Preliminary May labor force data counts for San Francisco, Marin and San Mateo counties puts the unemployment rate at 9.1%, 7.5% and 8.4% respectively, up 0.3 percentage points from April across the board.
The 9.1% unemploment rate for San Francisco in May represents a new 25 year high.
Extending the observations of a plugged-in reader last month, the number of unemployed in San Francisco increased by 1,000 from 39,800 to 40,800 in May while the number of employed fell by 5,800 (from 412,900 to 407,100) as the labor force fell by 4,800 (from 452,800 to 448,000), a loss of 7,000 over the past two months.
Monthly Labor Force Data for Counties: May 2009 (Preliminary) [EDD]
San Francisco County Unemployment Dips To 8.8 Percent In April ’09 [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by Jeffrey W. Baker

    Clearly this can mean only one thing: rents are going to skyrocket! As Moldavian bauxite barons snap up all the housing stock in their favorite travel destination — San Francisco, obviously — the squeeze will be on. Desperate DINKs unable to find a house to buy at any price will find themselves offering $5000, $6000, even $10000/month for a 2/1 on the south side of Potrero Hill.
    Buy your tickets to Vegas now, landlords, and practice whistling “We’re in the Money.” Good times right around the corner.

  2. Posted by tony

    Wow, a full 1%+ of the labor force left in May?
    I suppose the silver lining there is that if you have the means to ride things out, there may be far less competition around when new jobs finally emerge…

  3. Posted by ex SF-er

    when new jobs finally emerge…
    I think this is the most worrisome aspect of contemporary America. The last 2 recoveries have been so-called “jobless”. the jobs simply don’t come back as times recover. They either go elsewhere, or are replaced by automation, or are eliminated and the work shuffled to other employees. (so called “productivity gains”)
    This is one of the chief reasons why the US in general (and SF particularly) must reduce it’s cost of living. It is often simply uneconomical to do business in high COL areas. we do have a major technological advantage, but that isn’t always enough.
    Can tech innovate enough to make it “worth it” to continue doing business in a high COL high tax bankrupt state? we shall see.

  4. Posted by Brahma (incensed renter)

    Can tech innovate enough to make it “worth it” to continue doing business in a high COL high tax bankrupt state? we shall see.

    Probably not, but the fact that it’s a high tax state and does not have it’s fiscal house in order matters little. Hopefully carpetbaggers will leave and the COL will come down, but I’m not holding my breath.
    A big portion of the shot callers on Sand Hill Road right now are there largely to make sure that jobs are in fact not created here and are diverted to Bangalore.
    If I had $5.00 for every time I’ve read the phrase “If you’re a startup, unless you have a plan for outsourcing to India, we won’t even look at you” in the last three years, I’d have enough for a 30% down payment on an SFH in Noe Valley.

  5. Posted by NoeValleyJim

    California is not a particularly high tax state. This is an often repeated myth, but it is not true.
    http://money.cnn.com/pf/features/lists/taxesbystate2005/
    The overall tax is slightly higher than average, but so are incomes, so it evens out. I guess the question is whether incomes will continue to be slightly higher than average.
    Pretty much all post debt-bubble economies work their way out with export lead growth and America won’t be any different. The Emerging economies, especially Brazil and China are picking up right now and this will help drag us out of recession.
    I tend to think that the West Coast and San Francisco in general will benefit from Chinese economic growth, though I have to admit I don’t really know the exact mechanism this will happen.

  6. Posted by LMRiM

    Income tax in California is already just about the highest in the nation. The same goes for sales tax.
    The overall tax burden relative to aggregate income appears average (NVJ’s link), but that’s because property taxes are relatively low and these are aggregated within those stats. In effect, because of prop 13, relatively recent purchasers “subsidize” long term owners.
    The problem for job creation going forward is that it is income and sales taxes that will affect desirability, not the fact that legacy property owners enjoy very low property taxes (while new entrants face sky high housing costs, partially because of the tax distortion inherent in the property tax regime).
    I personally don’t think Caifornia’s fiscal situation is solvable as a political matter. I wouldn’t count on CA’s growth in the next decades to be anything like the last few.

