Bruce Norris is joined this week by Robert Kleinhenz. Dr. Klienhenz is the chief economist at the Los Angeles County Economic Development Corporation (LAEDC). He directs the Kaiser Center for Economic Research, which conducts research on regional, state, and national economies. He has also been a teacher for over 25 years as well as a past guest on the Norris Group radio show.
When you are in the looking-forward business and look at the beginning of 2014 compared to how it ended, Bruce wondered if there were any surprises. Robert said many expected when they looked at the overall economy that 2014 was going to be strong from start to finish. As they now look at national numbers like GDP, they got off to a bumpy start. This was not unlike what happened in 2015. There was a particularly bumpy start in the beginning of 2014 that tempered the economic outcome for all of the year 2014.
They went through a major revision of the job numbers at the beginning of this year, looking back at 2014 and prior years. They had a very pleasant surprise to see upward revisions in job counts for the state of California, especially LA County, and the whole US. All of these retroactively told them that 2014 turned out to be a good year as far as the economy and labor market is concerned. The biggest question looking back and ahead is when wage growth will kick in a substantial way so as to increase the incomes of middle income households.
Bruce said when they have an oil price change like they did, he wondered at what point the consumer actually begins to say they can spend the extra money and count on it being a permanent reduction from their budget. Robert said the plunge in oil and gasoline prices in 2014 was a big, positive, unexpected event. Some people anticipated it, but it was a slow period of coming that accelerated in the year 2014. Robert thinks people are still not quite sold on the idea that gasoline prices will be sustained for some period of time. If they think it will be sustained by a longer period of time, that will figure back into their budgeting and some of that money will be freed up. Since they are not spending as much on gasoline, they will be able to spend the money to pay off credit cards and other expenses.
People are still trying to size things up. The experts are saying we are looking at a period of low oil prices for at least the next five years. As recently as yesterday OPEC has come out with an analysis that suggests they do not think oil prices will cross the $100 mark for another 15 years. What is interesting was that none of them said in advance they thought they would see a 50% cut in oil. While we wait for wage growth, anything that increases net spendable income is almost exactly the same except when it is viewed as temporary versus permanent. This is why households are still sizing up whether or not this decline in gas prices is permanent.
We need to add a couple things to this calculus. Going back historically, even before the recession, the typical household income has essentially been flat, if not declining against inflation. Purchasing power has actually been falling for the typical household for many years, even before the recession. They are going to turn around and spend some of the money they would normally spend at the gas station on other goods, services, credit card payoff, or financing a car. However, he does not think the monthly household will see that much in monthly savings on a monthly basis to warrant that type of change in expenditures. They have not really seen an increase in consumer spending that many experts thought would come around as the result of declining gas prices.
Bruce said what is interesting about this is that for the last 35 years we have enjoyed ever-decreasing costs of interests. When he borrowed money on a residence in 1981 to become an investor, he refied at 17 and a half. Now if he refied it, then it would be different. The cost of financing, if that is cheap, also equates to more net spendable income. Bruce asked how you maintain GDP growth in the light of more expensive borrowing when that chart starts to go in the other direction. Robert said at the time you were borrowing money at 17%, inflation was also in double digits. In many instances, wages were growing a lot faster than they are now. When we look at the prospects over the next few years, we have to figure that interest rates will increase, not decrease.
Inflation is expected to be fairly low; but even so, interest rates going up from what is essentially rock bottom. Whether you are looking at 30 years ago or 50 years ago compared to today, we really have not seen rates this low in many decades. It has fueled some spending, although a lack of business and consumer confidence has held that spending back. Unless we see wage growth in the face of higher interest rates, we have to be concerned about how the economy will grow over the next couple years. We need to be mindful of this.
Bruce asked if raising minimum wages creates a domino effect for minimum wages. Robert said the evidence on this is mixed. If you take a look at what often precipitates the interest in raising minimum wage, it is usually a desire to improve the lot of low-income households. Many think that, as opposed to a minimum wage, doing more with the earned income tax credit at the Federal level is a way to ameliorate low-income household problems.
As far as the United States and California in the oil world, Bruce asked if California is a fairly large participant in the creation of oil as far as something we use or export. Robert said we are one of the top five producers and among the largest producers as a state, Texas being the largest. Robert’s hunch is that South Dakota is second, while we are third or fourth. As far as whether shale oil predominates or what percentage of it predominates is not known. However, in California we have seen fracking take place across the state for many decades.
On the subject of water, this seems to have risen to the top of the list as far as concern. Bruce asked Robert’s take on water and its possible ramifications for the economy of California. Robert said the near-term impact on the overall economy is muted. We want to take a look and see how fresh water is used in the state of California. About half of it goes to environmental uses. The remaining half is used by humans, and about 80% of it is used for agriculture while the remaining 20% is used in cities for residential and non-residential uses. We have already seen that agriculture in the state of California has been hit, having to take acreage out of production because of reductions in water. Agriculture accounts for 3% of the total workforce and 2 ½% of gross state product. Its impact of shrinkage due to the drought is very limited. The longer term question is if water scarcity will affect the community’s ability to engage in new residential development. We have to assume that they have to get water from somewhere. Our ability to build new housing may be compromised at some point in the future, but it is not clear how far out that future happens to be.
