Fewer Families Dictates State's Destiny

FEB. 9, 2011

By WAYNE LUSVARDI

The package of spending cuts and tax increases championed by Gov. Jerry Brown in his State of the State (SOS) address, and his opinion poll chorus at the liberal Public Policy Institute of California, won’t solve the state’s long-term structural budget problem even if is ratified by the voters in June 2011.

Neither will Gov. Brown’s continued backstage attempts through the Federal Energy Regulatory Commission (FERC) or the California Public Utilities Commission (PUC) to impose the high costs of green power directly onto the backs of electricity ratepayers or indirectly in the high cost of consumer goods due to higher energy prices.

“Demography is destiny” is a phrase attributed to the 19th century French father of sociology August Comte. California’s current budget crisis is due to the destiny of its demography and the loss of what is called “the culture wars,” as much or more as it is to anything else.

David Goldman writing in the May 2009 issue of First Things Magazine (“Demography and Depression”) convincingly advances the proposition that America’s housing market and financial system collapsed because we lost the demographic culture wars, even while social conservatives were prevailing in the same-sex marriage wars, although narrowly and tenuously in California. Goldman is a former director of market research for Bank of America, Credit Suisse and Bear Stearns.

Goldman aptly describes what happened with our financial meltdown as a breakdown of the life cycle of credit that has its foundation in demography. There is a demographic imbalance in the growing number of retirees and flat lining of the number of economically productive intact families needed to sustain the stock and bond markets, as well as Social Security and CalPERS pension systems.

Retirees need a return on their savings and pension funds, and correspondingly young people need to borrow money to start marriages, buy houses and capitalize new businesses.  What underpins all this is family formation.  Each new generation needs to produce children and economic enterprises to support the old, and vice versa. This is not a Ponzi scheme unless the number of family formations runs out.

In Jerry Brown, California may have unwittingly elected another Carlo Ponzi to be its new governor.

According to Goldman, families are the backbone of both the housing and financial markets.  Two-parent families are inescapably the primary source of wealth formation because single-parent families are poor.  Propping up one-parent families with subsidies, affordable housing financed by property taxes via redevelopment or redistribution, just spreads the burden back onto intact families.  Single parent families don’t have much discretionary income and thus little buying power. Raising taxes just takes more money out of the private sector and leads to fewer family formations.

Goldman points out that the number of two-parent families in the U.S. has remained flat at 25 million since 1970, while population grew from 200 million to 300 million from that year to today. Moreover, the supply of family homes in 1970 was about equal to the number of families, or 36 million units. But by 2005, three-or-more bedroom homes had spiked to 72 million units, but with the same number of families. The artificially induced housing bubble over built large houses for small households but it didn’t increase intact family formations.

Goldman highlights a disturbing statistic: while the number of families in the U.S. has grown from 47 to 77 million since 1963, most of the increase is due to families without children (i.e., one-person families).  What underlies the financial condition of the U.S. is the fact that  single-parent families have tripled, intact families have declined from 50 percent to 30 percent, while the dependent elderly have doubled from 15 percent to 30 percent since 1960.

Too few intact families, too many dependent elderly and too many one-parent families are dependent on subsidies.  The economic food chain has broken down due to a lack of intact families.

While California has preoccupied itself with environmental sustainability and the remote possibility of a flood disaster of Biblical proportions in the Sacramento Delta, it has become demographically and economically non-renewable, which will be elaborated below.

As Goldman states:

“If capital markets derive from the cycle of human life, what happens if the cycle goes wrong? Investors may be unreasonably panicked about the future, and governments can allay this panic by guaranteeing bank deposits, increasing incentives to invest, and so forth. But something different is in play when investors are reasonably panicked. What if there really is something wrong with our future—if the next generation fails to appear in sufficient numbers? The answer is that we get poorer…The declining demographics of the traditional American family raise a dismal possibility: Perhaps the world is poorer now because the present generation did not bother to rear a new generation. All else is bookkeeping and ultimately trivial…”

Despite rampant immigration by family-oriented Latinos, California, like the rest of the U.S., saw a leveling off of intact nuclear families from 2000 to 2007, the period over which the U.S. Census Bureau maintains data online. The number of two parent families with children grew from 4,117,036 in 2000 to only 4,218,469 in 2007, a minus half percent (-0.5%) decline relative to total population. Two parent families with  children constituted 35.8 percent of all state households in 2000 and 34.7 percent in 2007, a 1.1 percent decline. Meanwhile state population grew 8.1 percent over the same seven-year period.