  7. Posted by NoeValleyJim

    Everything LMRiM says is true, but I think that slowing California’s explosive growth was one of the points of Prop 13. It has taken a long time, but maybe it is finally starting to work.
    I think that California is going to continue to grow population, mostly from overseas immigration, but I agree that on a percentage basis, it will slow down.
    What has been killing California more than the relatively high local tax burden for new entrants has been the siphoning off of California tax revenue to less productive regions of the country, particularly The South. California only gets back 78 cents in federal spending for every dollar it sends to DC. I am probably not going out on a limb here to suggest that this will reverse itself with a Democratic White House and Congress, though the carbon cap and trade discussions have not been encouraging.

  8. Posted by Condo Prospect

    California has an enormous tax burden on its citizens. For starters, many people are now subject to the 10% income tax rate, and those who are not aren’t taxed much lower. Additionally, we have sales taxes that are approaching 10% in many counties. When you start adding in fuel taxes and property taxes, it is really expensive to live here.
    The other insidious element is that the high CA income tax rates are going to bump more and more people into AMT, which taxes ALL income at a two-tiered rate that is higher than the average rate paid by someone making the same amount of money who is NOT subject to AMT. Why? State Income Taxes and Property taxes are AMT “preference items”, which are added back to someone’s Adjusted Gross Income, among a few other key items. If the resulting total of these preference items is high in proportion to their income, they will likely be subject to AMT.
    Someone paying 10% state income taxes and paying several thousand in property taxes is going to have a much higher federal tax obligation than someone else making the exact same amount of money in a state with lower income taxes.

  9. Posted by Robert

    Well, Tony, who knows where they went to? If it was the east bay or south, then they are still in the labor market here. People need to keep in mind that the role of SF is to be the entertainment hub of a 7 million person economic zone, and people shift around this zone as jobs and their fortunes shift. As they say, being the most expensive house in the block is not always a good idea.
    I do expect a 10% or so population loss when this is all over. Of course, there are all sorts of phony statistics out there — if you believe the california department of finance, we already have 850,000 people! I have a friend who is a city waste-treatment engineer, whose department was told to assume there are 750,000 people (less than 1940), with 1.1 million during the day (e.g. commuters, tourists). So, it sounds like they are keeping two sets of books, one for the federal cheese, and one for actual management.

  10. Posted by nnona

    “but I think that slowing California’s explosive growth was one of the points of Prop 13.”
    What? Honestly, that is the first time I’ve heard this in the 30+ years of Prop 13’s existence.

  11. Posted by justin

    Robert, right on both counts. I have been doubtful of the so-called population boom of the city, and have long given up hope of San Francisco being the “Wall Street of the West”. San Francisco is looked at by my friends in L.A. and N.Y. as a weekend get away destination for shopping and restaurants, but they seem to talk about our city almost as if it were a theme park instead of a city of real business and culture.

  12. Posted by LMRiM

    Well, NVJ, two quick rejoinders to your 1:20 PM
    post.
    First, while it is true that CA “gets back” a smaller percentage of Federal spending relative to Federal taxes collected within its borders, CA also derives a tremendous amount of revenue/income from companies that sell into the whole of the US. It’s always hard to tease out the costs versus benefits in any integrated economy like the US. Complaining about not “getting our money back” is sort of like me complaining that I contribute so much more to CA’s tax base than I receive in services (after all, why should the good people of Tiburon contribute so much to the “less productive” people of California – and yes, despite my not having a job in over 10 years and my very best efforts to minimize reportable income, unfortunately I am still well above the median household income for Tiburon, which itself is probably 2-3 times the HHI for California) :) Also, just how much of the US’s overall debt burden is now being run up to “bail out” Californians who weren’t smart enough to figure out that their houses were overpriced? With 58% of the Option ARMS alone originating here (with only about 12% of the population), I’d say that CA is starting to look like a welfare case :)
    Second, I hear the argument a lot that CA isn’t “getting back” its tax dollars from Uncle Sugar and that Obama Claus is going to change all that. Maybe, maybe not, we’ll see… But I would note that if the state is looking at how to beseech their Washington masters for more crumbs, they’re running out of productive ideas…. Sort of like a number of the welfare cases I grew up around back in the Bronx – always trying to figure out how to get some more goodies rather than how to elevate their families’ living situation.
    Everybody has to make the determination of the benefits versus tax detriments of living in CA. For us, it no longer makes sense, and so for tax year 2010, it’s adios Cali! Interestingly, I spent Sunday at a barbecue at one of my kid’s friends’ place. Somewhat unsurprising story it seems among people I seem to know – dad was a former “technologist” (his term)/VC who now just spends time with his young kids and trades his own account, mom dropped out of the corporate rat race years ago. Ph.D and JD/MBA – the kind of people that a state would probably want to keep. Mostly because of taxes I gather (and some quality of life issues, but at their level of assets, CA is not particularly expensive), they’re leaving CA after a decade and are looking to go to rainy Seattle in no tax Washington. I do suspect that CA has already reached a trend turning point, but if I’m right it will only become clear a decade or so from now.

