Explaining Southern California's economy

Visual Aid: Are falling gas prices telling us bad things about the economy?

I'm all about gas prices today, having already posted on the topic here and here. The price of gas is falling nationally, but there are some unusual things about how that's happening. I got the above chart from GasBuddy.com — it shows gas-price fluctutations over the past six years. There are two big spikes: in the summer of 2008, when the price got above $4 per gallon; and...the past spring, when the price climbed over $3.87 per gallon. One big difference between then and now: in 2011, we have 9.1 national unemployment. In 2008, in was under 6 percent. 

I've highlighted a stable period between the peaks. I think you have to factor in unrest in the Middle East when you look at the price increase in late 2010 and much of 2011. But what we're seeing now is the price of gas responding to a national economic forecast that expects sluggish growth and continued high unemployment.

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Be thankful for expensive gas — and a gas tax?

Matt Yglesias makes a useful point about gas prices that I think applies to all of us in car-mad Southern California: 

It’s important to see that under present circumstances, anything that succeeds in promoting robust economic recovery would raise the price of gasoline….After all, unemployment’s 9.1 percent. If it fell to 7 percent, that would mean a large increase in the share of Americans who are commuting to work on a daily basis. And the United States of America is both a large country, and one in which commuters consume an unusually large quantity of gasoline as they go about their business. Consequently, 2.1 percent of the American workforce shifting from unemployed to employed means a meaningful increase in the consumption of gasoline.

The global oil markets are complex and don't always make sense at the pump. The price of oil falls, but the price of gas remains high. Or at least higher than we think it should be. I won't even get into the various issues involved, which range from refining capacity to OPEC production planning. There's a reason why some economists spend their entire careers looking at this single commodity. 

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Reportings: Jumbo loans shrink; broken tax system; Suskind disappoints; gas ain't cheap

Los Angeles will be hit harder than the rest of the country by decision to downsize jumbo loans that the federal government guarantees, from $729,750 to $625,500. "Real estate professionals are bracing for the policy change to hit California hard, as buyers begin learning that they may no longer be able to afford the higher-priced homes they had been considering. The California Assn. of Realtors estimates that more than 30,000 California buyers statewide will face bigger down payments, higher mortgage rates and stricter requirements under the adjustment." (LAT)

 

Harsh words for taxes, from John Steele Gordon in of all place the Wall Street Journal: "Before the modern era…the federal tax system was manifestly unfair by any reasonable standard, grossly biased in favor of the well off. Ironically, attempting to fix that unfairness is what has brought us to the present moment, with a federal tax system that is grotesquely complex, often arbitrary, and corrupted by mutual back-scratching between members of Congress and influential lobbyists." (WSJ)

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Visual Aid: What's dragging down the mortgage market

There are plenty of homes for sales, both in California and the nation. But new homes sales fell again in August, continuing a six-month trend of decline. What gives? Interest rates are at historic lows, and Federal Reserve monetary policy for the past two years has been designed to keep them there — and drive them even lower. The above chart, from the Federal Reserve Bank of Cleveland, is telling. To sell a house, you need three things: a seller, a buyer — and a bank that will write a mortgage. What we have right now is a distinct absence of banks willing to make loans, or only willing to make loans on restrictive terms. Until that changes, we're looking at below-average mortgage-origination levels for a while.

Also note that refinancing originations don't look too good, either. This is proof that plenty of borrowers are too far underwater in their homes to make refinancing an option. 

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Bullet Points: Is the grocery workers' new contract a good deal?

Details on the new contract that the UFCW and the major California grocery chains negotiated — and that the union's membership has now approved — are still somewhat sketchy. I'm going to try to find out exactly what the numbers are, but in the meantime, here's a quick breakdown. 

  • According to the LA Times, UFCW members will now pay $7/week for individual health care and $15/week for family care, beginning next April. My understanding was that when a strike was in the offing, the chains wanted $9 and $23, for individuals and families respectively. But prior to this contract most employees were paying $0 for their health care, although so-called "second tier" workers — those hired after the strike in 2004 —were paying $7/$15. So my reading of the new contract is that ALL workers are now contributing to the fund. So while the stores didn't get the contributions they wanted, they did get everyone to contribute the pot, which means that...
  • ...the stores apprently don't have to up their contribution to the health care fund to insure its solvency. The fund had hit trouble because it had been running a deficit, tapping its reserve to cover health costs while operating under the terms of the 2007 contract. Back in 2007, the union and the chains had worked out a deal whereby the stores would be able to reduce their contribution to the health fund, from $3-4/hour to $2-3/hour, in exchange for not adhering to the provisions of the two-tier hiring structure. It bugged me that the union had in effect turned over what was a $260 million health-fund surplus to the stores, but a spokesman for the UFCW pointed out that this enabled the union to get many more families insured.
  • So under new contract, the UFCW's entire membership is insured, and although everyone is contributing. their contributions look like 2007 amounts, rather than 2011 numbers. That's a qualified win because the stores have successfully shifted a significant burden of health costs to workers who were formerly paying nothing. It looks as if they're "subsidizing" this with a wage increase. But there's a problem here, which is that health care costs are rising at a torrid rarte, much faster than wages can keep up.
  • The union was up against a very weak labor market and the threat from some of the chains to close stores. That probably took away some incentive to strike. But if you look at the cost of the last strike, estimated at $2 billion for the stores — not to mention their market-share loses to newcomers and upstarts — you could argue that the chains were willing to spend somewhere between $2 and $8 per union member or family per week, by reducing what they orginally demanded as a health contribution, to avoid losing money and share again.

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