Monday, February 13, 2017

Does Equality of Opportunity Study Suggest Community College Should Be Free?

An op-ed in today's Sacramento Bee uses the Equality of Opportunity study to argue that the state should make community college and the first two years of CSU tuition free.  I am not sure how the op-ed author derives his conclusion from the analysis in the Equality of Opportunity study.

I had skimmed the study a few weeks ago and did not come to these conclusions.  I thought it raised serious questions about California's higher ed structure with an enormous community college system and strong incentives for students to start in community college.  California has had the cheapest (nearly free tuition) community college education in the U.S. for decades and its educational outcomes are backsliding, especially for those under 40 who were educated in the state.  California still does a great job of attracting highly educated workers to move here from other places.

Prompted by this op-ed, I just gave the study another read to see if I was missing something.  I found no recommendation about free community college or expanding community college.  In fact the study notes that many community colleges don't rank that well on mobility, despite being high-access institutions because their success rates are so low.  It does have positive things to say about outcomes for students who start in the CSU system.  I could see it as an argument for expanding CSU's so more students can start in a 4-year environment, and I also can see it as an argument for continuing to provide financial aid opportunities that allow lower-income students to access private, non-profit institutions.

I edited some of the tables from the Equality of Opportunity study below.  There are many more community colleges than CSUs, UCs, and private, non-profits in California - so it seems they should dominate these tables.

The first table focuses on the mobility rate, which combines low-income access with success in mobilizing low-income students into the top-tier of earners.  The table shows the top 10 colleges in California (excluding very small institutions) for mobility and the bottom 10.  There is 1 community college in the top 10, but community colleges are 7 out of the bottom 10 for mobility.

The second table looks only at the success rate of low-income students attending a given university, irregardless of the share of students at that institution that are low-income.  Thus, Stanford can top this list despite only having 3.6% of students with low-income parents - since 63% of those students are successful in getting to the top income quintile by their early 30's.

When it comes to success rate, there were no community colleges in the list until 42nd place.  The very bottom of the success rate list are for-profit career colleges, but community colleges make up the rest, 15 of the bottom 20 places.

Community colleges are important, and I know many people who have had good educational experiences with them, and have successfully used them to achieve their educational goals.  The policy question here is at the margin.  Should California be putting more resources and directing more students in their direction, or would there be a better return on investment in expanding the CSU system and low-income access to private non-profits with high success rates?

Mobility Rate Rankings

Institution Name Median Parent Hhold. Income ($) Median Child Indiv. Earnings Ages 32-34 ($) Low-Income Access: % of Parents in Bottom Quintile Success Rate: % of Children in Top Quintile Among Those with Parents in Bottom Quintile Mobility Rate: % of Children who Come From Bottom Quintile and Reach Top Quintile
Top 10 Mobility Rate(>= 300 students per cohort)
California State University, Los Angeles  36,600  43,000 33.1        29.9        9.9       
Glendale Community College  40,100  30,500 32.4        21.9        7.1       
California State Polytechnic University, Pomona  80,200  55,100 14.9        45.8        6.8       
University Of California, Irvine  92,100  60,400 12.2        55.3        6.8       
California State University, Northridge  61,100  44,100 19.8        32.0        6.3       
University Of California, Riverside  75,000  52,800 14.7        41.0        6.0       
California State University, Dominguez Hills  45,600  40,300 26.3        21.3        5.6       
University Of California, Los Angeles 105,500  65,800 10.2        54.6        5.6       
San Jose State University  91,700  56,500 11.7        46.6        5.4       
University Of California, Berkeley 114,700  67,900 8.8        55.2        4.9       
Bottom 10 Mobility Rate (>= 300 students per cohort)
College Of The Redwoods  59,900  20,300 18.8        7.5        1.4       
Point Loma Nazarene University 113,300  45,900 3.3        42.7        1.4       
Lake Tahoe Community College  64,600  22,100 14.2        9.8        1.4       
Mendocino College  51,900  21,400 21.0        6.0        1.3       
Sierra College  85,900  30,900 7.8        15.7        1.2       
California Lutheran University 110,600  50,900 3.2        38.2        1.2       
Saddleback College 100,600  31,100 7.0        16.5        1.2       
Solano Community College  84,300  34,300 7.9        13.7        1.1       
Las Positas College 109,500  37,300 4.9        16.5        0.8       
Marinello School Of Beauty, Xenon International Academy, International School Of Skin And Nailcare And Hair Professionals Academy  44,200  11,400 25.4        2.9        0.7       

