Does anybody really think after Covid-19, California's economy will look anything like before January 2020, strong and growing? It's most likely not going to happen. We'll be facing challenges like never before from three major areas: The WFH (Work From Home) movement, automotive trends, and the silly notion that people will watch all that "defunding the police" nonsense and stay in the state. But how will all that affect the California tennis industry?
California Economy Outlook – Potential Effects on Tennis Clubs
Far-reaching effects of politics and a new WFH economy on tennis in California.
By Rich Neher
The following hypothesis is a worst-case scenario designed as a wake-up call for everyone thinking post-pandemic life will go on as usual in Southern California.
I’ve been studying economic, political, and social issues in California since I moved here in 1991. The state has gone through a lot of growth with the associated growing pains since then. Politically, it didn’t really matter which party had the majority since the other side was generally pretty strong to keep the ruling party in check.
Wikipedia states, “California was a Republican stronghold in presidential elections from 1952 until 1992. During this period, the Republicans won California in every election except the election of 1964. In these years, the GOP regularly nominated Californians as presidential candidates: Richard Nixon in 1960 and 1972, and Ronald Reagan in 1980 and 1984. Since then, however, the Democrats have carried the electoral rich state since 1992. The immigration of Hispanic Americans and Asian Americans and migration of northern liberals, who tend to vote Democratic, and the flight of white, middle and upper-middle-class suburbanites out of the state shifted the balance in favor of the Democratic Party.”
Things changed in 2008 when the Democratic Party started to hold veto-proof supermajorities in both houses of the California State Legislature. The Assembly now consists of 61 Democrats and 18 Republicans, with one vacancy, while the Senate is composed of 29 Democrats and 11 Republicans.
Why is that important to mention in the context of my article? Because without strong opposition, the ruling party can do almost whatever they want to do in any state. Just look at the California history of the last eight years with hiring of thousands of new government workers, billions spent on that boondoggle of a high-speed train to nowhere and driving the state into a $54 billion deficit and $1 trillion unfunded pension liability. Without a huge federal bailout, the state is bankrupt. A huge number of citizens and companies have already left the state and probably will continue to do so. (Source: Forbes)
But there are other, future factors that are compounding the dire situation of the California economy.
FACTOR 1 – WORK FROM HOME (WFH) ECONOMY
Millions of company employees have spent the last five months working from home. Most of them found the upsides of WFH outweigh the downsides, and at the same time, many company owners realized how well it worked and how much it improved their bottom line. About half of working Americans can't do their work remotely. However, half of 164 million people is 82 million. (Source: Wikipedia) Let that sink in, folks.
NPR’s Uri Berliner said June 22, “Indefinite. Or even permanent. These are words companies are using about their employees working from home. It's three months into a huge, unplanned social experiment that suddenly transported the white-collar workplace from cubicles and offices to kitchens and spare bedrooms. And many employers now say the benefits of remote work outweigh the drawbacks.
Tech companies Twitter and Facebook captured headlines with announcements about permanent work from home. But the news from a 94-year-old company based in the heartland — Columbus, Ohio — may have been even more significant. Nationwide Insurance is shutting five regional offices since remote work has gone off so smoothly during the pandemic. And thousands of employees will permanently ditch their commutes for home offices.”
It’s, of course, all about the money. Saving money is the ultimate goal for any company, right in line with higher sales. How do those WFH plans by probably thousands of companies affect our economy?
Commercial Real Estate – It can be safely predicted that section of our economy may be taking a downturn like never before. Morgan Stanley CEO James Gorman said it on Bloomberg TV, “We’ve proven, we can operate with effectively no footprint.” 90% of their 60,000 employees work already from home. A lot of office buildings, from small units to high risers housing thousands, could remain largely empty in the future. When smaller tenants realize that anchor tenants won’t return, they will consider safety issues and maybe leaving, too.
Effects of a considerable downturn in California commercial real estate:
Fewer property taxes for local governments, currently at 75 billion dollars.
Fewer property taxes lead to reduced funding for schools (see graphic below)
Fewer sales taxes from empty commercial buildings few people want to buy.
Fewer taxes from closed downtown service businesses like restaurants and bars.
To get out of that calamity, the government needs to raise taxes and/or cut services.
Fewer commuters – We will probably like it when our California streets and freeways are becoming less congested because up to half of the workforce is staying home. However, there may be consequences we really can’t quantify right now. Theoretically, fewer cars on the road should also result in fewer car sales. Right? And if people buy fewer new cars, doesn’t that also mean they are not selling their used cars? Take that one step further and look at reduced gas sales and car repairs. What does that all mean? Reduced tax revenues.
