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Proof that California's economy is not representative of the rest of the country

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June 12, 2009 – Comments (25) | RELATED TICKERS: WINN.DL

Yesterday, I posted that I felt as though a blogger named Denninger was being hypocritical by criticizing a Bloomberg article for being too bullish on the economy by using flawed logic to make the national economy look worse than it really is (see post: The flawed logic of the silly Karl Denninger "Downturn Moderating? More LIES!" post).  In short, Denninger took sales tax data from the state of California and then used it to deduce that the entire United States was in a depression.  I argued that the California economy is in much worse shape than the country as a whole and that it is flawed logic to use data from it to show what rough shape the United States is in.

 

It took a little digging, but I found an organization that tracks changes in state sales tax revenue on a monthly basis.  To be honest, the entire process of researching this has been fairly interesting.  The group that tracks this data is called the National Conference of State Legislatures.  It's absolutely amazing what you can find out there on the Internet.  Here is a list of the year over year change in sales tax receipts by state: State Tax Performance June 2009.

Denninger stated that in California in May 2009 "revenues from sales taxes sagged by 7.6 percent."  It appears as though the decline in sales tax revenue is lessening as the year progresses.  In April, sales tax revenue in California was down a whopping 13% versus the same period a year earlier.  The drop in May was around half that.  As many, including myself have claimed, the economy is still in a recession but the pace of the decline is slowing.  We are no longer in the panic driven economic freefall that we saw at the end of 2008 and the beginning of 2009.  The trend is moving in the right direction.

The question remains whether the California economy is a fair representation of what the economy is like in the rest of the country. Here are the facts:

In April 2009, California's decline in sales tax revenue was the second worst out of the 39 states in the U.S. that collect sales tax.  The only state that experienced a larger drop in sales tax revenue than California in April was Washington state (0.1% more).  In fact, in April 10 of the 39 states that collect sales tax saw their revenue from it increase versus the same period a year ago.

I rest my case (someone owes me a dollar).  I think that it's pretty clear that extrapolating data from the state of California to the rest of the country is faulty logic.  Yes, the U.S. economy is in bad shape.  Yes, it will continue to get worse for a while and the eventual recovery will be weak.  But things are not as bad in the country as a whole as they are in the messed up state of California and the pace of the decline is slowing.

Deej

25 Comments – Post Your Own

#1) On June 12, 2009 at 8:16 AM, JTShideler (76.02) wrote:

California is clearly in a class of its own.  You can check with the Buearu of Labor statistics and see that by metropolitan area, Californian cities are at the top of the list for unemployment.  I am also fairly certain that a majority of Foreclosures are in CA, AZ, and NV which probably plays into the decline.  But even though California may be an exception, it is clearly a drag on the rest of the U.S Economy as a whole.  Although you clearly can't cherry pick your numbers from one state and call it equivalent everywhere.

 I had thought it might be interesting to do a comparison of Unemployment rate versus the overall State and Local Tax burden to see if there is any correlation between Personal and Business taxes and the loss of jobs.. 

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#2) On June 12, 2009 at 8:22 AM, portefeuille (99.66) wrote:

Buearu -> Bureau. Your version sounds a little like an atoll in the South Sea.

I should take a vacation ...

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#3) On June 12, 2009 at 8:24 AM, portefeuille (99.66) wrote:

Marlon Brando purchased Tetiaroa during the filming of the movie classic "Mutiny on the Bounty" in 1965 .

(from here)

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#4) On June 12, 2009 at 8:28 AM, portefeuille (99.66) wrote:

okay, now to the post: as I said in comment #2 here it is also not okay to write the following:

----------------

Therefore, if sales tax revenue is down 7.9%, you can reasonably presume that economic activity at the consumer level is down somewhere around 7.9%.

Since the consumer is 70% of the economy, it is not hard to figure out that we are approaching the 10% "top-to-bottom" decline level that defines economic depression.

---------------- 

That "calculation" is naïve at best ...

Nice detective job, tmfdeej!

 

 

 

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#5) On June 12, 2009 at 8:42 AM, OneLegged (< 20) wrote:

Where do I send that dollar?

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#6) On June 12, 2009 at 8:52 AM, eldemonio (98.55) wrote:

Good find.

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#7) On June 12, 2009 at 9:13 AM, alstry (36.15) wrote:

Denninger was talking about May......not April....there was an anomly in April which is really outside the scope of this blog.

How deep of a hole do you want to dig for yourself???

Now who is the hyporcrite.......by taking only one month to justify your point......The Rockefeller Institute took the entire Q1 and you just admitted May was in line.......

The issue is simply whether CA's sales tax decline is representative of the nation.......and if you take its decline over the past half year, or year, or May it is......

But nice try.....things feeling a bit tighter this morning????

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#8) On June 12, 2009 at 9:18 AM, alstry (36.15) wrote:

Deej loves to be wrong......

