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Stagterity: An economic ailment the region may not shake easily

By   /   Friday, May 18th, 2012  /   Comments Off on Stagterity: An economic ailment the region may not shake easily

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By the time Gov. Jerry Brown’s desperate actions to close a $15.7 billion budget gap trickle down to the Central Coast, the region will be stuck at zero growth rates for as far as the eye can see.
What we face is a situation where stagnation is fueled by austerity, resulting in a condition I’ve dubbed “stagterity,” an homage to the “stagflation” of the 1970s.

Economist Bill Watkins of California Lutheran University’s Center for Economic Research and Forecasting laughed at my newly minted term, but he said it fits the current situation where “cutting spending leads to a downward spiral but there’s not much room to raise taxes.”

Perhaps the best example of how the stagterity scenario plays out on the Central Coast is Brown’s decision to grab money from the court system’s construction program to conserve cash. Shelved, perhaps permanently, is a $152 million construction project that would have built a new criminal county courthouse in downtown Santa Barbara, creating 300 construction jobs and perhaps having some broader economic impact across the mid-city business corridor.

A glance through the UC Santa Barbara Economic Forecast Project’s recent 2012 outlook underscores the scope of the problem. Government spending, typically a buffer against recession, has been acting as a brake in all three of the Tri-Counties. In San Luis Obispo County, government spending fell a full percentage point,  from 15 percent of GDP to below 14 percent, between 2008 and 2010.

The May 12 issue of The Economist says that nationally, state and local governments have shed 600,000 jobs since mid-2009. With federal stimulus funds running out, more cuts are on the way.

Watkins thinks the way out of this economic trap is to “reduce regulatory burdens,” particularly when it comes to getting private-sector projects moving more quickly. He’s skeptical of big government spending on projects such as the governor’s coveted high-speed rail program. Instead, Watkins thinks government should focus on “education and smart infrastructure.”

For the Central Coast, that would mean pulling out the stops to keep Haas Automation’s plant expansion in Oxnard rather than moving it to Texas. It would also mean getting Rick Caruso’s stalled Miramar Hotel project going again in Montecito. But Watkins thinks old habits will be hard to break; George Lucas’ efforts to build a studio in Marin County have come to naught, and it’s been “more than a decade” since Amgen launched a major expansion of its sprawling Thousand Oaks campus.

A second way to grow tax revenue and the number of jobs simultaneously would be to drill for oil, Watkins said. Oil production is not the messy business it was in the 1960’s; it employs scientists and engineers who make a lot of money, and onshore production could really help depressed areas such as the Santa Maria Valley.

The UCSB Forecast notes that despite a sharp oil decline offshore, Santa Barbara County alone produced 22 million barrels of oil in 2010.  Too bad the Tranquillon Ridge project, which would have increased production in return for eventually shutting a refinery and offshore facilities, was torpedoed by regulators; a San Luis Obispo proposal to reopen several wells has gotten nowhere.

The maddening thing about stagterity is that it’s unlikely that California will totally fall off a cliff. Business sentiment is improving, tourism is bouncing back, lower home prices will encourage housing starts and Watkins thinks that “wealth and technology” enclaves such as Silicon Valley and the Highway 101 corridor will grow.

But he also thinks California and the region will trail national averages for a long time.

Even if Gov. Brown’s November ballot initiative passes and the most draconian cuts are avoided, revenue increases “are likely to be disappointing” Watkins says. That’s because as taxes go up, wealthy people move away completely or become part-timers.

The UCSB forecast has growth at or near zero for Santa Barbara and SLO counties and slightly better than that for Ventura County, thanks in part to agribusiness, which remains a bright spot, and to a rebound in manufacturing and trade.

But as California remains in the grip of its stagterity trap, consider the situation in Colorado, a state with which I am quite familiar. There the unemployment rate is 7.8 percent, below the national average, and the top individual tax rate is 4.6 percent.

In California, where unemployment is at 11 percent, the top tax rate will be 12.3 percent if the ballot initiative passes. If your combined state tax rate and state unemployment rate are above 20 percent, you’ve got a problem.
Stagterity may be a way to keep the budget in balance today, but it doesn’t create a clear path to a sustainable future.

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