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There will be plenty of anecdotes in between now and November about the fruit picker or dish washer whose wages would rise 50 percent if the minimum wage were to jump from $10 to $15 per hour. But experts say that’s not the only factor to consider.

Experts agree that increased wages will increase prices, as employers are forced to compensate for increased labor costs. This means minimum-wage workers will lose some of their new-found earnings to inflation.

“Obviously, when minimum wage goes up, businesses try, if they can, to pass the extra costs to consumers,” said Dr. Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University. “So, a person who got a higher minimum wage will be paying higher for the products or services that they received, and as a result they may not be as well off.”

Some industries are more reliant than others on minimum-wage workers, so price increases won’t be universal, said Adibi, adding that not all of the increase will be passed on as higher costs, as businesses “cannot really proportionately pass all that cost onto consumers.”

Experts at the UC Berkeley Center for Labor Research and Education estimated in a 2015 study for the city of Los Angeles that increasing the minimum wage to $15 per hour incrementally over a five-year period would increase prices overall by less than 1 percent, and just under 8 percent in the restaurant industry, with the cost of the increased wages being absorbed through savings from lower turnover and increased productivity (better paid workers are happier workers).

“The increase in prices reduces overall demand for goods,” said Ken Jacobs, chair of the UC Berkeley Labor Center. “On the other side of the equation, workers have more money to spend, which increases the overall demand for goods. As a result, the net effect on economic activity is very small.”

What Does It Mean For Workers?

The UC Berkeley study on Los Angeles estimates that once all factors are considered, the average earnings for low-wage workers will increase 30 percent.

“That represents a very real economic gain for the workers,” said Jacobs.

UC Berkeley experts point to research highlighting how an increase in the minimum wage reduces dependency on public assistance programs, like food stamps, and how this, plus the increased minimum wage, would have a positive effect on poverty.

The Public Policy Institute of California reported in 2014 that 16.4 percent of Californians were living below the poverty line, which was at $24,000 per year for a family of four. That comes to $11.54 per hour for one income.

“Raising the minimum wage is not a cure-all, especially in the face of larger forces generating inequality that require national attention,” wrote the UC Berkeley experts. “Still, our assessment of the research evidence is that these policies have worked as intended in raising the incomes of low-wage workers and their families.”

But another study, by the Los Angeles County Economic Development Corporation, estimated that because of increased wages, employers may turn to automation, may reduce hours, may substitute the lowest-skilled workers with those who are more productive and may reduce thier share of the profits.

And as a result, prices will increase, employment for those at the bottom of the skills ladder will be diminished, employment growth will slow, and “there will be little impact, if any, on poverty in Los Angeles,” according to the LACEDC report.

What Does It Mean For Employers?

Many experts point to a ripple effect. As those at the bottom wage scale are paid more, workers slightly ahead of them — the shift supervisor, for example, who makes a few dollars more per hour than the minimum-wage workers — would have their status diminished as they’d be no longer making as much compared to those below them.

Even if the increased minimum wage bumps these workers up, employers may still have to give them another increase to compensate for their higher level of responsibility, tenure or skills.

Also, the minimum wage requirement for exempt employees (exempt from overtime) is based on the minimum wage. State law requires, in most instances, they be paid at least twice the minimum wage, so even employers with no minimum wage employees may see labor costs rise.

“That does affect everybody,” said Peter Tateishi, president and CEO of the Sacramento Metropolitan Chamber of Commerce.

And in some instances, the negative effects of an increased minimum wage are already being felt. An Oakland city councilman told the San Francisco Chronicle last month that when Walmart decided to close some local locations as part of nationwide downsizing, it was partially due to Oakland’s increased minimum wage.

The Chronicle also pointed out that a San Jose location — also subject to a higher minimum wage — would close as well, while two stores in San Leandro — where the minimum wage was no higher than the state’s — would remain open.

Income Inequality

Throughout the presidential debate, voters are reminded of the widening gap in income inequality. The rich are getting richer, the poor are getting poorer and the middle class is shrinking.

While proponents, like the experts at UC Berkeley, argue that increasing the minimum wage is worthwhile, detractors say that raising the minimum wage does nothing to increase upward mobility and fill in the gap.

