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The UCLA Anderson Forecast Suggests that Drops in Government and Consumer Spending Could
Erode Economic Recovery; Temporary Tax Increases Might Provide Some Relief
and the Real Estate “Bomb” is Slowly Ticking
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March 12, 2003
UCLA Anderson Forecast
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LOS ANGELES, March 12, 2003 — Without definitive word from Sacramento on how the legislature and
governor plan to deal with the budget deficit, it remains to be seen exactly where the inevitable
strains on the economy will be. The UCLA Anderson Forecast believes that while any government action
might not affect the state’s recovery, the budget crisis could certainly slow the state’s growth rate
for several years.
 In a report titled “Frequently Asked Questions about the California Economy,” Tom Lieser, senior
economist for the UCLA Anderson Forecast and long-time predictor of the California economy, addresses
the most worrisome problems facing the state. In response to the question, “Will the Budget Deficit
Kill California’s Recovery?” Lieser writes, “We continue to view the deficit primarily as a symptom of
the state’s economic weakness, rather than a causal factor. But the size of the annual deficit is
sufficiently great that its resolution will be a significant source of drag on the economy.” He notes
that, unlike the federal government, the state must balance its budget annually and the resolution of
the balancing act will ultimately cost thousands of jobs in both the government and the private sector.
Lieser also tackles questions that consider the danger of raising taxes in California (done properly it
is less damaging than budget cuts impacting employment), the impact of higher gas prices (depends on the
extent and duration of higher prices, but potentially a problem for consumers) and the potential explosion
of the “real estate bomb” (it’s not a bubble, so don’t look for it to burst).
In his quarterly national report, Forecast Director Edward E. Leamer asserts that the best possible
solution for state economy is a temporary increase in taxes. “Now is the time to put more of the tax
burden on those with discretionary income whose personal spending will not be substantially affected by
a tax increase,” Leamer said. He also recommends that spending cuts that do not impact employment level
are preferable to those that do. Leamer is emphatic that any tax increase be temporary and strongly
advises on approaches to avoid feast or famine in state government budgeting.
 Comparing state and local government spending to the series of imbalances causing havoc in current economic
conditions, Leamer believes that current economic conditions should be considered corrections and not a
recovery.
The three imbalances Leamer believes are in need of correcting are:
- business investment without profits
- an inefficient consumer savings rate
- unsustainable capital investment in the United States
Locally, the economic outlook is very promising. Senior economist Christopher Thornberg writes in a report
that the biggest weakness for the Los Angeles area economy is its relationship to the rest of the state,
nation and the rest of the world. Internal sectors like healthcare, retail trade and professional services
remain very strong. As the national economy continues to recover or correct its imbalances — the Southern
California position only becomes stronger.
About UCLA Anderson Forecast
The UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for
California and the nation, and was unique in predicting both the seriousness of the early-1990s downturn in
California, and the strength of the state’s rebound since 1993. Most recently, the Forecast is credited as
the first major U.S. group to declare the recession of 2001. Visit the UCLA Anderson Forecast on the Web at
http://uclaforecast.com.
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