This week Bruce Norris is joined by Robert Kleinhenz. Robert is the Chief Economist of the Kyser Center for Economic Research, which conducts research in regional, state, and national economies. Dr. Kleinhenz has a Bachelor’s Degree from the University of Michigan, a Masters and Doctorate from USC, all in economics. Prior to joining LAEDC, he served as Deputy Chief Economist at the California Association of Realtors and taught economics for over 15 years, most recently at California State University Fullerton.
The Kyser Center is within the Los Angeles County Economic Development Corporation or LAEDC, which among other things is interested in promoting the local economy and doing what it can do to help local businesses to streamline permitting processes and promote a long-run vision of where the region is headed in terms of the economy and related issues. The Kyser Center’s economic research function is in support of this. They carry on what is happening in the economy and what is happening with key sectors in the economy. They also produce forecasts, one coming up on February 15 in downtown L.A. They have an annual forecast that comes out at the beginning of the year in February and a mid-year forecast update that typically is released in July. This is the one that Bruce took a serious look at a few nights ago, and one of the things that really impressed him was it was not in the least bit promotional. He said it was very informational and quite candid if it had to be negative. This is one of the things that have given rise to the reputation of the Kyser Center and the LAEDC have established over time. Their forecasts have really maintained their objectivity when looking at issues pertaining to the regional economy; so they have a lot of credibility, which they had even before he came on board.
It’s a great asset for the community to have this kind of document. When it becomes promotional and inaccurate, it does not help anybody map out a proper business plan. We are certainly at a key point here. 2012 is a pivotal year where potentially we can see the local economic situation and the national situation accelerate if the right things fall into place. You have to have an objective view on things as business people so that these business people can make smart decisions about their future and the future for their businesses. When you are dealing with the local economy, even one as large as Southern California and Los Angeles, you also have to determine how effective we are by state and federal level decisions. The most obvious impact that we have seen over the last couple of years is that the budget problems that have popped up at the state and have filtered down to the local level have given rise to real job losses in the public sector. Therefore, the private sector is adding jobs that are much needed jobs.
We have unemployment rates that continue to be stubbornly high. The economy and the labor market have both been very slow in recovering from this most recent recession. Anything that detracts from growth is problematic; and unfortunately one of the very weak segments of the labor market over the last couple years has been public sector or the government labor numbers. They have been declining even as the private sector has been taking off, so that is certainly one constraint that we have to deal with in the immediate term. The longer term issue that we need to bear in mind is that the state and county government agencies are often times responsible for so many infrastructures that we rely upon, both physical infrastructure and the education of our young people. Both of these are things that concerns Robert as they look at the longer timeframe and the role the government plays.
Bruce wondered if education needs have started to shift. One of the things Bruce read that was very interesting to him was the manufacturing sector. It is not something we think about being a major player; yet it really is, but there are shifts occurring. As far as education is concerned, you go to high-school through college. Bruce wondered if you emerge as a useful participant in the manufacturing sector in any of the training to where you can take on a high-tech manufacturing jobs and function. Robert said it is safe to say that the jobs that the people who went to high school and college will be taking on through the course of their career are jobs that we know nothing about right now. The most important thing one gets from a college education in particular is learning how to think and to adapt to what is a changing workplace environment. There are really dramatic changes that take place both in the consumer side and in the industry side. You have a sector of the economy that is quite dynamic and is one of the leading sectors here in Southern California. Putting it differently, Southern California is one of the leading manufacturing centers here in the United States. At the same time, in the United States manufacturing is still one of the leading GDP. It is a high-value added segment of the economy, but it has experienced a trend decline in the number of people working in that sector over time because much automation has taken place that has displaced some workers. Manufacturing on a wide, broad scale such as mass production of goods, frequently goes offshore because they can produce at a much lower wage or lower cost of goods produced outside of the United States and certainly outside of Southern California.
When Bruce read the document, he said the thing he found interesting was the number of jobs was down, the number of products produced was way up, and the earnings per worker was up. The people who are working in manufacturing have to be more skilled today than their predecessors had to be ten or twenty years ago. They probably have some training in computers and other types of automation, so it is no longer that you have strong hands and a strong back. You also have to have a pretty nimble mind to be able to do what is necessary in these jobs, which are increasingly automated and require some knowledge of sophisticated machinery. The first question was really if in the education process if we are taking people through it, do we need a college degree to understand how to operate that particular piece of machinery even though it is technical? Do we have trade types of training that are taking that on?