  13. Posted by Jimmy (No Longer Bitter)

    NVJ: To suggest that California’s overall tax burden is “not particularly high” is utterly disingenous. As others have pointed out, for new entrants and young people, the tax burden is the absolute highest of any state in the union. Taxes here are almost as high as in the UK or parts of Canada (e.g. Alberta) but without the acompanying benefit of free healthcare.

  14. Posted by Jeffrey W. Baker

    Jimmy, I hate to throw in any evidence into this ignorant discussion, but everything I’ve seen points to California being in the middle of the pack in terms of overall tax burden. This CNN article from 2005 puts California 20th among the 50 states.
    http://money.cnn.com/pf/features/lists/taxesbystate2005/index.html

  15. Posted by sfperson2000

    The carbon caps and green movement will and has had a greater impact on companies leaving california than taxes. Electricity prices has been and will continue to shoot through the roof. They are 10x the price in parts of Washington sate.
    Also, it isn’t just taxes, it is the harsh regulatory environment that comes complete with self-funded agencies (read: they must fine business to keep regulating).
    All together this is not a pleasant place to do business.

  16. Posted by Jeffrey W. Baker

    Actually, carbon caps are going to clobber places like Ohio without really having a great deal of impact in California. Our economy is relatively light on the carbon production.
    It’s quite disingenuous to compare electricity rates between California and Washington when Washington has the Columbia River and we do not.

  17. Posted by Rillion

    “I am probably not going out on a limb here to suggest that this will reverse itself with a Democratic White House and Congress”
    I think you are going out on a limb with that prediction. The majority of the federal budget is non-discretionary spending (ie entitlements, like social security, medicare, etc). Until the average age of California starts increasing relative to the rest of the states we will not see a dramitic shift in our share of Federal spending.
    The states that generally get a bigger share of the Federal pie usually have older populations with high number of retirees, particularly veterns. Them retired people make a huge difference in the amount of taxes paid and amount of government money and services received.

  18. Posted by Rillion

    >they’re leaving CA after a decade and are looking to go to rainy Seattle in no tax Washington.
    Well they are almost tax efficient. If they wanted to be really tax efficient they could move to just outside of Portland, Oregan, just north of the Oregan/Washington border. Then you can pay no state income tax and do most of your shopping in no sales tax Oregan.

  19. Posted by grass is greener

    Lets be real: S.F. is a supply and demand, 7×7 mile area bounded by 3/4 water. Our roads dont get iced, humidity is not on par with FLA and our views are boundless. I would argue it is one of the most beautiful cities in the US. If you cant afford it, move on; someone else will fill your space. Nothing goes down for ever, nothing goes up forever. Govt tax bill assesments will bypass Prop13 controls and 70% renters will pass measures that sound good, leading homeowners to pay the bill, yet I dont see a mass exodus. If you cant afford it, sell at a loss and move to LA and NY. My advice, hold on untill it gets better and ride the next wave (I.E.: gold rush, 50’s beatnik, 60’s hippies, 70 gays, 90’s hitech or whatever change brings) Sometimes there is no rhyme or reason for what happens, but change is inevitable and people from all over the world desire to live here.

  20. Posted by dub dub

    Hey NVJ, you should update your talking points (or change your sources).
    The tax foundation (where NVJ got his 2005 data in the cnn link above) puts CA as 48/50 in FY 2009 for overall business taxes (behind new york and new jersey).
    Also (and I’ll quote)
    “Estimated at 10.5% of income, California’s state/local tax burden percentage stands at 6th highest nationally, above the national average of 9.7%. Californians pay $5,028 per capita in state and local taxes.”
    http://www.taxfoundation.org/taxdata/topic/15.html