According to Adibi, worker training, education and opportunity for advancement is the “fundamental issue,” so that the minimum wage is more “transitory.” According to Adibi, the increased minimum wage would certainly help, but isn’t going to make minimum-wage workers substantially more prosperous.

“The public policy should address the core policy here rather than put a band-aid on by increasing the minimum wage,” Adibi said.

A big problem was pointed out to CalWatchdog.com by Esmael Adibi, A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis at Chapman University: Three of our Western States competitors make the Top Ten list of the least-taxed states: Nevada in third place, Utah in 9th and Texas in 10th.

Overall, the state with the least taxes is Louisiana, followed by Mississippi, South Dakota and Tennessee.

Adibi pointed out that California’s high rank derives largely from it having the highest personal income tax in the country, 13.3 percent at the top marginal rate after voters passed Proposition 30 in 2012. “Prop. 30 really pushed us over,” he said.

He added that, despite the Proposition 13 tax limitation measure, California ranked only 14th-best for property-tax collections. If property here cost less, then California would rank much higher. “But property is so expensive, the taxes paid equal the tax rate times the amount you pay for the property,” he calculated.

California also scored low on the overall 2015 State Business Climate Index, with third-worst business climate. Worst of all was New Jersey, followed by Connecticut.

That’s similar to the finding of CEO Magazine’s survey of CEOs, who have ranked California the worst state in which to do business for eight straight years.

And the Kosmont-Rose Institute Cost of Doing Business Survey found, “California dominates the list of the most expensive cities, with a total of 12 cities – nine in Southern California and three in the San Francisco Bay Area. Los Angeles and the San Francisco Bay Area are the two most expensive metropolitan areas in the western United States.”

Leaving the Golden State

“There’s no question high taxes at least affect some people on whether to stay in California or move to a state with lower taxes,” Adibi pointed out. He provided CalWatchdog.com a chart showing “Net Population Outflow and Destination” for California. “Net” means both those coming into the state and those leaving.

From 2005 to 2013: 279,000 Californians left for Texas, 222,500 for Arizona, 157,200 for Oregon, 153,200 for Nevada, 98,300 for Washington State, 76,900 for Colorado and 59,500 for Utah; all other states were 217,500.

Rankings

Some other rankings from the Tax Foundation “Facts & Figures”:

• Sources of California state and tocal tax collections: 28.1 percent from property tax, 22.3 percent general sales tax, 30 percent individual income tax, 4.3 percent corporate income tax and 15.3 percent all other taxes.
• Federal aid as a percentage of general state revenue: 25 percent. The national average is 30 percent. That is, California is a “donor state,” it pays more into the federal government than it gets back.
• State individual income tax receipts per capita: $1,750, ranking fourth; Connecticut was highest, at $2,174.
• State and local sales tax rate: 7.5 percent, highest of any state. (Some local governments add to that.)
• State gasoline tax rate per gallon: 45.39 cents, second highest. Pennsylvania is highest, at 50.50 cents.
• State spirits excise tax rate, per gallon: $3.30, 39th highest; California is Wine Country. The highest was Washington State, at $35.22.
• Like most states, California exempts groceries from the sales tax. The highest grocery sales tax is Tennesse’s, at 5 percent.
• California does not have a state inheritance tax, or “death tax.” The highest state rate is Washington State, at up to 20 percent.
• California state and local debt is $11,094 per capita, 8th highest. At the top is New York, at $17,405.

The California Employment Development Department today announced unemployment dropped to 6.9 percent in February, down from 7.1 percent in Dec. 2014; and down more than a point from the 8.1 percent of Jan. 2014.

It also found “nonfarm payroll jobs increased by 67,300 during the month for a total gain of 1,806,700 jobs since the recovery began in February 2010.”

But a slight caution comes from the California Composite of Consumer Sentiment released yesterday by the A. Gary Anderson Center for Economic Research at Chapman University. Any score above 100 is considered positive. The Index dropped to 101.2 in the First Quarter of 2015 from 108.9 in the Third Quarter of 2014.

The Third Quarter reading was “a 10-year high since 2004,” Anderson Center Director Esmael Adibi told CalWatchdog.com. “Now we’re seeing a little dip. But more people still are optimistic than pessimistic.”

He said the drop in sentiment “was kind of puzzling” in the midst of generally positive news. The survey asks only if things are better or worse, and doesn’t ask reasons.