Success Rate Rankings

Institution Name Median Parent Hhold. Income ($) Median Child Indiv. Earnings Ages 32-34 ($) Low-Income Access: % of Parents in Bottom Quintile Success Rate: % of Children in Top Quintile Among Those with Parents in Bottom Quintile Mobility Rate: % of Children who Come From Bottom Quintile and Reach Top Quintile
Top 42 Success Rate (schools >=300 students per cohort)
Stanford University 172,600  84,800 3.6        62.7        2.2       
Santa Clara University 149,900  72,500 3.6        62.0        2.2       
University Of California, Irvine  92,100  60,400 12.2        55.3        6.8       
University Of California, Berkeley 114,700  67,900 8.8        55.2        4.9       
University Of California, San Diego 111,300  65,300 8.8        55.1        4.8       
University Of California, Los Angeles 105,500  65,800 10.2        54.6        5.6       
University Of Southern California 120,100  63,700 7.2        54.6        3.9       
California Polytechnic State University 124,800  65,500 4.2        53.6        2.2       
Pomona College 161,600  62,000 3.7        53.0        2.0       
University Of California, Davis 109,400  61,600 8.6        51.8        4.4       
University Of The Pacific  96,500  59,000 8.6        49.7        4.3       
University Of California, Santa Barbara 124,000  58,800 6.2        49.5        3.1       
Scripps College 126,300  46,400 5.1        49.1        2.5       
University Of San Diego 139,300  61,200 4.9        46.8        2.3       
San Jose State University  91,700  56,500 11.7        46.6        5.4       
University Of San Francisco 106,900  56,900 5.9        46.2        2.7       
Loyola Marymount University 131,800  56,200 5.4        45.9        2.5       
California State Polytechnic University, Pomona  80,200  55,100 14.9        45.8        6.8       
California State University, East Bay  86,000  51,300 9.9        44.0        4.3       
Saint Mary's College Of California 110,500  55,200 6.7        43.7        2.9       
Pepperdine University 124,100  55,800 4.3        43.1        1.9       
Point Loma Nazarene University 113,300  45,900 3.3        42.7        1.4       
University Of California, Riverside  75,000  52,800 14.7        41.0        6.0       
San Diego State University 100,500  51,000 9.0        40.8        3.7       
California State University, Fullerton  83,300  47,800 12.1        39.6        4.8       
Occidental College 122,400  49,000 8.5        39.1        3.3       
California Lutheran University 110,600  50,900 3.2        38.2        1.2       
California State University, Long Beach  85,800  48,800 11.6        38.2        4.4       
University Of California, Santa Cruz 115,400  46,100 7.4        37.6        2.8       
San Francisco State University  87,200  45,800 10.1        34.7        3.5       
Sonoma State University 113,700  46,400 5.0        34.4        1.7       
California State University, Bakersfield  67,700  46,100 14.1        32.8        4.6       
University Of Redlands 108,400  47,700 5.3        32.3        1.7       
California State University, Monterey Bay  93,200  41,100 10.5        32.3        3.4       
California State University, Chico 112,200  48,700 6.1        32.2        2.0       
California State University, Northridge  61,100  44,100 19.8        32.0        6.3       
California State University - Sacramento  88,700  47,900 10.5        31.9        3.3       
Chapman University 109,600  47,900 5.3        31.9        1.7       
California State University, San Bernardino  69,800  43,500 14.1        31.2        4.4       
Azusa Pacific University 103,700  42,100 4.9        30.9        1.5       
California State University, Los Angeles  36,600  43,000 33.1        29.9        9.9       
Ohlone College  91,100  38,500 7.1        29.0        2.1       
Bottom 20 Success Rate (schools >= 300 students per cohort)
Victor Valley Community College  62,600  25,200 17.7        12.1        2.1       
Chaffey Community College  66,300  27,700 14.7        12.0        1.8       
Southwestern Community College District  54,200  28,200 20.2        11.8        2.4       
Antelope Valley College  66,600  25,700 16.4        11.8        1.9       
West Hills Community College District  46,100  25,600 22.5        11.7        2.6       
College Of The Sequoias  51,500  27,500 21.8        11.6        2.5       
Yuba Community College District  48,700  25,400 20.4        11.5        2.4       
Miracosta College  71,200  26,500 13.4        11.5        1.5       
College Of The Siskiyous  57,500  27,900 19.0        10.5        2.0       
Lake Tahoe Community College  64,600  22,100 14.2        9.8        1.4       
Merced Community College  48,400  25,400 24.0        9.5        2.3       
State Center Community College District  47,600  25,200 24.7        9.4        2.3       
San Joaquin Valley College  36,000  21,500 34.8        7.9        2.8       
College Of The Redwoods  59,900  20,300 18.8        7.5        1.4       
Carrington College California  47,900  25,000 24.5        7.0        1.7       
Westwood College - Los Angeles  37,800  26,400 26.9        6.7        1.8       
Mendocino College  51,900  21,400 21.0        6.0        1.3       
United Education Institute  29,600  19,100 42.4        5.3        2.2       
American Career College of Los Angeles, CA  30,400  25,700 41.5        4.8        2.0       
Marinello School Of Beauty, Xenon International Academy, International School Of Skin And Nailcare And Hair Professionals Academy  44,200  11,400 25.4        2.9        0.7       

Thursday, February 2, 2017

Another view of the Northern California Mega-region

Another recent study has analyzed mega-regions in the U.S.  This one is from Dartmouth with some cool graphics.  It imagines what U.S. states would look like if they were defined by economic relationships, and like most studies of its kind, it sees the Northern California mega-region (Bay Area, Sacramento, North San Joaquin Valley, Monterey Bay) as a distinct state.