  21. Posted by NoeValleyJim

    But I would note that if the state is looking at how to beseech their Washington masters for more crumbs, they’re running out of productive ideas
    You have got to be kidding me. Pretty much the entire Interstate system in California needs work, as well as the water system. We have the High Speed Rail we are starting work on, and we really need to start building another tube under the bay, since the BART tunnel today is at capacity. California used to lead the nation in infrastructure spending, back in the Golden Era of Pat Brown, but we have lagged since Prop 13 and there is a tremendous amount of catching up we need to do.
    There is no particular reason that Federal dollars should be used for this, but there is no particular reason why they should not be, either. It is all politics. Have you ever ridden on I 73/74 in North Carolina? It is a beautiful four lane freeway that runs through the Caroline pine forest, with practically no one on it for hundreds of miles. They should name it the Jesse Helm’s memorial patronage freeway.
    The states that generally get a bigger share of the Federal pie usually have older populations with high number of retirees, particularly veterns
    New Mexico, Mississippi and Alabama lead the pack and they do not have particularly old populations. It is probably true that a lot of this has to do with military spending, but this will probably take a dive, too.

  22. Posted by Robert

    Pretty much all post debt-bubble economies work their way out with export lead growth and America won’t be any different. The Emerging economies, especially Brazil and China are picking up right now and this will help drag us out of recession.
    NVJ, I couldn’t disagree more with this conclusion, which is what makes this deflation very interesting. There is a lot to say on this topic, but I will summarize quickly, and (hence not efficiently):
    1. There is a powerful global web of political/trade relationships whereby wages have suppressed and the surplus capital has been diverted into the U.S. and the emerging economies. This allows enriching of well-connected exporters within China, and indeed globally. More on that here. One way to think about this, is that when an exporter earns large profits, they want to get those profits out of the country quickly, to prevent them from driving up the cost of capital goods or (God forbid) fall into the hands of the workers. This allows for sustained profit growth in the hands of the exporting owners of capital.
    2. A “financial” corollary of 1) is the “savings glut”, which is very real, but should be thought of as a “profit glut” or “income concentration glut” or “inequality glut”, whereby there is more investment capital chasing (relatively) shrinking purchasing power, causing real returns to fall, and therefore deflation. Deflation in credit-based economies can be thought of as nature’s remedy to extreme income concentration.
    3. An “economic” corollary of 1) is the profound malinvestment/structural problems with the global economy. It’s not just a question of americans consuming too much — the supply chain is too dependent on massive international subsidies of labor, cost of capital, and commodities. Because of this over-dependence on unsustainable input costs, the supply chain has stretched and crawled all over the globe, and the end result is a massive transfer of wealth from foreign consumers/workers to foreign/american owners of capital, with the american consumer getting a small slice of the action in the form of slightly lower product costs.
    4. Those dictatorships/pseudo-democracies that have been taken captive by their exporters will not willingly give up the export game. Not until revolutions occur. That means, China will not restructure to promote domestic demand — notice that it has recently shifted to a “hard” currency peg, and has been hoarding commodities. It is working very hard to keep the current game going, notwithstanding the pablum about the dollar.
    5. Not everyone can be an export power, but this deflation is global. It’s a race to the bottom in terms of whose population/environment can suffer the greatest declines, and in that competition, the u.s. will lose, thankfully.
    6. This is not to say that the size of the current account deficit will continue to grow. It will shrink, as the deflation happens (i.e. “money shrinks”). Indeed, deflation is the only successful counter-trend to 1). However, the U.S. will not be a major export power until there is a revolution in asia that forces the exporters out of power, installs real unions, and shifts asia to a consumption oriented society. I am not holding my breath. Only then can the u.s. even think about exporting its way out of anything.
    7. Until those political adjustments occur in our trading partners, the necessary financial adjustment is deflation. I.e. as long as everyone is using trade as a mechanism to suppress domestic purchasing power, then real returns will continue to fall, which means that assets become worth less — i.e. deflation. Rather than exporting our way out of the deflation, global attempts at becoming export powers will inevitably lead to deflation.

  23. Posted by Jimmy (No Longer Bitter)

    JWB — overall tax burden for WHO? That is the crux of the argument.

  24. Posted by Robert

    dub dub,
    The tax foundation is intellectually bankrupt. I wouldn’t trust any data coming from them. PPIC is much more well-respected, and NVJ is right about that.
    There are a whole host of ways that you can manipulate the data:
    1. Look at per capital expenditures instead of per-capita expenditures as a fraction of per-capita incomes. This makes wealthier states look like they spend more, and makes heroes out of places like Alabama.
    2. Another trick is to look only at income taxes and not at the total tax burden. States that rely on income taxes vs. property taxes look like they spend more.
    3. Another trick is to include enterprises (e.g. state run utilities, airports, etc.) which makes “spending” look higher when comparing against states with fewer enterprises.
    When you adjust for all of these tricks, California ends up being in the middle of the road for both spending and revenues.
    The problem with california, of course, is our broken budget process, and more importantly, that the state is too dependent on higher income households, which necessarily means that it is a boom/bust state, as the higher incomes are much more volatile and dependent on asset valuations. But windfall revenues are quickly absorbed and funneled into new programs — hence the perennial budget crises that hit during downturns.

