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Pearlstein: California's Economy

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Steven Pearlstein
Washington Post Columnist
Wednesday, March 25, 2009; 11:00 AM

Washington Post business columnist Steven Pearlstein discussed Southern California's economy and the end of the California Dream on Thursday, March 25 at 11 a.m. ET. He also answered questions about the Obama administration's responses to the economic crisis.

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Read today's column: California's Wipeout Economy.

A transcript follows.

Pearlstein won a Pulitzer Prize in 2008 and is co-moderater of the On Leadership discussion site.

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Tampa, Fla.: You mentioned that "[much of the blame -for California's fiscal problems] lies with public employee unions and a handful of other special-interest groups that have essentially hijacked political control of state and local governments."

I'm not sure that this can be fixed short of bankruptcy. I think the public will fall for a slick PR fear campaign to preserve these benefits at all costs. Do you think otherwise?

As I understand it, the real culprits are law enforcement and firefighter retiree benefits, including health care. The city of Vallejo, CA, filed for Ch. 9 because of this. Further, the prison guards union has been very effective in stopping legislation that would reduce the number of people sent to prison for non-violent crimes. I doubt they'll give up a dime of benefits without a fight.

Other states face this same problem, and it may be coming to a head with the ratings agencies. The rating agencies want state and local governments to follow GAAP and show the present value of pension and other retiree benefits on their financial statements when they issue bonds. Texas is so worried that it passed, or is actively considering, a law trying to ban rating agencies from requiring this disclosure. Of course, this may well violate federal law, but that's another matter. And the agencies could refuse to rate bonds. I don't think Texas can require anyone to rate its bonds.

But again, the law enforcement and fire fighter unions, and not the garbage collector unions, were the big supporters of this bill. And they got the state of Texas to play their tune.

I just can't see California breaking the hold of law enforcement and fire fighter unions over fiscal policy. I think they're just too strong, and public too gullible. As soon as they see the police telling the public that their daughters will be raped unless the police pension multiplier stays at three times that of other public employees, they'll flip out and demand to be protected.

What do you think?

Steven Pearlstein: I don't know the details as well as you do, so I can't really comment on whether its firefighters or cops or garbage collectors. In general, however, public employees are allowed to retire fairly early with very generous pensions and health care benefits -- and then are sometimes ehired in some other capacity. It's a huge financial overhang and it is literally bankrupting state and local governments, as you point out.

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Danville, Calif.: Steven,

I left the area of the District of Columbia in 1972 to start grad school at Berkeley. I've lived in California ever since. When I first came here I was struck by how new and clean everything seemed, and how well the state was run. Today the schools are terrible, the roads and bridges are crumbling, criminals get early release due to crowded prisons, social services are failing, etc., etc. But our taxes are the highest in the nation. When I visit other parts of the U.S., state services appear to be much better for much less money. If my wife would leave I'd start packing tomorrow!

Sorry for the mini-rant. Here's a simple question: What is California doing with all my money?

Steven Pearlstein: They are basically spending it on oversized pay and retirement benefits for public employees and in offering services and benefits to citizens who have particularly powerful lobbies. The political system has been totally captured by special interests, and in this case it is not usually business interests.

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Sacramento, Calif.: Meg Whitman wants to run the State of California like a business. Is that possible with an overwhelmingly democratic legislature and an entrenched bureaucracy?

Steven Pearlstein: I don't like that terminology of running a state or a national or local government like a business. Its really not all that comparable. Governments can learn things from businesses, they can operate some things in a more businesslike fashion -- I like it, for example, when Departments of Motor Vehicles refer to people as customers. But government is, as you point out, different than business,w ith different goals and more complicated metrics for success and a lot of practices and strategies and ways of doing business that work for private enterprises won't and shouldn't work in government.

