Is Population to Blame for the Drought?

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The current drought has resurrected–and put a fine point on–the long simmering debate about the pluses and minuses of California’s population growth.  Is growth the problem in regards to water or do we just need better management?  This question could also be asked about another serious economic issue for California–housing supply and affordability.

According to Edwin Pattison, general manager of the Mountain House Community Services District, “When you increase a population significantly, you reach a point of what’s called ‘demand hardening,’ and you cannot conserve your way out of a situation where there’s just too many people and overcommitment of demand across the spectrum.”

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According to the California Department of Finance, by 2060 the state’s population will grow from  39 million people now to more than 51 million.

Californians for Population Stabilization want to blame the drought on immigration, “Virtually all of California’s population growth is from immigration. Let’s slow immigration and save some California for tomorrow.”  This reflects the public’s and economists’ mixed feelings about immigration’s effect on the economy, largely driven by the uncertainty-and subjectivity of-tallying up net gains/losses and the sorting out winners and losers.

“It’s totally the wrong question,” said Dowell Myers, a USC demography professor. “Without immigrants, California would be dead as a doornail. We don’t have enough children right now as it is to replace the workforce and the tax base … when Californians retire.”

Similarly, according to Heather Cooley of the Pacific Institute, the challenge is not the size of the population, but “how we develop, and the reality is we can be developing a lot better.”  Southern California water consumption has remained flat for 15 years, despite population growth.

“The notion that there’s too many people here is frankly absurd,” asserts Richard Sybert (former director of Gov. Wilson’s office of planning and research}.  “It’s frankly not borne out by the numbers … You could halve the population here – say we have 20 million instead of 40 million – and there would still be a drought.”

Since agriculture accounts for 80% of California water use, the solution could be a small shift of water from farm to urban uses according to Gregory Weber of the California Urban Water Conservation Council.  “I think there’s plenty of room for California to grow,” Weber said. “How it should grow, how big it should grow, these are I think some of the major pressing questions that are facing the state today.”

So is the key better growth management, better water management, or both?

The California Water Blog describes How To Manage Drought with five key prescriptions for better water management:

  • Get inside consumers’ heads – shift from engineering solutions to understanding human behavior.
  • Increase role of water markets – increased use of water transfers “would introduce further flexibility in managing water resources.”
  • Tiered water pricing works – consumers respond to higher prices.
  • Keep closer tabs on crop water use – use better water-use tracking and estimation.
  • Monitor and manage our groundwater – excessive groundwater pumping in dry years must be replenished in wet years.

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California jobs report; more shopping, more venture cap, more job seekers

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Beacon Economics provides a good roundup of mixed but generally positive May employment news for California.  The state’s nonfarm job growth outpaced the nation by  “expanding by 3.0% over the past year compared to a more modest 2.2% growth rate in the U.S. overall.”

A mixed signal came from a surge of  nearly 72,000 additions to the labor force–a  positive “sign of worker’s increased optimism about their employment prospects”–which ticked up the state’s unemployment rate from 6.3 to 6.4 percent in May.

With “consumers are growing more comfortable spending income and making larger retail purchases” retail trade employment added 8,600 positions.

Professional and Business Services employment surged, with strong growth in Scientific, and Technical Services, driven by “venture capital money” more of which “has been raised in the state than at any time since 2000.”

Despite losses in the farm sector, “to date, the overall California economy has yet to suffer serious setbacks from the drought.”

Check out Beacon’s full report including charts and talbes

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Gas price conundrum

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Foon Rhee’s recent editorial about California’s premium gas prices points to a true conundrum. High  prices are bad for the wallet but good for the environment.

Cal Gas price gapIn May Californians paid the highest premium for gasoline compared to the rest of the nation since the turn of the century –$1.03– that may have cost Californians an additional $1 billion at the pump.   But that premium has had long-standing benefits for the environment: greater fuel and energy efficiency. Relative to its economic heft, California has long left a smaller environmental footprint than most other states.  This is the result of factors including dense population clusters (less long distance rural driving), a moderate climate (lower demand for winter heating fuels), fierce regulators, and HIGH PRICES.

