The Rejuvenation of California

By: 
Al Jacobs

The headline in the Orange County Register couldn’t be clearer: “California Starts Reopening Today.” The following sub-headline was somewhat less clear: “Back to limited business: Strict rules accompany easing of state orders.”

It’s been a unique experience since Governor Gavin Newsom, on March 19, chose to effectively terminate all social and occupational involvement and interaction in an effort to protect Californians from what is referred to as The Deadly COVID-19 Virus.

Since that date not a single person has been permitted to dine in a restaurant, leave their home for an unauthorized reason or be employed at a job not specifically approved by our leader. As a compliant society, we’ve obeyed the orders we’ve received, and during the two-month period since the lock-down, we’ve witnessed more strange events than in any science fiction movie you’ve ever seen.

Unfortunately, the governor’s subsequent appearance before cameras to announce his order that all Californian’s will “shelter in place,” was badly delivered and left many confused as to what they might do or not do. But even more regrettable, he gave little consideration to its economic consequences over even a short period of time.

As the strength of an economy is evidenced, not by the number of dollars it possesses, but rather by its economic output, restrictions must be sensible and targeted. As we now know, the unrealistic demands placed upon the state’s entire commercial structure put it into a head spin from which it’s still reeling.

Thus far California has processed more than 4.2 million unemployment claims since mid-March and the Newsom administration estimates almost 478,000 jobless claims were filed in just this past week.

But what is probably most telling is the state’s financial status. Early in the year the 2020-21 budget reflected a $5.6 billion surplus. It currently projects a $54.3 billion deficit; this was accomplished in only two months since the governor’s rule by edict, which wiped out $60 billion of the state’s net worth. Is it fair to suggest some changes are in order if California is to retain a viable economy?

And an arrangement Governor Newsom entered into, in conjunction with the state court system, prevents any tenant in the state to be evicted by a landlord for nonpayment of rent and, in addition, prohibits any mortgage lender to commence foreclosure action on any parcel of real property for nonpayment of a loan installment.

Effectively, this permits a tenant to live in a rental unit without paying rent indefinitely, just as it permits a borrower to avoid any payment on a mortgage loan indefinitely. What this will do to property viability and value is practically unimaginable.

Let me refer once again to the newspaper headline: “California Starts Reopening Today.” It’s obviously time for the things we’ve done badly to be discarded and replaced by things we’ll do correctly. Let’s take a close look to determine the activities responsible for our misfortunes and how they’re to be corrected. And we may acknowledge Governor Newsom is fully aware of our economic problems, for as recently as May 8 he declared: “These numbers are jaw-dropping. It is alarming. We’ve never experienced anything like this in our lifetime.”

It also presumes the governor, who is ruling by executive order, is fully desirous the corrections be made and that he does not actually desire that the state he presides over becomes, for all practicalities, bankrupt.

We’ll take a quick look to see how our governor is processing this second phase of reopening, hopefully on the route to solvency. His oversight of this phase will allow a very limited number of retailers to resume their businesses. It will not, however, permit them to actually reopen their stores. Instead, they must function while sitting curbside.

Unfortunately, customers often wish to enter a store to view merchandise. As Jessica Tjelmeland, chief clerk at Hayman Jewelers in Yorba Linda says: “We’ll do what we can. If it keeps going this way, it’s not enough to keep us in business.”

As for California’s 1,830,000 restaurant and food service employees at the start of 2020, all but approximately 91,500 are permanently or temporarily without work. This is how it will remain for the foreseeable future. Apparently the potential risk of people in any proximity to one another, eating food without simultaneously wearing face masks, is unacceptable to the governor’s inclinations … so all restaurants will remain closed.

The governor will also permit select counties to move along faster, as long as they can meet a specific guideline he established. It’s that during any recent 14 days, they must assure no more than one new case arises out of 100,000 residents, as well as no COVID-19 related deaths.

As expected, of course, no county to date met, nor could possibly meet, such a standard. Accordingly, a May 9 headline from a Los Angeles Times article sums it up nicely: “Forget the rush to reopen.”

So, how might a reopening proceed? The very first thing to change, and which is probably the principal reason for our financial distress, is to immediately permit the reopening of all closed businesses. And the reopenings shall be on the basis each may – if they choose – function in the manner they did before the closing.

The second thing to be accomplished, and which will be integral with the reopening of the businesses, is elimination of the massive unemployment. As this resulted from the shelter in place instructions, that too must be immediately and fully rescinded. In short, the economic vitality which California has traditionally displayed over its entire existence must be permitted to return, with no impediments.

There are a few other things which will need to occur to make certain such misuses of executive authority may not reoccur. Specifically, the governor’s ability to declare the right to issue executive orders should stripped from him, to prevent him or any future governor from exercising such a right. It should, instead, be provided that the state legislature may grant such right to a governor, but only in the event that eighty percent (80%) of all legislative members are in agreement … and remain in agreement.

The other vital change to be made is to once again permit owners of rental properties and holders of trust deed notes to enforce their contractual rights in a reasonable manner.

The governor’s current rules, effectively prohibiting evictions and foreclosures indefinitely, is nothing but a device to invalidate the rights of rental property owners and promissory note holders. This may have been acceptable in Vladimir Lenin’s Russia of the 1920s, as he confiscated the landlords’ estates and distributed them to the peasants, but it’s inappropriate in 21st Century America.

Both evictions and foreclosures must be permissible once again, not later than July 1, 2020.

Concerning the state’s economy over the past two months, I don’t understand why Governor Newsom conducted himself as he did. He’s not stupid, and I can’t believe he actually wants to bankrupt the state and impoverish his constituents. Yet, when he ordered millions of workers to terminate their jobs and confine themselves to their residences, he surely knew the likely result.

It takes no great insight to understand that when many members of a society generate no income, the economy is moribund. And as the presence of the traditional annual virus never before required any sort of bizarre action – presumably urged by hysterical health department officials – he should have ignored their recommendations and simply acted prudently.

A final word: If the nonsense now being enforced – shelter in place, businesses closed, six feet separation, masks and gloves, restaurants closed, constant government oversight, etc. – is not promptly terminated, California’s economy and residents will remain mired in insolvency for years to come ... and we don’t deserve it.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience.

Al can be contacted at al@abjacobs.com.

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