What If a Recession Hits California?

John Seiler

Former Editorial Writer at the Orange County Register


As I predicted on Fox and Hounds just after the November election, there’s a Trump Boom in California. But what if it stops? What if a recession slams us again? Two scenarios:

  1. The Federal Reserve keeps increasing interest rates – much higher than now. Historically, that has brought a recession.
  2. War breaks out with North Korea. No doubt America would win. But even if nutty dictator Kim Jong Un’s missiles and nuclear bombs fizzle, the real threat comes from his massive, low-tech artillery on the border with South Korea. The Huffington Post just reported:

“Burrowed into hard granite mountain faces and protected behind blast doors, 15,000 North Korean cannons and rocket launchers are aimed at the glass skyscrapers, traffic-choked highways and blocks of apartment buildings 35 miles away in Seoul ― and the U.S. military bases beyond.

“In a matter of minutes, these heavy, low-tech weapons could begin the destruction of the South Korean capital with blizzards of glass shards, collapsed buildings and massive casualties that would decimate this vibrant U.S. ally and send shock waves through the global economy.”

If you’ve ever driven around Silicon Valley, you’ve seen a massive Korean presence there. The reason is obvious: Apple, Google and other U.S. tech firms work closely with Samsung, LG and other giant South Korean electronics firms.

The Seoul companies also compete with the Americans, of course. But as Fox News reported, “Apple’s iPhone 8 involves rival Samsung in a big way, reports say.”

So if Seoul is turned into Dresden in 1945, the South Korean electronics economy will be decimated, perhaps never to recover. At a minimum, production of new iPhones, Samsung Galaxies and other devices would be delayed, plunging profits in Silicon Valley.

It’s true most manufacturing now occurs outside South Korea. But as with Silicon Valley, where almost no manufacturing now occurs, the key is not the factories, but the engineers, chemists, physicists and others who design the whiz-bang products. They can’t easily be replaced

Given that Silicon Valley’s massive profits now drive California’s economy, along with tax revenues, the destruction of Seoul also would hammer the state budget. Brown actually warned in January that already slowing income growth among wealthy California problems would bring a budget deficit. (Although I think the May revision will show otherwise because of the Trump Boom.) At the time, the Los Angeles Times reported on how the state has become even more reliant for tax revenue, “The top 10% of earners – who made an average of $404,184 in 2014 – paid 79% of all personal income tax revenue that year, up from 70% two decades ago.”

But whatever the potential cause of a recession – a war, Federal Reserve misfeasance or some other calamity – the massive California budget deficits of the past would return, with a vengeance. The $35 billion deficits of the Gray Davis years would just be for starters. The general-fund budget of Davis’ last year in office before he was recalled, fiscal year 2002-03, was $77.5 billion. Gov. Jerry Brown’s proposed budget for fiscal year 2017-18, which begins on July 1, is $122.5 billion. That’s 58 percent higher.

Worse, the state now is burdened with $12 billion yearly in higher taxes: $7 billion from the “temporary” Proposition 55 “extension” of the “temporary” Proposition 30. And $5 billion from the “temporary” new fuel and car taxes to rebuild the roads (and a lot of other stuff). I think we can assume that, during a recession, the new transportation moolah will be diverted, as similar levies always have been, to pay for the pensions.

Again, I’m not predicting a recession. But just as it’s prudent to take out auto insurance “just in case,” so it would be prudent to take out “budget insurance.” The “rainy day fund” does that – but only a little, to $7 billion so far. That would be a fraction of a deficit of the size of Gray Davis’ $35 billion.

The real “budget insurance” or “rainy day fund” is sound fiscal policy that doesn’t overburden taxpayers. Sure, it seems like everything is going great. Silicon Valley is not just a state, but a national and even global profit engine. For now.

A better policy, at a minimum, would be to reduce taxes to promote economic growth across the whole economy, thus ending the over-reliance on one sector, Silicon Valley. Higher economic growth also would boost the tax base – thus actually providing higher revenues in a more radiant future.

Even in California, it doesn’t make sense to depend for our fiscal well-being on the sanity of Kim Jong Un.

Longtime Orange County Register editorial writer John Seiler now writes freelance. His email: writejohnseiler@gmail.com

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