The Bet Here is Oil Prices will Rise

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Joel Fox is offering a guarantee against rising oil prices!

Well, he didn’t explicitly offer that guarantee, but that’s the inference I drew from his recent column in which he worries that alternative fuels elicited by Governor Schwarzenegger’s Low Carbon Fuel Standard could raise transportation costs for California consumers. Apparently Joel is so certain that gas prices won’t rise that he’d rather California remain reliant on that product for 97% of its transportation fuels than seek alternatives.

I’m glad he’s offering that guarantee because I’m not comfortable with that bet. Instead, I’m betting Saudi Arabia, Iran, Russia and Venezuela want oil prices to rise, and I’m betting that gasoline demand by the three billion new drivers in China, India and other rapidly-developing countries is likely to make that happen. So I would like alternatives.

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Attacking AB32 Won’t Lower Unemployment

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Recently a State Assemblyman proposed suspending AB 32 until
California’s unemployment rate reaches 5.5%.

Putting aside for the moment that AB 32 is not yet in effect and
therefore not responsible for our current unemployment and that
there’s no support for the view that an AB 32 implemented
intelligently would constrain job growth (indeed, there’s evidence
that many of AB 32’s efficiency measures in particular would likely
boost rather than retard profits and jobs), let’s first ask a
fundamental question:

Why has California’s unemployment rate exceeded the national
unemployment rate since 1991?

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Public Employee Gain Reason for Higher Ed Loss

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

This Thanksgiving I gave special thanks for the University of California and California State University systems. In California, jobs and economic growth are inextricably linked to the well being of higher education. With their 33 campuses and 670,000 students, UC and CSU play central roles in providing opportunity to students, preparing California’s workforce, and powering our diverse and entrepreneurial economic growth. Put simply, a healthy California economy requires a healthy university system.

Yet, despite its essential importance, higher education’s share of the state budget has been reduced by 30% over the past thirty years, largely to make room for more compensation for state government employees. In the last ten years, cash expenses relating to state employee compensation (just for direct employees only) have more than doubled and now total more than $20 billion per year, in excess of three times what the state provides to higher education. On an accrual basis it’s more like four times.

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Stop Blaming and Start Praising AB32

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

In 1973, the president of Ford testified against pollution-reducing catalytic converters on cars on the grounds that such a requirement risked “a complete shutdown of the US auto industry.”

Of course, no such shutdown occurred and pollution was greatly reduced. But 35 years later, Meg Whitman, a candidate for the Republican nomination for governor, is raising similar fears about California’s Global Warming Solutions Act, signed into law by Governor Schwarzenegger in 2006 (AB32). In doing so she betrays an apparent lack of understanding about how AB32 will be implemented, the opportunities arising from that implementation, and an indifference to the risks of suspending the law.

Ms. Whitman says that AB32’s implementation can only result in reduced economic growth, but as California demonstrated in the 1970’s when it launched its energy efficiency effort using performance standards, that does not have to be the outcome — provided we harness the power of capitalism and competition. Back then, refrigerator makers claimed performance standards would curtail consumer choice and raise prices, but instead, choices weren’t reduced, energy consumption per unit dropped 75%, and prices fell nearly 50%. In fact, relative to a 1974 model, energy savings have put $15 billion in Californians’ pockets.

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“Smoothing” Today Makes For Bumpy Road Tomorrow

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

This week, the board of the California Public Employee Retirement System (CalPERS), the largest pension fund in the country, will be asked to approve a “smoothing” proposal designed to provide short- term cash flow relief to local and state governments by deferring pension contributions.
If that sounds to you like a free lunch, you’re right. Such an offer is tempting to governments facing harsh budget troubles, but CalPERS should reject the proposal as at best imprudent and at worst dangerous to future generations.

From Enron to AIG, we have seen the consequences when complex financial engineering and mystifying terminology is employed to obscure simple truths. In AIG’s case, “credit default swaps” masked transactions that in reality were unregulated insurance contracts. In CalPERS’s case, what is unthreateningly framed as “smoothing” is in reality a negative amortization borrowing of the type that recently led so many homeowners down the garden path to foreclosure.

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Governor’s Executive Order Will Create Commission To Propose New Tax Model

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

All across the country, states are facing declining revenues as a result of our troubled economy. Yet, California is uniquely burdened because our revenues swing from extreme to extreme – boom or bust – more than other states. For example, the state of Washington is projecting a revenue shortfall of less than 1%, while our state may face a shortfall of nearly 10%. The difference is that our state’s tax revenues reflect Wall Street’s economy more than California’s economy.

This is because more than 50% of California’s personal income tax revenues come from the just 1% of taxpayers (fewer than 150,000 taxpayers), and that 1% of taxpayers gets a substantial amount of their taxable income from Wall Street investment gains. When there are big investment gains, California’s budget picks up revenue. When there are no investment gains, California’s budget suffers even if California’s economy is still growing.

For example, during the last economic slowdown in 2001, the economy in California grew 1.1% but tax revenues fell 17%. On the other side of the coin, when the economy grew 8.7% in 1999, tax revenues rose twice as fast. Simply put, our tax revenues are too decoupled from our economy and too volatile for our state.

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Lack of a budget means Governor Schwarzenegger must conserve state funds

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

California still doesn’t have a budget for the current fiscal year, which commenced on July 1. Without a budget now for nearly a month, California faces additional pressure to conserve cash. The following explains why.

Though often (and perhaps conveniently) forgotten, as a general rule our state Constitution prohibits expenditures in the absence of a budget. Because of that limitation, a great deal of spending – for childcare centers, health care providers, centers for the developmentally disabled, many county services, contractors, and more — was already suspended as of July 1.

However, notwithstanding that general rule, the Constitution as well as federal law and public safety require some spending whether or not there’s a budget. Examples of such mandated or essential service spending include certain funds for public schools, debt service, child welfare programs, public safety, disaster relief and more. Those activities require cash and therefore the state must always have ready access to cash sufficient to meet those essential or mandated requirements.

Moreover, if we run out of cash, we will be forced to access the Revenue Anticipation Warrant (RAW) market for that cash. To understand the nature of the RAW market, one must first understand its cousin, the Revenue Anticipation Note (RAN) market.

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The State Infrastructure Shortfall

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

California is the richest state in the richest country in the world and we lead the world in entrepreneurship and innovation.

But when it comes to infrastructure, we are neither rich, entrepreneurial nor innovative.  States and countries with a fraction of our wealth provide their citizens with far superior infrastructure services. People elsewhere travel on more convenient and comfortable transportation systems, study in better school facilities, live behind more secure levees, drink from more secure water systems, and more. California’s environment, quality of life, workers, students and innovators all suffer as a result of our infrastructure deficit.  

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