What Does The Future Hold for Us?

I did not attend last night’s SOHA forum at Notre Dame High School due to another commitment.

I will be discussing the Q&A with people tomorrow and possibly post a summary by Thursday night or Friday.

Let me digress from the details of the CD2 election and address the issue that underlies my passion concerning its outcome -economic uncertainty.

We have entered unchartered waters; there is a whole ocean yet to cross. To make matters more complex, we do not have a GPS device, compass or even an astrolabe to guide us.

Our country has lived off the fat of the land ever since the conclusion of World War Two.  The United States was the only game in town for many years after the conflict.  Other nations gradually took bites out of some sectors of our economy: automobile manufacturing, steel production, aerospace, etc. All saw some business go overseas.

Actually, that was a good thing.  It instilled competition.

The only problem was that we did not adjust our economic game plan and started to pay dearly for our inaction. More and more manufacturing and production went overseas and imports became more attractive to American consumers.

To make matters worse, the United States clung to an economic model that was tied to housing.

In the post-war years, the construction of single-family houses fueled the economy. That, too, was a good thing at first.  Homes had to be built to accommodate the workforce in growing regions of the country, such as California. The ancillary benefits were many.

Somewhere along the line, housing ceased to become a necessity and evolved into a commodity.  It was as if we all started to participate in the Chicago Board of Trade, making buys and sells of pork bellies and wheat futures.

The housing bubble burst and you all know where we are today.

As I am writing this; as you are reading this, the City Council is meeting to deal with the most severe man-made financial crisis in modern times.

Not only is it man-made in the macroeconomic sense, for the City of Los Angeles it is man-made by a City Council who could not or would not see the economic graffiti on the wall.  It is ironic that the largest manufacturing sector remaining in Los Angeles involves the production of a multi-billion dollar deficit by our elected officials.  Now we have to pay for the obsolete inventory.

Established politicians such as Paul Krekorian blame our woes on the international economic meltdown. What they do not tell you is that had either the state or the city managed our finances sensibly in the last few years leading up to the collapse of the housing market, our deficit would not be nearly as bad.

Paul Krekorian shares the responsibility for this at the state level.  Yet he had the pompous audacity to proclaim at the SONC forum that this was “not a time to elect an amateur.”

What disrespect to the other candidates and arrogance on his part.  His experience has really taken us far –in the wrong direction.  It makes you wonder just who the real amateur is.

It gets worse.

He stated that he would support the restoration of any cuts once the economic cycle shifted.  That would be like removing a cast before a broken bone healed.

What Krekorian does not understand is what lies on the other side of the recession.  The answer:  no one knows.  Candidate Augusto Bisani would probably provide the same answer.

Here are a few articles that deal with the so-called recovery from international, national and state perspectives:

http://www.nytimes.com/2009/09/17/business/global/17oecd.html?_r=1&ref=business

http://www.latimes.com/business/la-fi-bernanke16-2009sep16,0,2376504.story

http://www.sacbee.com/business/story/2185654.html

What they all say is unemployment will be high for a very long time.

That translates to low consumer spending. That spells lower sales taxes and marginal profits.  Marginal profits translate to lower taxes.

The housing market will eventually recover, but it could take decades for it to become robust.  Don’t expect property taxes to surge and bail us out.

In times of uncertainties, it is unrealistic and irresponsible to make assertions about restoring cuts.

That did not stop Paul Krekorian from doing so.

Uncertainty means our leaders must use conservative assumptions in any type of growth or rate of return projections.

Why is that important?

Consider the pension plan.  What has been lost in the debate at the City Council this week is what the assumed rate of return is for LACERS.  Everyone is talking about the Early Retirement Incentive Proposal; no one is talking about the overall health of the plan from the standpoint of the status quo.

If ERIP is voted down, lawsuits notwithstanding, there remains a huge unfunded liability.  The liability might be worse than reported.  If the assumed rate of return on assets is even a little too optimistic, it will mask an even nastier liability later.

In other words, even if we think we are digging ourselves out of a hole, the economic equivalent of another water main break will undermine our progress.

We do not need people like Krekorian in Los Angeles during times like these.  Let him go back to Sacramento, start with a clean sheet of paper, distance himself from his union supporters and honestly try to resolve the state’s problems.  

If he does that, I promise I will do everything in my power to support him.