  25. Posted by tipster

    We’re using the slowdown to further automate our operations. Our goal is that when things come back, we’re going to have 20% of the people running the place than we did last year. 80% of our jobs will be automated. We’re implementing it now, and it’s absolutely killing us in terms of efficiency as we work the bugs out of everything, but that’s what smart business people do in a downturn.
    I’m looking into a new line of business as well, and that will be completely outsourced. You can just get people in Austin and Oregon to run everything for you these days, if you don’t want to go overseas that is, and still save a bundle. The new business will have ZERO California employees. They just aren’t feasible for us any longer.
    So we’re killing off jobs and we’re not going to replace them in state. You can’t compete in what is looking to be a lost decade, if your costs aren’t in line with what your out of state competitors can provide.
    80% of our jobs are going to be gone, we aren’t hiring any new employees, and those that are being replaced are being replaced at 80% of the former employees’ salaries.
    Its just the new reality.

  26. Posted by Jimmy (No Longer Bitter)

    California’s only problem is its broken budget process?
    How about the fact that VC investment (the raison d’etre of Silicon Valley) has fallen off a cliff (and limited partners are fleeing to other asset classes due to persistent low returns and poor liquidity on their funds)?
    I think that could be a teensy little problem for the state, to name just one.

  27. Posted by dub dub

    “taxfoundation.org is intellectually bankrupt”
    Robert the 2005 cnn tax link is based on data from taxfoundation.org (according to that link)!
    I merely posted their most-recent (contradictory) data, which I bet NVJ already knew about, which is why he posted the indirect, old second-hand cnn data, which everyone else is “using” to tell themselves what they want to hear.
    Knocking down straw men is a lot easier, can we do those instead? :)
    I’ll take your word that taxfoundation.org is intellectually bankrupt (I have no idea). You can evidently use its data to prove anything you want to, so at best it’s useless (though very convenient)! :)
    @tipster: good stuff!

  28. Posted by ex SF-er

    I think some of you focused on only one part of my quote when I said “Can tech innovate enough to make it “worth it” to continue doing business in a high COL high tax bankrupt state? we shall see.
    it’s not just that CA is high tax. it’s also that it is high COST OF LIVING.
    and not just in comparison to other US states, also in comparison to global trading partners.
    Up until now SF has benefitted because the innovation was centered near SF, and then the production has all been shifted elsewhere. (the so called Apple model… create in Silicon valley and then build it in Asia). Can this technological advantage continue like this?
    My guess is no. CA could remain high tax and still do well globally, but would need to lower its COL IMO.
    as for CA not getting its tax dollars back- get over it. Almost all of the “Northern” states put far more in than they get back.
    7 states get less back than CA:
    Delaware, IL, MN, NH, Conn., NV, NJ

  29. Posted by marko1332

    Rillion, that would be Vancouver, WA, across the Columbia from Portland. To be even more efficent, you would rent or buy a house and never move; Washington charges a 1.8% excise tax on the sale of property. There is no state income tax, but they do find other ways to get you.

  30. Posted by NoeValleyJim

    No dub dub, I did not know that more recent data from taxfoundation.org shows CA at 6th, but poking around their site, they claim that CA was 9th in 2005, so someone somewhere is confused.
    High taxes don’t necessarily cause slow economic growth in any case, the northern European democracies prove that. It is how the money is spent that really matters more than the overall tax burden. Here is where CA tends to fall down, I think. Instead of investing in education and infrastructure, we have build lots of prisons and expanded our welfare benefits.
    Robert, I don’t believe that we are going to start exporting a bunch of stuff to China anytime soon, but as long as the relative level drops, we should be fine.
    http://www.tradingeconomics.com/Economics/Balance-of-Trade.aspx?Symbol=USD
    Our overall trade deficit has dropped dramatically.