But Adibi surmises the reason is the recent spike in gas prices has people jumpy. In a month, prices in the state have gone up $1 a gallon.

“Overall I’m not seeing too much into the drop,” he said. “The last four quarters have been good. There’s steady job growth going on. Home prices are up, making homeowners happy. The stock market is up, bringing the ‘wealth effect'” — in which stock owners spend some of their profits on consumer goods. “And mortgage rates are helping financing.”

U.S. unemployment

The California improvement followed the overall U.S. unemployment rate. The U.S. Bureau of Labor Statistics today reported:

“Total nonfarm payroll employment increased by 295,000 in February, and the unemployment rate edged down to 5.5 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in food services and drinking places, professional and business services, construction, health care, and in transportation and warehousing. Employment in mining was down over the month.”

It was the best showing since mid-2008, before the financial crisis struck in September that year.

But disappointing was wage growth. Reported the New York Times, “Last month, wages rose just 0.1 percent, according to the Labor Department, a disappointment coming off an increase of 0.5 percent in January.”

Forecast

Along with Chapman President Jim Doti, every December and June Adibi delivers a forecast of the state and national economies. Adibi gave CalWatchdog.com a glimpse into what the next June forecast will look like — assuming there are no unforeseen events, he cautioned, such as a major war.

Adibi said overall U.S. jobs growth was “steady, but not strong.” So that’s another caution.

He added that lower oil prices have helped the overall European economy, which is much more dependent on imports than the American economy.

“The main worries are with other countries. But we think Europe will do better — except for Greece,” which remains near insolvency. “German exports are strong thanks to the weaker euro, which also helps European tourism.”

In addition to the Chapman survey of California consumer sentiment, Adibi pointed to the similar survey of all America by the University of Michigan. Released Feb. 27, it found:

“The small overall decline from January still left consumer confidence at the highest levels in eight years. It is hard not to attribute the small February decline to the temporary impact of the harsh weather, as declines that occurred in the Northeast and Midwest were triple the average loss, while Southern residents grew more optimistic.”

At least most Californians don’t have to put up with all that snow.

Summing up, Adibi said, “Overall we’re positive for stronger growth.”

The report’s headline: “California unemployment indicator declines.”

The California Employment Indicator declined to 121.6 in the first quarter of 2015 from 124.2 in the fourth quarter of 2014, a drop of 2.6 points. The Indicator includes such variables as movements in the lagged values of real GDP, real exports, the S&P 500 and California’s total construction spending.

Any number above 100 indicates jobs growth. So the news generally remains positive. The slight decline to 121.6 still is well into positive territory. And it’s certainly than the 46.6 the Indicator plunged to in 2009 during the trough of the Great Recession, as shown in the following graph:

‘Cautionary’

The slight decline “is a little bit cautionary,” Esmael Adibi told CalWatchdog.com; he’s an economist and the director of the Anderson Center.

He said that, historically, the Indicator closely reflects the growth or decline in state jobs, “but not necessarily every downtick and uptick” in the data. A couple more quarters will be needed to see if this really is a worrisome trend, or just a jiggle in the data.

“I would not like it to be a trend,” he said. “Still, we’re over the 100 threshold” indicating continued jobs growth.

The following graph shows how closely the Indicator follows actual employment.

Culprit

He said the culprit in the downtick was the decline in GDP in the fourth quarter. As Forbes reported on Jan. 31, for the United States, “Real GDP increased at only a 2.6 percent annual rate from the third to the fourth quarter 2014, about half the 5 percent increase in the third quarter. Without inventory accumulation, the increase would have been 1.8 percent, down from 5 percent in the third quarter.”

Adibi added that, if the downward trend in the jobs Indicator continues, “jobs creation still will be positive, but the rate of growth will be slower.

He said the California and U.S. economies continue to perform pretty much as Chapman’s 37th Annual Economic Forecast expected last Dec. 3, as CalWatchdog.com reported at the time.

“Consumers are in good shape,” Adibi said. “They’re driving the economy more than exports. GDP is up 3 percent, as we forecast. And we still are bullish on jobs creation of about 2 percent, which is respectable.”

The growth in the stock market (despite recent setbacks) and the housing market are causing a “growth effect.” That’s when growth in asset values leads some people to cash in their profits and use it for spending or investing.

