The following are comments made by Susanne Trimbath, Ph.D., Senior Research Economist, on December 16, 2003, during a roundtable discussion hosted by Secretary Sunne Wright McPeak of the California Business, Transportation and Housing Agency in Sacramento. The meeting, the first in the agency’s series of “economic recovery conversations,” was attended by leaders from business, industry and labor, economists, and the governor’s executive officers. ................................................................................................................................................
The most immediate positive impact on California’s economic recovery will come from events like this where we display a cohesive front across the political and business leaders in the state. We need to send a strong message that 1) we recognize we have serious problems and 2) we are ready to find the cooperative solution that advances our goal of strong growth and prosperity. I will argue for three steps to advance us toward that goal. First, to rationalize the budget; second to bring back financial services jobs; and finally to remove the roadblocks to homebuilding in California. It may be foolhardy, but I suggest we find a way to rationalize the budget and to forsake the idea that we need to negotiate the budget. To rationalize is to bring into accord with reason. It’s not about how we feel; it’s about what we know to be right and reasonable. A rational budget, by definition, involves only a finite number of procedures based only on multiplication, division, addition and subtraction. A negotiated budget, by definition, would carry on business the way it’s been done for the last 16 years. All the complaints that we can’t balance the budget without cutting education or social services are red herrings, meant to distract us from the slight of hand. What that hand is hiding is “business as usual,” which is what got us into this mess in the first place. A negotiated budget requires the analysis of unconscious motives. A rational budget requires only good math skills. Therefore, I support a rationalized balanced budget.
Next, for our long-term strategy, we need to find ways to bring the financial markets back to California if we expect to see significant improvement in our economic competitiveness. It seems to me, that as our economy made the transition from industrial to service-based, we rushed too quickly to build jobs and infrastructure in technology at the expense of a sector where America retains a clear competitive advantage: financial services. Are you aware that until 1987 all the assets of CalPERS and CalSTRS were held in a vault in San Francisco, providing hundreds of mid-level clerical jobs? It’s a disgrace that no California bank even bid on the contract when management of those assets came up for renewal 16 years ago. As a result, the jobs generated by managing the pension funds for California’s retired teachers and public employees went to Boston and the jobs generated in maintaining custody of the securities that back those assets went to New York City. Within days of the announcement that the CalPERS and CalSTRS contracts had gone to two East Coast banks, the Pacific Stock Exchange announced the closing of the securities depository and trade clearing companies in San Francisco. The immediate cost was 500 jobs; the long-term damage is far greater, because with the depository went the only reason for any financial services firm to locate in the state of California. Financial services jobs could help balance the more cyclical technology jobs that we have over-invested in over the last 10 years. We generate an economy that would rank among the nations of the world, yet the money we generate is being managed and stored where it creates jobs for someone else. So I support efforts to bring financial services back to California. Finally, I would fail in my obligation to you today if I did not mention the need to find ways to finance the construction of more homes throughout the state. Every imaginable initiative is available to increase demand for housing, but every imaginable roadblock is in place to restrict supply — from a prevailing not-in-my-backyard mentality to liability insurance premiums for home builders and even home repair companies that have tripled in a decade. Until we solve this problem and focus more on increasing the supply of housing in California, affordability is a pipe dream. To attract jobs, we have to attract labor. And workers need housing. At the end of the 1980s, total construction lending by commercial banks declined more than 40% in three years. At the same time,
home builders faced increasing risks that drove many of them out of the California marketplace. In 1990, a California state appellate court ruled [in the case of Maryland Casualty Co. vs. Reeder] that home buyers could sue home builders for latent defects even if negligence wasn't proved to have caused the problem and even before the home builder was given a chance to correct what they could. California builders soon found themselves paying much higher insurance premiums for much less coverage. By 1996, insurance companies were withdrawing from the market, and general liability coverage for projects like condos and apartment buildings — the most affordable of all workforce housing — became virtually unavailable. In California, we passed only a watered-down version of the reform bill recommended by the National Association of Homebuilders. If you need further convincing that more housing is good for the economy, a report released this time last year by the Job-Center Housing Coalition makes the case for the economic benefits of housing as an industry that itself provides jobs and revenue for all of California. We can make financing available to the home builders if we adopt rational policies that make them insurable. To summarize, I recommend that we immediately begin the work to find the cooperative solution that advances our goal of strong growth and prosperity by balancing a rational budget; bringing financial services jobs back to the state; and finally, removing the roadblocks to building more homes in California.