  31. Posted by Robert

    dub dub,
    You are confusing me with NVJ. I did not link to tax foundation data — I linked (in a previous) thread, to PPIC data (pdf).
    I agreed with NVJ’s statement that we are about average, once you adjust for the fact that incomes are higher in this state (see the third bullet point). That does not mean that I wholeheartedly agree with every supporting point that he made.
    For a critique of other approaches to measuring revenue burden, look at the first chapter of this report.
    I think, it’s safe to say that in public policy circles, PPIC is much more well-respected than the tax foundation, or other partisan groups. Others can chime in here about that.
    If you can give an example of me “twisting” data, then please do so — I would he happy to issue a retraction, as I have in the past.

  32. Posted by Robert

    NVJ,
    Of course the deficit dropped dramatically during a deflation! See point 6, above.
    There is a huge difference between the current account turning less negative and exporting our way out of the deflation. The latter cannot happen in this case; we will get no help from exports — the only help, in terms of arresting the deflation — will be if domestic demand (purchasing power) increases.
    Now, having 1/6 of incomes come from government benefits certainly helps, but is it sustainable? Moreover, as soon as domestic demand shows signs of picking up, there is an army of export firms waiting to capitalize on that, and another army of domestic capital (such as evidenced by tipster), ready to suppress domestic demand yet again.
    There really is no way out of this barring fundamental political change, and a secular shift of of profits away from capital and into wages, such as what happened in the post depression era.
    Now, a very inefficient way to do this is via massive government benefits programs, but at the moment, that’s all we’ve got. Exporting our way out is a non-starter.

  33. Posted by dub dub

    “You are confusing me with NVJ”
    Quite impossible, robert, since I happen to know who NVJ is ;) ;)
    I’m sorry I misunderstood you to be using NVJ’s old 2005 cnn/taxfoundation link to justify your conclusion (as another poster above seems to have done).
    I don’t have time to read your actual link, but thank you for providing it. There’s no need for either of us to spend more time on this issue.
    I like your posts (and NVJs) so please keep it up, and I’m lucky to be able to read what you and other folks have to say for free.
    I find that SS is an amazing data filter — sure, the quoted data might be B.S, but it provides a smaller pile to sift though. :)

  34. Posted by anon

    Somewhat unsurprising story it seems among people I seem to know – dad was a former “technologist” (his term)/VC who now just spends time with his young kids and trades his own account, mom dropped out of the corporate rat race years ago. Ph.D and JD/MBA – the kind of people that a state would probably want to keep.
    Just curious, LMRiM, why exactly would we want to keep these people? Ok, maybe we’re siphoning some tax money off of them if the husband is a successful trader, but if both are no longer actively contributing to working or creating jobs here, they don’t seem like the type of people that we should be going out of our way to “woo”.

  35. Posted by Robert

    why exactly would we want to keep these people?
    Maybe they spend money here — and do so without demanding high wages in return. Sort of the perfect economic actor as far as businesses are concerned. Demand is a good thing, and in short supply at the moment.

  36. Posted by anon

    ^Sure, they’re not bad for the area, but they’re essentially the same as retirees. Are retirement locales generally economic leaders?

  37. Posted by anon

    To clarify – I’m not suggesting that we want them to leave, but I’m suggesting that we shouldn’t be designing and shaping policy based on this type of person.

  38. Posted by ex SF-er

    There really is no way out of this barring fundamental political change, and a secular shift of of profits away from capital and into wages, such as what happened in the post depression era.
    Now, a very inefficient way to do this is via massive government benefits programs, but at the moment, that’s all we’ve got. Exporting our way out is a non-starter.
    which is why I have predicted for some time that we’ll see trade wars. Tariffs, protectionist measures, etc.
    At some point the Asian tigers (and India) will be able to create internal demand and increase consumption. un/fortunately that seems to be a long ways off (decades). I agree with you that there simply isn’t a consumer to replace the Americans yet.