This image of commuter flows from the Dartmouth study shows the distinct break between the North San Joaquin Valley and Fresno, there is almost no economic linkage at all.  Even though every objective outside look at the economy doesn't place Stockton/Modesto and Fresno/Bakersfield in the same "state," important economic development and planning organizations at the state level (like this and this) continue to lump them together and exclude the North San Joaquin Valley from its true economic region. 

It's up to the North San Joaquin Valley communities to redefine themselves and organize themselves in ways to more effectively engage as a cohesive region with growing linkages to the Bay Area and Sacramento. 

Here is another view from the study.  The data is 2006-10 flows, so the linkages have only grown. 

Wednesday, February 1, 2017

Economic Forecast: Slowdown Not a Downturn

Headline on the front page of today's Stockton Record could cause some confusion and concern.

The forecast is for a slowdown in growth with higher uncertainty, which yes does mean higher recession risk in future years.  Preliminary data suggests slower growth has already arrived in Stockton.  Our forecast for jobs in the area is pictured below.  Not a downturn, but it is a downgrade compared to our previous forecast and a definite slowdown from rapid growth of recent years.

We have also reduced our forecast of housing starts which has been too optimistic in recent years.  It's still solid growth from current levels, but maxes out at about half of 2002-05 housing production.

The full forecast is available here,

Sunday, January 29, 2017

For affordable housing, should we subsidize rent payments or subsidize the construction of rent restricted units?

Today's Sacramento Bee includes an op-ed touting AB 71, which would end the mortgage interest reduction for second homes and redirect the estimated $300 million towards tax credits that finance construction of rent-restricted affordable housing units.

Of the various funding mechanisms for affordable housing currently proposed in the legislature, I prefer the AB 71 approach to some of the other proposals, such as a transfer tax on real estate transactions.  But given the enormity of California's affordable housing problem, we need to allocate these funds to the most efficient approaches.  I'm not sure tax credits for affordable housing construction are it.

While the op-ed calls this approach "proven," tax credit financed affordable housing actually has a lot of critics in economic and policy research.  The costs of projects financed in this way are high, there is evidence the program "crowds out" other housing invesment and thus does not increase housing units by as much as it appears.  In addition, not all of the benefits are received by low-income households - it creates benefits for high-income households who buy the tax credits and financial professionals who bundle and market them.

Thus, there are many economists who believe subsidizing rent vouchers (section 8) is a more effective approach.  A recent op-ed by Zillow Chief Economist Stan Humphries captures this line of thinking.  He argues that we should eliminate tax credit programs and mortgage interest deductions and redirect those funds to rent vouchers that reach more households and allows them more flexibility about where they live and do not lock them into a specific unit to receive a subsidy.

The summary of the Governor's proposed budget has some interesting data on the cost of building tax-credit subsidized affordable housing in California.  In the housing chapter it states, "Total development costs average $332,000 per unit for the construction of new affordable units, which limits the number of units that can be built with limited resources."

That prompted me to take a quick look at the average cost of providing affordable housing in California's largest county, Los Angeles.  According to the Governor's budget, it cost $372,000 per unit to build affordable housing in LA County between 2011-15.  Typically, the tax credits provide 70% of project financing (the rest private investment), thus $300 million in funding from AB 71 could finance up to $428 mil. in affordable housing construction or about 1,150 units per year at LA Costs.

What are the costs of providing rent vouchers in LA?  Note there are also waiting lists for rent vouchers, just as there are for placement in affordable housing units.   According to the Housing Authority of LA, $465 million in annual funding serves 45,000 families, an annual housing subsidy of about $10,333 per family.  At these costs, directing AB 71's $300 million towards rent subsidies would help 29,000 families per year, about 25 times the number of families that could move into new affordable units each year at the same funding level.  Of course, the tax credit financed units stay in the affordable housing stock year after year and the buildings are required to remain rented as affordable units for 30 years after construction.  So after 25-30 years, there would be a similar amount of low-income families helped each year by the same continuous funding stream - but why wait decades when you can reach more people now with rent subsidies that provide them with more flexibility about where they can live.

Looking at these numbers and the other policy arguments, I would suggest the state look towards increased funding of rent subsidies rather than subsidizing construction of affordable units.  To increase housing supply, we need policies that reduce the cost of constructing all types of housing, both market rate and affordable.

Thursday, January 12, 2017

What Should My Family Do With Our L.L. Bean Gift Cards After Trump's Latest Tweet?

I have a small personal connection to one of President-elect Trump's latest tweets, and it also provides a good discussion topic for my students.
It all started with a consumer boycott advocated by a group called "Grab Your Wallet" because corporate board member Linda Bean has been an active Trump donor and supporter who just got in trouble with the FEC because she didn't properly register the "Make Maine Great Again" PAC she founded as a super-PAC and thus exceeded legal political contribution limits.  L.L. Bean has responded with this statement

I have L.L. Bean gift cards in my wallet right next to my L.L. Bean Visa which has some reward points built up that I could spend.*  My 19-year old college student daughter who has been actively protesting Trump also has gift cards, and I expect I will learn that she has joined the L.L. Bean consumer boycott when I speak to her later tonight.