Adibi also tagged the cut in gas prices drivers are enjoying as being “like a tax cut.”

Although for California, the new tax at the pump from the cap-and-trade portion of AB32, the Global Warming Solutions Act of 2006, has stunted that effective “tax cut” and its salutary effects.

According to GasBuddy.com, today’s average price for regular gas in California was $2.49 a gallon, the third highest for any state, after $2.63 in Alaska and $3.11 for Hawaii.

Enjoying much lower prices were Idaho at $1.87, Utah at $1.89 and South Carolina at $1.91.

Despite the generally good news, California is not the state of Pollyanna. “There always is the message not to raise taxes or hurt the economy in other ways,” Adibi warned.

The California Index of Leading Employment Indicator jumped to 128.4 in the first quarter of 2014 from 122.5 in the fourth quarter of 2013. The Indicator is compiled by the A. Gary Anderson Center for Economic Research at Chapman University. Any number above 100 indicates growth; below 100 means jobs shrinkage.

The following graph follows the Indicator’s path over the last eight years, dramatically showing the jobs crash in California during the Great Recession, and the subsequent recovery.

The Indicator compiles four components:

• GDP growth, which rose 2.7 percent in the fourth quarter of 2013 (year to year), up from 2.0 percent in the third quarter.
• The S&P 500, which increased 29.6 percent in the fourth quarter, up from 16.7 percent in the third quarter.
• Real exports, which rose 5.4 percent in the fourth quarter, up from 2.3 percent in the third quarter.
• Construction spending, which rose 27.1 percent in the fourth quarter, up from 23 percent in the third quarter.

“We used the fourth quarter 2013 components to show us what will happen in the first quarter of 2014,” Esmael Adibi, the director of the Anderson Center, told CalWatchdog.com.

Jobs growth

“All variables combined in the Indicator series show a decent jump from the previous quarter,” Adibi said. “So jobs creation should pick up a little bit of steam and do better than in the fourth quarter of 2013.”

Adibi pointed to a second graph showing how closely actual jobs growth (the dotted line) tracks the Indicator’s projected jobs growth. So Chapman’s jobs projections have been close to spot on:

The graph does show that jobs growth still is not as strong as it was in the previous economic recovery of the a decade ago.

Taxes

The jobs growth comes despite recent tax increases, in particular the $7 billion increase from Proposition 30, which voters passed in Nov. 2012. The biannual Chapman Economic Forecast, which Adibi produces along with Chapman President Jim Doti, has warned that tax increases would retard economic growth and jobs creation.

“Tax increases obviously are negative,” Adibi explained. “If we didn’t have those, jobs growth would be even higher.”

Adibi still expects the 2.3 percent annual economic growth projected in Chapman’s Nov. 2013 Forecast to be close to what really happens, “barring the unexpected.”

He said that businesses especially crave certainty. And they’re currently getting certainty on taxes. The state budget is balanced for now, meaning more tax increases are unlikely.

As to Brown’s re-election bid, Adibi said the economic numbers are looking good should the governor seek a fourth term. “The economy is doing better,” Adibi said. “The budget surplus is kicking in due to higher taxes and economy. Voters also will like more spending taking place” on schools, universities and other popular programs.

By John Seiler

Chapman University’s 35th annual economic forecast projects more sluggish growth for California in 2013. It was presented Wednesday in Costa Mesa before about 1,500 business and community leaders by Chapman President Jim Doti, also an economist; and Esmael Adibi, director of the school’s A. Gary Anderson Center for Economic Research.

According to Chapman, California’s unemployment rate of 10.1 percent in October remains higher than the U.S. rate of 7.9 percent because the state lost jobs faster during the Great Recession; then created jobs more slowly during the recovery. My analysis is that the state was severely crippled by Gov. Arnold’s Schwarzenegger’s policies of tax increases, wild spending increases and regulatory excess, especially AB 32, the Global Warming Solutions Act of 2006.

Note that the only time California exceeded national growth was during the late 1990s, when we had a “comparative advantage,” according to Chapman, because of the dot-com boom.

However, in recent quarters California once again actually has been creating jobs faster than the national average. Chapman attributes this to growth in the fields of leisure and hospitality; professional and business; and health care. (The following chart includes Orange County data.)

