As we ramp up for the New Year, making resolutions and setting goals, it’s always nice to have an idea of what we are in for for the next year. In our fourth annual forecast, area experts weigh in on what’s to come for the economy, politics, technology and the climate. While it’s no easy task, peering into the crystal ball and getting an accurate picture, our local authorities on the subjects have a pretty good handle on what’s on the horizon.
by Bill Watkins and Matthew Fineup
This forecast is the most optimistic we’ve had for California in CERF’s (Center for Economic Research and Forecasting) existence at California Lutheran University. There are a couple of reasons for this. One is the big upgrade to the United States forecast, mostly a result of lower oil prices. The other is California’s tech sectors. California retains its leadership position in most tech industries, and that leadership is currently serving the state well.
Annualized GDP growth should exceed t3 percent in most quarters throughout the forecast horizon.
We’re a bit concerned that this growth will cause a relaxing of pressure to improve, economic opportunity for the many Californians not able to share in the tech sectors’ bounty. It is similar to the water situation. California needs water, and we hope it rains. Still, we’re concerned that a rainy winter will cause Californians to abandon needed reforms in our water system and pricing.
Water is the big question mark in forecasting California’s economy this year, and this forecast implicitly assumes that the drought does not become worse. That is, it assumes rain, but not in biblical quantities. So far, that appears to be a reasonable assumption. We’ve had one big storm and another is expected as we write this.
Still, it wouldn’t be the first time that the winter looked good in December, but disappointed in the remaining months of California’s rainy season. By contrast, in the winter of 1990-1991 it had only snowed 52.3 inches through February at Mammoth. In March, the mountain received 176 inches of snow. There is always hope.
If we don’t get enough snow and rain this winter to at least maintain California’s current water position, Californians could really see some economic pain. Already, some agricultural communities in the Central Valley have imposed draconian water restrictions and suffer extraordinary unemployment. Without rain, next year will be far worse. Our reservoirs and aquifers have far less water in reserves than they did just a year ago, meaning we’ve pretty much run out of reserves.
No rain would also incite more discord among Californians. A lot of that discord is unnecessary.
As my colleague Matthew Fienup likes to say, there is a difference between a drought and a water shortage. A drought occurs when it doesn’t rain or snow. A water shortage occurs when the price of water is too low.
Instead of extensive regulation, rationing, intrusive policing, shaming apps and water allocations based on political power more than economics, California’s water issues could be more efficiently dealt with by capping aquifer withdrawals at sustainable levels and allowing those with water rights to resell the water at market prices.
Unfortunately, we’re more likely to see buckets of rain that we are to see California with efficient markets in water. So we pray for rain. If we get rain, California will probably have a good year. If not, well …
As it is, we’ll be watching rainfall and snowfall amounts. If we don’t get what we need, we’ll have to incorporate the lack of rain into our forecast.
Thoughtful students are often frustrated with macroeconomics because we have so many theoretical models and there is no consensus about which is the correct model. The less-thoughtful students just want to know what will be on the final.
My take on the multiple macro-model issue is that each of these models has important insights, and the trick to economic analysis is determining which model is most appropriate for the situation being analyzed.
You might ask why somebody doesn’t create a unified model. Attempts have been made, but it appears to be beyond our abilities. It also might be that such a model wouldn’t be very helpful. It could just tell us that anything is possible, and of course, we already know that.
Forecasting is even more challenging. Not only are there all these theoretical models, but we only have data for a minute portion of mankind’s existence, and those data are often flawed. Still, some attempt to forecast with extraordinarily complex models, something that will work in all states of the world. For example, there is the Ray Fair model maintained by Yale.
At CERF, we take another approach. We use complex models, but we don’t attempt to model every facet of the economy, and we don’t try to tease more inference out of the data than the data give us with only a minimal amount of torture. Consequently, our models are less complex than many.
The downside of our approach is that the models need respecification as the world changes. For example, we created new models after the Lehman Brothers’ collapse in September 2009. The world had changed in significant ways, and we needed new models to analyze the new world. Those models have served us well, but the world continues to change. We’ve been working on new models to reflect those changes.
When modeling, it’s important to know that big economic changes come from excessive price volatility, or big changes in prices. The most recent recession is a case in point. The price of risk soared, while the price of real estate fell. There is also evidence that oil price increases contributed to the recession.
