Explaining Southern California's economy

Will California ever choose right-to-work?

UPDATE: AirTalk did a great segment on this general topic today. UCLA Economics professor Lee Ohanian outlined a "new union" strategy that I've actually explored in the context of the auto industry and its negotiations with the United Auto Workers. The idea is basically for the unions, both public and private sector, to become partners and "solution providers" for employers -- labor consultants, if you will. Could be a way for unions to re-invent themselves, amid greatly increased global competition.

California is not a right-to-work state (and neither are any of the other, un-highlighted states in the chart above). What that means is that if you belong to a union in California, you can be required by the union to pay dues. Critics of unions argue that this excludes some people from certain workplaces -- the old “closed shop” distinction. If states want to opt for right-to-work instead, they need to enact a law that enables it. The last time this happened was in

Oklahoma 10 years ago. But much of the U.S. South is right-to-work. In practice, this has meant that manufacturers ranging from Boeing to Toyota have set up factories in states like South Carolina and Alabama.


These states haven’t escaped the national unemployment disaster, but they’re all doing better than California, which at 12 percent is second only to the living hell of American joblessness, Nevada (12.9 percent). LA County is in between, at about 12.5 percent. Other SoCal counties are far worse.

This has stoked a debate about whether California should pass a right-to-work law. Unions don’t like it (obviously) and one of the state’s Congressmen, Brad Sherman (a Democrat who represents the San Fernando Valley), introduced a bill last year that would repeal right-to-work nationwide. The whole thing is highly politically charged: The right considers unions a Democratic bastion and an obstacle to business; the left believes that allowing a swath of non-unionized operations to take hold means that workers will move to those states and drift away from the Democratic party. 

At a less pragmatic level, many Democrats also believe that businesses will exploit workers in right-to-work states, reducing the wages and benefits that collective bargaining has brought to unionized workforces. 

There is some evidence that RTW laws do attract workers and lead to an overall uptick in earnings. The conservative/libertarian economist Richard Vedder published his findings last year in the Cato Journal. You would expect his research to cut in the RTW direction (although libertarians are tormented on the issue), but the data make a case. An example:

Without exception, in all the estimations, a statistically significant positive relationship (usually at the 1 percent level) was observed between the presence of right-to-work laws and net migration. To be sure, the results indicate that right-to work was only one of several factors explaining migration—for example, there was strong out-migration from manufacturing-intensive states, and Americans as well moved into low tax states, while the climatic variables were relatively weak and not statistically significant. Nonetheless, the findings reinforce the view that people vote with their feet to move to freer labor market environments.

We’ve already had a preview of what the political debate over this economic issue might look like: collective bargaining rollbacks for public employees were a significant part of the 2011 protests in Wisconsin. In that context, labor economist Laura Dresser presented the anti-right-to-work case for NPR:

Dresser says most businesses look at more than just labor costs.

"The broadest and strongest evidence suggests that employers are looking for good workers — that takes good schools. They're looking for good infrastructure — that takes money for roads and rails. They're looking for cities where they can have suppliers and relationships with other businesses, and all of those things tend to happen in non-right-to-work states."

In addition, the most significant job growth over the past decade has been in states with high immigration. Dresser says that includes both right-to-work states and strong union states, such as New York and California.

So this one is just getting started. With no respite for California unemployment on the horizon, we could be spending more time debating it in the months to come.

Chart: Wikimedia Commons


Horrified by new bank fees? There’s always the credit union...


Last week, we posted a link on Facebook to a KPCC story about a hike in debit-card fees by Wells Fargo and asked for comments. What say yee, good folk of the banking-beleaguered Interwebs? Forty-three comments later, the results are in: people hate, hate, hate the idea of a fee of even $3 to use their debit card. 

You can’t blame them. Banks basically invented and marketed debit cards to generate higher profits by compelling customers to embrace electronic transactions. But that was then. Nowadays, big banks are doing whatever they can to restore the profits they’ve lost on credit cards and mortgages. Shareholders are demanding it. New regulations are also forcing banks to take a hit on overdraft fees, which means they need to get their money at the front door, so to speak, rather than the back.

Effectively, the era of big banks competing for business by waiving fees is coming to an end. Before the financial crisis, it was possible, even easy, to find a bank hungry for deposits that would allow you to keep next to nothing in your checking or savings account and still incur no fees. A big change from the good old days, when banks routinely charged fees for services.