Robert said that particular aspect of education in the United States, which is typically provided by trade schools and community colleges, is one that is often overlooked. However, Robert believes it is very important to training people for jobs that don’t require a college degree but do require something more than an unskilled background. You have to have skilled workers. One of the things we are contending with now and really have for quite some time is that we probably do not dedicate enough of our resources and educational resources to training people for those kinds of jobs. There is so much emphasis and so much pressure on seeing people complete their Bachelors Degree, which is important for the reasons that he mentioned at the beginning. However, it does not really create someone who has a great deal of versatility. However, there are a lot of other jobs. Robert had just spoken with one of the business assistant managers, and he said there are a lot of jobs for which you have to have a certain set of skills. Many people who are running businesses right here in Southern California right now have job openings for skilled workers, but they cannot find people with the appropriate skills to fill those spots. It is a challenge right here and now, and it is an ongoing challenge for years to come.
We also have an aging workforce who with those skills will be retiring, and there will be even more of a need for those replacement skilled people with very high-paying wages. The fact of the matter is the baby boomer generation, particularly the oldest members of the baby boomer generation, turned 65 last year in 2011. In terms of numbers, the first few years that are marked by that boomer generation have fairly small population numbers. However, as you see people who were born in the early 1950s to the mid to late 1950s, you see that this is where you have the real bubble in terms of population growth in that particular generation. In the next 3-4 years, we are probably going to be looking at what could be a fairly large number of people going into retirement. There are probably not as many people choosing to retire as would have been the case before the recession. Still, large numbers of people will at least consider retirement or maybe going to a part-time schedule. This may lead to a void in the workforce in terms of many skills, not to mention the experience that these individuals have accumulated over so many years of work.
Bruce said when you do have this baby boom generation begin to retire, it brings up more pressure on the budget. The California budget and the national budget both have their share of problems. Bruce wondered if we solve it by aggressive cuts and austerity, or do we solve it with some type of growth program that makes sense. Robert said that as far as the budget situation at the national level is concerned, it is important for us to break it into two parts. You have the budget deficit at the federal level, the $1.3 trillion deficit, and the corresponding level of national debt. The high deficits that we have seen over the last couple years stem in part from the weakness of the economy, which has lead to reduced tax revenues. At the same time, especially with the stimulus program that actually came and went the high expenditures that were a part of that stimulus program and other programs has driven a wedge between the amount of money that the government was bringing in and the amount of money that was spending. However, as the economy improves, that wedge should narrow. Robert believes this will improve over time, so he is less concerned about that and more concerned about the Social Security program and Medicare, both of which could escalate out of control and dominate the budget before too long. It would be in the 2020s by which time it might happen, but certainly changes will take place between now and then to prevent that from happening. Robert does not think we would sit back and just let it happen.
There was a joint committee that worked on the aforementioned suggestions; they produced a document, then when it got to Congress it seemed both sides were not interested in the conclusions and looked like they pushed it forward to 2013. Because of that, this was one of the things that pushed rating agencies to downgrade the United States credit situation. Bruce found this interesting because since he is connected to real estate; his assumption would have been that we have a downgrade and an interest rate hike. However, this was not what happened. If we are talking specifically about the downgrade and what happened at the time back in August of last year; that downgrade and the anticipated impact on interest rates for T-Bills and Treasury notes was trumped by what was happening in Europe, specifically the sovereign debt crisis. This was a much bigger problem; so instead of having a spike in treasury rates as a result of the downgrade, we had a flight to safety globally to U.S. government securities. This pushed yields down, not up.
We are fortunate in that we continue the dominant and reserve currency that so many countries around the globe rely on, and we continue to be the safe haven for investors not just around the globe, but also here in the United States. That worked to our advantage that time as it pushed yields and pushed rates down at a time when rates otherwise might have increased. Robert said he is not terribly concerned about the downgrade, but he does think we all need to be worried about the reaction in Washington D.C. to problems with the deficit and the fact that they are not willing to take action. The credit markets are most likely watching this carefully. If after the 2012 election we do not see a real concerted effort and a real plan to take care of these long-term concerns with respect to the federal budget, then he would be more concerned about downgrades of our credit.
