1. Econ 240 C Lecture 12

2. 2 The Big Picture w Exploring alternative perspectives w Exploratory Data Analysis Looking at components w Trend analysis Forecasting long term w Distributed lags Forecasting short term

3. 3 The 2010-2011 CA Budget w Long Run Perspectives Univariate trends Bivariate relationships w Short Run

4. 4 UC Budget $B nominal Vs. Fiscal Year

5. 5 UC Budget Billions Nominal $ Vs. Fiscal Year: 1998-09 – 2010-11

6. 6 1991-2 RECESSION 2001-02 Recession ?

7. 7 US Civilian Unemployment Rate

8. 8 UC’s Share of California General Fund Expenditures

9. 9 Relative Size of California Government

10. 10 CA Budget Crisis w Estimate of the relative size of the CA government: 5.14 % w Estimate of UC’s Budget Share: 3.68% w UC Bud = 0.0368*0.0514*CAPY w UC Bud = 0.00189* 1597.2 $B w UC Bud = 3.021 $B for 2010-11 w UC Bud = 3.019 $B Governor’s proposal

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12. 12 Schedule 6 Fiscal Year: CA personal Income, CA General Fund Expenditures

13. 13 Schedule 9: UC Budget, Gen. Fund Support

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17. 17 Salary by Major

18. 18 Economic Concept of a Public Good w Consumption by one person does not leave less for the next person National Defense Safe Streets Public Health Flu shots Measle vaccinations

19. 19 Return to Education

20. 20 07-08 The story based on a bivariate distributed lag model

21. 21 Another Story Based On a Univariate ARIMA Model

22. 22 Part I. CA Budget Crisis

23. 23 CA Budget Crisis w What is Happening to UC? UC Budget from the state General Fund

24. 24 UC Budget w Econ 240A Lab Four w New data for Fiscal Year 2008-09 w Governor’s Budget Summary 2008-09 released January 2008 http://www.dof.ca.gov/

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27. 27 CA Budget Crisis w What is happening to the CA economy? CA personal income

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29. 29 Log Scale

30. 30 Nov 1989 Berlin Wall Down

31. 31 CA Budget Crisis w How is UC faring relative to the CA economy?

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33. 33 CA Budget Crisis w What is happening to CA state Government? General Fund Expenditures?

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35. 35 CA Budget Crisis w How is CA state government General Fund expenditure faring relative to the CA economy?

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37. 37 Long Run Pattern Analysis w Make use of definitions: w UCBudget = (UCBudget/CA Gen Fnd Exp)*(CA Gen Fnd Exp/CA Pers Inc)* CA Pers Inc w UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc

38. 38 What has happened to UC’s Share of CA General Fund Expenditures? w UC Budget Share = (UC Budget/CA Gen Fnd Exp)

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42. 42 UC Budget Crisis w UC’s Budget Share goes down about one tenth of one per cent per year will the legislature continue to lower UC’s share? Probably, since competing constituencies such as prisons, health and K-12 will continue to lobby the legislature.

43. 43 What has happened to the size of California Government Expenditure Relative to Personal Income? w Relative Size of CA Government = (CA Gen Fnd Exp/CA Pers Inc)

44. 44 07-08

45. 45 California Political History w Proposition 13 approximately 2/3 of CA voters passed Prop. 13 on June 6, 1978 reducing property tax and shifting fiscal responsibility from the local to state level w Gann Inititiative (Prop 4) In November 1979, the Gann initiative was passed by the voters, limits real per capita government expenditures

46. 46 CA Budget Crisis w Estimate of the relative size of the CA government: 6.50 % w Estimate of UC’s Budget Share: 3.00% w UC Bud = 0.03*0.065*CAPY w UC Bud = 0.00195* 1588.5 $B w UC Bud = 3.098 $B for 2008-09 w UC Bud = 3.494 Governor’s proposal

47. 47 Forecasts of UC Budget, 08-09 Method Forecast Actual (proposed)$3.394 B Identity/CAPY$3.098 B

48. 48 Econometric Estimates of UCBUD w Linear trend w Exponential trend w Linear dependence on CAPY w Constant elasticity of CAPY

49. 49 Econometric Estimates w Linear Trend Estimate w UCBUDB(t) = a + b*t +e(t) A lucky coincidence Usually either too low or too high!

50. 50 A Lucky Coincidence: 2 out of 10

51. 51 Econometric Estimates w Logarithmic (exponential trend) w lnUCBUDB = a + b*t +e(t) w simple exponential trend will over-estimate UC Budget by far

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53. 53 Econometric Estimate w Dependence of UC Budget on CA Personal Income w UCBUDB(t) = a + b*CAPY(t) + e(t) w looks like a linear dependence on income will overestimate the UC Budget for 2007- 08

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55. 55 Econometric Estimates w How about a log-log relationship w lnUCBUDB(t) = a + b*lnCAPY(t) + e(t) w Estimated elasticity 0.833 w autocorrelated residual w fitted lnUCBUDB(2007-08) = 1.32945 $3.78 B w actual (Governor’s Proposal) = 1.18481 $3.27B

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57. 57 Is Higher Education a necessary economic Good?

