Presentation by Tom Campbell, former US Congressman, current Candidate for Governor of California

1. Tom Campbell
CURRENT U.S. ECONOMIC CONDITIONS & CALIFORNIA'S FISCAL SITUATION
Director of Finance, State of California, 2004-5
United States Congressman, 1989-1993; 1995-2001
Member, Joint Economic Committee
Member, Banking and Housing Committee
Member, International Relations Committee
California State Senator, 1993-1995
Chairman, Housing Committee
Vice-Chairman, Budget Committee Subcommittee on Education
Professor of Law, Stanford University, 1987-2002
Professor of Business, University of California, Berkeley, 2002-present
Dean, Haas School of Business, University of California, Berkeley, 2002-2008
Director, Bureau of Competition, Federal Trade Commission, 1981-1983
White House Fellow, Office of the Chief of Staff, 1980-1981
Ph.D., economics, University of Chicago, 1980 (Milton Friedman, advisor), 1980
J.D., magna cum laude, Harvard University, 1976
Law clerk, Judge George E. MacKinnon, U.S. Court of Appeals, Washington, D.C. ('76-'77)
Justice Byron R. White, U.S. Supreme Court ('77-'78)
Presidential Scholar and Visting Professor, Chapman University, Orange, California, 2008-9
Economic Advisor, Gibson, Dunn & Crutcher
tom@campbell.org
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2. COMPARISON OF RECENT RECESSIONS
GDP Growth Rates
10%
GDP Growth Rate (ann. %)
8%
6%
4% Apr '80
2%
Oct '90
0%
Oct '01
(2%) -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13
(4%) Apr '08
(6%)
(8%)
Quarters into Recession
Unemployment Rates
Unemployment Rate (%)
10.0%
Apr '80
8.0%
Oct '90
6.0% Oct '01
4.0% Apr '08
CA '08-'09
2.0%
0.0%
-3 0 3 6 9 12 15 18 21 24 27 30 33 36 39
Months into Recession
Sources: http://www.bls.gov/data/home.htm
http://www.lao.ca.gov/laoapp/laomenus/lao_menu_economics.aspx
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3. U.S. HOUSING PRICE TRENDS
National Average Home Prices vs. CPI (2000-present)
200 '06q2, 189.93
'08q4, 139.14
Index Value ('00q1 = 100)
150
'08q4, 125.39
100
Case-Shiller
Home Price Index
50 Consumer
Price Index
0
Quarter
Home Prices for Selected U.S. Metropolitan Areas
272 278
Case-Shiller Home Price
250 233 228
215 216
Index ('00q1 = 100)
190
200 167
178 173
145 139 141
150 124 120
134 Jan-00
100 Jun-06
Oct-08
50
0
Dallas New York Chicago Los Angeles San Francisco Miami Las Vegas Phoenix
Metropolitan Area
Source: http://www2.standardandpoors.com (Case-Shiller Index)
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4. U.S. PRODUCTIVITY & OIL PRICES
U.S. Productivity Trends
5.0%
Productivity (% chg. vs. previous year)
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
Definition: Productivity = annual output / worker
Source: http://www.bls.gov/data/home.htm
Price of Oil: Fall in price of oil: 6/30/08 -- $4.06/gal. ─→ 4/20/09 -- $2.06/gal
US gasoline consumption: 320.5 million gals./day
Annualized savings due to fall in price: $234 billion
Compare with June 2008 tax rebate quot;stimulusquot;: $160 billion
Source: http://www.eia.doe.gov/
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5. U.S. GDP & FEDERAL BUDGET OVERVIEW ($ in billions)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 (E)
GDP 10,060 10,378 10,804 11,504 12,245 13,023 13,670 13,807 14,413 14,701
Deficit(Surplus) (86) 32 317 538 568 494 435 344 455 1,800
% of GDP (0.9%) 0.3% 2.9% 4.7% 4.6% 3.8% 3.2% 2.5% 3.2% 12.2%
Total Debt 5,792 6,213 6,783 7,379 7,618 8,170 8,680 9,229 10,700 12,000
% of GDP 58% 60% 63% 64% 62% 63% 63% 67% 74% 82%
Annual debt service, 2007: $184B
Years to pay back federal debt, at current rate, if NO NEW BORROWING: 293
Mandatory part of federal budget: 61%
Five-year growth in Medicare: 54% Medicaid: 53% Social Security: 28%
Unfunded liabilities (in addition to debt): $58.6 trillion
Annualized
Growth Rates 2007 2008
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
GDP 0.1% 4.8% 4.8% (0.2%) 0.9% 2.8% (0.5%) (6.2%)
Personal consumption 3.9% 2.0% 2.0% 1.0% 0.9% 1.2% (3.8%) (4.3%)
Exports 0.6% 8.8% 23.0% 4.4% 5.1% 12.3% 3.0% (23.6%)
Residential investment (16.2%) (11.5%) (20.6%) (27.0%) (25.1%) (13.3%) (16.0%) (22.2%)
Sources: http://www.treasurydirect.gov.govt/govt.htm
http://www.treasurydirect.gov/govt/reports/pd/pd_debtposactrpt_0907.pdf
http://www.cbo.gov/ftpdocs/89xx/doc8917/01-23-2008_BudgetOutlook.pdf
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
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6. THE MONEY SUPPLY -- AN EXERCISE IN BASIC ECONOMICS
The Basic Principle: MV = PQ
where M = money supply
V = velocity of money (i.e., how often money changes hands in a year)
P = price level
Q = GDP
So. . . If the money supply (M) increases, some combination of the following must occur:
Comments
a. V decreases Significant change very unlikely
b. P increases
c. Q increases Coming out of a recession, 5% would be tremendous
In other words, most of a large increase in the money supply must be absorbed through inflation (P).