That certainly is positive. But Chapman notes that employment in California still remains below what it was before the Great Recession hit in late 2007. By contrast, after previous recessions, by this point in the recovery period all lost jobs had been replaced.

Another positive point is that exports from California to foreign countries have risen sharply during the three years of the recovery. There is great global demand not just for the magical devices from Silicon Valley, but for the medical devices whose industry is centered in Irvine, the fantasy entertainment conjured up by Hollywood, and the goods and services of many other industries.

Note how, since the depths of the recession in 2009, merchandise exports have risen from $28.7 billion in the second quarter of 2009 to $42.1 billion in the second quarter of 2012. That’s a 47 percent increase in just three years; although of course it comes off the recessionary trough.

Chapman’s survey of California manufacturers also shows increasing growth.

It may seem that the state is overcoming  its reputation for over-regulation, such as AB 32, and high taxes. But despite this encouraging growth, as mentioned above the state still hasn’t recovered all the jobs lost during the recession, let alone exceeded them with robust expansion. Moreover, the last chart shows the manufacturers’ sentiments actually turning downward, to 58 percent positive in the fourth quarter of 2012, compared to 61.1 percent positive in the third quarter. (Anything above 50 percent positive indicates future growth.)

Another positive element is that consumer sentiment in California remains as sunny as a day at the beach. It’s at its highest level since before the Great Recession.

Despite the many positive indicators, payroll job growth remains sluggish. During the horrible year of 2009, California actually lost a stunning 6 percent of its jobs. Another 1.1 percent were lost in 2010.

Since then, job growth has been only 0.9 percent in 2011 and 1.7 percent in 2012. The projection for 2013 also is anorexic, at just 1.6 percent.

The job numbers are 238,000 jobs created in 2012 and 234,000 in 2013.

California Payroll Job Growth

Fiscal Cliff and California

California, of course, is part of the United States. Chapman anticipates that the “fiscal cliff” crisis will be resolved with some tax increases of about $150 billion, combined with $50 billion in spending cuts. This will produce national economic growth of 2.1 percent in 2013, down a little from 2.3 percent in 2012.

Both numbers are sluggish, indicating that there’s going to be no radiant boom to propel the United States and California into economic nirvana.

That means the Proposition 30 and Proposition 39 tax increases, as well as the tightening regulatory environment under AB 32, will take their toll on the state, with no relief from an economic boom such as was enjoyed a decade ago.

Chapman warns that the European economic crisis could cripple the global economy, slowing growth across the United States, including California. Golden State exports, the lifeblood of our prosperity, could suffer.

By JOHN SEILER

Not even a week old, the California budget Gov. Jerry Brown signed already is out of balance. “They did not cut as much as they needed to, and they pushed up revenue estimates,” Esmael Adibi told me; he’s director of the A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis.

Adibi said that, according to Chapman’s economic forecast, released a month ago, the state can expect only $2 billion in additional revenue. But the Brown budget anticipates $4 billion.

So, it’s more of the old Capitol “smoke and mirrors” and “gimmicks” that the governor, in his inaugural address last January, promised he would disdain.

The budget does include “triggers” that supposedly would cut spending, should the rosy scenario on revenues pan out; but nobody knows how that would work in practice.

“The problem is coming up with $2 billion more,” Adibi warned. “How realistic that is, we will wait and see. My guess is that, come January, they’ll come up short. They did not really want to go through the hard choices. Their assumptions were too rosy.”

He added that some budget spending items also should go up, especially because of the cost of living, further tilting the budget into imbalance. The budget gap in 2012 then will be used as a reason for Brown and the Democrats, as well as their union bosses, to work for a tax increase expected to be on the November 2012 ballot. “They’re just trying to get that tax increase,” Adibi said.

Struggling Economy

Chapman University on Wednesday released its latest survey of purchasing managers in California. It is further proof that the booming economy on which Gov. Brown’s smoke-and-mirrors budget depends is unlikely.

The good news is that commodity price increases are easing from the tepid levels of recent years. “Commodity prices in general have been going down,” Raymond Sfeir told me; he’s a professor of economics and research fellow at the Anderson Center. “That’s the most important part. We expect it will continue into the third quarter. It’s not going to be as high as in previous quarters.”