So what should she do with the gift card?  Burn it?

My suggestion is that she spend it right away on a hat or warm boots she could use for the protest march outside the Chicago Trump tower she will be attending.  Why?

L.L. Bean already has the money.  Thus, the gift cards and our Visa reward points are a liability to the company, so if we cut them up we have given them cash for nothing in return.  Ironically, the most harmful thing she can do to L.L. Bean is to buy something with the gift card right away.  I suggest she buys their most popular products so all the new Trump supporters making their first purchase from L.L. Bean today face a depleted inventory and poor selection.

If you are a holding a L.L. Bean gift card and want to support the company as Trump suggests, it could be the best way to support them is to throw it away.

Of course, there are other more serious issues embedded in this tweet/controversy.

For the most part, I think the company's statement from a few days ago is fine and I certainly see no reason to boycott them.  However, I noticed the end of their statement asks the group "Grab Your Wallet" end its "misguided" boycott.  But today, the President-elect gave them an endorsement for political reasons, and specifically directed his supporters to buy their products.  I have to wonder if L.L. Bean CEO Shawn Gorman also thinks Trump's tweet is misguided and will ask him to withdraw it as well.  I won't hold my breath on that one, especially since they are probably setting January sales records right now thanks to the President-Elect.  I can certainly understand why they would not want to upset or embarrass President-elect Trump by refusing his assistance at this point.

And that leads to what is the worst part of this entire episode.  The President-Elect is personally using the power of his office to promote products and companies connected to his political supporters.  And this is coming the morning after he had a news conference that was supposed to show his understanding of conflicts of interest, separate business from his public life.  While it is true that Presidents of all parties have rewarded political supporters in various ways, Trump's corporate intervention is taking it to a new and dangerous level.  So much for draining the swamp...  

Finally, I would note that Maine is a critical swing state that has political value to Trump far beyond what its 4 electoral votes would suggest.  It also has a moderate Republican senator in Susan Collins who is seen as one of the Republicans most likely to defect from the Trump agenda on issues like Obamacare and others.  It seems that Trump's corporate interventions have primarily been to the advantage of companies headquartered in these critical locations.  California may be the largest state in the U.S., but I doubt it will receive it's proportional share of President Trump's corporate help.

* Why do we have so much L.L. Bean stuff?  I married into a Freeport Maine family with L.L. Bean roots and loyalties.  My wife's grandparents worked in the Bean shoe factories and later the retail store their entire lives, and lived in a modest house a few blocks away until they passed away about a decade ago.  Her grandfather was the fire chief at the old station a few blocks away from famous L.L. Bean store and warehouse complex.  My mother-in-law grew up working in the store and was childhood friends with some of the family members who have gone on to great wealth running the family-owned company.    My brother-in-law and sister-in-law founded and operated a bed and breakfast walking distance from the Bean's complex catering to their tourist/shoppers until they sold it a few years ago.  Thus, my closets are full of many of their products, and I have eaten Linda Bean's "perfect" lobster rolls at her restaurant, etc.  I haven't talked to any of my immediate or extended family members about this episode yet, but I am sure the next discussion will be more lively than usual.

Monday, January 2, 2017

Final WaterFix EIR/EIS Shifts Incremental Water Supplies from Central Valley Project (Farms) to State Water Project (Cities)

I spent some of my holiday break reviewing the recently released Final EIR/EIS for the California WaterFix.  My goodness, that is a long and boring report even when you are just skimming key chapters and tables.  However, I did find one important change from the 2015 Revised Draft EIR/EIS.
Compared to No Action, building the WaterFix is now projected to increase water supply to the State Water Project by an average of 186,000 acre feet per year, and decrease water supply to Central Valley Project south of Delta users by 14,000 acre feet per year.  While this is a slight decrease from the total exports estimated in the 2015 draft EIR, it is a large change in the distribution between agricultural and urban users.  The numbers in the table below are from Table 5-12 in the Final EIR/EIS and Table B1-3 of the 2015 Revised Draft EIR/EIS.  The Final EIR/EIS only presents one scenario, eliminating the range from earlier drafts.

Change in Annual Average Water Supply From WaterFix Compared to No Action Alternative (acre feet)
Final EIR/EIS  Draft RDEIR/RDEIS High Scenario Draft RDEIR/RDEIS Low Scenario
Total SWP South of Delta 186,000 398,000 -97,000
Total CVP South of Delta -14,000 106,000 66,000
Combined 172,000 504,000 -31,000

I don't have any insight into why the CVP/SWP distribution changed, but these modeling results would seem to set the stage for the what I (and others) have long anticipated.  CVP agricultural contractors will drop out of the tunnels/WaterFix due to the cost and minimal water yield.

The tunnels are more financially feasible if all the incremental water goes to the urban-dominated State Water Project, but they still represent a very poor return on investment for urban water users for the $16+ billion in capital cost: only about 10,000 acre feet of annual water supply per $1 billion in capital investment.