If we get to this is 2013, Bruce wondered if we are going to go the route of austerity and how we would produce GDP growth from this. The kind of austerity programs that have been talked about and implemented in the European economies, unfortunately, do damage to the economy in the near term so that they can get their financial house in order. The levels of indebtedness and sovereign debt in countries like Greece and Italy, relative to the overall economy, are much higher than here in the United States. If there was a belt tightening that was required in order to set things straight in the United States, it would certainly hinder a growing economy and could slow down the pace of expansion. For the record, it does not feel like we are out of the recession, but we have been expanding and our GDP is higher now than it was in the last peak. Technically the economy recovered from a recession and started to expand. If we do go through an austerity program of sorts, it would either slow down that rate of growth that is mediocre at best right now; or it could tip us back into a recession. These are things we have to be very concerned about going forward a year or so out.
The GDP numbers have actually accelerated past the former peak, but we had 8 million jobs lost and have only rehired 2 million of those people. This is one of the quandaries we find ourselves in this particular economic cycle, and we should not be surprised by it. We had the recession, and it was the Great Recession; so it was the worst recession in the working lifetimes of many people. It was a large recession with unemployment rates that have risen to levels we have not seen since the Great Depression of the 1930s both in California and in the United States. When that recession hit and when the job losses occurred, the companies became very lean with respect to their workers and their workforce. They also took advantage of technology, which has been partial of the economic story really for the past 30 years, beginning with the PC and going forward. As a result of that, they were able to repair their workforce and replace some of the functions with some kind of technology. Now that the economy is coming back, some of the jobs that used to be there are no longer there because of the displacement by technology. This goes back to the point touched on earlier that people have to be adaptable and have to be able to move in to the jobs of 2012 and 2013, which might well be different from the jobs of 2002 and 2003. Training is very important for these kinds of transitions from the job climate that existed ten years ago to the job climate we have today.
Bruce recently looked at a report that talked about rankings as far as business friendly states, and California was almost at the bottom of the barrel. Robert is in the Los Angeles County Economic Development Corporation having to attract people into an environment that you maybe did not create. In other words, Bruce wondered how you attract people to Los Angeles and Southern California for jobs in a negative environment and it has that reputation in place. This is indeed one of the challenges that we face across all of California, especially in Southern California, with the high cost of labor relative to other parts of the country. This also includes the high cost of other resources, not the least of which would be buildings and land. The perception, if not the reality is that there is a fair amount of red tape that one has to navigate in order to establish a business here. Fortunately, there are entities such as the LAEDC that provide assistance to employers who are interested in locating here to Southern California to help them work through that. The reputation that California has as not being a terribly friendly business state is certainly a hurdle to be overcome. This is something that is a long-term concern and has been a concern for a few decades; and it continues to be a challenge that we have to work on.
Bruce believes Texas might be the favored state and wondered why it is so different with them. Robert said that Texas has, among other things and from the workforce point of view, income tax at the state level and is also a right-to-work state. The presence of unions is not quite what it is here in the state of California and other states around the country. Their permitting and regulatory requirements are also not what they are here in California. When you are in the predicting business, you have to really pay attention to the whole country. Bruce stays up until midnight now seeing if Greece is going to default. It seems to be much more complicated than it ever has been. There is no doubt about the fact that our local economy is more closely tied to what is happening around the state and around the globe than it ever has been in prior years. To begin with, you take a look at things such as mortgage rates, which are determined in the global financial system. A problem in Greece, specifically their sovereign debt problem, will indeed cause difficulties for someone who is trying to finance the purchase of a new home or refinance a home. This is one example of how we are so much more integrated today as a global economy where local meets global in a way we did not really have to worry about or be concerned.
If you go back 40 years in the early 1970s or even the 1960s, which was not terribly long after World War II had ended, you would have seen that the U.S. economy was really the only economy that was untouched by World War II. Its infrastructure was in place, and it was the dominant economy around the globe. Over time it gave way as different economies and different countries rebuilt and then saw Germany and Japan and other economies that had been industrialized become re-industrialized and become more important players on the global scheme. You look at the 1980s, we had another wave of economies that have come onto the scene.
Tune in next week for the second part of Bruce’s interview with Robert Kleinhenz on The Norris Group Radio Show and be sure to visit our website, www.thenorrisgroup.com, for more information on trust deed investing and our loan programs.
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