Oil prices have whipsawed the United States economy since OPEC (Organization of Oil Exporting Countries) first raised prices in 1973 in response to U.S. aid to Israel in the Yom Kippur War.
Oil price shocks are once again the driving force behind economic change, only this time for a completely new reason. Prices change in response to changes in demand or supply. Since 1973, price increases have been in response to supply interruptions by OPEC. Price declines have been a result of decreasing demand. Advanced economies are far more oil-efficient, and thus less dependent on oil per unit of output than they were in 1973. According to United States Forecast 2014 Q4 CLU Center for Economic Research and Forecasting 2 Today, though, oil price declines (negative price shocks) are mostly a result of new supply. It turns out the world had far more oil that many thought, and the peak oil folks are busy wiping egg off their faces.
In just the past few months, we’ve seen an impressive fall in oil prices. This bodes well for our economy, and one result of the price decrease is the first major upward revision to our forecast in several years.
We’re pleased to be able to finally make a significant positive revision. We’re sure that a lower oil price is good for our economy. As we say in another essay, we’re not sure of how much the oil-driven gain will be offset by increasingly expensive regulation. We’re working on models to incorporate those impacts, but creating those models is a tremendously difficult challenge.
We’re also not sure how low oil prices might go, or how long they may stay low. We’ll be working on models for these issues too, but there are, again, very difficult problems in creating the models.
Bill Watkins is the executive director of the California Lutheran University Center for Economic Research and Forecasting and Matthew Fienup is an economist at the center.
by Herbert Gooch
2014 was the Year of the Incumbent in California, further solidifying California’s reputation for exceptionalism. 2015 promises to be a time of political lull, anticipating a big year of presidential campaigning to follow.
Nationally, Republicans delivered a crushing defeat to the president’s party, retaking the Senate by substantial number and achieving a margin of party dominance not matched since 1876. But in California, Democrats reiterated their dominance. Although they lost their two-thirds “supermajority” in both houses of the legislature, a triumphant Gov. Jerry Brown retains substantial strength to do what he wills.
The question for 2015 will be, what will Brown do? As the only four-term governor in our history and the son of the governor, who, 50 years ago, laid the infrastructure of roads, schools and waterways that made modern California possible, it will be legacy-building time for Brown.
But his long-term aspirations may conflict with the short-term wants of fellow Democrats, who worry more about the next election than the rest of the century. With new Democratic leadership in both Assembly (Toni Atkins) and Senate (Kevin de León), Brown’s political juggernaut may spring a leak or two. Moreover, his big legacy items — high-speed rail, twin water tunnels providing water, tax and revenue reforms — require investing vast resources, yet are unpopular at the polls. It is not clear that he is willing to let go his reputation as the miser with a vision to become the master of revision.
The state elections are over; long live the next election, which will be presidential. All signs point to rising revenues, yet fracking and environmental concerns may prove incompatible. Our tax increases of two years back, which have proven so helpful to whittling the budget deficit, are scheduled for extinction in another couple of years. And the rebound of the economy, with its collateral advantage in capital gains and income taxes, will certainly not last forever. Brown will need to start his legacy moves while the good times last.
The congressional and Assembly races of 2014 made Ventura County conspicuous. The Brownley-Gorell contest was one of a handful of congressional seats nationally at play and resulted in a narrow victory for Brownley. The Assembly seat went to newcomer Jacqui Irwin. Over the last two years, the Democrats managed to seize congressional and Assembly seats which had been in Republican hands for decades, thus confirming the momentum favoring Democratic registration in what had been one of the few Republican coastal strongholds in the state. Democrats need to consolidate their victories this coming year. And if they want to remain anything other than an also-ran, a dispirited Republican party needs to overcome the ideological rifts dividing its base and expand its reach to minorities, women and younger voters.
Democrats swept the statewide primaries and general election offices. The sense that California is back as a strong and viable economy cemented the advantages of incumbency everywhere. In the off-term election, when turnout is normally low because there is no “top” office at stake, turnout was at near-record lows in the primaries and general elections. Brown barely broke a slow gait in campaigning. (Kashkari resorted to sleeping in the streets, quite literally, to gain attention.)