Metropolitan Water District is still telling their board that they won't pay more than 25-30% of the tunnels cost. Realistically, I think the only way the tunnels are built is as an urban project - with MWD probably paying about 90% of the cost.  Maybe now that we have a final EIR/EIS, we can finally see a realistic financial plan and an honest assessment of project feasibility.

1/3 10AM Table corrected:  An observant reader let me know that I reversed CVP and SWP in the table.  They also told me not to put too much stock in these modeling results which depend on many things that remain in flux.

Wednesday, December 7, 2016

Income Growth Very Strong Across all Northern California Metro Areas in 2015, But Large Disparities Between the Metros Remain

The Northern California mega-region ranked extremely high in per-capita income growth in 2015 according to the latest data from the BEA.  As shown in the table below, 10 out of the 11 metro areas ranked in the top 10% of the 382 metropolitan areas in the U.S. for growth in per capita income, and even the lowest ranked area, Merced, was in the top 20% of the U.S.

The table shows huge disparity in per capita income across the region, and if you dig deeper in the data you can also see big changes in the composition.  One thing they all have in common is that at least some of the growth is radiating out of the income-generating engine of Silicon Valley.  Between 2013 and 2015, the net change to the "adjustment for residence" (wages earned in one metro area by a resident of another) in Santa Clara County was -$8.1 billion.  The largest share of that commuter income fell into San Francisco and the East Bay, but these commuter gains are also driving a large share of income growth in places like Modesto.    

2015 percap income U.S. rank 2014 % change 2015 % change U.S. rank
U.S. 48,112 -- 4.4 3.7 --
Salinas, CA 49,836 60 3.9 7.3 3
Vallejo-Fairfield, CA 44,504 122 3.3 7.0 5
Napa, CA 61,483 13 6.0 6.9 6
Santa Rosa, CA 53,520 33 4.9 6.7 7
San Jose-Sunnyvale-Santa Clara, CA 81,592 3 7.4 6.6 8
Stockton-Lodi, CA 38,769 252 4.2 6.3 13
San Francisco-Oakland-Hayward, CA 79,206 4 6.1 6.3 15
Yuba City, CA 39,216 241 2.8 6.2 17
Modesto, CA 39,445 237 6.5 5.6 21
Sacramento--Roseville--Arden-Arcade, CA 49,639 63 4.6 5.2 34
Fresno, CA 38,323 264 4.8 5.1 37
Merced, CA 36,185 317 5.2 4.7 68

Another big difference between the inland areas and Silicon Valley was the large importance of government transfer payments (primarily in the form of health insurance subsidies through Obamacare), as well as government and healthcare employment to income growth in the Central Valley.  Since so much healthcare spending growth is related to government programs, I have combined transfer payments, and earnings from government and healthcare employment in the table below.  As shown in the table below, there is a stark contrast between the metro areas. 

Share of 2013-15 income growth from government transfer payments, and wages from government and healthcare jobs.
Merced 58.2%
Stockton-Lodi 54.3%
Sacramento-Roseville 48.7%
Modesto 41.6%
San Francisco-Oakland 19.0%
San Jose 15.7%
Merced and Stockton have particularly high growth because of expansions at UC-Merced, and the new CA Healthcare Facility for corrections in Stockton.  But the common element of all of these is that at least half of the total is due to Obamacare's expansion of Medi-Cal and private insurance subsidies.

While we don't know when or how much healthcare will change as a result of the election, it is clear that the economic impacts will be felt the most in the Central Valley.  

Thursday, November 10, 2016

Thoughts on the Economy and President Trump

Below is what I wrote in the Center's economic forecast about 6 weeks ago.  It still reflects my thoughts.

If Donald Trump is elected, the near term economic effects are highly uncertain. If he were to follow through on promises to impose tariffs on certain imported goods, threaten leaving the World Trade Organization, and restrict immigration, a Trump presidency would have negative effects on both the U.S. and global economy. However, other parts of Donald Trump’s proposals could stimulate the U.S. economy in the near-term and he is likely to want to do what he can to give the economy an immediate boost so that voters can feel the effect of his election. For example, he proposes a large tax cut, an even larger investment in infrastructure than Clinton, increased military spending without any offsetting proposals to significantly reduce government spending in other areas. If Congress were to go along with these elements of the plan, the economy would receive a near-term jolt from increased deficit spending while the federal debt would grow substantially over time. While stimulative in the short-run, the increase to the deficit will create long-run problems for the U.S. economy, especially considering that the current deficit is already very high by historic standards. Overall, the near-term economic effects of a Trump presidency are highly uncertain between the effects of global instability and domestic stimulus. However, the long-term economic effects of his approach are seen as negative in the view of most economists. 
While polls show slightly more voters trust Donald Trump over Hillary Clinton to manage the economy, no modern Presidential candidate has received less support from professional economists than Trump. Leading Republican economists who have consistently served as advisors to Republican Presidents, such as Martin Feldstein and Greg Mankiw, have publicly denounced Trump’s economic platform. Trump placed third behind Clinton and Libertarian Gary Johnson in a poll of the National Association of Business Economists. The Economist magazine lists his potential election as one of the top threats to the global economy. Trump certainly did not win over economists during the first Presidential debate when he criticized highly-respected Fed Chair Janet Yellen for “playing politics” with interest rates, raising concerns that he could try to reduce the independence of the Federal Reserve. 
I should note that the last forecast assumed a Clinton victory, so there will be changes in our January forecast.  By then, we may have a better idea of how great the potential is for domestic stimulus in the near-term.  A large tax cut seems a certainty, but will the Republican Congress go along with a big-spending Trump infrastructure plan?  We may also have a better idea of the speed and extent of unwinding Obamacare; protectionist, anti-trade policies; and foreign relations.  One thing is clear, the uncertainty over the 2017-18 economic outlook is much higher than it was a few days ago.

