath water lesson. That is improving environmental quality does not have to destroy jobs. But that is often the unintended consequence of the cumulative impact of rules and regulations that seem reasonable at the moment but haunt us over time.
California is an example of both extremes at work. Some of the early environmental policy decisions made in California involved establishing energy efficiency standards on a wide range of products sold in the state. Yes manufacturers opposed such unilateral actions, but California lived into it best traditions as laboratory and trendsetter in focusing on reducing wasteful energy use. Today the energy intensity in California of about 50% of the national average and the size of the California consumer market meant that manufacturers could do well by doing good by adopting the California efficiency standards for the products sold across the United States.
Similarly, setting renewable energy portfolio standards requiring utilities to get 20% of energy consumed from clean, renewable sources indeed jump started the market for wind and solar energy and a range of other technologies and California utilities are closing in on the 20% targets.
But TJ Rogers talks about his company’s acquisition of money losing Sun Power and how the decision needed to save the company from bankruptcy and return it to profitability meant moving the solar panel production from increasingly high cost California to lower cost Malaysia while growing its sales and customer service functions in the California market. Eventually, he said 4000 jobs went to Malaysia while 800 new jobs were created in California.
Over time the cost of doing business in California is having impacts that even threaten our environmental goals. While we still generate ideas and our venture capital in Silicon Valley builds new companies and new products they can’t afford to build them here and thus our high cost status deprives us of the job creating benefits of that cleantech investment as R&D turns into manufacturing.
Proposition 23 on next week’s ballot would suspend AB32 the California Global Warming Solutions Act until unemployment in the state is below 5.5% for four consecutive quarters. As I write this the polls suggest that California voters are likely to vote the proposition down. Doing so will not improve the odds that California will achieve its greenhouse gas emission reduction targets but it may cost the state as many as 1.1 million jobs as business shifts its manufacturing and other operations out of state. Even if California held its GHG emissions steady at it 0.36 gigaton 1990 levels (the target for 202 under AB32) TJ Rogers described the impact as reducing the total US GHG emissions of 5.98 gigatons in 2007 to 5.94 gigatons. NONE of those emissions would actually go away they are just exported to other markets along with California jobs.
And that’s the lesson, when California policy makers stick to environmental strategies that encourage real changes in energy intensity and use that is lasting we can have a profoundly positive environmental impact within the state and well beyond our borders. But when those policies are a zero-sum game that induces business to go elsewhere California forfeits both its environmental leadership and its economic growth and standard of living.
So pay attention to how California voters decide three propositions on the ballot: Prop 23 on suspends the Global Warming carbon tax, Proposition 24 adds $1.3 billion in new taxes on business by eliminating investment tax credits on new plant and equipment for business growth and Proposition 25 reduces the legislative votes required to pass a budget from 2/3 to a simple majority.
The Tax Foundation called California the second worst business tax climate of the 50 states after New York but it will displace New York as the worst depending upon how voters act.
Prop 19 Makes Californians Nervous
Proposition 19 is making Californians nervous. The proponents for the ballot proposition to legalize marijuana for personal use in California have used every argument imaginable to make Prop 19 nonthreatening to California voters. But as Election Day draws near not even a last minute $1 million donation from George Soros may help to close the deal for voters.
Why?
Proponents say legalizing pot will drive out the drug dealers and create a tax producing market for what is now being sold anyway under the table. They compare it to ending prohibition.
Opponents including US Attorney General Holder say just because California might vote for this ballot measure won’t make pot legal under US laws. Others say we are just legitimizing unhealthy behavior and being hypocritical when California spends so much money and effort to ban smoking cigarettes for health reasons.
Ironically, some of the loudest opponents of Proposition 19 are the marijuana growers themselves who fear that the price of their products will drop and competition will expand. Nowhere is this view more widely held than in far Northern California where the place may as well be called MaryJane County instead of Humboldt County because ideal growing conditions, its rural location and easy access to I-5 make it a pot paradise.
Marijuana seizures in California have more than tripled since 2005 to record levels. But drug enforcement agents admit they are seizing only a fraction of the drug grown in the State. In fact there are so many growers and it is so easy to buy pot already in California that the market is saturated and growers and dealers are exporting increasing larger quantities anyway possible.
This information is having an effect on public attitudes and undercutting what had been the biggest attraction to the ballot measure—proponents say Prop 19 would cut the legs out from under gangs who use pot sales to fund their gang activities across California.
That George Soros would write an op-ed in the Wall Street journal and give a million dollars to make a last minute pitch for voter support for Prop 19 suggests the pollsters are right that the public is losing faith in the wisdom of legalizing pot and more likely than not to vote no.