The automotive industry in California employs 180,000 workers and contributes $19 billion in tax revenues. Reduced tax revenues are not the only issue associated with fewer car sales. The California economy is highly dependent on a well-functioning cycle of moving used and new cars within its population. Buying a new vehicle usually means the sale of a used vehicle. That buyer is most likely also selling their used vehicle. Not only is the state interested in sales and use tax every step of the way down that chain, but the buyers at the lowest level, often immigrants in low paying jobs, are equally highly dependent on getting their hands on those lowest priced used cars. When that cycle is not working as it should be, because the sale of new cars breaks down, more people than usual would be forced to use public transportation. That in itself creates a new set of problems.
I’m quoting from an article by Aaron Gordon in vice.com titled “Why the U.S. sucks at building public transit.” Gordon, a senior writer for the ‘Motherboard’ section of VICE, says that America is worse at building and operating public transit than nearly all of its peers. The following chart speaks volumes of the money spent in the U.S. on miles of public transit vs. highway miles.
Gordon sees the reasons in the desolate situation in politics, cost, and missing public trust in our ability to build good functioning systems. He says, “What is undoubtedly clear is every transit project is first and foremost a political project, and political projects are about consensus-building. This gets us not the projects we need but the projects we deserve.” He didn’t mention one other factor in our politician’s unwillingness to do the right thing and why they didn’t tackle those problems decades ago: A strong lobby of the aforementioned automotive industry. Their interest is more in car and gas sales and building more and bigger highways than public transportation. There is reason to believe that the California raising of the speed limits in 2011 was also a direct result of lobbying efforts.
In other words, a sizeable number of Californians will not have access to low-priced used cars and are confronted with a public transportation system that is not working for them.
Effects of a considerable downturn in California commercial automotive sales:
Fewer sales taxes for state and local governments, currently at 19 billion dollars.
Budget deficits cause all government departments to cut their vehicle purchasing plans.
Breakdown of the automotive sales cycle
Higher dependency on a public transportation system that is not good enough for Californians.
Again, to get out of that calamity, the government needs to raise taxes and/or cut services.
WHAT DOES IT ALL MEAN FOR TENNIS?
Our contributor Gary Horvath sees the WFH future as an opportunity for the tennis industry. He says, “Even before Covid-19 came along, we saw a trend of Millennials moving to the suburbs. It is believed they will support the construction and retail industry there for a while.” What would actually work in favor of the tennis industry is former commuters staying in the burbs and working virtually may even find themselves with more time for recreation. Big opportunity for tennis clubs!
Horvath continues, “Anticipated commuting trends are counter to many recent economic development trends designed to build mini-communities along mass transit lines.” If we go down this road, we have to ask ourselves whether infrastructure projects may better focus on broadband rather than roads or trains. Will California mega-cities become less relevant in the future? Horvath thinks, “It would cause tax revenues to be redirected from cities to suburbs. This would give suburbs more funds for recreation and tennis courts.”
FACTOR 2 – AUTOMOTIVE TRENDS IN CALIFORNIA
In three quick years, from 2016 to 2019, all-electric car sales have more than doubled from 40,347 to 99,704 in California. Sales of plug-in hybrids have gone down at 46,160 units in 2019 vs. 62,847 units the year before. (Source: Wikipedia).
Covid-19 has, of course, had an impact on this development in 2020. Forbes writes July 6, “Zero-emission vehicle sales slipped in both California and China during the first five months of 2020 because of COVID-19’s impact on the economy. If this slowdown continues, it will impede China’s goal of a 25% EV market share by 2025, and California’s plan for five million EVs on the road by 2030.”
Unfortunately, the Trump administration seems to be hindering California's progress in green automotive leadership by favoring supporting the sale of gas-powered cars. I assume keeping hundreds of thousands of auto workers employed and supporting the U.S. oil industry with hundreds of thousands of more jobs is their priority. Tough call, although I am lately more on the side of embracing the green energy future.
Since there is a good chance that Governor Newsom will successfully buck Trump’s policies, let’s assume the trend of buying EV’s will hold in California, much to the detriment of conventional car sales. Changing government vehicle fleets to green energy (planned for 2030) will be tricky since the state has effectively run out of money in light of that huge $54 billion budget deficit and the grave situation with the $1 trillion unfunded pension liability.
Reducing the number of gas-powered cars in California is, of course, bad news for the oil companies since gas sales will slump, and lower demand may also increase the pressure for lower gas prices. Here, the California government will be in a similar conundrum as with cigarette sales. They have to encourage staying away from it, but they can’t really afford to lose that tax revenue, thus, increasing the tax rate is the only way out.
Effects of migrating California car sales to EV’s:
Less tax revenue from gas sales.