As for the Valley Economy, there are a few additional issues that loom large.  First, repealing Obamacare has the potential to have some significant negative economic effects in the Valley - you will be hard pressed to find a region that has seen a bigger change in the number of insured individuals and overall dollars flowing into healthcare.  Health has been one of the fastest growing sectors of the Valley economy in regional years, and this could slow substantially.

The agriculture sector could be hurt by a much feared "trade war."  If the U.S. starts implementing tariffs on manufactured goods as Trump has threatened, U.S. agricultural products would be a likely target for retaliation from trading partners.  Immigration changes could also affect agricultural labor markets.  The industry is already facing serious labor cost challenges from rising minimum wages and overtime rules, but a sudden change to immigration policy could hit the agricultural labor markets even sooner.  Some isolated parts of the Valley ag might see some benefits from relaxed environmental protection but the impact of these policies are actually much smaller than the political rhetoric around them suggests.  The larger industry-wide issues of trade and labor will be more impactful.

Finally, will the Valley see any of the much-hyped infrastructure wave.  Perhaps.  Tops on my list would be converting highway 99 to an interstate highway with a series of significant upgrades.


Wednesday, September 14, 2016

How can a $6.5 billion farm subsidy to Central Valley farmers provide no benefit to Valley farms and the Valley economy? When it is used to subsidize the delta tunnels.

For my detailed comments on last fall's Brattle analysis,  reported by the AP todaysee the memo I wrote that is posted on Restore the Delta's website.  Restore the Delta surprised me late last week by sending me a copy of this report and related emails from their PRA request and asked for my thoughts.  I wrote the comments memo over the weekend, and gave them permission to distribute it with the report.

If you have followed this blog over the years, it should be obvious that I was not at all surprised by the findings that the tunnels' are a bad deal for farmers - even if there is a enormous federal subsidy for costs allocated to the Central Valley Project.  The benefit-cost report I published last month statedIf only the benefits and costs to water exporters who would pay for the tunnels are considered the costs still exceed benefits by more than $7 billion in the most optimistic scenario.”  

The big surprise to me in the Brattle report, was that it explicitly stated the need for federal subsidies, and then openly advocated for additional state subsidies. Coming from a state consultant, that is very newsworthy, especially given 10 years of public denials that there would be any public subsidies.  In addition to the draft report RTD released today, I saw several similar drafts in the PRA documents that went back and forth between the consultants and the state last fall.  The only substantive difference I detected in these drafts was the section with the weak rationalization of state taxpayer subsidies expanded in later drafts.  So it seems pretty obvious to me that the state sponsors were pushing the consultant to find a solid argument for state taxpayer subsidies.  However, the consultant was unable to develop a compelling case despite their best efforts, because there simply isn't one.

It is important to realize that even if there is a combined $6.5 billion in federal and state taxpayer subsidies for agriculture's costs of the tunnels, the net benefit to farmers who would receive water from the tunnels is still zero.  Add in the negative impacts on Delta farmers, and some risks for other farmers upstream from the Delta, and the tunnels are clearly a bad deal for the overall Valley economy.  Why no net benefit?  The subsidy would not pay all of agriculture's cost share for the tunnels - they are still responsible for $3-4 billion in direct payments for the tunnels even if the subsidy is $6.5 billion.  Thus, the billions in costs that they would still pay consumes all of any water benefits they would get from the tunnels.

The Valley economy has many, many needs.  It breaks my heart to think that anyone in government would contemplate a $6.5 billion subsidy to Valley agriculture that provides no net benefit to the Valley economy.  If such a subsidy were to happen, it would be a tragic example of ineffective and wasteful government.  If the government feels compelled to spend billions in industry subsidies in the Valley, I would suggest spending a much smaller amount to entice some other industries that would diversify the economy and create good paying jobs.  If a subsidy proposal is ever formalized, every mayor in the Valley should oppose it and offer up an alternative economic development package that is much cheaper and does more for their constituents.

Three additional comments that occurred to me this evening as I read the AP report and some reactions to it.

1.  Why did I say $6.5 billion in subsidy, when the AP and report only quotes $3.9 billion from the study?  Two reasons:  First, the $3.9 billion figure in the report is a discounted present value, so I have converted it to a $4.6 billion undiscounted value that is comparable to the estimated $16 billion construction cost.  The other $1.9 billion is the amount of additional subsidy that would be needed to get the tunnels break even for farmers, and it is the reason for the extended discussion of additional subsidies for the project.  So while the report does not assume a specific amount for state subsidies, the minimum amount of state subsidy the consultant is trying to justify is pretty clear.  The AP reporter is just being careful to quote exactly what the report said about a federal subsidy, and she also notes that agriculture still comes up short.