And then there is the other ugly reality. Pot is virtually legal in California already because of medicinal marijuana clinics. The more they have sprouted in city neighborhoods the more problems the police and neighbors have discovered as unintended consequences. While not unlike the problems that bars and other establishments might cause—the reality has been that medical marijuana has been a ruse to allow some to buy pot legally only to turn around and sell it illegally on the street to get money for their other drug habits.
The truth is reducing demand is the only sure cure for drug problems in America but we are unwilling and unable to do that so we are forced to live with the ugly consequences.
California Pension Crisis Looms
“If no corrective actions are taken, the combined liability of the three major state pension funds will be more than 5.5 times as large as total state tax revenue around 2012–2013. Moreover, the combined liability per each working-age adult in California is projected to more than triple, from $3,000+ in 2009 to over $10,000 in 2014.” —-Milken Institute
That was the numbing conclusion of a new study on the alarming state of California public pension crisis released by the Milken Institute. Addressing California’s Pension Shortfalls calls for immediate action to raise the retirement age and increase employee contributions while simultaneously shifting to a risk-sharing retirement plan which will lower the guaranteed level of pension.
Even the unions seem to recognize that the crisis is worsening and SEIU has agreed to most of the changes the Milken study recommended plus additional employee work furloughs in new contracts covering 132,000 employees or about 16% of the CalPERS covered employees. So there is a lot more negotiating progress that needs to be made and soon to get this problem under control.
The Millken study does through a detailed explanation of the problem include the use of faulty assumptions about investment income, bond discount rates and the State’s demographics concluding that many of the assumptions used are faulty or deliberately designed to mask the problem.
Whoever the new Governor of California is after the election this problem appears to be headed for the ACTION NEEDED NOW inbox.
‘Put-Back’ Push Back by Banks
Bank of America reported its lost $7.3 billion, or 77 cents a share for the quarter because of new federal rules on consumer accounts and credit cards that forced reduced fee income. Bloomberg reported that excluding one-time gains and costs BofA earned $3.1 billion, or 27 cents a share.
While that may be the headline if was not the real story.
The real story was the rising calls for ‘put back’ from buyers of BofA mortgage securities to take back the loans they sold for fear they are tainted by poor documentation. There is a part of me that delights in this creative mischief as one financial institution tries to slit the throat of another to avoid taking financial or other accountability for their share in the mortgage mess that clouds the housing recovery.
‘It could not happen to nicer guys’ seems to be the public sentiment when spoken in polite company. Behind the scenes the desire for revenge on the banks is palpable.
Perhaps sensing impending doom, BofA CEO Brian T Moynihan talked tough saying the bank will “defend our shareholders” from the unjustified demands that BofA buy back defective mortgages. While not denying that there might be problems, Moynihan said that most claims “don’t have the defects that people allege,” in an interview on Bloomberg Television. He said when the bank finds a problem it fixes it and puts the note back into the pool to be bundled and sold.
We feel little sympathy for BofA which stepped in this mess by being bludgeoned into buying Countrywide, but that does not mean we feel any better about the hoard of other miscreants lining up shouting ‘put back, put back, put back’ at the top of their lungs. Bloomberg reported October 19th that Pacific Investment Management, BlackRock and the Federal Reserve Bank of New York want Bank of America Corp. to repurchase bad mortgages included in $47 billion of bonds Countrywide sold to them.
Is it possible that the markets will punish the banks far worse than Washington ever would consider for their misbehavior?
That is the real fear isn’t it? The financial hocus pocus of thinking you could bundle many high risk loans together and resell them on the premise that they now are high quality loans instead is right out of a Michael Douglas Wall Street movie. But that is exactly what these firms did—and they all knew exactly what was happening. They just hoped they cold flip the bundles to some other sucker before the underlying loans went bad like an off key version of musical chairs.
But this win-lose game of put back could turn into lose-lose for the economy if it stalls the purging of foreclosed or foreclosable problems from the market and allows home prices and consumer confidence to go back up.
The real question is what is the appropriate pain threshold to discourage future bad behavior like this by imposing loses for past sins without the unintended consequence of imposing more pain on a slowly recovering economy?
Those who took out mortgages they could not afford should not be bailed out. If there are paperwork problems—fix them and get the foreclosures finished. Those who bought securitized mortgage bonds knew exactly what game they were playing so let them eat cake. Let’s hope bank profits and their share prices suffer just enough to deprive the CEO of his bonus even if he keeps his day job because the mess was started on his predecessor’s watch.
But if Washington ever needed a better reason to blow up Fan and Fred and sprinkle their pieces across the market in a score of smaller firms that must live or die by their business savvy not a federal subsidy this is it.
Can Healthcare go to Pot?