What has happened to the money supply lately?
In the last year, Federal spending not offset by revenue sources has included ($ in billions):
Mar-09 1,000 Federal Reserve announces additional spending to purchase mortgages and bonds
Mar-09 200 Additional amounts in Federal Budget, not offset
Feb-09 280 Federal assistance to Freddie, Mac, Fannie Mae, and individual mortgage holders
Feb-09 789 Federal stimulus package
Aug-08 350 Federal quot;TARPquot; (another $350 authorized but not yet spent)
Jul-08 160 Tax rebate quot;stimulusquot; checks
2,779 Total increase in money supply
8,275 Money supply before the above additions
Increase ÷ Current Supply = 34% . . . In other words, the Federal spending listed above will increase the money supply by one-third!
Source: http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt
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7. CALIFORNIA'S FISCAL SITUATION
California State Gov't Revenues & Expenditures (in $ billion)
102.6 103.6 104.5
101.4
100.0 93.5 91.6 95.5 93.2
80.6 82.2 81.8
78.1 76.8 77.5 76.9 76.3
80.0 71.4 72.3
60.0
Revenue
40.0 Expenditures
Surplus(Deficit)
20.0
3.1 0.5 0.4 1.9
0.0
(1.0)
(6.6) (4.5) (5.9)
(20.0) (11.3)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 (E)
Annual debt service: $3.4 billion
Total debt: $63 billion. Years to pay off, at current rate,
IF NO NEW BORROWING: 84 years
Mandatory part of California budget: 60%
Unfunded liabilities (in addition to debt): $99 billion (low estimate)
If we adjusted Gov. Gray Davis' First Budget for Inflation and Population since then—and spent no more – we'd be balanced today!
1998 2008
Expenditures in CA state budget $57.8 $103.6
Population 33.3MM 38.0MM
Take $57.8 billion. Express it in 2009 dollars: $74.9 billion.
Increase it by percentage growth of population since 1998: $85.5 billion
Total revenue est. 2008-09: $93.2 billion! ($87.5 excl. transfers/carryforwards)
Sources: http://www.lao.ca.gov/laoapp/laomenus/lao_menu_economics.aspx
http://www.taxfoundation.org/taxdata/show/228.html
http://articles.moneycentral.msn.com/Taxes/Advice/PropertyTaxesWhereDoesYourStateRank.aspx
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8. CALIFORNIA STATE TAXES, COMPARED TO OTHER STATES
State Tax Levels, by type of tax
CA MA
10.0% 9.6% 9.5% 5,000 CA
OR CA
9.0% CA 8.8% AZ
NY
8.3% NV
8.0% 7.7% 4,000
AZ NY OR
7.0% OR 7.1%
NV
6.5% TX 6.6% NY
MA TX
6.3% 3,076
AZ 2,974
6.0% MA 5.6% 3,000 NY
AZ 5.3% MA
5.0% 5.0% CA MA
NY
2,278
OR TX
4.0% 1,910 1,926
4.0% 2,000
NV
1,445
AZ
1,133
2.0% 1,000
NV TX OR NV TX
0.0% 0.0% 0.0% 0.0% 0.0%
0.0% -
Income Tax State Sales Tax Business Tax Property Tax
(top rate) (excl. cities) (median $ pmt.)
California ranks . . .
-- among --
Type the 7 All
of states 50
Tax shown States
Income #1 #1
Sales #1 #1
Business #2 #8
Property #3 #10 Note: California's property tax rate ranks 45th, but its median property tax paid ranks 10th,
because of the higher cost of real estate
Sources: http://www.lao.ca.gov/laoapp/laomenus/lao_menu_economics.aspx
http://www.taxfoundation.org/taxdata/show/228.html
http://articles.moneycentral.msn.com/Taxes/Advice/PropertyTaxesWhereDoesYourStateRank.aspx
http://www.taxfoundation.org/files/bp58.pdf (Table 8)
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9. DISTRIBUTION OF U.S. INCOME & TAX PAYMENTS
Share of Individual Income & Taxes Paid (2000 Data)
100.0%
80.0%
Cumulative Share (%)
60.0%
U.S. Income
Federal Taxes Paid
CA Taxes Paid
40.0%
quot;Uniformquot;
20.0%
0.0%
0% 20% 40% 60% 80% 100%
Percentile of Income (e.g., 5% means top 5% of earners)
California state personal income taxes: 50% is paid by the top 3% of households
70% is paid by the top 9%
93% is paid by the top one-third
Sources: “Effective Federal Tax Rates 1997 to 2000,” CBO (August 2003) p. 27 (data for 2000)
quot;California's Tax System: A Primer,quot; LAO (2001) chapter 2, p. 3
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