Contrary to popular notions by some social conservatives, non-family households in California grew slightly in total numbers but remained the same proportion of the population – 10.5 percent – from 2000 to 2007. What apparently has grown in California, as in the rest of the nation, are the number of single parent families due to divorce and out-of-wedlock births, not childless households. Unmarried partner households (same sex) only represented 0.9 percent of all households in 2007.

Goldman forecasts a future shock to California’s real estate when he writes that demand for large-lot single family homes will drop nationally from 56 million today to 34 million in 2025—a whopping reduction of 40 percent. California’s “golden” housing market will not be immune to the laws of such demographics and its housing values will deflate, and with it, its huge state budget.

In other words, it just isn’t the short-term effects of the recent-past “housing bubble” that is causing a temporary state budget crisis. There is a greater California economic earthquake to come. And those who believe that eliminating Prop. 13 property tax protections will fix the structural state budget deficit are deluded because property taxes, with or without Prop. 13, will be a shrinking pie.

Likewise, those who advocate saving redevelopment agencies and the thousands of units of affordable housing they produce are equally myopic. Overbuilding affordable housing for single-parent families is only digging California’s budget hole deeper.

Many people are in denial that California, with its desirable weather, beaches and mountains, thousands of acres of preserved open space, Hollywood, and Silicon Valley could face long term stagnation. But California and its governor have not focused on the connection between demography and decline.

According to Goldman, only some limited things, such as immigration and inculcating youth with a work ethic, can be done to offset the coming great California earthquake of real estate wealth destruction. The recent past inflation of the real estate bubble by desperate social policies enacted in Washington to save the future of Social Security was only an effort to forestall the inevitable, and only hastened a collapse.

While Californians were waging a contentious “culture war” over same-sex marriage, and our courts prevaricated about whether gay marriage was a legal “right,” California was experiencing the foreshocks of the coming  great California economic earthquake. But there was no cultural seismometer at Cal Tech to measure the preliminary shock wave.

And instead of sending out messages to earthquake-proof our families, our homes, our churches and our state treasury, sociologists (our cultural seismologists) in California self-righteously turned into radical social engineers advocating affordable housing, serving as President Barack Obama’s policy advisers based at his alma mater Occidental College in Los Angeles.

Likewise, conservative and liberal religious activists took up the cause of “faith-based affordable (luxury) housing,” under the absurd banner of biblical justice or civil rights. Presumably, “affordable” Cadillacs would be advocated next.

Local politicians rushed to embrace “inclusionary housing” policies to buy votes without recognizing such policies will artificially inflate housing prices in the coming falling market. Redevelopment agencies are arguing that even if commercial development is dead for the next 10 years that their existence is still justified in order to provide “affordable housing,” mainly for more single-parent households in “urban villages” far from parks, churches and social institutions that grow intact families.

None of them have a clue that in the future, affordable housing will be a non-issue except as possibly a dead-weight loss on the economy.  We have put too much material capital into housing and not enough cultural capital into family formations. As such, California and Russia share the same demographic fate of declining family formations and declining economies. Vladmir Putin’s focus on family formations in Russia may make him more of an advocate of “sustainability” than Jerry Brown.

The sociologist and former U.S. Sen. Daniel Patrick Moynihan once wrote: “The central conservative truth is that it is culture, not politics, that determines the success of a society. The central liberal truth is that politics can change a culture and save it from itself.”

But history hasn’t validated Moynihan’s second proposition as far as California goes. Social engineers have been so busy “saving” California by changing its culture and laws by political means, that they are culturally blind to see that they are pushing the state into demographic and economic ruination.

What California needs to return to is the central conservative truth that only culture can save it from political ruination.

Brown has focused on environmental sustainability, not cultural and economic sustainability. Brown is the priest of a new Philistinism that despises cultural and commercial values in favor of unthinking redistributionist material values.

The real question is whether California has the cultural capital and political leaders for an economic recovery.