Business Update with Mark Lacter

How would sequestration affect Southern California's economy?

KPCC's business analyst Mark Lacter says sequestration wouldn't have a major impact on the Southland.

Steve Julian: As we head toward Friday's deadline on federal sequestration, we get an idea of how it'll affect Southern California's economy.  Mark, do we even know the answer?

Mark Lacter: You know, Washington can't even stage a full-blown fiscal emergency without there being mass confusion, Steve.  Obviously, this is not going to be good for the economy (they’re throwing around all kinds of scary numbers), although it's hard to know how bad it'll actually turn out to be.  It’s important to look at these numbers in the context of the overall state economy, which is huge.  We talk about all the Californians who are involved in the defense business (and that's more than 200,000 at last count), but when Pew Research added everything up it was just 2.8 percent of California's gross domestic product, which is not much.

Julian: Who's really behind the sabre rattling?

Lacter: Well, all sides, in various ways.  The White House has been trying to shake everybody up with concern about government programs and services that would be cut because of the sequestration, and in California it seems like a sizable list: funding for primary and secondary education, federal grants that support law enforcement, job training programs, clean air programs, public health programs, and so on.  A lot of the folks most vulnerable are the folks who are always vulnerable: poor people.  But, keep in mind that much of the federal funding that California receives is through programs that are exempt from sequestration.  L.A. County says that the cuts involve less than 1 percent of the federal revenue it receives.

Julian: But, what about delays at the airports?

Lacter: This is getting lots of attention because it’s one of the few government functions that involves direct contact with the public.  The concern is that air traffic control will slow down because not enough controllers will be on duty.  But furloughs would be phased in over a period of weeks, so if there are delays, they won’t start being felt for another few weeks.  And, here's one more thing for budget hawks to keep in mind: despite all the chatter about spending cuts, a majority of Americans believe that current spending levels on defense, health care, education, infrastructure, veterans benefits, food inspection - everything, in fact, except foreign aid - should be either maintained or increased (again, that's according to a Pew survey).  So, there appears to be a disconnect between what some in Congress would like to cut, and what most Americans would like to keep.

Julian: There’s another money issue on the local level.  What happens with L.A.'s budget if voters don't pass sales tax hike?  The vote's a week away.

Lacter: Very good question - and at this point, it's doubtful voters will want to raise the sales tax (it would go from 9 percent to 9-and-a-half percent).  None of the candidates running for mayor are in favor, the L.A. Times has editorialized against the measure, and as a practical matter, they're expecting a small turnout next Tuesday, which is normally a death knell for any proposed tax increase.  The problem is that if the measure does go down, the city of L.A. will be left with a budget deficit of more than $200 million, give or take (the tax money would have been used to pare down that shortfall).

Julian: If only there were a state parks system buried in city hall…

Lacter: I doubt anyone's sitting on THAT much money.  Now, budgets work in mysterious ways because revenues and expenses keep changing (just like our own budgets).  At any given time, a city as large as L.A.'s could find some extra money from a department that didn't spend everything it was owed.  But, it could work the other way if a department faces some unexpected cost.  In any event, moving around enough money to make up $200 million is a tall order, and – of course – they would have to do the same thing next year and the year after.  And, that comes on top of years of slashing staff and services.

Julian: Any of the candidates for mayor seem to have a remedy?

Lacter: They really don’t, other than to say that more jobs and a growing economy will generate more tax revenue.  But, that's really more of a hope than a promise, and it's based on projections that are considerably more optimistic than is warranted by the current recovery.  The only obvious answer is a cut in retirement and health benefits for city employees, and that's considered almost impossible politically.  So, the slog goes on.

Mark Lacter writes for Los Angeles Magazine and writes the business blog at LA Observed.com.


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