... and California's Deficit Comes Right Back.

From the New York Times: "A federal judge on Friday rejected California’s motion to regain control of mental health care in its prisons, ruling that the quality of care failed to meet standards required by the Constitution."

This suggests a significant defeat is in the offing for the Brown administration, because the State budget will now likely be thrown back into a deficit position due to the $1.9 billion in costs associated with housing prisoners out-of-state; while the decision today concerned the mental health system, it is expected exactly the same rationale will apply to the overcrowding decision.

"What Crimes did Prisoners Commit?"

Criminal Justice and Judiciary FAQ

California Legislative Analyst

available at http://tinyurl.com/cedexfj

This is not the first time I've blogged about this. Prison overcrowding is the enduring wild card in the State budget on the spending side, especially now with the emergence of Obamacare.

Perhaps one of the ironies of the whole situation is that California (particularly its voters) is working rather hard to decriminalize marijuana. According to the State's Legislative Analyst's Office, approximately 31 percent of inmates in California’s prisons were incarcerated for a drug-related crime. I don't think decriminalization of possession would make the difference-- there are about 1,500 prisoners at the State level for possession -- but I suspect the real change would be caused by the legitimization of formerly criminal enterprises -- there would be less need for violent "self help."

But Federal law continues to block that legalization, while at the same time the Federal Government is criticizing the State for failing to build enough prisons to reduce the overcrowding that is at least partially created by the very policy the voters of the State have rejected.

Hmmm.

Prop. 8 and Crossing the Rubicon.

In the Prop. 8 arguments on Tuesday, Justice Kennedy focused on the fact that there are 40,000 adopted children of same sex couples in California. It was perhaps the most poignant moment in the whole oral argument (I bothered to listen):

"On the other hand, there is an immediate legal injury or legal — what could be a legal injury, and that's the voice of these children. There are some 40,000 children in California ... that live with same-sex parents, and they want their parents to have full recognition and full status. The voice of those children is important in this case, don't you think?"

I don't think that Justice Kennedy was asking a question here. Justice Scalia followed up with an oblique history reference:

"I mean, we granted cert. I mean, that's essentially asking, you know, why did we grant cert. We should let it percolate for another — you know, we — we have crossed that river, I think."

The allusion to Caesar crossing the Rubicon was appreciated by the historian in me.  The phrase originates with Julius Caesar's seizure of power in the Roman Republic in 49 BC. Roman generals were strictly forbidden to bring their troops into the home territory of the Republic in Italy. On 10 January, Caesar led his army across the Rubicon River, crossing from the province of Cisalpine Gaul into Italy. After this, if he did not triumph, he would be executed -- it was a point of no return.

I think that Justice Scalia (and probably Justice Kennedy) are aware that society has reached a point of no return when the families of 40,000 children are at issue.  The court needs to do something, one way or another. I continue to think there's going to be a decision on the merits.

The Plutonium Standard.

Free Exchange, one of the Economist's bloggers, speculates today on the value of the U.S. Government as a venture capitalist, and comes down in favor, with significant caveats.  The one that grabbed my interest was:

"... it might make sense for America's government to ... support innovation while also being a very bad idea for [nations like] Belgium or ... Mexico. Why? Well the "extraordinary privilege/burden" afforded America by its control of the world's favourite currency and safe asset means that the dollar is always going to be a bit too strong and foreigners are always going to be lending American money a bit too cheaply. That status places American exporters at a slight disadvantage (except in knowledge industries where trade costs are negligible) and means that in the absence of government borrowing cheap loans may flow to less productive investments in stuff like empty exurban homes. It makes sense, then, for America to plow a lot of money into research activities that may boost long-run growth, helping to keep it attractive as controller of the currency/safe-asset of first resort."

This is a less perceptive point than it first appears to be -- the salutary effects of national debt are many, as Alexander Hamilton argued.  Rather than liquidate the national debt, Hamilton recommended bonds be issued and repaid to promote their exchange as legal tender, equivalent in value to hard currency, which allowed the government to increase the money supply and stimulate investment, which in turn increased revenue. Alexander Hamilton didn't argue that such government borrowing can also reduce speculative or inflationary economic activity through upward pressure on interest rates, which is what this blogger's arguing for here. The unstated assumption is that the government allocation of capital might be more efficient at the margin than privately directed investment, a point one or two people might argue with.