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61. 61 Is Government a luxury Good? w Elasticity = 1.073

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63. 63 Forecasting Conclusions w Trend analysis and bi-variate regressions of UC General Fund Expenditures on California Personal Income focus on the long run w The UC budget depends on the business cycle, a more short run focus w Try Box-Jenkins Methods

64. 64 Econometric Estimates w Try a distributed lag Model of lnUCBUDB(t) on lnCAPY(t) clearly lnUCBUDB(t) is trended (evolutionary) so difference to get fractional changes in UC Budget likewise, need to difference the log of personal income

65. 65 Box-Jenkins Distributed Lag w Dlnucbud = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + … + e(t) w Dlnucbud(t) = h(z) dlncapy(t) + e(t) w Dlncapy = 0.709*dlncapy(t-1) + resdlncapy(t) w [1-0.709z]dlnucbud = h(z)[1-0.709z] *dlncapy(t) + [1-0.709z]*e(t) w W(t) = h(z) resdlncapy(t) + e*(t)

66. 66 Identify dlncapy: trace

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70. 70 Estimate ARONE Model dlncapy

71. 71 Validate model

72. 72 Orthogonal Residuals

73. 73 Normal Residuals

74. 74 Cross-Correlate w and resdlncapy

75. 75 Distributed lag of w on resdlncapy w W =h 0 *resdlncapy + h 1 *resdlncapy(-1) + e*(t)

76. 76 Distributed lag Model

77. 77 Residuals

78. 78 Also model error as arone

79. 79 residuals

80. 80 Estimate this model for dlnucbud

81. 81 Estimated model

82. 82 Diagnostics

83. 83 Residuals

84. 84 Fitted dlnucbud Dlnucbud (07-08) = 0.046

85. 85 Dlnucbudf(07-08) Dlnucbudf(07-08) = 0.0452

86. 86 Forecasts of UC Budget, 07-08 Method Forecast Actual $ 3.270 B Identity/CAPY $ 3.155 B univariate model distributed lag $3.223 B = UCBud(06- 07)*[1+dlnucbudf(07-08)]

87. 87 Identify dlnucbud

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91. 91 Model dlnucbud

92. 92 Identify dlncapy Estimate model for dlnucbud

93. 93 diagnostics

94. 94 residuals

95. 95 Univariate forecast dlnucbud(07-08) Dlnucbud(07-08) = 0.0696

96. 96 Univariate forecast for 2008-09 w Fit AR(1) to dlnucbud, 68-69 though 07-08 w Forecast dlnucbud for 08-09 = 0.059 with sef =0.064 w Governor’s proposed increase is 0.069

97. 97 proposed Actual 2004-05 was Scwarzenegger’s First budget

98. 98 Forecasts of UC Budget, 07-08 Method Forecast Actual $ 3.270 B Identity/CAPY $ 3.155 B univariate model $ 3.298 B ($18 M high) distributed lag$ 3.223 B = UCBud(06- 07)*[1+dlnucbudf(07-08)] ($ 47 M low) simple exp. smooth$3.083 B double exp. Smooth -HW $ 3.309 B ($39 M high), trend = $226 M/yr.

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101. 101 Efforts from earlier years

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104. 104 Estimate ARONE Model for dlncapy

105. 105 Satisfactory Model

106. 106 Estimate ARONE Model for dlncapy(t) w Orthogonalize dlncapy and save residual w need to do transform dlnucbudb w dlnucbudb(t) = h(Z)*dlncapy(y) + resid(t) w dlncapy(t) = 0.72*dlncapy(t-1) + N(t) w [1 - 0.72Z]*dlnucbudb(t) = h(Z)* [1 - 0.72Z]*dlncapy(t) + [1 - 0.72Z]*resid(t) w i.e. w(t) = h(Z)*N(t) + residw(t)

107. 107 Distributed Lag Model w Having saved resid as res[N(t)] from ARONE model for dlncapy w and having correspondingly transformed dlnucbud to w w cross-correlate w and res

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109. 109 Distributed lag model w There is contemporary correlation and maybe something at lag one w specify dlnucbud(t) = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + resid(t)

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113. 113 Try an AR(6) AR(8)residual for dlnucbudb

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117. 117 w Try a dummy for 1992-93, the last recession, this is the once and for all decline in UCBudget mentioned by Granfield w There is too much autocorrelation in the residual from the regression of lnucbud(t) = a + b*lncapy(t) + e(t) to see the problem w Look at the same regression in differences

118. 118 05-06 92-93

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124. 124 Distributed lag Model w dlnucbud(t) = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + dummy (1992-93) + resid(t) w dlnucbud(t) = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + dummy (1992-93) + dummy(2002-03) + resid(t) w dlnucbud(t) = h 0 *dlncapy(t) + dummy (1992-93) + resid(t)

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129. 129 Distributed Lag Model w dlnucbud(t) = h 0 *dlncapy(t-1) + dummy (1992-93) + resid(t)

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134. 134Fitted fractional change in UC Budget is 0.032 (3.2%)versus Governor’s proposal of 0.033 (3.3%)

135. 135 Conclusions w Governors proposed increase in UC Budget of 3.3% is the same as expected from a Box-Jenkins model, controlling for income w The UC Budget growth path ratcheted down in the recession beginning July 1990 w The UC Budget growth path looks like it ratcheted down again in the recession beginning March 2001

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138. 138 Try estimating the model in levels

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145. 145 07-08

146. 146 Postscript 2006-07

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