Let’s Not Imperil State With Foolish Votes

California’s economic expansion continues to outpace that of the rest of the country. Our recovery started later, and from a deeper hole. The primary culprit was the large actual and prospective defense cutbacks, which were responsible, directly and indirectly, for more than half the job losses during the recession.

Fortunately, despite the substantial disruption, California’s multifaceted economy has rebounded. Led by the growth of new and small business, the boom from high-tech industries in Silicon Valley, telecommunications, entertainment and exports (especially to Asia), to name but a few, California’s economy steadily and cumulatively is on the mend. To be sure, serious problems remain: Not all parts of the state are growing, and there are several clouds on the horizon. For example, construction, although improving, remains sluggish.

There are, however, several potential wrenches that could be thrown into the gears of continued economic expansion. Although it appears that the national economy is slowing from a stronger first half of 1996, there is always the possibility of an unexpected recession caused by a policy mistake (higher taxes, say, or a misstep by the Fed) or an external shock to the economy, such as an oil crisis in the Persian Gulf.

California has a big stake in several economic policy issues likely to be decided in the next year in Washington and Sacramento. California may well determine the presidential election with its 54 electoral votes. We will elect 52 members of Congress, the entire state Assembly and half of the Senate; we will decide on numerous ballot initiatives. In short, California will help to define the economic future.

First, we are still a large defense and aerospace state, even after the wrenching consolidation. Presidential candidate Bob Dole and congressional Republicans want to reverse the draconian Clinton defense cuts. President Clinton claims he wants to hold defense spending steady, but many experts believe the defense budget is being used to fund programs that have little to do with defense. Indeed, the General Accounting Office--Congress’ watchdog arm--says Clinton’s budget is $150 billion dollars short over the next five years to fund even his own minimal defense priorities.

Second, although Gov. Pete Wilson and the Legislature have made progress in reducing the heavy burden of taxation and regulation, the Clinton tax hikes hit California particularly hard since we are a high cost-of-living state. As a result, it takes a higher income to achieve the same standard of living in Los Angeles than it does in Little Rock, Ark., but the federal tax system does not allow for these differences. So when U.S. taxes are hiked, it hurts more in California than it does in Arkansas. Of course, federal policies with respect to serious welfare reform and reimbursement for the costs of illegal immigration are other issues of importance.

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Despite all of the talk in the presidential election about education, almost all education funding is at the state and local level, and almost all of the important decisions are and should be made there. The Department of Education has a budget that amounts to about 5% of total education spending in the country. Some of that federal funding is spent on useful things and would survive abolition or realignment of the department, but much of it is spent wastefully, in a way that amounts to micro-managing of local school districts. In fact, several states have refused federal funds because the strings attached can affect the way they can spend their own money. Although improvements and cuts have been made in the tax code and regulatory morass, California is still considered a difficult business environment. Wilson is pushing an aggressive agenda in this regard--tax relief and reform, regulatory reform, litigation reform, etc. Let’s hope he is successful in getting another major part of his reform agenda through for the state’s long-term economic future.

Finally, it is not just in Washington and Sacramento that these decisions are made. There are a variety of ballot initiatives in every election, some of which can have profound economic consequences. Proposition 217 would foolishly raise top state income tax rates back up to 11% from the current 9.3%. The 11% rate was imposed temporarily during the recession-induced budget crisis of the early 1990s as a temporary compromise to secure spending cuts to move the budget into balance. However unpopular that trade was, it did succeed in bringing the budget back into balance and in controlling autopilot spending. Despite much public pressure, Wilson held firm and the rates went back down to 9.3%. That’s progress. It would be foolish to reverse it in the name of a redistributionist populism. You can’t tell from the political reporting and rhetoric, but the top 5% of the income distribution in California already pays 50% of the income taxes. We should be reducing taxes, especially marginal tax rates, and heading toward a flatter, fairer tax system at the state as well as at the federal level.

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Perhaps the most pernicious issue is the infamous Proposition 211, which would radically expand the ability to file frivolous lawsuits for alleged securities fraud. Of course, anyone harmed by securities fraud already has ample opportunity to sue and collect damages. That right should be and is protected. Proposition 211 is a blatant attempt by plaintiff lawyers to blackmail corporate executives and boards into settling phony lawsuits by preventing businesses from indemnifying the personal assets of officers and directors. California’s businesses will lose an immense number of talented people who will not want to have their homes, for example, potentially subject to forfeiture because of a wild jury award in our overly litigious society. This is a recipe for losing thousands of businesses and hundreds of thousands of jobs in California. It would dramatically worsen the business environment in California and is perhaps the single most important risk faced by the state’s economy.