The advantages of incumbency played out at the nonpartisan levels of county, city and special district. There are very, very few new faces in office for 2015. One interesting race will be the June 2 special election in Thousand Oaks to fill the vacated seat of Jacqui Irwin with, therefore, no incumbent. Assuming the economy continues to recover, water management and securing resources will still continue to be major concerns. Scattered local elections in the fall will prolong the incumbency advantage and there is not likely to be much change in offices.
But political junkies, do not despair. Beneath the calm waters of 2015, the fish will be scheming about 2016. Not only will California be shaken by maneuverings for the coming presidential prize, but there are a number of Senate and Assembly seats to be termed out.
Gov. Brown, now 76, may be too old to be president, but he is not too bold to be kingmaker. He comes out of 2014 as one of a handful of Democratic winners in an ocean of defeats. And with the California delegation in hand, he is the key to winning any Democratic primary and national election.
In 2016, incumbency won’t be there for a number of termed-out seats in the state Assembly and Senate, like that of Sen. Fran Pavley, D-Agoura Hills. Brownley and Irwin will be tested. And the political temperature, turned down in 2015, will again be turned up for 2016.
Herbert Gooch is a professor of political science at California Lutheran University.
by Michael Soltys
This has been a tumultuous year in technology; we have seen security breaches, iPhone 6, Google Glass, drones and the virtual reality of Oculus Rift. In 2015 we will see that mobile devices will continue to become the prevalent way for people to browse the Internet. Highly visited sites such as google.com provide the mobile experience by sensing that the request for a web page originates from a hand-held device, and more sites are going to follow suit. Already, over half of consumer time spent on the Internet is on mobile devices, and hence the prediction of great growth in the mobile web, and, in particular, in mobile shopping.
But mobile devices are not only becoming the window of choice to the Internet; they are in fact becoming the computing platform of choice. For example, the CIO at Hargrove Inc., a trade-show and event services company in Lanham, Maryland, is investing in mobile technologies that will make it easier to access floor plans and information from the trade-show floor. For this to be practical, the screen size of mobile devices has to increase, and indeed it already has. Take, for instance, the seven-inch MediaPad X1 by Huawei, a giant smartphone. Thus, another prediction is that the line between mobiles and tablets will become more blurred and we will have devices that qualify as both smartphones and tablets.
3-D printing will continue leaving the domain of academics and enthusiasts, and it will become more and more of a standard, bringing the manufacturing of small parts to the household. The next generation of at-home 3-D printers will use lasers, heat or liquid to bind powders into solid materials.
We will see plastics and minerals at first, and eventually metal printing machines. There is a great variety of printers, ranging from Blueprinter (a Danish company) for $25,000, to Plan B made from off-the-shelf 3-D and inkjet printer parts under a Creative Commons license, a $1,200 machine that uses gypsum powder and a liquid binding agent. But overall the trend will be to become more affordable and more widely available, as the worldwide shipments of 3-D printers are expected to grow 98 percent in 2015.
Data Analytics will take center stage as the volume of data generated by embedded systems increases, and vast pools of data will be crunched by companies hungry for knowledge of users’ behavior. This trend is deeply connected to the Internet of Things, as more and more devices now have IP addresses and are constantly generating data. So Analytics will become ubiquitous in 2015, and invisibly embedded everywhere. An area of dramatic growth will be cars with embedded sensors that generate tons of data, not to mention serious privacy issues. It seems that not a day goes by without a major company reluctantly confirming that its data has been hacked. Today it is Sony’s turn, and as details are coming out we are learning of the staggering amount of data that was stolen, including social security numbers of employees, as well as celebrities.
Just as astounding as the data loss is Sony’s seemingly cavalier attitude toward data security. The Wall Street Journal has reported that Sony’s spreadsheets containing confidential information were not password-protected, or the passwords were kept in an eponymously named file. The cost to the company will be in the tens of millions of dollars. The onslaught of attacks has been relentless. For example, JPMorgan Chase was hacked in October of 2014, and Home Depot in September 2014. In the days prior to Thanksgiving 2013, someone installed malware in Target’s security and payments system, malware designed to steal every credit card used at the company’s 1,797 U.S. stores. Companies will have no choice but to invest heavily in data security in 2015.
