State Reforms Are Imperative to Sustain California’s Recovery

While virtually all private forecasters predict a continued, if unspectacular, California economic recovery, that forecast depends critically on continued growth for the nation and abroad. American economic growth depends on a variety of factors, from growth abroad to federal economic policy, especially monetary policy. The Federal Reserve Board, by raising interest rates before inflation accelerates noticeably, may succeed at that elusive goal--engineering a soft landing with sustained growth and low inflation. And while Mexico is in for a serious recession (the financial crisis was mishandled by both the Mexican and U.S. governments), growth is picking up in Europe and Japan, and that should offset the modest drain to California’s economy from a temporarily lame Mexico.

The tax, budget, defense, and regulatory policies of the federal government all seem to be tilting in California’s favor. The immense defense drawdown will be slowed, halted and perhaps even slightly reversed. The non-defense items President Clinton has stacked in the defense budget will be weeded out. Taxes are very likely to go down--and certainly will not go up. A capital-gains rate cut plus some middle-class reforms will be tied together, with Clinton likely to sign the package.

And despite the difficulties of agreeing on specifics, the consensus for reducing government spending appears quite broad, at least on the surface. Both House and Senate leaders have stated that spending will be cut before, or at the same time, as taxes, so there will be no doubt about deficit reduction.

Finally, the Republicans in Congress are trying to restore some balance in federal regulatory policy. They started with restrictions on new unfunded mandates on states and localities. Old unfunded mandates--which include those controversial costs for illegal immigrant services--will be reviewed and, in some cases, repealed. Private sector regulatory burdens are going to have to pass cost-benefit and risk-benefit tests and may be subject to an overall cap, such as proposed by Senate Majority Leader Bob Dole (R-Kan.).

To brighten California’s economic prospects, state economic policy reforms are essential, as well.

The state’s top priorities should be to lower tax rates, reduce unnecessary regulation, privatize the delivery of some public services, reverse the litigation explosion, improve education outcomes, control crime and transform welfare. Taken together, these individual reforms will add up to much more than the sum of their parts, substantially improving the state’s business climate. Gov. Pete Wilson laid out a bold series of such reform proposals in his inaugural and State of the State addresses. These build on reforms that the governor (sometimes with the Legislature) has enacted: workers comp reform, modest tax reforms, one-stop shopping for permits, etc.

Wilson starts with a basic, incontrovertible premise. In today’s ever more competitive economy, with more and more firms able to separately site corporate headquarters, R&D;, marketing, manufacturing and back office functions, California must take bold steps to improve its jobs climate. Despite all of its great natural advantages, the state’s tax, regulatory, tort, and other policies have gotten way out of line over the past couple of decades with places with which we compete for business location and expansion and the jobs that come with them.

The governor starts with tax reform and reduction. (Full disclosure: I chaired his Task Force on Tax Reform and Reduction). His proposed 15% across-the-board cut in personal and corporate tax rates would go a long way toward restoring California’s tax competitiveness. The beneficial effects on California’s competitiveness make this carefully phased-in three-year tax rate cut high on the priority list of anyone seriously concerned about California’s economic future.

Wilson proposes a constitutional amendment to rein in the red tape of regulation, as well as bold tort reforms. Remarkably, in the Legislature as in Congress, lawmakers have been passing laws which regulate the private sector without any idea of the costs of compliance. That’s simply outrageous. And the costs ultimately get passed on to you and me as consumers. Ditto the costs of unnecessary litigation.

I received an excellent education in Los Angeles public schools in the 1960s. Today, the state’s public education system is not delivering a consistent quality education. Wilson suggests dumping the state Education Code and replacing it with a new one by 1997. I was shocked to hear that the code is 11 volumes and 7,000 pages, prescribing everything from how many electrical sockets must be in each classroom to how many fruit trees can be on a school campus. How out of touch with the empowerment age!

Our school system is top heavy with bureaucracy, inflexible and lacking a competitive compensation structure that rewards quality teaching with steady pay hikes while weeding out poor teachers. More magnet and charter schools--and, ultimately, greater competition from private school choice--will be necessary to improve public schools. Better public education is not just important for the families with kids in school. It is also important for employers. This is the training ground of California’s future labor force.

Wilson has raised many other issues: welfare reform, crime control, illegal immigration, parental responsibility, privatization, affirmative action-reverse discrimination. As with any bold reform agenda, there will be numerous complaints from various special interests and the entrenched political class, including the Legislature in Sacramento. The stakes are too high for petty partisan bickering to stand in the way. If we are to lay a strong foundation for California’s economic future, beyond this modest cyclical uptick, the Legislature must cooperate with the governor in moving this agenda forward--and rapidly. If not, the governor should bypass the Legislature and quickly take his reforms directly to the voters.