Some people feel like they’re stuck with the banks, but as several of our Facebook comments demonstrated, they aren’t. Online banks with no brick-and-mortar operations are still an option, as are credit unions. Both are generally insured by the federal government up to certain limits, so your money is safe.

Another commenter argued (briefly) for a rudimentary financial strategy that actually keeps you off the hook for debit-card fees: Don’t use the debit card. Use a credit card instead and pay off the balance every month. This is savvy. You’re essentially borrowing money at 0 percent if you do this, while allowing your cash to sit in a savings account, earning interest. 

Rates are extremely low right now -- and will stay low for the next few years -- but they will eventually rise, so it’s worth it to see this approach in action. If you getting 1 percent on a savings account at, say, INGDirect, and you spend $500 on food during the month, you can pocket $5 on this piece of little-guy arbitrage. Sounds meager, but if interest rates move back into 4-5 percent territory, you can see some benefits -- $240-$300 per year. Obviously, you want to do this with a no-annual fee credit card. And you want to BE DISCIPLINED! Carrying a balance destroys this strategy, because even if you have a relatively low rate, it’s definitely going to be higher than what you earn on savings. 

Photo: Wikimedia Commons


Infrastructure bank: Good for Los Angeles – and the USA?

We won’t know until he actually gives the speech, but there’s been speculation that when President Obama lays out his jobs plan in September, he may resurrect the idea of establishing a national infrastructure bank.

What, you may ask, is an infrastructure bank? Well, it’s what it says it is: a public bank that invests in infrastructure, such as bridges, roads, rail lines, ports, and even energy projects and things like broadband capacity. Here’s how theWhite House presented the idea:

The Administration’s six year plan would invest $30 billion to found a National Infrastructure Bank (I-Bank).  The I-Bank would leverage this Federal investment by providing loans and grants to support individual projects and broader activities of significance to our Nation’s economic competitiveness.  For example, the Bank could support improvements in road and rail access to a West Coast port that benefit farmers in the Midwest, or a national effort to guarantee private loans made to help airlines purchase equipment in support of the next generation air traffic control system (NextGen).  A cornerstone of the I-Bank’s approach will be a rigorous project comparison method that transparently measures which projects offer the biggest “bang for the buck” to taxpayers and our economy.  This marks a substantial departure from the practice of funding projects based on more narrow considerations. 

If $30 billion sounds relatively modest, that’s because it is. It’s seed money, which the I-Bank could them use to attract private capital. And there's private capital out there. For example, Goldman Sachs runs a $10 billion infrastructure fund.

Leverage ratios for the I-Bank's initial $30 billion could vary, but let’s say it’s something like 25:1. That’s $750 billion to spend on projects that would put potentially thousands of currently unemployed Americans to work building stuff that would yield a long-term return in capital. Take it to 50:1 and you’re looking at $1.5 trillion.

The I-Bank would function something like a national venture-capital  firm -- albeit one that’s not necessarily interested in making huge returns off its investment, but rather by providing the basis for private sector investors to put their capital to work on infrastructure (and, not incidentally, create jobs). The tricky part would be in working out the relationship between the independent government committee that would oversee the fund -- and choose the projects that have the biggest bang for the buck -- and the private investors who might, you know, have their own ideas. Or have better ideas than politicans who want to steer money toward their constituents.

OK, now you know what it is. So how would it be very good for LA? Two reasons: first, because it would provide a means to accelerate development of Mayor Villaraigosa’s public transit goals; second, because it would enable private investors to get in on big freeway or port improvement projects. Now, you can see why there might be some wrangling over this. Mass-transit projects and freeway-improvement projects could benefit entirely different voting constituencies. This is where some -- but only some -- of the I-Bank debate has been concentrated.

In other respects, the I-Bank has caught the attention of supporters on both sides of the political spectrum, and in between. Hard-core free marketers don’t like it. But Reason Foundation’s Robert Poole -- whose experience with California and Los Angeles transportation is extensive -- sorta kinda does. Moderates and moderate conservatives, including Big Idea folks like Felix Rohatyn and Fareed Zakaria, love the plan, because it offers a tasty compromise: a public solution to both the unemployment problem and the crumbling-infrastructure problem that involves private money.

Robert Dove, a managing director at the Carlyle Group, a private equity firm, did a pretty convincing job of defining the way a national infrastructure bank would operate. Here's his Congressional testimony:

Congress should look at the infrastructure bank as a true bank that must make difficult credit decisions. The institution’s primary purpose is to lend to large projects with longterm maturities at a small margin over its borrowing cost. The bank would provide a project with a base of capital that could then attract, either at the same time or later, outside private investment that we need to support our nation’s infrastructure. The bank should cover its costs, but not operate as a profit-making venture. The purpose of the bank should be to utilize its expertise to attract additional investment from the private sector for public infrastructure priorities, rather than replacing existing funding from government institutions.