  39. Posted by LMRiM

    Just curious, LMRiM, why exactly would we want to keep these people?
    I had hoped that that was facetious, but then I read your later post in response to Robert….
    It’s a little unfair, because I didn’t provide a lot of details (I’m actually pretty good friends with them, having grown to know them through our kids’ school interactions).
    The dad’s a foreign immigrant who went from relatively little to an 8-figure net worth. Very late 30s now, and he wants to have a “light footprint” for a while so that he can raise his children, but I doubt someone like that (Ph.D in e.e.) stays out of the “productive workforce” forever. Even if they do (and the wife is no slouch either), they still provide all sorts of resources to the economy through their natural consumption demand, as Robert notes.
    Moreover, their kids are statstically likely to be high achievers with high educational attainment. So, even apart from the fact that the family is always going to contribute more in tax revenue than they receive in services (thereby subsidizing the legions of California civil servants, who of course provide zero tax revenue, net, as well as subsidizing the huge welfare entitlement class), the state should probably want them to put down permanent roots because the kids will be more likely to settle down where their parents are.
    I’d also think that, ceteris paribus, you want to have more rather than fewer high IQ people in a region, regardless of whether or not they are now in the workforce (or will ever be again). Option value, I guess.
    But you know, I’m not wedded to the idea, and I’ve been thinking about your point some more, anon. Perhaps you’re right, in that there is a social cost to having high achievement/high wealth people around in close proximity (as in cities or built up areas) to people of lower abilities. “Politics of envy”, and all that. Who really knows?
    About designing policy to attract certain sorts of people, I think that high taxation of income that is generated through productivity (whether personal or corporate) is a bad idea, period; I also think it is a bad idea to incent legions of very low skill low wage low literacy immigrants who will tax the very large social benefit system that has arisen, but what do I know? I can see how the power structure benefits greatly from having a large, highly dependent lower class (cheap labor and reliable votes to expand government). I’m not sure how the power structure is going to benefit from our friends selling their Tiburon place and moving their tax dollars and resources to another state.

  40. Posted by Jimmy (No Longer Bitter)

    I think this is a very interesting debate. I don’t see a particular benefit from designing tax policy to encourage or discourage high-income individuals from taking up residence here.
    There is, however, a benefit from creating economic distortions that favour investment in new enterprises (e.g. reducing 28% tax rate on capital gains from small businesses), additional credits for R&D investment and, generally speaking, tax benefits for local manufacturers and exporters. (And while we’re at it, risk capital for truly new ideas — an important role that the federal government takes that is not and never has been taken up by the private sector. Historically (for millenia) this funding has taken the form of military spending).
    Those types of incentives and spending are unquestionably beneficial to their local economies, while spending on welfare, tax deductions for non-productive asset (housing) and other counterproductive tax incentives do nothing to help employment growth.
    I don’t really see a connection to personal tax rates, I believe that a core group of people will, given the tools, naturally strive to excel and create new companies, and only later when you actually have enough money to worry about, do tax incentive factor into the equation.

  41. Posted by anon

    LMRiM – don’t take what I said as saying that I want them to leave or think that the state should want them to. I was more looking for the type post that you and Robert posted.
    I do think that there is some level of too many wealthy people sitting around living off investments though (but I don’t think we’re anywhere near that in this area). At some point in time, too much of the economy shifts to simply providing services for these people, rather than looking towards new ways of creating wealth and bringing in money from other areas (which tends to have a negative effect on everyone, including the kids of the wealthy folks – Santa Barbara would be a good example of this).

  42. Posted by Robert

    I don’t really see a connection to personal tax rates, I believe that a core group of people will, given the tools, naturally strive to excel and create new companies, and only later when you actually have enough money to worry about, do tax incentive factor into the equation.
    Absolutely. The broad stroke is that only after people stop being productive do they start to read Ayn Rand. If they are really busy inventing and working, then they are fulfilled by it, and they do it for far less money than is commonly believed, as big rewards are both rare and uncertain, although a decent life is not hard to come by. But I wouldn’t prescribe to intelligence or effort an 8 figure net worth. I’ll butcher a Taleb quote: “talent and hard work will get you a professorship or a book deal, but a nobel prize or a booker award requires luck.”
    Which is not to say that we should drive out the lottery winners, particularly as most things in life are learned by mentoring from someone who is good — so we want and need good people, in all fields, and we need them mixing around everyone else, not barricaded in some tax haven.
    But it’s Saturday, so let’s talk about wealth and the underclass! I think people don’t appreciate the “reset” that we had in the forties and fifties, you can’t just keep siphoning off money from the population, without recirculating it somehow. It leads to systemic problems. Given that talent and productivity are not equally distributed, and given that it is not possible to store wealth, you have to keep sprinkling the purchasing power on the masses, so that the most productive can fight to vacuum it up.
    Even people with no contribution to production still choose the most desirable products, thereby allocating resources to the most productive businesses, and allowing the private sector a steady flow of profits. It is that flow of profits which creates the illusion of stored wealth, and should that flow be disrupted, then you get asset deflation, sooner or later, and the wealth “shrinks” to some new, lower level, commensurate with the lowered ability of the unwashed masses to make purchases.
    Now maybe taxation is not the most efficient way to achieve this sprinkling — no need to talk about fairness here — but I have yet to see any intellectually honest alternative proposed. I guess for a time, you could try exports, and siphon off the wealth of someone else, should the domestic population not have enough, but that’s not very realistic, going forward. At some point, we will need to be honest with this.
    Now, all of this is in an environment of wealth, in which we’ve escaped the Malthusian trap, and are struggling over a plush life. It could be that productivity “runs it’s course” at some point, say because we are all providing manual services to each other, and it won’t be possible to support a large non-productive population. But I claim that in that case, it wont be possible to accumulate an 8 figure net worth either — one requires the other. Having the “moral compass” of manual labor economy while attempting to accumulate orders of magnitude more wealth than your fellows is disingenuous — people need to think through the implications of these things.