Arguably, that last item, in concert  with the regulatory environment, is the most effective driver of energy efficiency .  It’s a constant motivation that steers most people to make every day decisions in the name of their pocketbooks, such as preferring shorter commutes and more fuel-efficient cars.  Given these efficiencies, the total aggregate financial hit to the state economy is not as big as it would be otherwise or in other states.

According to Gordon Schremp of the California Energy Commission, the “blame” for the current spike in the gas premium was laid on several factors according to Gordon Schremp of the California Energy Commission:

  • California is an isolated gasoline market.  Pipes ship gas out, not in.  This means that gas can’t be easily imported to compensate for unexpected shortages.  Imported gas accounts for only 3-5 percent of gas supply.
  • Higher taxes including the application of  the state’s cap-and-trade system
  • Higher production costs for the transition from winter to summer gasoline mixes.

The good news from these high prices is that Californians will continue see value in fuel efficiency which should pay substantial, but generally unappreciated, environmental benefits.  In this case, what’s bad for budget is good for the soul.

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Rising tides don’t lift boats like they used to 

 
This shouldn’t be news to anyone paying attention.  Another bit of evidence of the increasing irrelevance of  standard economic indicators for the wellbeing of average everyday people.  According to Jon Ortiz, a recent Field Poll shows 

  • “The disconnect between attitudes about personal finances and larger economic conditions runs counter to conventional wisdom.” 
  • “More Californians have been negative than positive about the state’s economy for 13 years in a row.”

The article quoted Andrea Torain, a laboratory supervisor for UC Davis, “The jobs being added aren’t jobs you raise a family on.”

This disconnect has been evident for a while, especially following the popping of the dot.com bubble.  Most of the most watched indicators don’t clearly reflect the impact of rising economic insecurity, particularly those most relevant to middle class and aspiring middle class families. The standard output-job-income-inflation yardsticks don’t reflect factors such as skyhigh higher education costs, diminishing  pension and health benefits, unaffordable day care costs, the proliferation of part time and contingent employment, and so on.

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Droning On

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Can the emerging unmanned aerial vehicle (UAV or “drone”) industry lead to a turnaround for California’s aerospace industry that was decimated by the DoD budget cuts and industry consolidation that took place following the end of the Cold War.

Torey Van Oot in the Sacramento Bee’s article
California lawmakers look to regulate, attract drone industry to state” contemplates the implications of potential nonmilitary applications of Drones including its economic impact.

“An expected boom in the use of nonmilitary “unmanned aerial vehicles,” commonly known as drones, has California looking to regain some of the aviation industry swagger it enjoyed for decades”

“At stake for California and other states is a piece of $82 billion in economic activity the drone industry estimates it will generate between 2015 and 2025.”

California is home to many leading industries, such as such as computer and communication technologies, that are integral components of UAVs. Thus these developments offer the prospect of a resurgent California aerospace industry. However it’s seems unlikely that the Golden State can come close to restoring this sector of the economy to its past glory.

See The Man Who Invented the Predator for a brief history of the birth of this dynamic technology and its garage-based origins in Hacienda Heights in Los Angeles.

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The Real Problem

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The long-awaited recovery of California’s housing markets is welcome news. But it’s also time to reconsider that exorbitant housing costs are arguably the Golden State’s principal economic shortcoming.

Out of Reach by the National Low Income Housing Coalition compares and contrasts on a state-by-state basis “the gap between wages and rents across the country.” Unfortunately, California compares quite unfavorably with most states (and Texas in particular).

The collapse of the housing market in the wake of the Great Recession drove up the demand for rental units. According to the U.S. Census, in 2011, over one third of American households were renters. The nation’s rental vacancy rate dropped from 8% directly at the beginning of the recession to 4.5% by the third quarter of 2012. The, so far, inadequate investment in new affordable housing units coupled with the fact that nearly a third of renter households live in poverty has created a severe affordability problem.

The map above indicates the number of hours of minimum wage work would be needed to pay rent for a typical two-bedroom apartment. As you can see, California ranks as nearly the least affordable state, behind only Hawaii, Maryland/D.C., New York, and New Jersey. California is also notably less affordable than Texas, which largely explains the migration of middle and low-income households to the Longhorn State.

