Wilson Is Better Candidate to Lead State Out of Long Nightmare

The Brown-for-Governor campaign says it will plaster the state with a million copies of its (fourth) economic plan for California, which it claims would dramatically improve the state’s economy. The Wilson-for-Governor campaign denounces the plan as a recipe for higher taxes and more bureaucracy that would seriously impede the state’s recovery.

But can a governor, working with or over the Legislature, make a sizable difference in California’s economic life? And if so, how?

Buffeted by global and national economic forces and severely damaged by federal tax and defense policy, the state is slowly emerging from its worst downturn since the Depression of the 1930s. Employment is growing, and state revenues are running ahead of projections--business taxes by about 20%.

But the Clinton tax rate increases hit particularly hard; California is a high-income state, so the hikes took their toll further down the income distribution here than, say, Arkansas.

And the Clinton defense drawdown will be three times as large as the Reagan-era buildup. More than half the jobs lost in California during the deep recession were defense-related, and the size of the future defense drag on the rest of the California economy will be one of the prime determinants of whether the recovery will be slow or solid. Even the governor of the nation’s largest state lacks direct control over these forces--and has only limited indirect influence.

Technological, demographic and economic forces have also been at work. For example, the ability to decouple the sites of corporate headquarters, R&D;, design, manufacturing and marketing has led to a substantial decentralization of corporate America. That, in turn, has increased the competitive pressure to have a more hospitable business tax and regulatory environment.

The early 1990s punctured Californians’ naive confidence that rising incomes and plentiful jobs would continue regardless not only of national or international business cycles, but also of state and local tax, regulatory, land-use and judicial policy.

Over the previous 20 years, California had developed a reputation as not very hospitable to business. Tax rates became non-competitive, regulation and red tape excessive and the judicial system an unbalanced albatross often used to halt any economic development. The state’s economic policies began to exert a powerful negative effect on business location and expansion decisions, eventually eroding the job climate.

In this context, it is instructive to compare the different philosophies of Pete Wilson and Kathleen Brown. The easiest way to do so is to survey the really big economic issues and policy choices that have confronted the state over the last few years and the positions each has taken on them.

First, look at the vision of California’s role in the national and world economy, revealed in the candidates’ different stands on the North America Free Trade Agreement. Wilson strongly supported NAFTA; Brown opposed it. Apparently, the governor’s view is that California can compete and win in the global economy, while Brown’s view is that California needs to be shielded from global competition.

The second big issue is regulation and the micro-management of business. The “Big Green” initiative of a few years ago was overwhelmingly rejected by the state’s voters as an outrageous overreach. Big Green would have been the single most economically damaging initiative in the history of the state, ensnarling innumerable businesses in red tape and bureaucracy, preventing them from growing or locating in California and costing untold jobs. Wilson opposed Big Green; Brown supported it.

Third, it has been widely understood that one of the serious problems facing employers in California was an out-of-control, expensive and fraud-ridden workers’ compensation system. Last year Wilson and the Legislature took an important first step toward workers’ comp reform; in an appearance before trial lawyers, Brown condemned the plan.

Fourth, businesses, like homeowners, pay property taxes. Wilson opposes the notion of a “split roll,” in which businesses would be charged higher property tax rates than homeowners; Brown supports it.

It appears that Wilson envisions a California in which businesses are allowed--indeed encouraged--to locate, grow and hire workers. He envisions a California taking advantage of its location as the hub of Asia-Pacific trade to successfully compete in the global economy, its businesses and their workers less encumbered by government bureaucracy, red tape and expensive litigation.

It appears that Brown, by contrast, envisions a state hospitable to more trial lawyers, more government regulation and more regulators--and afraid of confronting new global trading realities.

Perhaps the most explosive issue is taxation.

These days, the Brown campaign blasts Wilson, somewhat disingenuously, for having agreed to raise taxes to get the spending cuts necessary to deal with the state’s huge budget crisis three years ago. Recall that a $15-billion deficit--roughly a third of the total general-fund budget--came out of nowhere. Yet Brown has said many times she would have done the same thing and has proposed several other tax hikes in the interim.

*

While I am no fan of higher taxes--they damage the economy--the proper way to think about where taxes would be is to look at the overall budget, not just the tax ledger. The independent Commission on State Finances forecast back in 1990 that state general-fund spending this year would be $60 billion. By taking tough action--much of it very unpopular--Wilson has kept such spending flat at about $40 billion. If spending had been allowed to grow to $60 billion, state general-fund taxes would be 50% higher than today, a whopping $20 billion more per year, or $2,500 per family of four.

To conclude, state policies will affect California’s economy for better or worse in coming years. The choice appears to be between Pete Wilson’s approach of improving the job climate for businesses to expand and locate in California, and Kathleen Brown’s 1930s- or 1960s-style government activism and micromanagement, albeit muted.

Even a cursory look around the world or among the states reveals that the former approach is what is producing prosperity and growth for regions and nations, while the latter has simply not worked.