Author: Loren Kaye

A consequence of California’s changing industry mix – the decades-long shift from manufacturing and production to service jobs – is in our international trade profile. Traded goods bring the most value to an economy – and usually create the best jobs. According to the latest figures from the International Trade Administration , California used to be the leading state in foreign goods trade – but no longer.

Until the collapse of the technology bubble in 2001, California was the nation’s leading merchandise exporter. Since then, Texas has claimed bragging rights – and not just in the petrochemical industries. California still leads the country in computer exports, but Texas is now the leading exporter of machinery, electrical equipment, plastics and fabricated metals. And it is gaining fast in high tech exports.

When the Governor and Assembly Speaker created the Commission on the 21st Century Economy, aka, “Tax Commission,” their main concern was, in the Governor’s words, “basically just looking for one thing, and that is to create stability.” Indeed, the Governor specifically charged the Commission to “Stabilize state revenues and reduce volatility.”

To assist the Commission in its efforts, the California Foundation for Commerce and Education prepared a brief policy paper examining the state’s tax system to determine if it is broken, and what we are trying to fix. Our conclusion was simple: if you want to fix budget volatility, look no further than Proposition 1A on this May’s statewide special election ballot. But if you want to fix the state’s tax system, you’d better get agreement on defining the problem.

Earlier this week, I made the case that Proposition 1A would achieve what no predecessor spending limit had: a sustainable, enforceable spending limit and mandatory rainy-day reserve that actually work. But wait … there’s more.

Approval of Proposition 1A would also trigger new powers for the Governor to reduce state spending without legislative sanction. This would be the first time a Governor could wield this common sense management prerogative since Governor Deukmejian was forced into surrendering similar powers in 1983.

The authority is limited, but significant. If the director of the Department of Finance determines that revenues will dip "substantially" below – or spending will rise substantially above –  budget estimates, then he or she may:

The most important difference between Proposition 1A – the budget reform measure on May’s special election ballot – and the numerous attempts to control spending or enforce balanced budgets that have preceded it: Proposition 1A might actually work.

California ballots and, indeed, the Constitution itself, are strewn with well-intentioned efforts to impose discipline on state elected officials. But each of these measures has failed because it either frustrated public demands to provide more resources for priority needs, such as transportation or education, or was never designed to work as advertised in the first place.

This is no small thing. It makes no sense to propose or adopt a tough measure to impose fiscal discipline if it won’t be adopted, doesn’t work, or cannot pass the test of time. But that’s been the track record over the past thirty years:

Californians have been treated to a bruising debate over the wisdom of raising taxes to resolve the budget deficit. But recent actions to improve the state’s economic competitiveness have mostly played out behind closed doors, leaving citizens with the incorrect impression that making tax policy in pursuit of economic development is too messy or obscure for democracy.

When the California economy begins its eventual recovery, our best hope for a strong resurgence in job creation will be to ensure we can compete for high-value, high-skill jobs that are in demand on the world market. But for companies who make decisions based on the tax climate – which include much of the high tech, biotech and entrepreneurial sectors – California has not been in the game.

While debate rages in Washington, DC over the size and extent of the economic stimulus legislation, a similar discussion is taking place in Sacramento behind closed doors: If California receives five-, ten-, or twenty-billion dollars in federal stimulus aid, how should it be used?

The Administration supports using the stimulus funds to repay or offset any borrowing needed to balance the budget.

Legislative Democrats and interest groups want to use the stimulus money to offset program cuts.

But the most economically effective and fiscally responsible use of part of the stimulus funds would be to offset one of the most egregious tax increases from last year.

California home prices continue their freefall. This week, Standard and Poor’s released its monthly index of metro home prices, and California registers another record year-over-year drop. The composite average for San Francisco, Los Angeles and San Diego prices dropped in November by 28 percent from the previous year, the same as last month’s year-over-year drop – the largest ever recorded by the state, and exceeded only by the Sunbelt cities of Phoenix and Las Vegas.

According to this index, California’s composite home prices are equivalent to where they were in 2002 or 2003, depending on the region of the state.

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California’s highest-skilled and best paying jobs have been steadily eroding, and are being replaced by government employment. While many government jobs provide competitive wages, they do not produce anywhere near the economic benefit and societal wealth that the very best private jobs provide.

The three best-paying, highest-skilled industries in California are the information, financial services and manufacturing sectors, which pay average annual salaries of $90,000, $69,000 and $64,000, respectively. Government jobs on average pay $55,000.

Since 1990, those three high-value industries have lost more than 400,000 jobs in California. During that same period, the government sector has more than filled the void, adding more than 450,000 jobs.

The worst since the Great Depression? Since the early 1980s? In our lifetimes? It’s too early to tell, of course, but so far in California this recession has been neither the mildest nor the worst during the past several decades. However, none of the economic signs on the horizon are encouraging; most of the leading indicators point south.

Employment is a lagging indicator of recessions, so the worst is probably yet to come. One-year into the downturn, California’s employment losses have been material, but not nearly as bad as the two most recent recessions. Ultimate job losses from the 1990–93 recession amounted to a stunning 4.1 percent of employment from the 1990 peak. To reach that level of employment, California would have to lose another 365,000 jobs, about half-again the number lost so far.