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Silver Spring, Md.: Hi Steve - Great columns lately, I hope some policy makers are reading too. My question is this - Do you think said policy makers are appropriately addressing the problem of "too big to fail" yet? Or do you think we get through the crisis and then go back and fix all the dumb ideas that caused it? In my opinion, it should have been the place of regulators to have stopped all the mergers that caused companies to get so big that we HAD to bail them out. Do you think Americans realize yet that it's really NOT in their best interest to have corporations exist that we can't afford to sit back and let the markets do what they will with? In my opinion, if AIG were five smaller companies, we could have easily let one go under, let the others gobble up whatever assets they had left at a cut throat price in bankruptcy court, and the other four would be all the stronger for it.

Steven Pearlstein: As you probably know, I may be the last journalist in American who still cares and writes about antitrust enforcement and I think the benefits of scale have been totally oversold. That's true in finance as well. I'm a bid believer in midsized firms, firms that have enough scale to take advantage of most of the efficiencies and yet small enough to be entrepreneurial and quick on their feet. I also think competition is more robust when there are more than a handful of competitors, particularly when it comes to innovation, which is often overlooked in most traditional antitrust analysis.

Is Citigroup too big to manage? I think so. Is AIG? I think that is obvious from recent experience.

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St. Louis, Mo.: What did you mean by, "Ponzi scheme that passes for public finance in California was suddenly and painfully revealed." I'm not familiar with how California pays for its services - how is California different from other states in funding? How do they have high taxes and a ponzi scheme

Steven Pearlstein: It is a Ponzi scheme because it only makes sense if you think the state is going to grow in population and in the future there will simply be more money to pay for the obligations that are taken on today. Retirement benefits are a big part of it.

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Alexandria, Va.: As a renter who waited out the market for prices to come back to a reasonable level, the Fed's policy of price stabilization seems to me to be delaying the bottom in the housing market. It seems like any news that housing is "turning around" is seen as good, but I know the market remains well above 2000 levels before they shot up. And with tighter (and more appropriate) lending standards, aren't prices still way too high and shouldn't policymakers let them reach a bottom?

Steven Pearlstein: There are places where prices are now back in the reasonable range, as compared to the cost of renting and in relation to income levels. Not sure that is true in Alexandria, Va., but it is certainly possible that it is.

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Harrisburg, Pa.: I recall a few months ago that California was debating a sales tax of just under 10 percent. What sales tax did California legislators and the Governor agree upon? To some, California is the caged bird in the coal mine, and soon other states may need to sharply raise taxes just to meet budgetary obligations. How are California residents reacting to the threat of losses of services vs. higher taxes?

Steven Pearlstein: I'm not sure California is the canary in the coal mine, although it is true that a lot of states have big, unfunded pension liabilities. Cities too. But California's cost structure is so way out of whack even going beyond the retirement stuff that it is probably in a class by itself.

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San Diego, Calif.: My son moved to San Diego after college and has worked for 2 small Internet marketing companies. In the last year both owners watched their business tank as internet advertising dried up, customers stopped paying their bills, and the banks quit lending money to make payroll.

One owner is bankrupted and has lost everything he worked ten years to build. The second is down to 12 employees from 50 nine months ago. His first action to stave off disaster was a 20 percent pay cut while he took nothing. My son lost his job six weeks ago.

Why don't people understand it is all about jobs? For California, the U.S.A., young, old, men, women, black, white Latino. If you have a job, life is probably OK. If you don't, goodbye money, house, health insurance, paying taxes, buying things to keep businesses going and other people employed.

Steven Pearlstein: Jobs, jobs jobs.

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District of Columbia: In your column you describe the "Ponzi scheme" that provides tax revenue to California state and local government, but don't mention that this scheme is very much engendered by Proposition 14, which severely limits the types and amounts of taxes those governments can impose. This is coupled with an initiative process that encourages citizens to demand more public services.

Steven Pearlstein: Yes, there are all sorts of voter initiative propositions that have passed and that severely restrict the state's flexibility in dealing with its financial situation. It's a mess. But you have to understand the political circumstances behind all those proposition, which is that the public employee unions and other interests groups have so thoroughly captured the legislature and the city councils that the only way a frustrated public can express its will is to go around the elected politicians and adopt sledge-hammer type solutions in the form of initiative propositions. The one limiting the growth in property tax revenues is a good example, but not the only one.

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Raleigh, N.C.: I've been reading on various blogs that even if we stabilize the home mortgage sector of the financial industry, that commercial real estate is then gonna rise up and kick our tails. You touched on that at the end of your article. How big of a threat is a collapse in commercial real estate to the national economy? Or is it likely to be only a regional phenomenon, striking in overbuilt areas but leaving the national economy relatively unscathed (or semi-scathed)?

Steven Pearlstein: Commerical property is the next big shoe to drop, particularly as it relates to banks, which have a lot of these loans. The trick will be to revive the secondary market for commercial mortgage-backed securities, which is now closed for all intents and purposes. The Fed is hoping to step in and buy or lend against these securities very soon, but it will require even more to get private investors back in, which is why the Geithner plan is needed.

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Dubai, UAE: What is your expectation for long-term population trends in Southern California and its effect on the homebuilding industry. Have we seen mass emigration during the past few years from Southern California?

Steven Pearlstein: I think the in-migration will slow considerably -- and should.

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Virginia: Thanks for taking our questions, I have found your work to be helpful and informative. I can't help but make this observation: If California is a real mess, then can't the comparison be made to the Obama/Democrat plan that makes the U.S.A one big California? Under Obama's budget/stimulus/bailout, we will certainly have higher taxes and more "things" we cannot afford that will only get more expensive in the future. Is this a fair comparison?

Steven Pearlstein: No, it is not a good analogy because government in California is really, really disfunctional. That said, the big fiscal elephant in our room nationally is health care costs under Medicare and Medicaid, which is why it is important that we move ahead on comprehensive health care reform. That is for us what public employee pensions and retiree health benefits are to people in California.

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Aldie, Va.: Isn't the story you tell of California a harbinger for the United States'future if the Democrat party is able to implement their platform of higher taxes, huge budget deficits, excessive regulation, burdensome mandates on private industry, growth of government at the expense of the private sector, refusal to force the unions to allow meaningful school reform, and policies that encourage uncontrolled illegal immigration that swamp public services?

Steven Pearlstein: Obviously lots of people thinking along the same lines.

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New Providence, N.J.: To those who do not like the idea of putting weak banks into receivership, or the risky new Treasury plan, here is a viable alternative.

The major banks are dead because of their worthless assets. Instead of being concerned about this problem government should simply ignore these banks. These dead banks have as much value as dead soldiers on a battlefield.

The worthless assets these banks hold are of no value to the economy or the credit market. It is totally irrelevant who holds worthless assets.

The current risky Treasury plan is to pump $750 billion into banks to start lending.

The following plan with out risk will pump $750 billion into banks to start lending.

The Federal government will directly provide $750 billion for lending.

Banks will use this money to make loans using this capital of the Federal government. The bank will receive as a fee say one half of the interest payments paid by the borrower. The other half of the interest payments will go to the government and all of the principle. Banks will receive an additional payment when the loan is fully paid to give an incentive to banks to make good loans. The range of interest rate for particular types of loans will be set by the government working with bankers. Banks will also be given the opportunity to invest their capital for the loans and receive additional monetary rewards.

Banks will join in with their own capital when they see this plan working, and government interest payments will not be so low that banks will not be able to offer lower rates on loans they will make with all of their own capital. The purpose of this government plan is to start lending and not for the government take over all lending in the United States.

Unlike the Treasury plan the full amount of $750 billion will be used over years, and when principle is returned at the end of loan it can be reused to make a new loan.

Unlike the Treasury plan this plan directly provides capital to banks to make loans.

Steven Pearlstein: I hate to break it to you, but the federal government is making trillions of dollars directly for lending. That would be the Federal Reserve. And those dollars are freshly printed. Auto loans. Student loans. Small business loans. Mortgage loans. Soon commercial property loans. The program is called TALF. You can look it up.

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Chatham, Mass.: Hi Steven, Many thanks for your helpful columns and web discussions. I have a question about Southern California residential real estate. My sister owns a home in Glendale,Calif., and she needs to sell it within a year or two. What do you think the Los Angeles real estate market will look like in the future?

Steven Pearlstein: There are signs of stabilization as recently as this month. But I don't see prices going up for a while, and in certain places (the richer, older communities) they probably have farther to fall.

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College Park, Md.: I have a question regarding the treasury's plan to help investors buy toxic assets. I heard Summers say that the government would not lose any money until the private investors were completely wiped out. In your column yesterday you described the deal differently. You said that the government would share 50/50 in the first part of the losses (12 percent) and then assume all of the loses after that. Is this correct? Second you said that borrowing money to purchase these kinds of assets is the way these investors do business. Is this really a good model? It seems like it puts more of the risk on the lender and would likely push the price beyond a market price for the expected revenue stream that the toxic assets would likely produce. This seems like the kind of business model that got us into this mess. Does it really make sense to continue doing business this way? Couldn't they have the private investors provide 10 percent of the capital and get 12 percent ownership for providing the service of managing the money with the government providing 90 percent of the capital and getting 88 percent ownership. That would seem to align interests better.

Steven Pearlstein: First, it makes sense to use some leverage (borrowed money) in buying financial instruments if you are a pension fund or hedge fund, just not the extreme leverage they were using during the bubble. Second, while the structure of the public-private deals can vary a bit, the basic concept is 50-50, which means among the equity risk capital (not the borrowed money) the losses and gains will be shared proportionately. In some cases, the Treasury is allowing the private equity investors, in addition to the 50-50 equity, to buy additional equity with money borrowed from the treasury. I don't know the terms of that borrowed equity money -- if it is a recourse loan (that is, the government can go after the investors or the fund for payback if the collateral proves insufficient) and whether it has any kickers to it that allow the lender (the government) to share in the upside if the equity produces a good return. Not sure that's been worked out.

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Great Falls, Va.: It's a fascinating subject, and I look forward to the next installment that you previewed toward the end. But I think the biggest issue is that of the public finance, which you touch on but don't spend too much time with. The reality is that both (a) Californians are going to be paying even higher taxes in coming years, and (b) the state is going to have to cut back on the services it provides. California is not alone in this situation, though it's an extreme case. At some point, the most liberally spending states are going to need to realize that their fiscal framework is unsustainable. Look out for the political fight that ensues.

Steven Pearlstein: I can assure you one thing: if California were willing to cut the pay and benefit of public employees, it could still have many of the services without raising taxes. I don't think California has much room to raise taxes more than they already are, or they will simply drive even more business out of the state.

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Oakhurst, N.J.: I agree that California is very much at-risk in this crisis. I would like to add another perspective that has been overlooked. CA is the "Mother of All Toxic Mortgages". In fact, more than 60 percent of the Alt-A and Option Arms are in CA. I authored a national survey conducted by the National Association for the Self-Employed (NASE). A press release was issued in November, 2008. The national survey found that Small Business owners fell prey to these Toxic Mortgages in the years 2002-2007 and they are at-risk for foreclosure in the upcoming 2nd "Tsunami" Wave of Foreclosures on the RESETS of these mortgages in 2009-2012. These expected foreclosures will result in business failure and job loss in CA. This catastrophe will come from California's Small Business community. This must be recognized by State and Federal legislators. Furthermore, this is not only California's problem. It also applies to FL, AZ, NV, MI, etc. and other States that will suffer during theses RESETS.

Samuel

Steven Pearlstein: Yes, it is a problem in all the fast growing sunbelt states.

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Laurel, Md.: From what you've seen in the southwest, is there a direct link between the American economic downturn and the drug cartel violence in Mexico? I'd read that when new construction began to slow in 2006, the amount of money being wired to Mexico dropped noticeably, since construction and related industry day labor had been an important income source among men who had separated from their families.

Is the explosion of the drug cartels due to the closing of their alternative employment outlet?

Steven Pearlstein: No.

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New York, N.Y.: Thanks for the chat and for your reporting about California today. Very grateful for your reporting and insight. 1. Why are some economists angry at the president for accommodating the banks? Isn't that where the money is and doesn't he have to accommodate until he can set the economy in a more productive direction? 2. In re 1) Are we heading for a more centralized economy where the government picks more winners and losers than it has in the last 30 years by providing seed money investment in certain sectors?

Steven Pearlstein: There are some economists who are always angry. They learn that at graduate school.

No, the US is not going in the direction, generally, of picking winners and losers. We don't like that and we won't tolerate that. Big banks during financial crises -- yes. But that's not picking a winner, its taking a loser and making it a winner because it serves the general interst. There's a difference, and we do it reluctantly and rarely.

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Silver Spring, Md.: From your article it seems like very tough times in California. I guess it wasn't such a good idea to elect a body builder governor. His election probably has little to do with the current problems, but in retrospect it seems frivolous.

Steven Pearlstein: I'm not sure the governator isn't exactly what California needs right now, a pragmatic centrist who can rally the people against the politicians and special interests.

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Washington, DC (formerly of Washington State): Steven- Just a point of clarification on your California article-- Washington Mutual's headquarters are (were?) actually in Seattle, Washington.

Steven Pearlstein: Oops. Sorry. They are a big presence there.

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Krugman vs. Geithner : Everyone agrees that Paul Krugman is a brilliant economist, and there are many who think that Geithner and Summers et al.are good too -- so on Monday it was a bit scary to read that Krugman has a sense of "despair" (very strong word) about Geithner's rescue plan for the banks (that was unveiled this week). For the ordinary person, this kind of open disagreement is confusing. I'm not an economist, so I don't know who's right, but I am sure we don't have much room for many more mistakes. How should we-who-are-not economists look at this?

Steven Pearlstein: I'm not an economist either -- I just play one on television. Geithner isn't either, by the way. But Larry Summers is every bit the superstar economist that Krugman is, and he has as his colleague Ben Bernanke, who is no slouch either. What Geithner brings to the table is an understanding of how the markets work that none of the others has, including Krugman, who keeps forgetting that the big problem here isn't the banks but the breakdown in the secondary market for loans and asset backed securities.

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Evanston, Ill.: Hey Steven, Martin Wolf wrote this in the FT this morning, "I fear, however, that the alternative - adequate public sector recapitalization - is also going to prove impossible. Provision of public money to banks is unacceptable to an increasingly enraged public, while government ownership of recapitalized banks is unacceptable to the still influential bankers. This seems to be an impasse. The one way out, on which the success of Monday's plan might be judged, is if the greater transparency offered by the new funds allowed the big banks to raise enough capital from private markets. If that were achieved on the requisite scale - and we are talking many hundreds of billions of dollars, if not trillions - the new scheme would be a huge success. But I do not believe that pricing legacy assets and loans, even if achieved, is going to be enough to secure this aim. In the context of a global slump, will investors be willing to put up the vast sums required by huge and complex financial institutions, with a proven record of mismanagement? Trust, once destroyed, cannot so swiftly return.

The conclusion, alas, is depressing. Nobody can be confident that the US yet has a workable solution to its banking disaster. On the contrary, with the public enraged, Congress on the war-path, the president timid and a policy that depends on the government's ability to pour public money into undercapitalized institutions, the U.S. is at an impasse."

Do you agree with that analysis?

http://www.ft.com/cms/s/0/1bdc2a28-1890-11de-bec8-0000779fd2ac.html

Steven Pearlstein: Up to a point. I'm not sure that thinking about it in terms of the aggregate amount of capital that will be needed is the right way to assess the adeqacy of what is being done. Martin assumes that this is a fixed number describing the size of the hole. I don't think that is necessarily true. It assumes a static view of how big the financial system has to be. And second, there is no reason that a trillion dollars n private capital can't and won't flow into the system over time. That is not an unreasonable number. Nor do I believe that if the current efforts begin to yield some success and the economy stabilizes, Congress will be hostile to expanding those programs in a reasonable way. So I'm not as pessimistic as Martin and most of the other people (like those at the IMF) that look at this as macroeconomists would. I think a microeconomic view is needed to balance that off.

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Bridgewater, Mass.: The government is hoping to entice "private capital" to invest in what are now being referred to as legacy assets. So a few people get rich and the rest of the population continues to seethe.

So how about opening it up to everybody - a lottery with real-estate as the payoff? You could buy a garishly-colored ticket at the convenience store and have a chance at winning a house, which you could either move into or sell at a price that would help keep down housing costs. Most people wouldn't win, but then, if there's one thing everybody knows about a lottery it's that you're probably not going to get your money back. The big thing is to give everybody a chance (and nobody who won would also get to be called one of the "best and the brightest" - just lucky, which Americans, I don't think, don't really object to.)

Steven Pearlstein: There's no reason the Treasury couldn't sell the equivalent of savings bonds -- call them bank bailout bonds -- that would allow the bearer to participate in the downside and the upside of the government's equity investments, or for that matter eeven the government's financing (lending) of the public private partnerships. Like war bonds. Its a good idea.

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Princeton, N.J.: "health care costs under Medicare and Medicaid"

I went to a talk by Uwe Reinhardt yesterday, and he says this is all wrong. We can well afford Medicare and Medicaid. The growth in costs is mostly from private insurance. You should read some of his articles.

Steven Pearlstein: I should read more of Uwe's articles, because he is almost always right. But just because most of the cost growth is coming from the private side, it remains a fact that cost growth of these programs exceeds the growth in inflation and in the inflation-adjusted incomes of the taxpayers supporting these programs. To that degree, it is growth that is too much. Plus the cost base includes a lot of unnecessary care. Uwe would certainly agree with that.

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Evanston, Ill.: Hey Steven, Way to parlay your appearance on Bill Maher into a great column on California. Is there a way to track your media appearances?

Steven Pearlstein: No.

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Colorado Springs, Colo.: Steven, I offer this question solely out of curiosity, not belligerence: What is your training and education? You've said several times that you're not an economist. If you were trained as a journalist, how did you educate yourself about economics and finance?

Steven Pearlstein: I wasn't trained as a journalist in any formal way, either. I have a degree in americans studies, with honors, from Trinity College in Hartford, Conn. Everything else I learned by doing and readings and asking questions of smart people over the years, including -- I might add -- one Paul Krugman.

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Silver Spring, Md.: A previous poster asked about emigration from California. I spent much of my life in New Mexico, and this exodus has been in progress for at least a couple of decades already. Unfortunately, people who are accustomed to LA real estate prices move to towns where the prevailing wage is $12 and hour, and they drive housing prices out of the reach of the locals. California ex-pats accustomed to green lawns and large trees move to desert cities such as Albuquerque and Phoenix, and they use huge amounts of water for landscaping instead of drinking. National chain stores like Subway and the Gap are displacing locally owned shops and restaurants on the Santa Fe Plaza. Face it, folks, sustainable consumption is a problem we are all going to have to deal with together.

Steven Pearlstein: Indeed it is.

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Wokingham U.K.: I have never been to California but I feel as if I have because it is the center of the world entertainment industry and I see its scenery almost every day on television. It's a place for which the whole world has some affection. I think that this status was effectively gained during the thirties when a depressed and troubled world needed entertainment pretty desperately. Could this trick be repeated in the current circumstances?

Steven Pearlstein: Perhaps. As I'll say in a future column, the world will still need entertainment, which is why there will always be a Hollywood.

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Anonymous: "I don't like that terminology of running a state or a national or local government like a business."

This has been popular for some time now. Given where we are today, maybe we need to popularize the concept of running a business like a government. That is, begin to re-balance the emphasis on process with the emphasis on results...

Steven Pearlstein: Yes, maybe. A bit.

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District of Columbia: " I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010", said Senator Byron L. Dorgan, Democrat of North Dakota. "I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness."

That quote is from a 1999 NY Times article on the repeal of the Glass-Steagel act.http://www.nytimes.com/1999/11/05/busine ss/congress-passes-wide-ranging-bill-easing- bank-laws.html? sec=&spon=&emc=eta1&pagewanted=all

I am assuming it is an extremely gross simplification to blame the financial crisis repeal of the Glass-Steagal act. But what percentage of the crisis, if any, do you think was caused by the act's repeal? 10 percent? 20 percent?

I know this seems like digging up an old issue, but it seems like most of the people who opined on this issue were either liberals trying to blame conservatives for the crisis or conservatives trying to blame liberals. I've yet to find an answer from someone I can trust. For the sake of an accurate historical account, do you have an opinion?

Steven Pearlstein: We should get this Glass-Steagall thing behind us, okay. It would be nice to make these clear distinctions between banks and financial markets. But the truth is that financial markets are a very big part of how debt financing works right now, as I've written here so often, because they are a more efficient form of financial intermediation. That genie is out of the bottle and we can't and don't want to put it back in. We need to regulate that market better, for sure. But as long as debt capital flow both through banks and through financial markets, you can't put a wall between the two. That doesn't make sense.

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Berkeley, Calif.: Tax correction: Ours are not the highest in the nation. Our federal taxes are definitely above average, along with our income. I used to be a school teacher, and for a while at least, Catholic school tuition was higher than state funding of schools.

One thing I noticed when I moved to CA is not just the amount of money spent, but how ineffectively it's spent. For example, in schools site-based management was all the buzz for a long time, and may still be. What it means is that every school has to reinvent the wheel. We inventors brought in different levels of skill and energy, and the results were necessarily uneven, but no matter whether we produced a good or poor product, the process was exhausting. Add in a lack of agreement on what schools are for (this is a nation-wide problem) and you get people working at cross-purposes in the same institution.

Steven Pearlstein: I don't think I ever said they were the highest in the nation -- I live in the District of Columbia, which is no slouch when it comes to taxation, let me assure you. But it is one of the highest in most every category.

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Danville, Calif.: A major cause of the current mess out here is the way the Democratic majority has gerrymandered the voting districts. Consequently, we either get Democrats controlled by the left-wing special interests or far-right Republicans who seem to be against everything. There are no moderates.

I don't read about California politics anymore (I'm old and it's bad for my health). But I've heard that a recent initiative that was pushed by the governor and that recently passed will change the redistricting rules. Is there hope?

Steven Pearlstein: There's always hope.

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Wilmington, N.C.: Wow , it sounds like the City of L.A. is in a similar situation as the Detroit auto companies are or were fiscally. Sounds as if more negotiating will be necessary to save the municipalities from greedy union types. What are they working on now? Thank you

Steven Pearlstein: There is a good analogy to be made between Detroit and California's public sector.

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Falls Church, Va.: California's public pensions (and those of other states) are getting paid by you and me, right? Isn't a big chunk of the stimulus funds that are going to the states being paid right out into public pension funds?

Steven Pearlstein: No.

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Government as a Business: Steve, I mourn for the California of my youth (and fear that the Florida of today is drifting that way).

I think that the government-as-a-business model is closer than you think, though: although businesses survive on revenue from their customers, those customers have a choice whether or not to spend their dollars with that business. Governments have always operated as though their revenues were in some way guaranteed (as with other monopolies), but people can move and choose to pay taxes elsewhere, right?

Steven Pearlstein: To a point they can and to a point they do. But I wouldn't overstate this case.

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Steven Pearlstein: That's all the time we have for today, folks. "See" you next week.

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