But the columnist does finish well, at least analytically speaking:

...  the unique role of America's military as chief guarantor of the public good that is international peace also shines a (generally) more favourable light on investment in technologies ..."

This is the "plutonium standard" argument. America's near-overwhelming military power means that investors have a great deal of confidence in the U.S. Government, and that power has been built on technological innovation.  Instead of an economy based on a gold standard, it is ideas and innovation that the dollar (and ultimately, the American economy) is built upon, which inclines me to agree with the blogger, who argues it is "hard to regret big government investments in technology despite the frequent emergence of waste and failure."

Cyprus, Bank Runs, and the Metallic Flick-Click of a Switchblade.

Wolfgang Münchau, in his column in the Financial Times today, paraphrases Sir Mervyn King, the Governor of the Bank of England. Normally, not a big deal.

Today it's about Cyprus. Also not usually a big deal.

However, the paraphrase today is about bank runs, and specifically, how the European Union has now created the potential for one in Cyprus.  I've tracked down the actual quote.

"These things are very fragile. Once the run starts it was then rational for other people to join in"

Because the quote suggests that a run is rational for depositors, and because of the potential for a Cypriot run to cause the same to occur in Spain or Italy, this is the banking-finance-economics equivalent of the metallic flick-click of a switchblade in a dark alley. 

What did the EU do to cause this? The EU is bailing out the Cypriot banks via a "stability levy" of 9.9% on deposits larger than €100,000. There are strong arguments this is a good idea; deposit insurance's protection is typically not unlimited, and bank deposits over a certain sum begin to look more like investments, where socialized risk has substantial downsides -- namely moral hazard.  

The EU didn't stop there -- they also imposed a 6.75% levy on deposits smaller than €100,000. That was dumb. Banks provide payment services, and bank accounts are indispensable to businesses and individuals. By undermining the security of those smaller accounts, the EU risks destroying the Cypriot economy -- and has sent a message that other customers throughout Europe are not protected against the same.  And the thing is, for smaller banking customers, certainly in Cyprus, and maybe throughout the EU, taking their money out of their accounts is now rational. The design of deposit insurance should make that argument wrong, always.  

Since 2008, Atlantic civilization has faced the dismal truth that while standard economics has offered good answers, political leaders — and all too many economists — chose to forget or ignore what they should have known. This isn't my awesome, unique idea -- it's Paul Krugman's.  And he's right, once again.

Le Mieux est l'ennemi du Bien.

One of the hardest things in life is to know when something's done -- when it's good enough, versus when it's perfect.  Voltaire's observation that the best is the enemy of the good (the original version,
en français, is the title of this post) and Herbert Simon's principle of satisficing both come to mind. The list of interesting blog posts in my drafts folder is a testament to that fact; I'm definitely the sort that wants the post to be right, not merely good.

But having said that, sometimes I see something in my daily reading that's so obviously important that I have a sense that it's worth comment on, even if only briefly.

Civilian Employment-Population Ratio

Federal Reserve Bank of St. Louis

available at http://research.stlouisfed.org/fred2/graph/?g=glG

Today, it's the graph on the right, courtesy of Brad DeLong, a professor of Economics and chair of the Political Economy major at the University of California, Berkeley.  His post today concerns the +236,000 change in nonfarm payrolls in February 2013.  Anyone getting back into work is A Good Thing, but Brad's reality check is well warranted.  The graph on the right really tells the story.  The St. Louis Federal Reserve Bank has outstanding statistical reports on their web site (oh, if I had only been a student today with tools like this available ...), and Brad's has his eye on the Civilian Employment-Population Ratio.  It was around 63% until 2008, and then fell off a cliff that it hasn't recovered from.  To start getting this number up over 59% again generally will require more than 300,000 new jobs every month, and as this graph (painfully) demonstrates, it's just not happening.  

It seems that every spring since the start of the Lesser Depression businessmen are hopeful this will be the year things turn. Yet to paraphrase Brad, there has been no closing of the output gap and no decline in the unemployment rate from putting a greater share of the adult population to work -- all of the decline in the output gap and all of the decline in the unemployment rate since 2008 is from the collapse in labor force participation. And as Paul Krugman notes this morning, hundreds of billions of dollars are piling up in the treasuries of corporations that, facing weak consumer demand, see no reason to put those dollars to work -- and thus, sadly, I must note that this time it doesn't look like it's going to be any different.