First he says he is as successful as Denninger.....well my guess is Karl has made more money in a month that deej has made in his entire lifetime.

Then he says Denninger is a hypocrite for using May sales tax data for CA which is representative of nation BUT deej uses April?????

Karl went out of his way to use the representative data but deej goes out of his way to use the non repsresentative data....

Now ask yourself, who is the hypocrite????......my suggestion is keep the dollar and ask for a penalty payment.

 

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#9) On June 12, 2009 at 9:31 AM, portefeuille (99.66) wrote:

The issue is simply whether CA's sales tax decline is representative of the nation.......and if you take its decline over the past half year, or year, or May it is......

No, that is not the only issue. The "sales tax -> GDP" "calculation" is a big issue as well.

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#10) On June 12, 2009 at 9:33 AM, GNUBEE (24.26) wrote:

Also if your starting point was higher due to falsley inflated values driving spending, large drops would be expected in these inflated economies to normalize them. So assuming Ca was overinflated, you'd expect more of a decline there than anywhere else. 

One could even argue that Ca is going to overshoot average declines proportional to its degree of exaggerated growth. -Making it NOT representative of the average

Ca economy had more money in the past because it was "imaginary" money. When this imaginary money dissapears, Ca's economy looks more like the rest of the union. (unless a significant part of the US relied on Ca)

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#11) On June 12, 2009 at 9:34 AM, portefeuille (99.66) wrote:

No, that is not the only issue. The "sales tax -> GDP" "calculation" is a big issue as well.

I think that is what some call the "elephant in the room" thing ...

Even if CA numbers were representative his next step is ridiculous.

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#12) On June 12, 2009 at 9:36 AM, portefeuille (99.66) wrote:

Maybe an expert could weigh in on the question of how correlated sales taxes and GDP are.

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#13) On June 12, 2009 at 9:37 AM, alstry (36.15) wrote:

portie,

Now you are questioning Karl's methodology....that is a separate issue open for debate.....

It has nothing to do with whether the experience of CA's drop in sales tax revenue is representative of the nations drop in sales tax revenue.

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#14) On June 12, 2009 at 9:39 AM, portefeuille (99.66) wrote:

#13 yes.

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#15) On June 12, 2009 at 9:57 AM, GNUBEE (24.26) wrote:

Did I miss something?

I thought this was the issue?

The issue is simply whether CA's sales tax decline is representative of the nation.......and if you take its decline over the past half year, or year, or May it is......

Or is it just a vanilla, Ca is the largest, so if its economy is declining, the rest of the US must be? No concern over rates of decline? Just that everyone must be suffering the same fate as the largest state?

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#16) On June 12, 2009 at 10:11 AM, TMFDeej (99.25) wrote:

I'm sorry that I disagree with the thesis that your "friend" put out there, Alsty.  I'm sure that you two are will have a good laugh about this over a beer this weekend.

well my guess is Karl has made more money in a month that deej has made in his entire lifetime. 

things feeling a bit tighter this morning????

Don't worry about me.  I'm doing just fine.  I'm not sure why you're making this debate so personal...as usual.  Statements like these don't help your argument, they just make you look strange and unnecessarily angry.  I don't recall ever saying anything about you, nor visiting any of your posts, yet you repeatedly come here and mock me.  All I did is debate the logic of another blogger's post.  In fact, neither the post in question nor the blog that was talking about it were yours, yet you have made it your personal mission to discuss this issue for hours on end.

I wasn't cherry picking data when I used the April sales tax receipts.  The National Conference of State Legislatures used April data in its June report on state revenue.  It is the latest national compilation of state sales tax revenue that is available.  I'm not about to spend 100 hours sifting around the web to find data that's a month newer for every single state individually.

Deej, who has wasted more than enough time on this exercise already and probably will not be posting any further on this subject.

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#17) On June 12, 2009 at 10:15 AM, Imperial1964 (97.80) wrote:

I don't think Karl actually said that california is representative of the entire country.  But California by itself  does happen to be 13% of the country's GDP.

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#18) On June 12, 2009 at 10:24 AM, StopLaughing (< 20) wrote:

Aside from deflation pressures in housing (seems to be bottoming) and unemployment (seems to be topping) I am a lot more worried about inflationary pressures such as the sinking $, rising oil, ballooning money supply and exploding government.

It is the last part (exploding government) coupled with the drop in government revenues that worries me the most for the future. The other problems can be fixed with sane government. However, exploding goverment is prima facia evidence that this government is not sane.

It is normal that government revenues (taxes) drop during a recession. There is about a 6% increase in savings (nationally). I do not know what the savings rate is in CA. Nationally a 6% savings rate would be consistent with a 6% drop in sales tax revenues. (yes I know transfer payments are way up).

A savings increase is good in the long run. It means that consumers are needlessly spending less on interest and can afford to spend more on goods if they want to. They have reserve purchasing power as they build savings.  Savings also holds the interest rate down. That might be one reason Japan did not run high interest rates with thier big deficits.