  43. Posted by Brahma (incensed renter)

    At some point the Asian tigers (and India) will be able to create internal demand and increase consumption. Unfortunately that seems to be a long ways off (decades).

    I hear and read this kind of thing all the time, but nobody has yet explained to me how it logically follows that, if indeed internal demand and increased consumption materializes in East and South Asia, how ever far off into the future, consumers in those countries will want/buy things that we export from the United States and somehow create jobs here that will magically offset all the jobs lost from offshoring and outsourcing over the last ten years in addition to the ones lost from the economic downturn over the last two years.
    No one seems to be able to comprehend that the Asian tigers including India can simply trade with each other for what they want and they don’t have to buy anything from the U.S.. China in particular has been using us, running up huge trade surpluses exporting cheap goods to our consumers fueling huge economic growth numbers. And doing what with the proceeds? Buying up our T-bills.
    Now folks expect their consumers to turn around and buy good from us. Good luck with that!
    Guess what, it’s going to be like a pickup artist talking to last nights conquest the morning after a one night stand: I got what I wanted, now beat it!
    From the mid-17th century onward, China sold silk, tea, porcelain, textiles and other manufactured goods to the English (and other European nations), but the Chinese weren’t very interested in buying English goods. Emperor Quanlong laid it out for them thusly:

    There is nothing we lack. We have never set much store on strange or ingenious objects, nor do we need any more of your country’s goods

    So we’ve seen this play before. We are England. China is China (and India). And we all know how great this worked out.

    I agree with you that there simply isn’t a consumer to replace the Americans yet.

    Yep.

  44. Posted by ex SF-er

    Brahma:
    you are correct. it is not assured that the Chinese will buy American if/when they increase their consumption. However, in general as countries increase their consumption they also increase trade with international partners. (this is not an inviolate law of course).
    China increasing demand will mean that the Chinese will feel less of a “need” to recycle our dollars. This will help to resolve the terrible trade imbalance we have now. The ONLY reason the trade imbalance can happen is that the Chinese peg their renmimbi/yuan below market rates to our dollar and then recycle those dollars back to the US in the form of credit/buying our debt/etc.
    This keeps the dollar above where it should be. which makes our workers uncompetitive.
    As China increases internal demand this “dollar recycling” will no longer be needed or desirable, and will slow and perhaps stop. this will make our dollar worth LESS of course, reducing our purchasing power. But also making our workers more competitive on a cost basis standpoint.
    Many of the jobs lost will never come back. And it is very possible that we as Americans will never see the standard of living (materialistic wise) that we’ve seen to date by being allowed to spend far beyond our means.
    But it should help with our job situation compared to otherwise. (meaning our job situation will improve with increased Chinese demand compared to a situation without increased Chinese demand). we’ll get more jobs (at less wages of course since our dollar will be worth less)
    the American standard of living will/must drop. increased Chinese/asian demand is just part of the process.
    that said: don’t underestimate the exporting power of the US. We export a LOT. (I THINK we’re the #1 exporter in the world… but don’t know for sure on that so please check it). the problem isn’t our exports, it’s that we import far more than we export.
    The Chinese will want iPods and Levis and American movies and our agricultural products in addition to Japanese electronics and German cars and French Wine and Italian clothes and all sorts of things! as their income goes up they will want the “real thing” and not the “knockoffs”. Go to a high end party/club in Shanghai or Beijing and you’ll see this for yourself.

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