A Billion Reasons to Like Peg Melnik.

Peg Melnik

Peg Melnik writes a nice blog for the Press Democrat which weighs in on interesting wine and tourism related issues in Napa and Sonoma from time to time. She's a great resource for anyone visiting the area, and her book, the Explorer's Guide to Napa & Sonoma, is now in its 9th Edition (you can pick up a copy on Amazon). She writes with her husband, Tim Fish, who is an associate editor for Wine Spectator.  

She put up a piece a few weeks ago about Sonoma Valley rebranding itself, a screenshot of which is at the right. It's an interesting article, but there was just one thing that really jumped out at me ... $7 million spent in Sonoma County on tourism per year? 

Peg Melnik, "Identity Crisis?"
Tasting Room Blog, The Press Democrat, Jan. 29, 2013
available at http://tinyurl.com/cgxg555

Someone gave Peg some very bad statistics.  The actual number in 2011, was, of course, much higher - about $1.32 billion.

By way of contrast, the value of the County's entire grape crop in 2011 was $347 million.

The figures are courtesy of Sonoma County's Economic Development Board, whose graph on the issue I excerpt at the right, and the Sonoma County Agricultural Commission.  

So -- Peg -- don't underestimate the effects of books like yours on the local economy ...

Moodys.com, "Annual Tourism Report, 2012"

Sonoma County Economic Development Board

available at http://tinyurl.com/ckwm5t3

These statistics are part of the very comprehensive economic reporting done on Sonoma County on a yearly basis.  The statistics on the EDB's web site go back more than a decade, and reading through them (and watching the changing predictions) is often illuminating.  These materials, like the UCLA Anderson Forecast and the Moody's annual reports to the County, are a great for answering questions about the economy for anyone involved in local government.

Dan Walters on Education Funding, Part 2.

I've blogged previously about Dan Walters and his views on California's budget. Dan has access to most of official Sacramento, and I generally believe that if he's thinking and writing about a certain problem, it is something that most of Sacramento already is (or soon will be) thinking about, too.

California State Assembly

The column that has my attention is about ELL.  Dan points out that Jerry Brown's latest plan for education reform "provides a 'base grant' of about $6,800 per student and then, over several years, adds as much as $5,000 to districts that have above-average concentrations of English learners and students who qualify for free or reduced-price lunches[.]" Dan Walters points to Los Angeles Unified as the potential biggest winner from this change in policy, noting that 76% of LA Unified is Latino or Hispanic.

However, Dan did miss a bit of the story; just pointing out the racial demographics of a school district isn't necessarily a good proxy for how many ELL students there are.  Those numbers are available.  27.3% of LA Unified, for example, are ELL students -- 180,495 out of 662,140.  Sonoma Valley's numbers are available, too.  31.7% of Sonoma Valley Unified students are ELL students -- 1,483 out of 4,673.

It's probable that Sonoma Valley Unified wouldn't receive the maximum grant under the program, because the calculation includes free and reduced price lunch enrollment, where SVUSD is just about at the Statewide average. But if Sonoma Valley Unified got even close to the maximum proposed grant, that would push Sonoma Valley's funding per student to somewhere near $11,800 per student -- which would add more than $10 million per year to the District's budget -- and which would bring total funding fairly close to the level enjoyed by, say, Healdsburg.

 I doubt Jerry Brown's plan will be enacted as proposed -- too many wealthy suburban school districts are highly motivated to fight it. But the specifics of the plan are less important at this point in the budget cycle than the simple fact that the issue's been identified -- that the battlefield in Sacramento has been chosen, and it's funding for ELL-impacted schools.

I suspect the choice by the Governor was a good one.

Finally, since it's "Catch Up With Dan Walters Day" for me, I also noted that Dan took on the "shadow budget" in a recent column, pointing out that the general fund (~$91 billion) does not equal the budget (~$225 billion).  He argues that the practice of reporting only on the balance status of the general fund tends to deceive voters.  I agree, Dan, I agree.