Anyway I saw a chart last night from the Fed that indicated that total debt (consumer, business and gov) is still rising as it has been for years.  This country is going to be in worse shape as the interest rates rise. Higher interest is going to act like a tax as we are a debter nation. If we inflate that will act like a tax that will bite savers.

Save all you can but try to get it into an inflation hedge.

 

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#19) On June 12, 2009 at 10:28 AM, alstry (36.15) wrote:

deej,

I am not making this personal you did....you said you were as successful as Karl and I responded that was simply false on an economic basis....which I assume you are referring to and not your value as a parent, spouse or citizen.  Alstry simply called you on it.

Then you said his figures were not representative of the nation....we KNOW that May's figures of 7-8% were very representative and YOUR figures of 12% were NOT representative....but very bad nonetheless.

If Karl wanted to be distort, he would have used April's figures and said we were already in a DEPRESSION....he did not.

You didn't have to spend hundreds of hours, I provided Q1s figures for your convenience....you only spent hours to try to distort the Rockefeller Institute's figures......and you failed again.

Next time you shoutout someone silly.....simply make sure you do your homework first.....and then you might be justified.....but this time you were not....plain and silly. 

Maybe an appology to Mr. Denninger is appropriate.

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#20) On June 12, 2009 at 10:54 AM, eldemonio (98.55) wrote:

Has anyone mentioned that on April 1, CA increased its sales tax by 1%? 

This would make declines in CA sales tax revenue even more concerning, and therefore less representative on the rest of the country. 

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#21) On June 12, 2009 at 11:08 AM, TMFDeej (99.25) wrote:

OK then.  HAHAHAHAHAHAHAH

Almost time for a tall cold beer.

 

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#22) On June 12, 2009 at 11:21 AM, catoismymotor (< 20) wrote:

Mmmm...beer in a tall, frosty mug being enjoyed on a deck overlooking a river. I'm buying, Deej. Illegitimi non carborundum!

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#23) On June 12, 2009 at 11:31 AM, TMFDeej (99.25) wrote:

Sounds great to me, cato.

Illegitimi non carborundum

I couldn't have said it better myself.  I won't.

Deej

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#24) On June 12, 2009 at 11:46 AM, UKIAHED (34.28) wrote:

StopLaughing

It is normal that government revenues (taxes) drop during a recession. There is about a 6% increase in savings (nationally). I do not know what the savings rate is in CA. Nationally a 6% savings rate would be consistent with a 6% drop in sales tax revenues. (yes I know transfer payments are way up).

This could be the reason - but let me repost the following for an alternate and easier reason for the drop in revenues (at least in California)...:

 

revenues from sales taxes sagged by 7.6 percent, according to a report released by Chiang's office.

 

The quote that I could find from the release was:

 “Sales taxes were $259 million lower (-7.6%) than last May”

 

According to Mr. Chaing – sales tax receipts are down by 7.6% for this May as compared to last May.  Some would suggest that this is because the consumer is not spending and that the economy is in collapse here in the great state of California.  I believe that I have found the reason (at least part of it) for this drop. 

If memory serves, gas was a tad more expensive last year.  So, I did a bit of calculation to see what I could see.

It turns out that California burns 20 Billion gallons of gas a year.  For easy math – I divided that by 12 to get 1.7 Billion gallons per month.  Last year – gas was $4.50/gallon.  This year – gas is $2.75/gallon.  To keep it simple – I use sales tax at 8% for 2008 and 9% for 2009 as we changed the rates in April.  The math:

1.7 Billion gallons X $4.50 X .08 = $608 Million in sales tax May 2008

1.7 Billion gallons X $2.75 X .09 = $414 Million in sales tax May 2009

 

$608 – 414 = $194 Million

 

Sooo, non-gas sales are down in this state for May 2009 by about $259 – 194 = $65 Million.  Hardly a depression for a $1.7 Trillion (ish) economy.

 

See, sales taxes are (1) almost never gamed as there is little point, (2) , (3) the penalties for cheating are draconian and the audits frequent, and (4) they apply to nearly all goods (except food in some states.)

 

Oh come on.  As a retired accountant in California, I can assure you that one of the first things to go underreported when money gets tight are sales figures.  If you cheat on sales numbers - then you save on sales tax and income tax.  With an audit rate of less than 2% - don’t think for a second that a self-employed owner is not doing a bit of risk Vs. reward when they report the sales numbers…

That is my .02 worth (or .04 if you think that hyperinflation is happening this year)

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#25) On June 12, 2009 at 3:32 PM, buildgreen (< 20) wrote:

Thanks for pipeing in again , UKIAHED

 

I suppose everyone will ignore this again as pieces of information that dont fit into the staunch position cannot be accepted right.

Deej i gotta give you credit for trying to make your point with facts, actual verifiable data and for the most part a calm head. This chilidsh banter is almost enough to drive a knowlege seeker elsewhere. But not quite enough.

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