Explaining Southern California's economy

California budget: If you think this year looks bad, just wait until 2012

California Governor Jerry Brown Unveils State Pension Reform Program

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California Governor Jerry Brown announces his public employee pension reform plan October 27, 2011 at the State Capitol in Sacramento, California. Gov. Brown proposed 12 major reforms for state and local pension systems that he claims would end abuses and reduce taypayer costs by billions of dollars.

It's unclear what sort of unicorns-and-moneybags fairyland that officials in California were living in when they projected a $500-billion surplus in the 2011-12 budget. Against 12-percent unemployment and exposure to the housing crisis that ranks right alongside Nevada and Florida, any surplus at all was political and economic wishful thinking. So now come the trigger cuts — $2 billion of 'em.

Education will bear the brunt of this, if lawmakers can't figure out how to dodge the cuts. Not that education hasn't already been pummeled: according to Education Week, K-12 statewide has endured $18 billion is cuts over the past five years. The University of California and Cal State systems will also take it on the chin. Education Week says that some districts are in better shape than others, based on budget planning. But there are some time bombs out there, such as San Diego Unified.

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How about higher taxes for everybody?

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The top of a form 1040 individual income tax return.

I'm generally a fan of NPR's Planet Money, but I'm a little perplexed by what one of its founders, Adam Davidson, has been writing since he took up residence at the New York Times Magazine.

This weekend, for example, he argued that the middle class needs to get over the idea that rich people and corporations should pay higher taxes. And while he runs the numbers quite well, the conclusion are, to say the least, troubling:

It serves the interest of both parties to argue about taxes on corporations and the wealthy because neither wants to discuss the alternative, which is where things get touchy. To solve our debt problems, we have to go to where the money is — the middle class. People who earn between $30,000 and $200,000 a year make a total of around $5 trillion and pay less than 10 percent of that in taxes (owing mostly to tax incentives and the fact that most families make less than $68,000, where larger tax rates begin). Increasing the middle-class tax burden an additional 8 percent, however, would actually have a bigger impact than taxing millionaires at 100 percent.

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It's a tough but manageable financial math problem. And America's middle class is actually a lot luckier than its counterparts in Greece, Spain or Ireland, who will be paying higher taxes while their countries' economies shrink, or stagnate. Even the Fed's dark forecasts anticipate that the U.S. economy will return to healthy growth (about 3 percent annually) within a couple of years. Unless we hold on to the fantasy that the solutions to our problems lie in the bank accounts of rich people and corporations.

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Inequality in America: The 'Great Divergence' explained

Sometimes, it's just so simple. What is the Occupy Movement protesting? That income and wealth gains have gone disproportionately to the top 1 percent. And how did this come about? Well, according to this recent paper from the San Francisco Fed, you can blame the "Great Divergence," which took place after the Great Convergence of the war years. And what caused the divergence? A failure of education:

Economists Lawrence Katz and Claudia Goldin argue that the educational system has failed to produce an adequate supply of skilled labor to keep up with the pace of technological change over the past 30 years. In contrast, remember that the Great Compression that took place in the early 1940s was essentially a reversal of this situation, where skilled labor was plentiful at a time when unskilled labor was in demand, flattening wages across the labor market. Today, employers are competing to hire highly skilled workers from a limited pool, creating a wage premium for those with better training and education; the result is the widening income gap across education groups. In addition, consider the impact of educational attainment on employability; in September 2011, the unemployment rate for those without a high school degree was 13 percent, but for those with a bachelor’s degree, the unemployment rate was 4.2 percent.

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