The automotive use cycle will compound that issue when more and more used combustion engine vehicles disappear from the market.
Here we go again; to get out of that calamity, the government needs to raise taxes and/or cut services.
FACTOR 3 – SLASHED POLICE BUDGETS
The favorite buzzwords of today’s students and all sorts of questionable organizations are “Defund the Police.” While I can absolutely understand the sentiment in light of recent stories about police brutalities, I have to point out the downsides of such chilling initiatives.
I think that wishing to have a society without a form of policing is a complete non-starter and also quite unrealistic. James Dudley, a 32-year veteran of the San Francisco Police Department and currently a member of the Criminal Justice faculty at San Francisco State University, writes in Police One, “We have already anticipated negative impacts on public safety budgets from the COVID-19-related recession, but some opportunists may seek to redistribute budget allotments to other favored unarmed services in the medical, mental health and social service sectors. If the intent is not to abolish law agencies altogether, but to diminish their capacity and presence, police response from the station house will be reactive, not pro-active. The result will be police responding to crime after it occurs.
Scholars have said that inner-city urban violence can be attributed to young men with guns who exact deadly retribution in their own hands rather than relying on the police for justice. Will defunding police be the answer to the violence we routinely witness in cities like Chicago and Baltimore? Knee-jerk policymaking will always result in unintended consequences. Cities that are quick to defund police agencies may see bigger problems than the ones they currently perceive.”
And here are the bigger problems in my worst-case scenario: Abandoned cities, unrests, higher crimes, vigilantes bands roaming the street and playing police.
I’m almost afraid to say it again, but the result of all this is less tax revenue for state and local governments in California. And all of this comes on top of the already existing problems California has with budget deficits and unfunded liabilities.
But I’ll give you another example of problems California has that is pretty unique compared to all other states: The staggering number of public employees with exorbitant incomes the taxpayer has to fund. See this May 19 Forbes article by Adam Andrzejewski: Why California Is In Trouble – 340,000 Public Employees With $100,000+ Paychecks Cost Taxpayers $45 Billion.
This is, in my opinion, probably the result of the unholy alliance the Democrat government enters into every four years. Teachers, college and university campus staff, state and local employees, first responders, and prison staff, all union blocks are being enticed to sell their votes for money. The fact that hiring for first responders is swopped for the ability to up their income through a sharply increased amount of overtime is most likely also the result of those internal voting agreements.
Andrzejewski writes, “In 2017, we found that 44 lifeguards in Los Angeles County cost taxpayers between $200,000 and $365,000. Today, it’s worse with salaries comprising only about half the total cost when including overtime, extra pay, and benefits. In total, $45 billion in cash compensation flows to local and state government workers across California, earning six figures. Our auditors did not include the cost of benefits. We also haven’t included the payroll costs of at least 28,000 federal employees making $100,000+ within the executive agencies based in California.”
What are the consequences of all those factors resulting in an even bigger budget deficit for California? Easy question to answer: Tax increases, already proposed for the 2020 election in November, and most likely doubled and tripled next time around. Higher taxes for the population and certainly for the businesses holding out will result in even more people and businesses to move away. Businesses are already massively lured to other low-tax states like Texas and Florida.
State legislators know there is only so much additional taxing they can afford to do before people may start storming the Capitol in Sacramento. But – there may be other plans that are likely being pondered right now.
Massive new immigration. Open the borders, bring in millions of more immigrants. In the short run, they’d be a huge burden on the system but in the long run, they will begin to pay taxes. They will also buy the used cars to keep the automotive circle going; rent the apartments left behind from people that fled the state; buy the gas at the gas stations.
Impede the move to all-electric cars. At least for the time being, the sale of combustion engine vehicles brings in much more taxes, while legislators can figure out a new scheme to double and triple revenues from green automobiles.
Plunder earmarked funds. Billions of dollars earmarked for special purposes like street repairs, public transportation, and so forth, can be dumped into the General Fund by the Governor without even thinking. It’s been done for generations, and the taxpayer will reelect him anyway. No worries here.
Again, what does that all mean for tennis? At this point in time and for the foreseeable future there are many distractions out there that could potentially kill tennis. To overcome those distractions we have to keep recreating our future, including the sport of tennis. More people moving to the suburbs would mean cities would become less relevant, and tax dollars may find their way to those suburbs. Big opportunities for tennis, I agree. And the cities? Maybe all those abandoned office buildings could be turned into multi-use centers for housing, shopping, and fitness/tennis/pickleball?
Could it be? You know the saying, “As California goes, so goes the rest of the country.” What do you think out there in Florida, New York, Texas? Send me your comments here.