Both health care and illicit drugs are driven, priced and delivered based upon the laws of supply and demand. Sixty years of employer based health insurance has not solved the social policy problem of how to insure unemployed or the uninsured without progressively driving up the cost for those who are insured stuck covering the unreimbursed costs through higher prices for health care services. Concerns over the rising cost of health care and its effect limiting access to millions of Americans gave rise to ObamaCare, but health costs are expected to continue to rise.
The “War on Drugs” has been spending money for more than thirty years to reduce drug demand without success. Last year California made more than 78,000 drug arrests most of which were misdemeanors. Along the US border with Mexico concerns are rising to near panic over violence between competing drug cartels for control of market access to buyers in the US and drug routes through Mexico. In California alone, the state estimates that growing pot is an estimated $14 billion a year business.[1] If the state collected sales and use taxes on pot sales it might generate $1.4 billion in taxes from an industry estimated to gross about $18 billion per year in California alone.[2]]
What do these two stories have to do with each other? You see this coming don’t you. The State needs money and Californians are going to smoke pot anyway, Sacramento reasons, so why not legalize it and tax it to help close our budget deficit.
Welcome to the progressive California Bear Republic!
So on the November 2, 2010 ballot, Californians will vote on Proposition 19 the Marijuana Legalization Initiative and decide just that question. State Assemblyman Tom Ammiano (D-San Francisco) introduced AB390 in the 2009 session to legalize, tax and regulate marijuana. AB390 passed the Assembly Public Safety Committee and was reintroduced as AB2254 in 2010, but the TaxCannibis2010 initiative campaign easily raised enough signatures to put the measure on the November ballot, and the Legislature was happy to let the people have their way on the measure without putting their own fingerprints on such a loaded question.
But before you file this as one more crazy idea from the left coast, consider this. There is growing opposition to the Tax Cannabis 2010 measure in the three far north coastal counties in California. This area is prime pot growing country and the local growers don’t want the competition. Listen to this radio story from the KCBS station in the San Francisco Bay area. http://www.kcbs.com/topic/play_window.php?audioType=Episode&audioId=4601417.
It turns out that when California legalized medical marijuana dispensaries several years back the retail price of marijuana fell from $6,000 per pound to $4,000 per pound and it keeps falling as more of these “wink, wink” medical facilities are licensed by cities. The North Coast growers cooperative does not want to lose its profits which are higher than anything the health care lobby has been able to impose on us to date.
Competition works to drive down prices and effectively manage supply and demand!
So let’s make a deal, we here in California will all vote FOR Proposition 19 if the ballot measure is amended to allow for the same full competition for the rest of the health care market. If the North Coast old hippies have it right we should expect health care to follow pot prices down, and there will be plenty of providers to deliver it, and the drug cartels will have to fight each other to INCLUDE Medicare patients instead of throw them under the bus.
Peace, Brothers and Sisters!
[1] Time Magazine, “Is Marijuana the Answer to California’s Budget Woes?”, July 24, 2009
The Economics of Baby Making
According to the California State Demographer the recession has put a crimp in our baby making style. The 526,774 actual births in 2009 were down 24,793 from 2008’s 551,567. This drop is larger than any California has experienced since 1994. The State’s latest forecast says California’s total annual births will increase about 65,500 (12.4 percent) from the 2009 level, to total over 592,000 by 2019. California’s total fertility rate is now below replacement level (2.1) and is expected to fall below 2 by 2019.
The fertility rate fell for all racial or ethnics groups but only Hispanics maintained fertility rates at or above replacement levels. But the forecast estimated that Hispanic birth rates will also slow from the decade high of 2.92 to 2.28 average live births per woman during her reproductive life. The replacement rate is 2.1.
It seems when the economy turns bad we postpone having babies. This is fine for guys but that biological clock keeps ticking for women. The Demographer’s projected increase in birth rate reflects the typical recovery pattern that better times put us in the mood again.
CHOICE: The Story behind the Waiting for Superman Story
There was a very op-ed by K. Lloyd Billingsley of the Pacific Research Institute in the San Francisco Examiner on the backstory you won’t see in the new movie ‘Waiting for Superman’. Here is what he wrote:
‘Waiting for ‘Superman,’” touted by Oprah, Bill Gates and other celebrities, is now playing in California theatres. Academy Award winner Davis Guggenheim directed the film, best documentary at the Sundance Film Festival. Several back stories, and the star, will not be apparent on the big screen.
“Waiting for ‘Superman’” follows five children of different backgrounds as they try to gain admission to better-performing charter schools across the United States. That is hardly a common theme, even for a documentary. So how did the filmmakers get the idea?
The producer, it turns out, had read “Not as Good as You Think,” by Lance Izumi of the Pacific Research Institute, and saw the film based on the book. The theme here is that government-run schools in upscale neighborhoods may have impressive buildings but they are not delivering the goods in student achievement.