The point he makes at the end is important: the bank would bring money into the process that wouldn’t otherwise be there. It wouldn’t be a way to cut federal spending, but rather a means enable federal money to have a greater impact.

Photo: Wikimedia Commons


Southern California grocery strikes and disruptive innovation

Here’s a story we’re following closely at SCPR/KPCC: the possibility of a strike by grocery workers in Southern California: 62,000 of them, who work at Ralphs, Vons, and Albertsons stores. Over the weekend, the United Food and Commercial Workers union voted to authorize a strike -- which isn’t the same thing as going on strike. But it does set the stage.

The last time there was a strike, in 2003-04, it didn’t go well for the the major unionized chains. This from the LA Times:

The drawn-out negotiations has area grocery workers nervously recalling the bitter debate over wages and healthcare benefits that led them to the picket lines seven years ago. In fall 2003, the labor dispute led to a contentious 141-day strike and worker lockout that affected hundreds of California grocery stores.


Meet the new recession – same as the old recession? Or worse?


There’s been a fair amount of discussion lately about whether we’re headed for another recession. The last recession -- and I’m not going to call it the Great Recession for reasons that will be apparent in a second -- technically ended in June 2009, more than two years ago. 

If you live in Southern California, you could be forgiven for thinking that the recession didn’t end in 2009 and was in fact a Great Recession that’s still ongoing. California’s unemployment level is at 12 percent and Los Angeles County’s is at 12.4 (both have recently risen, according to statistics released by the BLS). 

But if you feel the recession is still in full swing, consider two things: actual data that points to a recovery since 2009 in some areas; and the business cycle.

Consider corporate profits, which have bounced back vigorously since the onset of the financial crisis. Here’s the LA Times:

Profits aren't rising solely because companies are making and selling more widgets to keep up with customer demand, which would be the case in a healthy, booming economy. Instead, companies are more profitable because it now costs less to make the same widget, often because far fewer workers are needed to make it.

Think it through: High unemployment and a credit crunch has meant that business can’t count on consumers ponying up to buy more stuff. In fact, businesses have created this problem themselves by playing defense and shedding workers. They aren’t paying a percentage of their pre-crisis workforce the money that it needs to buy what business makes. 

So businesses are streamlining productivity to reduce the costs involved with selling roughly the same amount of stuff to fewer people. It’s good for the bottom line -- and in theory when the economy does begin to recover more robustly and demand begins to grow at a faster clip, productivity gains will boost profits even higher.

Sadly, it’s looking more and more like that isn’t going to happen right away. The business cycle is going to dictate that the above-mentioned productivity gains be eroded by things like inflation, which is creeping back into the economy, and the ongoing unemployment problem. Want a double-edged sword? How about layoffs that juice corporate profits but take consumers out of the markets?  

Allow me to quote at some length from a Howard Gold piece at MarketWatch, on the new-recessionary views of economist Gary Shilling:

“I’m predicting another recession next year,” [Shilling] told me.

Not a double dip, he emphasized, because we’re already two years from the end of the last recession and 3 ½ years from the business cycle’s previous peak, in December 2007. Historically, he said, economic expansions last about three years, especially in long down cycles of the kind he thinks we’ve been in since 2000.

So, he’s looking for a brand new cyclical recession beginning in 2012.

Many Americans will be forgiven if they can’t see the difference between that and the recovery we’ve been experiencing.

That’s Shilling’s point. Usually, deep recessions like the one we just lived through are followed by strong snapbacks, like a growth slingshot.

This time, however, the recovery has been “distinctly subpar,” in his words. “As of the first quarter, ..real GDP is barely above its peak in the fourth quarter of 2007, whereas earlier recoveries were well above their previous tops 13 quarters later,” he wrote in a recent edition of his newsletter, Insight.

Translation: More than three years after the peak, we’re still not back to where we were.

Additional translation: After the epic stock market turmoil of the past few weeks, the chances of a new recession are increasing. The UCLA Anderson Forecast already said earlier this year that, for California, there was "no recovery in sight" for 2011. We may not even get the 1.7 percent employment growth that was predicted. That could mean unemployment that won't be reduced to even the current (high) national number of about 9 percent until -- Yikes! -- 2014.  

Photo: Wikimedia Commons