Michael Soltys is a professor and chair of department of computer science at California State University Channel Islands.
by Simone Aloisio
The ozone hole is not causing global warming. This is one of those misconceptions that seems to persist. While there is a weak relationship between stratospheric ozone loss and climate change, for the most part, they are independent problems. Sure, they happen in the same atmosphere of our planet, but the ozone hole is in the stratosphere, which is a layer of air above the one we live in, the troposphere, where the effects of climate change are being felt. During my first year as a professor at Channel Islands, I told someone that I thought climate change was the most serious environmental problem of our time. He said “What about that ozone hole nonsense. You don’t hear about that anymore.” Well, here is why.
In the early 1970s a couple of chemists in southern California named Sherry Rowland and Mario Molina predicted that compounds called chlorofluorocarbons (CFCs) had the potential to get into the stratosphere and destroy the ozone layer. They built their work on other scientists’ findings, like Harold Johnston’s and Paul Crutzen’s. Isaac Newton said, “If I have seen further, it is by standing on the shoulders of giants.” Science is a team sport. At the time, there was very little evidence that CFCs were a threat. These compounds were widely used in refrigerators, air conditioners and as aerosol propellants. Measuring ozone in the stratosphere had been done for decades at that point, and there was little or no evidence that CFCs were destroying the ozone layer. Measuring ozone was even done in Antarctica.
Joe Farman had what I think must have been a horrible job in the late 1970s. He was part of the British Antarctic Survey, and his job was to measure ozone. To do this, he had to wait in the cold and isolated dawn of Antarctica for the sun to rise each year. After decades of normal readings, Farman saw that most of the ozone layer above him was gone. The next year, when the sun rose, it was almost completely gone. And the next year again, so Farman discovered the destruction of ozone predicted by Rowland and Molina in the form of an ozone hole.
I once heard Sherry Rowland give a talk, and someone in the audience asked him what would happen if the ozone layer was completely destroyed. His answer was “I would not want to know.” Me neither. Before our planet had an ozone layer to protect us from UV radiation that destroys DNA, there was no life on land.
Almost immediately following Farman’s discovery, there was an organized effort to discredit the science. At first these people said there was no hole in the ozone layer. They said CFCs were too heavy to mix into the stratosphere, even though they had been measured there many times. Then they said the hole was caused by natural things, like volcanoes and trees, even though science showed it wasn’t. Finally they said the only thing left for people to say when those other arguments fail, that it must be a hoax. Besides, they said, stopping the use of CFCs would lead to people living without refrigeration or air conditioning and would ruin the economy of our country. Even if it was true, we could not fix the problem without severe economic consequences. It was not clear if anyone was going to do anything about this global environmental problem.
In the 1980s, three things happened that changed that. 1) Susan Solomon especially, and other scientists (team sport) figured out exactly how and why ozone was being destroyed over Antarctica. She did this by thinking way outside the box, but that’s another story. 2) The Jim Anderson Research group flew a converted spy plane into the ozone hole and published the “smoking gun plot,” showing direct evidence that CFCs were destroying the ozone over Antarctica. 3) Facing a ban, the very companies that produced CFCs found cheap and reliable alternatives that do not destroy ozone to use in refrigerators and air conditioners.
In the late 1980s the world banned CFC production through a series of treaties. In less than a generation, our species predicted, identified and solved a major global environmental problem. This was an extremely complicated problem that everybody in the world got together and solved. We did this despite a tremendously well-funded political opposition. There is no doubt that lives were saved because of this. It was heroic.
The compounds that destroy ozone stay in our atmosphere for decades. Since we have stopped using them, the amounts in the stratosphere have been slowly decreasing. The ozone hole has stabilized and is showing signs of recovery. Within most people’s lifetimes, the ozone hole will no longer exist. And we still have affordable air conditioners and refrigerators. Most people didn’t even notice the change. So that ozone hole nonsense, you don’t hear about that anymore because we fixed the problem.
The ozone hole is not causing global warming. Global warming is a separate problem caused by the way we generate energy. We burn fossil fuels and let the waste gas escape into our atmosphere, where its concentration builds up over time. This changes the climate and causes lots of problems. It was discovered around 1990 and we know what is causing the problem. We have not fixed this problem.
So far, the year 2014 is the hottest year on record globally. It will be the 38th consecutive year of above average temperature. The thirteen hottest years on record will all have happened in the last 14 years. And my prediction for 2015: It will likely be hotter.
Simone Aloisio, Ph. D., is a professor of chemistry at California State University Channel Islands. He is also chair of the chemistry department.