When we talk about the migration game and population growth in California, we used to have a really positive on both sides. We had a lot of net migration coming from other states as well as immigration. Bruce wondered how this has changed now. Robert said there was a huge change that occurred in the 1990s because we went through the defense cuts and a lot of other restructuring in the California statewide economy that a lot of other parts of the country did not have to go through themselves.
We saw a huge exodus happen in the 1990s to other parts of the country. Yet they ask if this same kind of thing happened during the Great Recession that just ended a few years ago. The answer is no because a few years ago when we experienced the recession, so did the rest of the country. We saw migration really slow down dramatically, and some of the migration counts were the lowest in decades. At the two year point, we have seen a resumption of population growth that did not go negative but did slow down. We are still seeing a slight out migration to other states, which is more than offset by an in migration of international population to the state of California. Most of the regional migrations is from county to county.
When you look at the domestic out migration, most of the people leaving LA county are moving to Riverside, San Bernardino, and Orange County with a smaller number of people going to places like Clark County, Nevada, Mariposa County, Arizona, and Oregon. However, most of the migration taking place in Southern California is county to county. Bruce asked if this has anything to do with the cost of housing, which Robert said it definitely does. The affordability safety valve for Southern California is the Inland Empire as well as places within Los Angeles, although to a lesser degree here. What they tend to see is the out migration ramps up as affordability falls.
LA really does lose a fair amount of domestic migration to local areas, but they have very strong immigration. Bruce asked about the resume of the person who shows up in LA county from other countries, both who they are and how they differ from the people who showed up to Orange County. Robert said he does not know this off the top of his head, but he did paint a couple different pictures. You may have somebody arrive in Los Angeles County from Pointe South who has less of an education and is willing to take on any available job, whether they are legal or illegal. You find this is an attractive place for people all over the world. People who are educated have income.
There is a demand nationally for people in some fields of engineering with a visa program available to accommodate. Those kinds of people with those kinds of backgrounds is in short supply. We have a number of people who are international migrants and don’t fit that stereotype that many people think of when they think of an international immigrant coming to Southern California.
When the Japanese market boomed in the 80s and the stock market exploded in value, a lot of money showed up from the Japanese to the United States and pushed the prices for commercial real estate and residential. For the China market, the stock and residential markets exploded this year and have been in play for a number of years. We have a fair amount of people bringing money into China, so Bruce wondered if we are worried about their economy changing and the ramifications it may have here. Robert said he would draw an analogy between China’s economy and the experience of Japan.
You will find that if you look at projections of population for China, before too long they will see a decline in population. At some point, they will be overtaken by India in terms of their population counts. When you have an economy with a declining and aging population, you are looking at a scenario like the one that Japan faced. If we start in the ‘70s and ‘80s, they were already anticipating their economy demographics to be such that they would be looking at an aging population. If they wanted to see growth in their overall economy, they had to look outside their economy to do so. This is part of the reason, aside from the fact they have a lot of dollars from their trade surplus, that they invested heavily here in Southern California, particularly big parts of Los Angeles.
If you shift forward to the early 21st century where we currently are, it is certainly another period of time where another country is looking at its own demographics. It wants to grow, raise the standard of living for its residents, and it has a large trade surplus with the United States. It does make sense that we will see an increased level of investment over the next few years coming from China into the United States.
Bruce asked what the net effect to California will be if we get immigration reform. Robert said he has not had a chance to study this in depth, but he would say that one of the main industries that will be affected is agriculture. It does not account for a large segment of the economy or workforce, but the fact is that it is one of the largest sectors that exports. We are America’s farm basket in many ways, and we export a lot of our export and agricultural commodities to other parts of the country. Immigration reform would probably be affecting agriculture in California. He does not know what form immigration reform will take, but if it can be turned into a sensible approach that recognized the reality of people here right now as well as acknowledges that some key industries need to have migrant workers to conduct their business and figure out a rational way to accommodate it. This will be better for the California economy.
At the end of the day, the most conservative people would not all want to go home and vacate whatever position they have with the rental or ownership of the homes they have. We would likely see a very negative impact very quickly. This is an important part of our workforce and economy, perhaps more so than most of the other states around the country. However, he would make the observation that in the early 21st century we have a lot of other states that rely more heavily on migrant workers and international migration. It will be in the interest of many residents around the country to get things worked out here.
He would also point out there are skilled workers brought into the United States under quotas, and some revision to that part of immigration reform would also be necessitated. This has constrained our ability to grow some of our fastest growing industries which are really going to be a part of our 21st century economy going forward.
Bruce asked Robert if he sees a day in the near future where we load the crops onto diesel trucks with no drivers. Robert said this is a good question. The ports are another area where you see a lot of goods moving on vehicles. One of the things they are doing at the Port of Long Beach with the Middle Harbor project is they will have driverless trucks that will not only be emission-free but also automated. For certain kind of uses, we will probably see driverless vehicles in commercial applications before we see them running around town taking kids to school. Bruce thought it was a long ways away, but Sean O’Toole mentioned this recently. Bruce looked it up, and sure enough the coal industry already has massive trucks driven around by themselves.
One of the interesting things that comes up is the IT artificial intelligence technology is permeating almost every aspect of our economy in big ways. The driverless vehicles are just one of these technologies. You have to ask the question if this will mean people will not have to work anymore or the machines will do the work. We are a long ways away from this, but some have raised this possibility. However, it is remote at this time. Bruce never thought this would take a piece of the workforce out of this job, but you never know if it is a possibility.
Join us again as Bruce continues his interview with Robert Kleinhenz.
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