Unfortunately, the rise in manufacturing growth the state enjoyed earlier this year is easing up. “We’re not as optimistic,” Sfeir said. “We will still be growing in California, but not as high as in previous quarters.”

In the next graph, below 50 means contraction, above it means expansion. We’re still above 50, at 56.2 for the Third Quarter of 2011. But that’s down from 60.7 from the Second Quarter, and is heading closer to the 50 break-even point.

That means that gas and food price increases should abate for a while.

He added that it’s “difficult to tell” how well the future will be. Some comments from the purchasing managers “weren’t anything negative. The whole economy may be doing the same.”

He said that the U.S. Federal Reserve Board’s QE2 — Quantitative Easing 2 — finished at the end of June. That means less money will be pumped into the economy. So there will be “decreasing Fed expenditures. Consumption is not growing as fast as it used to. There will be a slightly slower growth rate.”

Employment

Employment also is doing well, although not spectacular. The employment index dropped a little, from 58.9 in the Second Quarter of 2011 to 56.1 in the Third Quarter. But that’s still in positive territory (anything above 50). As recently as the Fourth Quarter of 2010, the index was at 49.9, dipping into negative territory.

High tech industries’ growth has slowed, a warning sign that the state needs to nurture them more. In the Second Quarter of 2011, high-tech industries’ index stood at a robust 62.9. But that slid to 58.5 in the Third Quarter.

Conclusion

The upshot of the numbers and graphs is that California’s economic growth is slowing. There is unlikely to be adequate revenue to pay for everything in the new budget. Hence, the “trigger” mechanism to cut funding likely will be pulled.

Instead of still trying to increase taxes, Gov. Jerry Brown and the Democratic Legislature should be relieved that they failed to do so in the current budget (except for the disputed Amazon tax).

Today, new federal jobs numbers indicate a mixed picture at the national level — another sign of the importance of not destroying jobs in California. CNBC reported that “the private sector added 157,000 jobs from May to June, well ahead of estimates though still not enough to make a meaningful cut into the unemployment rate, according to a report from ADP.”

As California legislators look toward their summer recess, they might usefully make plans to talk to not only their allies in the government unions, but local businesses and private-sector workers who pay the taxes for everything.

By JOHN SEILER

This morning, Gov. Jerry Brown vetoed the budget passed yesterday by the Democratic-run California Legislature. Even as he was doing so, Chapman University was revealing a sobering economic forecast that should make the Legislature think twice before raising taxes. I attended the presentation before more than 800 Southern California business and community leaders.

The upshot is that there is going to be no booming economic recovery, as after the 1991-92 and 2001 recessions, with zooming new revenues.

Instead, the modest economic ongoing recovery will continue nationally, with about 2.7 percent growth in 2011 and 3.6 percent in 2012. Chapman last December forecast that the First Quarter of 2011 would enjoy a robust 4.6 percent annual growth rate; but the rate instead was a disappointing 1.8 percent.

Chapman University President James Doti explained that the disappointing First Quarter numbers stemmed from higher gas prices dampening consumer spending, the Japanese Earthquake, frozen Defense spending outlays and the European debt crisis. He forecast that all these will change for the better as the year progresses.

He also said that housing prices nationally would drop 4.3 percent in 2011. This will cause a “negative wealth effect,” in which people, because they have lower home equity, spend less in other areas. “If there is any risk to this weak recovery, the most serious threat is a worsening drop in housing prices,” he warned.

However, he added, the number of households is beginning to expand. People who “doubled up” — such as living with parents — to ride out the hardest times, now are looking for rentals. Eventually, that could turn into increased demand for purchasing homes.

This is reflected in the national number of excess vacant apartment units dropping from 1,008,000 units in the First Quarter of 2011 to 714,000 units in the First Quarter of 2011. Currently, the vacancy rate for apartments is 9.5 percent. That’s getting close to the 8.5 vacancy rate of normal times.

“There’s a lot of pent-up demand to live somewhere,” Doti said. “People are beginning to rent units, while seeing what’s going to happen.”

He added that, over the course of the past century, housing prices have averaged three times personal income. Currently, the ratio is 2.6 times personal income, meaning, “Housing rarely has been as affordable as today.”

The national housing affordability index is 70 percent of people being able to buy a home, “the highest since 1999.” However, he expects foreclosures to exert “36 more months of downward pressures on prices.” He noted that, during the Great Recession, housing prices have dropped faster than during the Great Depression; and there have been twice as many foreclosures.