The map below estimates the full-time hourly wage that a household must earn to afford a decent apartment at the HUD estimated Fair Market Rent (FMR), while spending no more than 30% of income on housing costs.

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CALIFORNIA’S PERSONAL INCOME

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Following the first post-World War 2 year-over-year decline in 2009—falling 5.8 percent—California personal income grew 3.1 percent in 2010 and 5.2 percent in 2011.  However, the details behind these trends point to a change in the nature of California’s economic recovery.

Personal Income Defined

Personal income is the earnings received by all persons from:

  • Employment (wages and benefits net of Social Security payroll taxes).
  • Property income (dividends, interest and rent).
  • Proprietors’ income (individual and partnership business income).
  • Public and private transfer payments, (Social Security, welfare, Medicare, MediCal, etc. from the public sector, and household credit losses from the private sector).

Personal income differs from “cash” income in that it:

  • Includes several non-monetary income items such as employee health insurance benefits and employer contributions to pension funds (Other Labor Income).
  • Excludes capital gains (because gains do not represent current production).
  • Excludes payouts from all pension plans, including IRA, 401k and traditional pension plans.

Income Grows in 2010 and 2011

Compensation paid to employees, or wages and salaries, is the dominant component of total personal income, accounting for 52 percent in 2010 and 2011.  In addition to the large share it represents, trends in wage growth have varied over time.  Historically, non-wage forms of income, such as proprietors’ income, dividends, interest, and rent, have grown faster than wages and salaries.  From 1970 through 1995 non-wage income in California rose an average of 9.9 percent each year while wages grew only 7.9 percent.  During the late 1990s, performance-based and stock market-linked compensation, such as bonuses and stock options, grew in importance, especially in emerging internet-connected industries.  This development, coupled with stock market activity, led to greater wage volatility and, for a time, faster wage growth.  From 1996 through 2000, wages grew 9.0 percent annually on average while non-wage income rose only 6.6 percent each year.  Following the collapse of the ‘dot.com’ bubble, wage growth slowed dramatically and once again non-wage income led the way.  From 2001 through 2011, wages grew 2.7 percent annually on average while non-wage income rose 4.4 percent on average.

Personal income growth in 2011 followed this trend.  California’s total personal income grew 5.2 percent led by 6.2 percent growth of non-wage components and 4.3 percent growth in wage and salary disbursements.  Property income—dividends, interest, and rent—was the leading income component, growing over 8 percent from 2010.  This was nearly twice the growth rate of wages and salaries (4.3 percent) and accounted for almost 27 percent of total income growth in 2011.  After wage and property income, nonfarm proprietor’s income and employer contributions for employee pension and insurance made the next largest contributions, accounting for over 13 percent of total personal income growth in 2011.

Wage growth surges at the end of 2010, then moderates

After declining in 2009, wage and salary disbursements increased in 2010 with a modest 2-percent increase followed by    4.3-percent growth in 2011.  These annual patterns, however, belie a gradual slowing in wage growth since the beginning of 2011.  Wage compensation surged during the final quarter of 2010 and the first quarter of 2011.  This surge was concentrated in four high-wage industries, including Mining, Durable Goods Manufacturing (including Computer and Electronic Manufacturing), Professional, Scientific and Technical Services, and Management of Companies, which accounted for a very disproportionate shares of these gains.  Two other high-wage industry sectors—Information and Financial Activities—also recorded unusually strong wage growth.  It appeared that as much as 30 percent of this surge came in the form of bonuses and stock options, which are often subject to significant fluctuations.

For the most part, subsequent wage growth in these sectors moderated dramatically. Only the Finance and Insurance sector posted higher wage growth at the end of 2011 compared to the end of 2010, and only just slightly better.  Wage compensation in the Mining and Durable Goods Manufacturing sectors actually declined in the fourth quarter of 2011 compared to a year earlier.

