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Let’s Send Washington a Message About State’s Economy

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MICHAEL J. BOSKIN, former chairman of the President's Council of Economic Advisers, is Tully M. Friedman professor of economics and senior fellow, Hoover Institution, at Stanford University

The early-June Labor Department report showing California’s unemployment rate declining to 8.3% is welcome news. It confirms what most of us had thought--that the jump in the unemployment rate between March and April was a statistical anomaly. The May rate is the lowest in almost 2 1/2 years. The modest May job growth corresponds to most other state economic indicators, which depict a gradual improvement from a very deep, long-lived recession.

There are several reasons the apparent economic recovery in California is proceeding slowly, some of them traceable to policies emanating from Washington. With the November elections approaching, what policy positions should Californians demand of candidates for federal office seeking their votes?

* Defense. President Clinton plans to accelerate the defense drawdown through 1998. What we need is a defense policy geared to national security in a dangerous and volatile world. With nuclear proliferation, regional conflicts and ethnic strife, the Clinton defense cuts do not make sense. Californians should insist on a slower, smaller drawdown. This would have the side benefit of reducing the drag on the California economy, which the rest of the economy must offset.

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* Taxes. Clinton’s enormous increase in marginal tax rates clobbers California disproportionately. Because California (despite its recent economic difficulties) is a high-income state, the higher tax rates take their toll much lower down the California income distribution than is the case nationally. The same is true of the higher taxes on Social Security benefits starting this year. And the small-business sector--so vital to California as well as to the nation--was hit quite hard by the Clinton tax increase, though not so hard as to throw the national economy back into recession, as some pundits had predicted.

To pay for its many new spending programs, such as its welfare non-reform, the Clinton Administration will be scrambling for more “revenue.” And in a second term, Clinton would have to come up with massive tax increases as the cost of his programs grew far beyond projections--at least if history is any guide.

Given these prospects, let’s elect people who will work to lower tax rates, not raise them. (By the way, expect Clinton to again propose his forgotten middle-class tax cut as part of his 1996 reelection bid.)

* Health care reform. The Clinton health care reform is too bureaucratic and too expensive. Private analysts estimate it would cost from 1 million to almost 3 million jobs nationwide. California would be disproportionately affected. Because California has a higher percentage of uninsured, the burden on small business would be severe here.

Because California already leads the country in enrollment in health maintenance organizations, any hypothetical savings from a move to “managed competition” would be far less.

Californians should insist on far less radical and expensive reform, such as a package of insurance, malpractice and other voluntary reforms that would greatly expand access, improve portability and help control costs without risking major economic disruption and deterioration in the quality of care.

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* Illegal immigration. As the grandchild of immigrants, I have always placed great importance on America’s beacon to the world, so wonderfully symbolized by the Statue of Liberty. Successive waves of immigrants from every continent and national and ethnic heritage have made tremendous contributions to this country, including its prosperity. A few years ago, sweeping legislation provided amnesty for illegal immigrants already living in the United States. Subsequently, reform of legal immigration both raised the quotas and based them more on skills in short supply.

But the federal government has failed to deliver on its promise to control the borders and stem the tide of illegal immigration.

At the same time, Washington is increasingly mandating benefits that states must provide to illegal immigrants. This policy has increased the incentives for people to enter the country illegally and overwhelmed the social services and tax capacity of the handful of states that receive almost all the illegal immigrants.

This is particularly true of California, where welfare benefits are 40% to 100% more than those of New York, Florida or Texas.

Gov. Pete Wilson was right to join the governors of Texas and Florida in suing the federal government to make it pay the costs of providing these services. The beef here is not with people from other countries trying to better their lives--that’s what we all try to do. With the government providing cash, education, health care and other benefits, just getting here puts many of them at a standard of living that would be upper-middle class or higher in their countries. The true problem is the breakdown of our federal system.

The federal government is responsible for our borders. If the policy is to curtail illegal immigration, the federal government ought to do so. If the policy is to allow greater immigration, the federal government, not a few selected states, should finance the services provided to immigrants in the interim before they become productive workers and taxpayers. Again, Californians should demand that our elected officials coordinate efforts to make Washington pony up.

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Federal policies are not the only factors affecting California’s short- and long-run economic future. But this agenda would go a long way toward ensuring more business starts and expansions, which would lead to more job creation and further declines in unemployment.

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