2.  Does Californians For Water Security have a secret financial plan for the tunnels?  CWS's response reminds me a little of Donald Trump's secret plan to defeat ISIS.  They said, the draft report "doesn't account for the latest thinking on financing the project."  So, what exactly is the latest thinking?  Please inform everyone.  What exactly is the plan?

If there was an actual finance plan for the tunnels, this "outdated report" wouldn't be so newsworthy. Tunnel advocates have no one to blame but themselves for not putting out a financial plan after 10 years.  An information vacuum will be filled, and this is the best information available.

3.  Doug Obegi's comments on the report are well worth reading.  He highlights some additional points that I didn't discuss, and explains some other points in a different way that may be more understandable to some people.

Friday, September 9, 2016

I wonder if all Modesto residents are really opposed to a regional airport?

Through the Center of Business and Policy Research, I have been involved in studies of the North San Joaquin Valley which have identified opportunities for regional cooperation to improve economic development.  One of the opportunities for regional cooperation is regional transportation infrastructure, such as regional efforts to improve air service - perhaps by combining resources through a regional airport - as well as regional efforts to improve rail transportation, transit and more.

Thus, this article from Jeff Jardine in the Modesto Bee,, a few weeks ago disapointed me.  It quotes a number of folks in the Modesto area who dislike the concept of a regional airport and shows how hard it will be to really get people in the North San Joaquin Valley to see the benefits of greater regional cooperation and identity.

The article rejects the idea of regional cooperation on an airport, and stokes unproductive regional rivalry by suggesting that people like me who suggest the concept of a regional airport are just trying to help Stockton to Modesto's detriment.  It ignores the impact of subsidizing an airport on the city of Modesto's budget, and whether such ventures are better handled at the County level or through multi-jurisdictional JPAs.  It defies location theory by suggesting locations in Merced or Modesto a few miles from highway 99 is a better location for a regional airport than adjacent to I-5 and 99 south of Stockton, arguing that it is more important to be far away from competitors than it is to be close and convenient for potential customers.

Honestly, I don't think explicit cooperation or support from the rest of the North San Joaquin Valley is necessary for the Stockton airport to develop into a regional service center.  If it stays on its current course of expanding service, I think consumers across the NSJV region will vote with their feet and wallets over time.

In the long-run, I think the regional concept around the airport could work not just because of economies of scale and efficiency, but it could also be valuable in trying to develop a name that doesn't include the words Stockton and Modesto and use it as the basis for a new regional brand with fewer negative associations to outsiders than San Joaquin Valley, Stockton, etc.. I am not a branding guy, but I know enough that a regional brand is most likely to stick if it is authentic and connected to an actual thing like an airport.  So, why not a regional airport in the NSJV that is not called Stockton-Modesto Regional but something like "NorCal Crossroads Airport" or "NorCal Gateway Airport"  or "Zinfandel Airport" or many much better ideas that real marketing and branding experts can come up with.  Now that is probably pushing an unpopular idea way too far, but it is a thought I have had.

Thursday, September 1, 2016

Farm Revenue Drops as Labor Costs Rise: Is the Era of Record Farm Profits Over?

Two interesting news stories about California agriculture this week.  First, initial estimates for 2015 farm revenue show revenues dropped sharply by $9 billion in 2015 compared to 2014.  Second, a bill that would align overtime regulations for farm laborers with all other workers passed the legislature and is on its way to Governor Brown.  If the Governor signs it, this will increase costs for farmers and comes just after the state approved large increases to the minimum wage that will likely have even bigger impacts on farm costs.

A couple of graphs help put the news in perspective.  The first shows total revenue and the net income of farms in California over the past 20 years according to the USDA data series released this week.  The data is adjusted for inflation, all values in 2009 dollars.  As the graph shows, farm revenue has increased sharply since 2011, and profits (net income) for the period of 2011-14 were at all time highs.  While the 2015 results are down sharply from the previous year, they still look very good from this historical perspective.  Expectations are for another decline in 2016, despite much less fallowing from drought.  If the 2016 drop isn't too large, it may just be that farming revenue is returning back to trend growth after an anomalous 2011-14 period were prices were unsustainably high, and that nut prices finally came down in response to a decade of massive increases in production. 

The next graph only goes until 2014, and shows labor costs and net income as a percentage of total farm revenue.  In 2014, labor costs (the sum of farm employees and contract labor costs) was about 32% of California farm revenue, making it the largest cost category for California agriculture.  This percentage varies significantly from crop to crop, with the highest labor costs for vegetables and fruits and the lowest for field crops.