California’s Forecast

California’s jobs were hit much harder than national jobs, Esmael Adibi told the audience; he’s Director of the A. Gary Anderson Center for Economic Research at Chapman University, which prepares the forecast.

He said that the peak California unemployment rate during the 1990-91 recession was 9.9 percent; during the 2001 recession, 7 percent; and during the 2007-09 recession, 12.5 percent. So we were hit harder this time.

Moreover, the time from the peak unemployment level to the time unemployment dropped to a normal level was 30 months in the 1990-91 recession and 21 months in the 2001 recession. But the number of months from peak unemployment during the 2007-09 recession is 38 — and counting.

California, with its heavy load of taxation and regulation, is just having a tough time dragging itself out of the recessionary bog.

Green Shoots

On the positive side, hiring finally is rising. Payroll jobs growth crashed 6 percent in 2009 and another 1.3 percent in 2010. But Adibi forecast payroll jobs would rise by 1.6 percent in 2011 and another 2.1 percent in 2012. That will create 216,000 payroll jobs in 2011 and 290,000 in 2012.

He also expects that, although state and local governments have been cutting jobs during the recession, they will start hiring again. This will be because the improving economy will generate more tax revenue; and some of the tax increases being proposed will be enacted.

I asked Adibi how the tax increases in the budget passed by the Legislature, but vetoed by Gov. Brown today, would affect the economy. Adibi said he would have to wait to see a final product before offering an analysis.

However, in talking with him many times over the years, including on Monday, he always has warned that higher taxes reduce private-sector economic activity.

Other positive signs for California growth are an improving trend in merchandise exports. From a low of $27.6 billion exported in the First Quarter of 2009, exports rose sharply to $38.7 billion in the Fourth Quarter of 2010. However, they dropped a bit, to $37.5 billion in the First Quarter of 2010, because of the Japanese Earthquake-Tsunami-nuclear crisis.

Chapman’s survey of purchasing managers also has risen. Anything over 50 on this composite index indicates growth. From a low of 41.2 in the First Quarter of 2009, indicating contraction, the index has risen to 62.2 in the Second Quarter of 2011, indicating a continued expansion.

Construction spending also has risen for the first time this year, although it is expected to rise at only about a 5 percent annual rate throughout 2012. That’s still much better than the 36 percent drop in 2010.

California’s housing prices essentially will reflect the stagnant national market. In California, prices rose 10.1 percent in 2010. But for 2011, prices are expected to drop by 4.4 percent; and drop by 0.7 percent in 2012. Adibi said, “There will be no significant increase in housing prices until we get significant job creation. Home prices will stay flat the next two years, waiting for incomes to rise. But prices won’t be declining.”

As I keep warning, the main economic focus of the governor and Legislature should be on jobs creation.

State Budget

Adibi forecast that, if the economy continues to increase, the state will reap higher revenues. However, he criticized Gov. Brown for spending half the unexpected $6 billion in revenues taken in this year because of higher capital gains taxes from the improving stock market. And he noted that the stock market has been declining in recent weeks.

He also warned that the state continues to be foolish in spending increased revenues during recoveries; that the state must even out the boom in revenues in good times, with the trough in revenues during bad times. “Without changes, we will have problems again,” he cautioned.

That was a clear warning to the Legislature to reform its high-spending ways, while restructuring the tax and budget system to prevent future crises. Unfortunately, the insular Legislature is living in a world of its own.

By JOHN SEILER

In the hullabaloo over extending tax increases, one thing is being overlooked: As things now stand, on July 1, just 10 weeks away, California gets some pretty hefty tax cuts. You’ll have more change jingling in your pocket.

That’s when most of Gov. Arnold Schwarzenegger’s record $13 billion tax increases of 2009 expire. (The 1 percent income tax increase of that year already expired on Jan. 1.)

Overall, combining the Jan. 1 and July 1 tax increases, the average California family will have about $1,000 more to spend on food, children’s clothing, mortgage or rent payments, car payments, gas, charity, etc. Some of the tax cuts also will go into investments to create new businesses and jobs.

The following tax increases will cease as of July 1:

* 1 percent sales tax increase;
* 0.5 percent Vehicle License Fee increase (the “car tax”).