Not everyone loves the film. Michael Powell of the American Federation of Teachers told the Sacramento Bee that the documentaries “leave the impression that public school teachers are bad, that charter schools are a panacea and that teachers unions are responsible for failing schools.”
That impression actually has a lot of merit. Teacher unions are a huge part of the problem. AFT president Randi Weingarten told The Nation that “only 7 percent of American workers are in unions. America looks at us as islands of privilege.”
Teacher unions make it difficult to fire bad teachers, which has even caused President Barack Obama to speak out. He wants to tie teacher evaluations to student achievement, which teacher unions oppose. That comes as no surprise because teacher unions stridently oppose most education reform, including merit pay and charter schools.
Charter schools don’t have to maintain a closed union shop, and can choose teachers for ability, not seniority. In return for meeting their achievement goals, charters get freedom from many regulations. Not all charters excel, but enough are succeeding that parents nationwide want to get their children into such schools.
Meanwhile, the real star of “Waiting for ‘Superman’” is choice. That’s what empowers the parents and students to find better opportunities. But President Barack Obama is not willing to give it to them. Indeed, he quashed a popular and successful choice program for low-income students in the nation’s capital, a move teacher unions applauded. To expand opportunity, someone else needs to step up and show leadership.
Crowdsourcing is Changing America’s Political Future
The American political landscape is being redefined right before our eyes by the Internet and the lessons its use has taught us about how to quickly find information we need and act on it. Social networks like Facebook and Twitter have redefined how we connect with each other and keep track of fast moving events in our lives.
Crowdsourcing will end up being the phenomenon of the 2010 Election and those that follow brought about by the growth in size and influence of a leaderless group of people who share common concerns and want to do something about it. It has enabled and empowered a leaderless TEA Party movement to redefine the issues of the campaign and force both parties to pay attention to our citizen “pain points.”
Crowdsourcing was first coined used by Jeff Howe in a June 2006 Wired magazine article “The Rise of Crowdsourcing“. Howe said that technological advances had driven down the price of consumer electronics so that the gap between the technologies we use at work professionals is no longer prohibitive for use of the same technology at home. In fact, since he wrote that in 2006 the fast rise of mobile web access with smart phones and other devices means individual users may actually be the early adopters well before corporate IT permits such things as iPhones or build the business apps for iPads. Howe described a marketplace of ideas where companies could take advantage of the talent of the public, and said that “It’s not outsourcing; it’s crowdsourcing.”
Fast forward to 2010 when the TEA Party movement exploded on the stage the Democrats referred to it as a rebellion inside the Republican Party. But that was only partly correct. It was a rebellion but it is affecting both parties and changing everything from the alliances in Congress on key issues to the shape of the election issues to the strategies used by candidates, lobbyists and the political consultants who thought they knew how to run campaigns—until now.
While the Democrats mocked her Governor Sarah Pail tweeted them back with a speed and razor sharp retorts that cut to the bone many of the traditional political concepts. The success of TEA Party movement candidates is not caused solely by the crowdsourcing power of the TEA Party itself but by the speed with which crowdsourcing itself has been used to refine and hone the message to bring along many other people who share the same fears, angst and aspirations. It did not take Gallup Polls to get the message right, it only took about 24 hours of tweets.
Now the Democrats have ‘beat cheeks’ out of Washington DC as if they feel burned by its proximity and think running for cover back to their districts will let them get away with their traditional campaign strategy when things are going bad with their message—negative advertising. Only this time the tweets of fact checkers and the crowdsourced judgment of constituents produces a raucous turnout at campaign events and town hall meetings ready to give incumbent of both parties a rough time.
Crowdsourcing is the worst of both worlds for politicians. At one in the same time it nationalizes the election by galvanizing the crowd around their common concerns about the “big issues” such as Federal spending, deficits, ObamaCare, unemployment, rising taxes and other consequences of the progressive agenda the Democrats have pursued. At the same time, crowdsourcing makes all politics local as never before galvanizing the home town crowd to turn out to speak out.
Republicans thought they could just blame all the problems of the country on Democrats and that would be enough to win. Democrats thought they could blame Republicans for having no new ideas as if that absolved them of their sins of overreach. Crowdsourcing has delivered the “pox on both your houses” message to both parties.
Thomas Jefferson would love this rebellion at work today among the crowd.
But the real challenge may not be winning the 2010 election for new faces with new ideas. The challenge is going to be governing and using the same crowdsourcing tools that make it easy to blow the whistle on a political miscreant to instead search for a common ground solution that brings people together around consensus for changes we can really believe in that will turn the country around while there is still time to fix it.