Historically, profit margins have been about 25% and labor costs about 35% but there are big fluctuations as farm revenue can be volatile.  What will big changes in labor costs due to minimum wage and overtime regulations do to this picture.  If nothing else changes (meaning farmers did not adjust their labor usage, crop choice, and technology as labor costs grow), the minimum wage increase and overtime regulation would likely push the labor share up to nearly 50% of revenue, and profit margins would drop to about 15%. 

Both numbers would be at or near records. That's a major shift, certainly enough to drive substantial changes in agricultural practices.  There is going to be a lot of interest in labor-saving or productivity enhancing capital and technology investments in the agriculture sector over the next decade.  That will reduce jobs, but should lead to better, higher-paying jobs. 

These are big changes for the Valley economy, and I think the changes will be mostly positive.  However, I am concerned that the changes will be too much, too fast for Valley agriculture - especially as revenue seems to be coming back to normal.

So what should Governor Brown do?  I am very sympathetic to the overtime rule and aligning labor standards across industry.  I don't see how the current rules can be seen as anything but discriminatory, so my views are the same as they were in this 2010 post when the legislature sent a similar bill to Governor Schwarzenneger.

Having said that, I was alarmed that the minimum wage increase passed this fall did not allow for regional variation in the state like was done in Oregon.  In my view, $15 per hour is too high for places like Fresno and Redding even though it may make sense in the Bay Area.  There is a chance that the legislature could revisit this issue before the largest increases hit, and I would encourage them to make the $1 annual increases that begin in two years, 50 cent increases in inland regions so that the final phased in minimum wage is $12.50 not $15 in the Valley. 

I am not an expert in the political process and how negotiation between the Governor and the legislature work.  I do know the outcome I would eventually like to see:  a) minimum wage increase for the Valley adjusted from $15 to $12.50, and b) farmworker overtime regulations normalized to be aligned with other industries.

Thursday, August 25, 2016

It Is Strange To Be Accused of Bias By WaterFix Supporters for Following The Information in Their Own Documents and Applications for Project Approval

The response from opponents to the benefit-cost report is both predictable and a little bit strange.

Someone from the Department of Water Resources criticizes it for not using the "declining baseline" of water exports, and the pro-tunnels group "Californians for Water Security" says that we "fail to acknowledge economic losses of future water cutbacks without project."

This criticism stems from the fact that I followed their documents.  In essence, they are saying that a good analysis would make stuff up that is completely inconsistent with the official documents the WaterFix has created to support its applications for regulatory approval.

It seems that in the opinion of Californians for Water Security, and Department of Water Resources' spokespeople, an unbiased benefit-cost analysis would make the following unsupportable and speculative assumptions.

  • Future environmental restrictions on water exports can only affect the no-tunnel scenario, and that the WaterFix is somehow immune.
  • If future environmental restrictions were to reduce water exports, it would have no environmental benefit to society, only costs to water exporters.    
Both of these are false, and addressed in the report.  Any reasonable argument to support the first assumption went away with the change in the proposal from BDCP to WaterFix.  Water operations could decreae in the future in response to environmental conditions and regulations with and without the WaterFix.  The benefit-cost analysis correctly focuses on the incremental change in water supply with and without the tunnels.  There is no reason to believe the incremental supply with and without would be any different even if future regulations are tighter.

The second assumption that these potential environmental regulations would only have costs but not offsetting environmental benefits is simply false.       

But this is a silly debate with media spokespeople.  There is only one reasonable response for project proponents.  Follow your own guidelines and repeated promises, and complete your own benefit-cost analysis of the WaterFix that is integrated and consistent with the environmental documents.

In fact, one of the goals of doing this report is to put some pressure on the state and project proponents to put their benefit-cost analysis on the table like they promised to do last year.  Then we could compare the assumptions, the points of consistency and inconsistency with the environmental documents, and have a real informed discussion about the merits of the WaterFix proposal.  

Wednesday, August 24, 2016

Benefit-Cost Analysis of the WaterFix

Earlier today, the Center released a benefit-cost analysis of the California Water Fix.  Last year, state officials said they would release their own benefit-cost analysis in August 2015, but it is now a year later and nothing has been forthcoming.  In this analysis, I would describe the "optimistic" scenario as my best estimate of what I think DWR's benefit-cost analysis would look - based on previous work done by their consultants for the tunnels when they were part of the BDCP.  The "base" scenario reflects what I believe are more realistic values, and in both cases the WaterFix has benefits that are far less than costs.

Since the benefit-cost ratio for the optimistic scenario is so low, it did not seem necessary to consider a pessimistic scenario which would consider possibilities of higher costs or that the tunnels created greater environmental damage than predicted in the proponents' documents.  While 23 cents of benefit per dollar of cost is bad, the reality could be even worse.

A link to the full report and a summary table of results is below.

Present Value of Benefits and Costs of the California WaterFix. 

2014 dollars, 3.5% real discount rate, 15 years of construction, and 100 years of operation. 

Base scenario
Optimistic Scenario
Export Water Supply
Export Water Quality
Earthquake Risk Reduction
Total Benefits
Construction and Mitigation
Operation and Maintenance
In-Delta Municipal
In-Delta Agriculture
In-Delta Transportation
Total Costs
Net Benefit
Benefit/Cost ratio