In 2011, wages grew 4.3 percent based largely on faster wage growth across a broad range of lower-paying sectors.  The strongest gains in 2011 were made in Professional and Business Services (7.7 percent) and Information (6.6 percent).  Construction saw the most dramatic turnaround.  Construction wages declined for three consecutive years starting in 2008 when a sharp drop-off in nonresidential construction put further downward pressure on a construction industry that had already experienced a dramatic slowdown in new home construction starting in the middle of 2005.  Wages paid in the construction industry fell over 19 percent in 2009, followed by a 10-percent drop in 2010.   Construction wages changed direction and expanded 3.5 percent in 2011 when home building started recovering.  In addition, Nondurable Manufacturing and Other Services, two sectors that pay below-average wages, saw big improvements.

 Changing trends in wage rates

Wage Table

Three high-paying industries, including two that are considered important California specialties, stand out.  In 2010, Mining, Durable Goods Manufacturing, and Information were the wage rate growth leaders, with average wages rising 12.9 percent, 10.1 percent, and 10.6 percent, respectively. Average annual wages paid in these sectors ranged from $89,000 to $120,000 in 2011 and they accounted for an exceptionally large share of total state wage growth in 2010.  However, this phenomenal growth was not sustained.  The pace of average wage growth in these sectors slowed to single-digits in 2011.  The average wage paid in Mining rose 1.3 percent; Durable Goods Manufacturing, 3.7 percent; and Information, 5.5 percent.

At the same time, wage rate growth accelerated notably in four other industries.  Average wage escalation in 2011 was led by the Management of Companies and Enterprises subsector of Professional and Business Services, which rose 7.8 percent in 2011 after rising 5.6 percent in 2010.  Average wages in the Arts, Entertainment, and Recreation subsector of Leisure and Hospitality rose 5.5 percent in 2011, a substantial acceleration from its 3.1-percent growth in 2010. After stagnating in 2010, wage rates paid in Construction rose 4.4 percent in 2011—the strongest acceleration among major industry sectors.  Finally, wage rates paid in the Real Estate and Rental and Leasing subsector of Financial Activities grew 5.2 percent in 2011 after rising 2.1 percent in 2010.

High, but volatile wages

These trends are clearly reflected in 4th quarter average wage payments, which indicate the importance and volatility of income earned in high-wage industries, particularly when it is paid in the form of performance-based instruments like bonuses and stock options.  These payments are fairly sensitive to national and global economic trends.  Average wages paid in the 4th quarter of 2010 rose 4.1 percent on a year-over-year basis—the strongest growth since the end of 2007.  At the end of 2011, average wages grew only 1.1 percent over the year.  Trends in the high-wage sectors noted above accounted for a large part of this slowdown.

  • Average wages earned in Mining increased substantially (over 30 percent) in the 4th quarter of 2010 from a year earlier following a period of rising oil prices and record-setting petroleum industry profits.  At the end of 2011, though, this sector’s average wage had dropped nearly 19 percent, most likely due to weaker global petroleum demand and rising energy production.
  • The wage rate paid in Durable Goods Manufacturing (computers and electronics) grew 11.6 percent in the final quarter of 2010, then dropped almost 5 percent by the close of 2011.   Information wage rates which were up almost 9 percent in the last quarter of 2010, nearly stagnated in 2011, rising less than 1 percent at the end of the year.  After rising 6.6 percent at the end of 2010, average wages in Professional and Business Services rose just over 2 percent by the end of 2011.
  • These trends reflect the strong resurgence of global demand for high technology goods and services that resulted from the initially strong recovery from the recession in 2010, particularly by China.  In 2011, however, global economic growth was slowed by the European economy and by China’s attempts to moderate its rapid expansion in 2010.

Conversely, as noted above, between 2010 and 2011 wage rate growth improved in Construction; Arts, Entertainment, and Recreation; Real Estate Rental and Leasing; and in Other Services—the only industries in which the pace of year-end      wage rate growth in 2011 improved from 2010.  This is generally a reflection of the broadening of California’s economic recovery.  Real estate markets stabilized in 2011, beginning with increased demand for rental properties.  General economic improvements also reinvigorated California’s travel and tourism industries.

Personal income data for 2011 demonstrates that California is still home to many dynamic high-paying industries.  This income, though, is more volatile than earnings in other industries.  Although income growth among California’s specialties was tempered in 2011, other industries picked up the pace, indicating that the recovery became more broad-based and sustainable.

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