SACRAMENTO / BRADLEY INMAN : Short-Term Solutions to Balance Budget Will Come Back to Haunt State

It’s not surprising that a measure to appropriate $3.5 million to finance California’s participation in the World Trade Expo in Seville, Spain, in 1992 is likely to fall victim to the state budget ax. Scrambling to balance the budget, lawmakers are on the lookout for any expenditure that might appear frivolous.

But this cutback and other more fundamental changes in state spending in critical areas such as education and infrastructure will have negative long-term implications for the California economy.

“State spending is one of the most important economic competitive policies we have,” said economist Stephen Levy. “Ignoring its importance is bad for business.”

By not attending the biannual business powwow in Spain, “California misses out on international economic opportunities that flow from these events,” according to California Chamber of Commerce executive Kirk West, who contends that the expo is a successful global tool for marketing California products. “It pays for itself over and over,” West said.

An even larger concern are budget cuts that affect the future skills of the labor force and slash funds for roads, transit, sewer and water, according to Levy, who heads up the Palo Alto-based Center for the Continuing Study of the California Economy.

“When a company can’t move products through the state because we can’t afford to improve the freeways, then we have a problem,” Levy said. “We must also consider our airport capacity and the ports--all of which depend on state government support.”

UCLA economist David Hensley said the focus in Sacramento has been on the short-term balancing act of who is going to pay more taxes, while the long-term economic consequences of the budget problem are being ignored.

California is crying out for increased public investment, Hensley said.

An estimated $13-billion state budget deficit has lawmakers scrambling for ways to cut. A state advertising program that promotes tourism is under scrutiny as is a promotional campaign that attempts to persuade employers to expand in California.

The budget debacle has also killed discussion about new economic initiatives that were being explored by the Legislature before news about the deficit began to unfold.

“It’s a terrible time to talk about a state tax credit that rewards private investment in research and development--even though other states offer it,” West said. And he said any loosening up of the unitary tax isn’t likely when the Legislature and the governor are determined to plug any leaks in current revenue. (The unitary tax permits the state to tax company earnings even when it is generated out of state. Industry contends that the tax discourages companies from doing business here.)

Education may be an even more important consideration. “So goes the state budget, so goes education and the fate of our skilled labor force,” Levy said. He points to corporate studies that repeatedly show that the most important consideration for companies is the skills of the local workers.

A study conducted by the Federal Reserve Bank of Boston concluded that there is direct correlation between shrinking public investment and lower productivity.

Nationwide, “the drop in labor productivity has been due to a decline in the growth of public infrastructure,” according to Alicia H. Munnell, senior vice president at the Federal Reserve Bank of Boston, who authored the study in the New England Economic Review.

It’s “not only the highways, airports and mass transit systems but also water facilities, sewers, hospitals, police and fire stations, all of which contribute to an orderly environment that facilitates private production,” she wrote.

The massive state deficit reinforces the growing impression that California’s economy faces tough times.

“In the real world, businesses make decisions every day about expanding, and they look closely at the intangibles such as quality of life and productivity,” said economist Joel Singer, who heads up the California Assn. of Realtors. “Once the leader in these areas, now California is definitely lagging and the deficit only makes things seem worse.”

Declining investment is not a new problem in California. The consensus on public investment broke down more than 20 years ago, according Michael Teitz, a professor of urban planning at UC Berkeley.

“The Reagan governorship sought to reduce taxes and public expenditures, targeting higher education especially,” wrote Teitz in a study prepared for California Policy Choices. Then, “the (Edmund G. Brown Jr.) Administration sought to reduce infrastructure expenditures, rejecting highways and large water projects as socially undesirable,” according to Teitz.

Despite the economic consequences, many business leaders supported the anti-tax ideology of the 1970s. They also failed to lobby for increased investment in education when spending money on schools fell out of favor with the public in the 1970s. And in the current budget mess, many industry leaders are focused solely on the short-term threat of higher business taxes.

“Right now, we’re too busy with the current recession and the budget problem to do much about the long term,” said David Edlund, spokesman for the California Manufacturers Assn.

Some companies see it differently. “We are trying to look at the big picture and not be limited by parochial concerns about higher taxes,” said Steve Shaudet, vice president of government affairs at Lockheed Corp. It was that “wider view” that prompted industry to push for the passage of Proposition 111, which increased the state gasoline tax for transportation improvements, according to Shaudet.

Savings and loan executive Herb Sandler said it’s time for the state “to adopt, sell and execute” a seven-year economic and public investment plan, which goes beyond the terms of elected officeholders.

“These are solvable problems, but our politicians have been frozen into inaction,” said Sandler, chairman of World Savings & Loan Assn.