The Breakdown

Explaining Southern California's economy

Facebook Effect, we hardly knew ye!

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38542 full

Remember the so-called "Facebook Effect?" That was the tax windfall that California was expected to get as a result of the Facebook IPO creating a legion of overnight millionaires. It was identified back in January.

According the Mercury News, "Gov. Jerry Brown and state lawmakers in June approved a $91 billion budget that included $1.9 billion in expected tax revenue from Facebook employees striking it rich — a rare projection that helped stave off cuts to schools and programs for the sick, poor and disabled."

Now the LAO says that "a big chunk of the extra state revenue" — hundreds of millions — "resulting from the IPO won't materialize" if Facebook's share price doesn't reverse its current downward diving trend (it made a decent start today, ascending more than 8 percent in midday trading, but it's still way below its IPO opening price of $38).

The Mercury News points out that California has until November to see Facebook climb back to something that resembles its pre-IPO glory (the IPO itself was a disaster). That's when employees who can't now sell their shares will be able to do so. 

At Fox Business, Elizabeth MacDonald runs the numbers: "...California was betting on the shares sticking at $35 or higher. Last May, the state had bet the stock price would hit $42 by November, reaping $2.1 billion for the state, which faces a $15.7 billion budget deficit."

But it's an open question as to whether Facebook will be able to recover its buzz by November. At Betanews, Derrick Wlodarz anticipates an ominous, MySpace-esque fate for both Facebook and Twitter. Over the long haul, Facebook may very well be able to figure out a way to generate advertising revenue from its 500 million mobile users. But then again, a more agile suite of social services that work better on smartphones could come along and make Facebook look like the of the PC social-networking age.

No matter what happens, the news is bad for California. But it does remind us, once again, of a structural problem with the state's budget: relying too heavily on the incomes of the wealthy. I wrote about this in January:

In California, the wealthiest taxpayers now account for 22 percent of all income, up from around 10 percent in 1980. This messes with forecasting. When times are good, they're very good. When times are bad, the deficit grows and grows and spending cuts plus new taxes — as Brown has proposed — as required.

We were kind of excited about the Facebook Effect when it first became apparent. Even if you didn't like Facebook, if you lived in California you saw the benefit of having high-flying tech companies in the state's economic mix. For my part, as a critic of how Facebook makes money from the free labor of millions of users, I thought the Facebook Effect represented a form of payment for all that gratis exertion.

But this is yet another cautionary tale about counting on boffo stock-market riches to solve problems. California never should have been looking for Facebook's new millionaires to help dig us out of a budget hole.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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