Restoring the Economy

An encouraging announcement emanated from California Governor Gavin Newsom this first week of the New Year, 2021. In an effort to help small businesses and the unemployed hit hard by the 2020 Covid pandemic, he previewed a $4.5 billion stimulus program he’s requesting be funded by the state legislature.

The project he envisages will include a variety of grants and tax incentives he hopes will be quickly approved. As he said, “California’s economy is known the world over for our innovation, inclusion and resilience. That spirit will carry us through this pandemic and beyond. These budget proposals reflect our commitment to an equitable, broad-based recovery ensures California remains the best place to start and grow a business – and where all Californians have an opportunity to reach their dreams.”

In extolling his proposed program, the governor described the details. A full one-third of the money, or $1.5 billion, is to be spent in cleaning the air by boosting the sales of electric cars. Californians who meet eligibility requirements based upon income and region may receive up to $9,500 toward the purchase of new or used plug-in hybrids, battery electric or fuel cell electric vehicles. In addition, charging stations are to be constructed throughout the state to service these many new users.

In an effort to assist the myriad of small businesses which suffered from the several lockdowns imposed, $575 million will pay for grants of up to $25,000 for each small business owner. A portion of that, $25 million, will be dedicated to museums and art galleries which were forced to close.

With the recognition many major businesses are currently fleeing California to escape the economic devastation being wreaked upon them … such as tech giants Oracle and Hewlett Packard, as well as electric vehicle colossus Tesla … the governor said he intended to give businesses $430 million worth of tax credits if they’d merely refrain from leaving the state and hire employees.

The rest of the money is set to be parceled out in a variety of ways. These include a Jobs Initiative of $775.5 million designed to create jobs and stabilize those jeopardized by the pandemic, another $50 million for a program offering loans up to $100,000 each for small businesses and $100 million to expand sales tax exemptions to reduce the cost of manufacturing equipment.

Exactly how many of these dollars will actually wind up in the pockets of the firms and individuals who truly suffered as a result of the lockdowns, the business closings and the employee layoffs is hard to say. The way such government programs normally operate is indifferent at best.

In contemplating what sort of activities California might engage in to restore the economy, many factors must be considered. Those groups most adversely affected deserve the lion’s share of assistance. You’ll recall the March 20 lockdown – effectively lasting for more than two months – to be very first action taken by our governor. The instantaneous result became the closing of businesses deemed nonessential.

Hardest hit were restaurants and small shops of all sorts. Why the authorities permitted the Walmarts and Targets to remain open while clothiers, novelty shops and hardware stores found their doors padlocked never became a subject addressed. The only explanation given was these decisions were for the experts who understood such matters. The result was tens of thousands of small businesses and millions of their employees wallowed without the income necessary to sustain themselves.

It’s true, of course, both the state and the federal governments instituted a variety of programs whereby sums of money were distributed on a semi-selective basis to those persons believed to be in need. In some instances, certain individuals received more monthly income in this fashion than they did in the jobs they held prior to the pandemic.

It probably goes without saying such malfunctions can never be accounted for and certain persons will receive restitution they don’t deserve. Distributions of funds in the fashion we’re describing will invariably result in unjustifiable sums paid when not warranted; such occurrences are simply unavoidable.

As the pandemic continued to drag out, others became victims. Consider those landlords who scraped up enough money to purchase a small building for retirement income – and whose renters are either unable or unwilling to pay rent – but are prohibited by the governor’s executive order to evict nonpaying tenants.

As these occupants remain in possession, visualize the owner of a 12-unit apartment encumbered with a loan equal to 80% of the property’s value. Within no time all equity and cash flow ceases to exist. As nearly as I can tell, there’s to be no relief for this hapless soul.

We’ve now arrived at the point in our analysis where neither right and wrong nor wise or unwise can be determined on a subjective basis. It’s time to consider how Governor Newsom’s proposed stimulus package shapes up financially. When numbers are thrown into the mix … particularly with dollar signs preceding those numbers … rationality becomes far more recognizable. We’re about to determine whether the $4.5 billion will perform the miracle intended.

Delve back into the earlier months of 2020 and you’ll encounter a pair of numbers which unhappily tell the story. In January the governor seemed pleased to announce a state budget surplus of $6 billion. However, on May 8, following his devastating lockdown, with tax revenues drastically down and a demand for social services soaring, the state Department of Finance released its report of a budget deficit topping $54 billion. A question now deserves to be asked: How can a $4.5 billion stimulus program rectify the $60 billion reversal of California’s fortunes?

The answer to a second question is also crucial: Inasmuch as Governor Newsom continues to pursue an agenda of slowing the spread of the virus – which by necessity extends the duration of the pandemic – when will we citizens be permitted to return to normalcy and thereby cease being a drain upon the state’s resources? Until the time arrives that our economy is functioning as it did before government regulations sent us into a tailspin, no amount of largesse will correct the situation.

While we’re continuing to push figures around, there’s another number you’ll find revealing. Irrespective of the various special programs the governor desires to fund through his stimulus package, let’s presume the entire $4.5 billion actually goes to people most harmed – presumably those unfortunate devils who still find themselves unemployed and struggling to survive.

As for the state unemployment total, the peak occurred last April with 3,043,334 individuals without a job. Although things eased somewhat, 1,786,461 are still unemployed. Let’s presume the fairest deed we can possibly perform will be to send the entire sum to these persons, to use as they choose with no strings attached. By simple calculation, each will receive $2,518.95. Though this won’t solve all their problems, it’s at least a step in the right direction… which naturally guarantees it will never be done.

For once this final comment is not mine. It’s from Susan Shelley, an editorial writer and columnist for the Southern California News, who summed up the circumstances every bit as nicely as I could have done. She says:  “Could the state see its way clear to let business operate so millions of California residents can get out of line at the local food bank and go back to earning a living and paying taxes? Reopening is essential. It’s the only way for state and local governments to raise the revenue for needed services without hitting taxpayers so hard that they fly over the California border and land in another state.”
 

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al may be contacted at al@abjacobs.com.