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

4. 4 Schedule 6 Fiscal Year: CA personal Income, CA General Fund Expenditures

5. 5 Schedule 9: UC Budget, Gen. Fund Support

6. 6

7. 7

8. 8

9. 9 Salary by Major

10. 10 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

11. 11 Return to Education

12. 12 07-08 The story based on a bivariate distributed lag model

13. 13 Another Story Based On a Univariate ARIMA Model

14. 14 Part I. CA Budget Crisis

15. 15 CA Budget Crisis w What is Happening to UC? UC Budget from the state General Fund

16. 16 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/

17. 17

19. 19 CA Budget Crisis w What is happening to the CA economy? CA personal income

20. 20

21. 21 Log Scale

22. 22 Nov 1989 Berlin Wall Down

23. 23 CA Budget Crisis w How is UC faring relative to the CA economy?

24. 24

25. 25 CA Budget Crisis w What is happening to CA state Government? General Fund Expenditures?

26. 26

27. 27 CA Budget Crisis w How is CA state government General Fund expenditure faring relative to the CA economy?

28. 28

29. 29 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

30. 30 What has happened to UC’s Share of CA General Fund Expenditures? w UC Budget Share = (UC Budget/CA Gen Fnd Exp)

31. 31

32. 32

33. 33

34. 34 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.

35. 35 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)

36. 36 07-08

37. 37 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

38. 38 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

39. 39 Forecasts of UC Budget, 08-09 Method Forecast Actual (proposed)$3.394 B Identity/CAPY$3.098 B

40. 40 Econometric Estimates of UCBUD w Linear trend w Exponential trend w Linear dependence on CAPY w Constant elasticity of CAPY

41. 41 Econometric Estimates w Linear Trend Estimate w UCBUDB(t) = a + b*t +e(t) A lucky coincidence Usually either too low or too high!

42. 42 A Lucky Coincidence: 2 out of 10

43. 43 Econometric Estimates w Logarithmic (exponential trend) w lnUCBUDB = a + b*t +e(t) w simple exponential trend will over-estimate UC Budget by far

44. 44

45. 45 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

46. 46

47. 47 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

48. 48

49. 49 Is Higher Education a necessary economic Good?

50. 50

51. 51

52. 52

53. 53 Is Government a luxury Good? w Elasticity = 1.073

54. 54

55. 55 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

56. 56 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

57. 57 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)

58. 58 Identify dlncapy: trace

59. 59

60. 60

61. 61

62. 62 Estimate ARONE Model dlncapy

63. 63 Validate model

64. 64 Orthogonal Residuals

65. 65 Normal Residuals

66. 66 Cross-Correlate w and resdlncapy

67. 67 Distributed lag of w on resdlncapy w W =h 0 *resdlncapy + h 1 *resdlncapy(-1) + e*(t)

68. 68 Distributed lag Model

69. 69 Residuals

70. 70 Also model error as arone

71. 71 residuals

72. 72 Estimate this model for dlnucbud

73. 73 Estimated model

74. 74 Diagnostics

75. 75 Residuals

76. 76 Fitted dlnucbud Dlnucbud (07-08) = 0.046

77. 77 Dlnucbudf(07-08) Dlnucbudf(07-08) = 0.0452

78. 78 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)]

79. 79 Identify dlnucbud

80. 80

81. 81

82. 82

83. 83 Model dlnucbud

84. 84 Identify dlncapy Estimate model for dlnucbud

85. 85 diagnostics

86. 86 residuals

87. 87 Univariate forecast dlnucbud(07-08) Dlnucbud(07-08) = 0.0696

88. 88 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

89. 89 proposed Actual 2004-05 was Scwarzenegger’s First budget

90. 90 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.

91. 91

92. 92

93. 93 Efforts from earlier years

94. 94

95. 95

96. 96 Estimate ARONE Model for dlncapy

97. 97 Satisfactory Model

98. 98 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)

99. 99 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

100. 100

101. 101 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)

102. 102

103. 103

104. 104

105. 105 Try an AR(6) AR(8)residual for dlnucbudb

106. 106

107. 107

108. 108

109. 109 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

110. 110 05-06 92-93

111. 111

112. 112

113. 113

114. 114

115. 115

116. 116 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)

117. 117

118. 118

119. 119

120. 120

121. 121 Distributed Lag Model w dlnucbud(t) = h 0 *dlncapy(t-1) + dummy (1992-93) + resid(t)

122. 122

123. 123

124. 124

125. 125

126. 126Fitted fractional change in UC Budget is 0.032 (3.2%)versus Governor’s proposal of 0.033 (3.3%)

127. 127 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

129. 129

130. 130 Try estimating the model in levels

131. 131

132. 132

133. 133

134. 134

135. 135

136. 136

137. 137 07-08

138. 138 Postscript 2006-07

139. 139

140. 140

141. 141

142. 142

143. 143

144. 144