Walters: California Also Faces Economic Hit

Gov. Gavin Newsom’s engaged, steady-hand-at the-tiller approach to managing California’s slice of the global coronavirus pandemic is winning well-deserved plaudits.
Newsom has slowly but steadily ramped up restrictions on Californians’ potentially dangerous social interactions in hopes of slowing the spread of the deadly virus, while dipping into the state’s financial reserves to cushion impacts.

As he called on lawmakers to act quickly, Newsom declared, “we must rise to the challenge facing our state with every tool at our disposal and without a second of delay. We cannot hesitate to meet this moment.”
The Legislature unanimously authorized Newsom to spend as much as $1.1 billion to fight the virus and its social and economic impacts.
Just hours later, Newsom extended “shelter in place” directives adopted in the hard-hit San Francisco Bay Area to the entire state, saying, “The directive coming out of the Bay Area…is no gatherings, which just makes sense to me at this point. … So directing that no gatherings be considered, advanced in this state, that’s the new guideline we’re putting out this evening as well, and we think it’s very rational under these circumstances.”

Newsom Must Also Accept That the State’s Economy Will Decline

Newsom’s hands-on, pro-active management stands in obvious contrast to President Donald Trump’s erratic performance, and is reminiscent of how a previous governor, Pete Wilson, dealt with a cascade of natural and manmade catastrophes during the 1990s.
Like Newsom, Wilson came into the governorship with ambitious plans to overhaul how governments deliver services, but as disasters — everything from a severe recession to a deadly riot — piled up, he figuratively shrugged his shoulders and accepted the role of crisis manager.
As he confronts the immediate crisis, Newsom must also accept that the state’s economy will decline, cutting into the revenues he needs to expand health care and early childhood education, attack homelessness and thus address the state’s yawning income disparities.
As Newsom was managing the crisis this week, UCLA’s Anderson Forecast, the state’s premier economic think tank, declared that the nation is already in recession and California will be hit particularly hard.
“For California, a state with a larger proportion of economic activity in tourism and trans-Pacific transportation, the economic downturn will be slightly more severe,” Anderson said. “Employment is expected to contract by 0.7% in 2020 with employment contracting during the second and third quarters at an annual rate of 2.6%.

The State Budget Is Extraordinarily Dependent on Personal Income Taxes

“The state’s unemployment rate will rise to 6.3% by the end of this year and is expected to continue to increase into 2021 with an average for 2021 of 6.6%. By the first quarter of 2021, California is expected to lose more than 280,000 payroll jobs with more than one-third of those in the leisure and hospitality and transportation and warehousing sectors.

“If the pandemic is much worse than assumed, this forecast will be too optimistic. If the pandemic abates quickly because of the extraordinary measures being put into place to address it, an outcome that the medical community thinks unlikely but possible, then the forecast will be too pessimistic and economic growth in the third and fourth quarters of the year will be higher.”
The state budget is extraordinarily dependent on personal income taxes from the state’s wealthiest residents who derive much of their incomes from stocks and other capital investments. Thus, state revenues tend to decline more than overall economic activity during a recession.
The state has about $20 billion in reserves, but they will be depleted quickly if the recession is severe and prolonged. Like Wilson, Newsom could spend most of his governorship as a crisis manager with his ambitious policy agenda on hold.
CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary.