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The Deficit that Ate California

With many stocks hitting new 52-week highs and some even hitting new all-time highs, it shouldn’t come as a surprise that the gains slowed a bit this week.  The markets look to finish the week mostly flat after finishing higher each of the past six weeks.  I suspect things may slow going into the end of the year as both resistance increases and investors increasingly slow their activity in lieu of time off.  And lastly, I don’t know who needs to hear this, but you’ve got exactly seventeen days before Christmas is here.

This week is going to be a little light on economic data.  Instead, I want to focus on a few areas I came across this week that may stir conversation when in the company of family and friends.  I came across an interesting piece this week that questions whether higher education is worth the investment in today’s labor market.  Considering how tight the labor market has been all year, many companies are eschewing college degree requirements and potentially opening industries to the nearly 80 million workers who do not hold a college degree.  IBM was among the first when in 2016 it coined the term “new-collar worker,” with the aim of hiring cloud technicians, database managers, cybersecurity personnel, user interface designers, and other types of IT positions.  In 2021 it stripped bachelor’s degree requirements for more than half of its U.S. job openings.  Other companies have followed suit including Accenture, Bank of America, General Motors, Kellogg’s, and Okta, as well as major airlines like American, Delta, Southwest, and United.  And most recently Walmart announced it no longer requires a college degree to climb its corporate ladder.  So, the question is whether this is a temporary phenomenon due to the tight labor market, or if it has staying power.  While this is touted as toppling a barrier to entry, part of me wonders if the pay is commensurate with what a college-degreed employee would have earned.  Put another way, is this a way to cut costs while simultaneously increasing the potential labor pool? I don’t know, but this will certainly create lively debate at your next office party or family get-together.

Here's another one for you.  Apple has been actively moving production outside of China for the better part of a year now.  Given the political difficulties and economic instability with China, this seems like a rational move to make.  During the pandemic, many companies discovered what a mistake it was to tie one’s supply chain to just one country. This week Apple announced it is moving product engineering for its iPad division to Vietnam.  However, is this a case of jumping out of the pot and into the fire?  A few weeks ago, I remember reading about how torrential rain in India shut down production at several Foxconn facilities for the better part of a week.  While Vietnam and India may seem more palatable than China, in some ways things like basic infrastructure and simple reliability may be a challenge.  There are lots of things not to like about China, but finding cheaper labor outside of China may have challenges of its own.

And finally, we learned this week that California is facing a $68 billion budget deficit.  While our federal budget deficit laughs at such “small” numbers, for a state budget to be so far underwater is unprecedented.  Tax filing deadlines across California were delayed from April until last month, leaving analysts in the dark about how much revenue was available.  Now that it is known, Governor Newsom is in a bit of a jam regarding solutions to this deficit.  Among the ideas being floated are reductions in education spending, and delay of the bill passed earlier this year to raise all healthcare workers to a minimum wage of $25/hr.  While the state has $30 billion in reserves, it is projected that the deficits will total $155 billion over the next six years and require substantial spending cuts.  What this demonstrates is the adage, “there’s no such thing as a free lunch.”  While the state is among the most progressive when it comes to taxation, it appears there’s only so much that can be squeezed from the rich.  It appears California is at the precipice and will require some large reforms in the years ahead.  If only there were another tax they could levy…

In closing, if you’re about to do a little interior painting to spruce things up for the new year, I’ve got just the color.  The color mavens at Pantone have anointed Peach Fuzz, otherwise known as PANTONE 13-1023 as 2024’s Color of the Year. Pantone describes the hue as “a velvety gentle peach tone whose all-embracing spirit enriches mind, body, and soul,” and it will soon be everywhere.  This year’s color was Viva Magenta, and the first one, twenty-five years ago, was Cerulean.  Now you know. 

Bruce J. Mason, MBA