Facts, Instinct Guide State’s Economic Seer

Ted Gibson might deny it, but in some ways he is responsible for the statewide shrinking of overcrowded school classrooms and the tax break that will soon shower most California families.

His job is to look at the state’s $1-trillion economy and make a guess--two parts scientific calculation and one part gut instinct--about where it’s headed and how much money it will generate for the state to spend.

Few economists do their act on a higher wire. If he is too optimistic by just 1%, that could mean a $550-million loss to the state budget. In practical terms, parks and libraries would probably close; life on welfare might get tougher and potholes might go unfilled a bit longer.

Last year, Gibson was off by more than 3%. But he guessed low. As a result, the state got about $2 billion more than it expected. Gov. Pete Wilson immediately launched a south-to-north tour to boast about sharing the windfall with schools, poor people and taxpayers.

“If I could run the world exactly as I please, the economists for the state of California would have job security as long as they underestimated revenue,” said budget hawk Tom McClintock, a Republican Assemblyman from Northridge. “The moment they overestimated revenue, I’d chop their heads off.”

Right now, Gibson and his staff are preparing a two-year economic forecast that will largely determine what Wilson has to spend when he announces his budget proposal in January for the 1998-99 fiscal year.

The analysis is something like an old family recipe, tweaked and twisted over years of experience, until it becomes an economist’s personal formula for predicting the future.

Gibson’s mixture, for example, will consider how many blockbusters might come out of Hollywood, how many California dairy cows will be milked, how many import cars arrive in Los Angeles ports and where in the devil the computer industry might go next.

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As Gibson has learned from 10 years of charting California’s course through some of its most volatile economic times, this is not a job for someone with a tender stomach.

Accurately predicting the economy, like the weather, is not always possible. Every year, the world’s seventh-largest economy will produce some surprises.

Droughts, freezes or flood might pester the state’s heartland; natural disasters can dampen tourism, slow commerce and destroy a property tax base; politics can play havoc with foreign trade and fickle investors will be stampeded by instant trends.

Sometimes that inherent uncertainty is lost on a political arena that must answer to voters for an economist’s misjudgments.

In Gibson’s case, observers say the best evidence of how well he has done may be the fact that he is virtually unknown. He could probably walk onto the floor of the Legislature and not be recognized by more than a handful of lawmakers.

That would not be the case if there was any evidence that some of the fiscal somersaults forced on the Legislature could be blamed on a faulty forecaster.

At the worst, when the bottom dropped out the economy virtually overnight, Gibson’s forecast in 1991 was so far off that lawmakers had to scramble and patch over a $14-billion budget deficit. As a result, Wilson’s political legacy was forever scarred by his decision to seek the largest tax hike in state history.

But in hindsight, Gibson’s survival looks like a sports team that stuck with its coach through a losing season. Instead of shooting the messenger, most lawmakers cried over his message.

“He is a very influential figure who nobody knows much about,” said Steve Larson, staff director for the Democrat-controlled Senate Budget Committee. “The fact that he’s never noticed is probably his greatest tribute.”

At 55, Gibson has a Santa Claus-like figure that he tucks into a pinstriped business suit. His graying hair is more tussled than coiffed. He has a quick smile and a jolly laugh to go with a dry and sometimes self-deprecating humor.

Gibson is a Los Angeles native who went to state government in 1987 from the buttoned-down banking world. Now, as a Civil Service employee making $80,500 a year, Gibson talks candidly with reporters about the state’s economic pulse.

He will also volunteer that he is not the best economist around. But over the years, he said, he has learned “what makes this place tick,” he said.

Even that, however, is not always enough.

Just last month, Gibson watched with sober attention as the stream of state revenue fell more than $200 million short of his prediction for September. That alone is almost enough to give state employees the raise they’ve been seeking for three years.

It’s not the economy. All of the indicators still show an engine that is purring down a flat-out straightaway. But for some reason, people aren’t behaving as expected. They’ve adjusted their spending patterns in a way that has--at least for the moment--profoundly affected California’s revenue stream.

Gibson and his staff are scratching their heads. They believe the latest hiccup is caused by a new law that allows large taxpayers this year to report major income gains about six months later than was previously required.

If so, the money will be collected, just later than expected. But in the meantime, there are plenty of jitters. “The main thing over here is just to calm everybody down,” Gibson said.

The shock of the 1991 recession also demonstrated the traps of economic forecasting. Out of about a dozen major public forecasters in California, UCLA made the closest estimate of the change in personal income levels in 1991--and it was off by more than 300%. Gibson missed by about 400%.

What made matters worse, Gibson said, is that he and others expected a brief downturn.

As a result, lawmakers made a series of one-time changes in the budget designed to survive a short dip. Instead, it ended up making the fiscal hole deeper when there was no recovery the following year.

Gibson now says his mistake was to use the post-Vietnam War period as an economic model for predicting defense cuts in the 1990s. Instead of a broad-based military reduction like the Vietnam War model produced in the early 1970s, Gibson said the latest cuts focused on aerospace and sophisticated weapon makers--California’s specialties.

Nearly three-quarters of the 760,000 California jobs lost during the recession are now attributed to defense cuts.

“He went through a very, very tough period and he emerged with both his reputation and his sanity intact,” said Jack Kyser, a forecaster at the Economic Development Corp. of Los Angeles.

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When things finally started to turn around in 1993, it also took state economists a while to figure out what was happening. It turned out to be the dawn of the new market the Internet produced for personal computers.

“We didn’t know if this was just a spurt,” Gibson said. “We were looking in all of the usual places and it just wasn’t there.”

Some of the most perplexing issues have followed changes in the tax laws.

One of the taxes Wilson raised during the 1991 downturn was on bunker fuel used by oceangoing freighters. The budget anticipated millions of dollars in higher revenue. Instead, McClintock said bunker fuel revenue dropped about 90%, as the ships stopped elsewhere to fill up.

This year, lawmakers cut the bunker fuel tax.

In 1987, economists were fooled by soaring state revenues that generated a budget surplus of more than $1 billion. Gibson recalls telling then-Gov. George Deukmejian, “This is real.” Deukmejian then issued rebates to millions of taxpayers.

The following year, the revenue spike was gone. Gibson now says the revenue surge was a one-time change in tax strategy for wealthy professionals caused by the law change.

Such periodic embarrassment keeps California’s relatively small community of economic forecasters humble. They are actually more like comrades than competitors. Gibson stays in frequent contact with several colleagues, especially when there is a puzzling development.

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Next month, shortly before he issues his annual forecast, Gibson will convene a gathering of his peers to test the economic assumptions he is considering. The closed-door meeting in a high-rise San Francisco office will include experts from key sectors of the state’s economy.

In May, just before the deadline for the Legislature to adopt a state budget, Gibson will update his forecast. Lawmakers also have the option of adjusting his estimate, but Larson said they rarely make more than a minor change.

Once the state has committed to a spending plan, there is little it can do to change course if things don’t go as expected.

“I joke that economists use decimal points to show they have a sense of humor because our [forecast] numbers are not that precise,” Gibson said. “But budget numbers tend to be very precise. There is nothing I can do about that. No economist is a soothsayer.”

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Economic Forecasting

Twice annually, state economists and other forecasters predict a variety of performance measures, such as personal income growth, for the upcoming year. The numbers are calculated into the state budget, telling the governor and legislators how much money they will have to spend. In 1991, at the dawn of a deep recession in California, personal income grew far less than forecasters had expected. The results was a $14-billion deficit in the state budget that led to the largest tax hike in state history. Last year, the economy grew faster than forecasters expected, producing a $2-billion surplus that prompted a tax cut last September.