Spurring Sales

At the end of a tax-increase period, people generally postpone some economic activities until the tax expires. For example, someone wanting to buy a $30,000 today can, by waiting until July 1, save 1 percent on sales ($300) and 0.5 percent on the car tax ($150). Total savings: $450.

That means sales will be suppressed in the next few weeks, but will take off on July 1.

We won’t know until a few months from now how many new sales will be generated by this savings, but it could be substantial.

Moreover, even if you aren’t in the market for a new car, you’ll see savings on the VLF. If you old flivver is worth $10,000, you’ll pay $50 less on the VLF. Maybe your spouse has another car worth $10,000, and one of your kids has another worth $10,000. Total family savings: $150.

Marginal Tax Rates

Another factor is marginal tax rates. At some point, tax rates become so high that people stop certain economic activities. That point differs with different people.

Conversely, at some point, tax rate cuts generate more activity. If the taxes on that $30,000 car are cut by $450, it well could make affordable something that previously was beyond your reach.

The additional economic activity, in turn, actually generates taxes — even at the lower rates. That’s because, unless the purchase is made, the car dealer doesn’t get the sale, so he doesn’t pay the business tax. The salesman doesn’t get a commission, and so doesn’t pay income tax on the commission. And the sale, not being paid, doesn’t pay any sales tax at all.

However, if the tax cut makes a product more affordable, and thus generates a new sale, then all those taxes listed above are paid.

“Of course it will increase sales,” Esmael Adibi told me of the expected July 1 tax cut; he’s director of the A. Gary Anderson Center for Economic Research at Chapman University. “A 1 percent sales tax cut makes big-ticket items, such as cars and boats, more affordable. It will stimulate durable goods purchases.”

He added, “Generally speaking, if you pay less in sales taxes and the VLF, you have more money in your pocket. A good amount will be spent.”

Budget Dilemmas

The tax cuts would mean that the state budget would have to be cut more than was planned in Gov. Jerry Brown’s January budget. State workers would have to be laid off. “Cutting spending would be negative” on the state economy, Adibi said. However, he added, the overall effect would be positive because “the reduction in taxes affects a larger group of the population than would the spending cuts.”

Another factor is the predictability of taxation. Business managers always insist that the predictability of the tax code is essential to smooth operations. If the Schwarzenegger tax increases expire on July 1, that would be a plus for businesses. But if different taxes later are increased, the uncertainty generated — as well as the new taxes — would be a negative. Among the uncertainties:

* The California Teachers Association now is pushing a tax increase without a direct vote of the people. The CTA is a close ally of Gov. Brown and the Democratic majority in the Legislature.

* Assembly Speaker John Perez, D-Los Angeles, is pushing a new tax on wealthy Californians.

* A $2 billion yearly severance tax on oil production is being advanced. It also would increase gas prices at a time when prices paid by drivers are approaching $5 a gallon.

So, the predictability of California tax rates remains volatile.

Other Economic Factors

It’s worth remembering that something similar happened in the past. After Republican Gov. Pete Wilson increased taxes a then-record $7 billion in 1991, during the height of a recession, California did not enjoy the national economic recovery that the rest of the country soon was enjoying. It stagnated until, in 1995, most of the tax cuts finally expired and the Golden State economy roared into the prosperity of the late 1990s.

Adibi pointed to some additional benefits of the pending July 1 tax cuts. “Clearly, the sales tax is a very regressive tax,” he said, hitting the poor more than the wealthy. A wealthy person might pay a high sales tax on a new Mercedes. But it’s the day-to-day purchases of a poor person — children’s clothing, a new muffler for an old car, over-the-counter medicine — on which a high sales tax can add up. Conversely, a sales-tax cut can mean a great deal to a poor person.

Adibi also warned that higher gasoline prices are washing out most of any benefit we might get from tax cuts. “So we’re getting it from every front,” he lamented.

Perhaps the gas increase is not felt by Gov. Brown and California Legislators, for whom cars and gasoline are supplied by taxpayers. But for most Californians, extending the Schwarzenegger tax increases would be a doubling of the heavy new burden of higher gas prices.

By contrast, any chance that California’s struggling economic recovery has to be sustained rests on maintaining the tax cuts beyond July 1.