Guest view: The abnormal-normal local economy

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Pen and paper

If you live anywhere in San Benito County, you have a $8.5 million budget shortage consisting of a $3.5 million deficit in Hollister and a $5.0 million county deficit – like it or not, both will affect everyone – we’re joined at the hip.

    One reason we have this problem is that it’s been a very long time since we have operated in a normal economy and we have to re-learn how to do it. That’s because the trends have been abnormal for more than 15 years. Unfortunately, the level we are currently at is very close to our normal level.

    From 1995 to 2006 the entire nation, and most of all California, operated on two bubbles – the dot-com bubble and the housing bubble. Those bubbles, especially the housing bubble, made everyone feel rich; when individuals or organizations feel rich, they tend to spend as if they are rich and it’s a hard habit to break.

     The price of the NASDAQ composite index adjusted for splits and dividends increased six fold in only five years; then, in 30 months, most of it went away. It should have been a lesson, but the housing bubble took over even before NASDAQ tanked.

    From 1998 to 2006, the inflation adjusted home price appreciation in California grew more than 80 percent and the average home valuation increased $80,000. It was also common for home prices to double or triple in areas of high demand like San Benito County. Does that look normal? According to City-data.com after this enormous run-up during the second quarter of 2006, the median price for the homes sold in San Benito County was $600,000. By 2009, the median price had fallen more than 55 percent back to $250,000 and we’ve been bumping along near there since.

    You may wonder why San Benito County and Hollister are reaching critical budget crunches simultaneously, especially now that the economic curve has stabilized to some extent. It’s because local government adjustments usually lag a sharply falling economic curve. First, well-stocked coffers cushion any drop and it takes time before reduced revenues have a cumulative effect. Second, as long as the cupboard is not completely bare there are enormous political pressures to keep spending, employment, and service levels high.

To get our budgets in order we must dissuade those who believe we’ve merely been unlucky or that things are going back the way they were during the bubble. Remember the last persons off the ride are always broke and we will all have to bail them out.

    My guess is that we are 5 percent or 10 percent below normal right now and the overall recovery, disregarding spikes, will continue to be slow. Officially, the recession has been over since mid-2009, even conservative estimates do not run past mid-2010. Although there is some economic upside ahead, the nation is running a massive national debt and $1 trillion-a-year deficit. If the economy starts to overheat, the federal and state governments will have first call on excess money to solve their own financial problems.

    If this is normal, then we have to start looking for long-term solutions that work at this level or slightly better. The obvious ones are consolidation, aggressive elimination of duplication and unnecessary overhead, and benefit reform focused on public safety personnel. We cannot wait for these reforms to happen at government’s usual snail’s pace.

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