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Thursday, May 30, 2024

A Third World (Fiscal) Prescription

I’m an economist, so my reading list tilts toward thoughts about the economy. But I recently read a piece that is more frightening than anything Stephen King has written. Yet in it lies opportunity for some communities in the Valley. The International Monetary Fund (IMF) is one of the world’s leading economic institutions. It tries to help foster international economic growth and stability. As part of its mission, it performs high-level research. One of its recent working papers is by renowned economists Carmen Reinhart and Kenneth Rogoff. “Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten” warns that Western countries are accumulating unsustainable debt that cannot be dealt with by traditional means: austerity, forbearance and growth. Instead, Western countries will be forced to use tools normally associated with Third-World countries. As they say, “resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression.” This is a dismal forecast, but the IMF and the authors have to be taken seriously. If we do see this sort of crisis, California and Los Angeles County could be ground zero. Our national debt is high and growing, and while California currently enjoys a budget surplus, it is because of a temporary tax, the fact that pension liabilities aren’t included in state budget accounting, and the ability of a very experienced governor to restrain the legislature’s tendency to spend two dollars of every surplus dollar. Los Angeles’ has its own fiscal challenges. After having suffered through the decline of its aerospace industry and the housing bubble, San Fernando Valley leaders must know that “it can happen here.” It has happened here. Denial is unacceptable. What would the Third-World Toolkit look like to a business person in the San Fernando Valley? First, governments with financial stress always defer infrastructure and maintenance. Freeways, roads, water systems, sewage systems and electrical systems would deteriorate. Parks would become ugly and dangerous. Traffic may or may not get worse; the infrastructure decline could cause a business decline and less traffic. Governments would try to raise revenue by increasing taxes and finding new things to tax. Interest groups would fight over what little money was available. What to do? To begin with, the issues need to be discussed, brought out in the open as it were. Politicians have a very short horizon and are anxious to defer difficult decisions to successors. They need to be forced to deal with the issue before it becomes another crisis. Every time a politician speaks in public, he or she should be asked what they are doing to divert a debt crisis. Then, find the opportunity that always exists in a crisis. In this case, the city of Los Angeles is likely to become a very unfriendly place for business. Those Valley communities that are not part of the city can be relatively attractive places to do business. So, attract some of the businesses leaving Los Angeles. But this leaves a number of communities still connected to Los Angeles and the unfriendly albatross it will be carrying. Those cities ought to consider either the much-discussed breakaway from the city, or building a menu of community-specific incentives to lure business owners. Sure, some businesses will leave the state, but not all. Some have to be in California because that is where their customers are. Some will stay in California because the boss wants to live in California. Some will stay because of the costs and risks associated with a long move. Moving is an expensive and risky endeavor for a business. The farther the move, the more expensive and riskier it is. There is risk in a new supply chain or distribution channel, and a long move risks losing some key employees. Whatever the reasons, many businesses will be looking for good, but nearby and familiar, places to set up shop. The new location won’t have to compete on cost with, say Texas; it will only have to compete with other California cities. It does that by having relatively business-friendly environments. In California, this mostly means lowering the costs of delay and uncertainty. Projects in California tend to take forever compared to other jurisdictions, and the risk is high that even after years of jumping through hoops and kissing rings, projects are denied. This reputation is the kiss of death for economic growth. By contrast, if a community can establish a reputation for telling businesses exactly what they need to do for approval, and then quickly approving conforming requests, it can gain more than its share of businesses abandoning declining cities. Bill Watkins is director of the Center for Economic Research and Forecasting at California Lutheran University in Thousand Oaks.

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