DOW JONES NEWSWIRES
Pacific Investment Management Co. fund manager Bill Gross says
California and the U.S. both are poorly positioned to compete in a
global economy where capitalism has moved to a more
production-oriented system from one emphasizing finance and levered
risk.
A new emphasis on a more conservative, regulated form of
capitalism gives an edge to countries which focus on thrift and
"deferred gratification" - leaving out in the cold not only the
U.S., and California, but also "global lookalikes" such as the
U.K., Spain and Eastern Europe nations, the bond king said in his
monthly letter to investors.
Despite the financial system's stabilization, Gross questioned
whether California Gov. Arnold Schwarzenegger and the Obama
Administration have "the capital, the vision, and indeed the
discipline of its citizenry to turn things around."
Gross noted the downturn in fortunes of "once-golden"
California, including a 12% unemployment rate, near a national
high; the country's lowest bond rating; poorly rated schools;
jammed freeways and what was a $26 billion budget deficit resulting
from laws shaped from an outdated democratic system. He called
"perverted" the state's form of government, which requires a
two-thirds vote by lawmakers to pass a budget.
"California's problems, while somewhat unique and
self-inflicted, are really Americas problems, and not just because
the California economy is 15% of national GDP," Gross said.
Both the state and the U.S. suffer from "a lack of discipline"
and "vision" to perceive that the "strong growth in revenues was
driven by the same excess leverage and the same delusionary asset
appreciation that was bound to approach cliffs edge," Gross
said.
State tax revenue is largely reliant on California's richest
residents, with money rising and falling sharply as the economy
strengthens and weakens. A commission earlier this week recommended
a flatter income-tax system and elimination of the corporate income
tax and the 5% of the sales tax that contributes to California's
general fund. They would be replaced by an up-to 4% tax on what
businesses produce, minus their costs of purchases from other
firms.
Also highlighting human capital, the fund manager lamented his
home state is "losing rapidly .. its crown jewel education system
that led to Silicon Valley miracles" like Hewlett-Packard Co.
(HPQ), Apple Inc. (AAPL) and Google Inc. (GOOG).
-By Mike Barris, Dow Jones Newswires; 212-416-2330;
mike.barris@dowjones.com;
