Test for Democrats

Over the last three years, California’s economic reputation has fallen from one of the best in the nation to the worst. Repelled by what they consider anti-business policies and saddled with soaring costs, defense, film and small and medium-sized companies in every economic sector are moving or expanding elsewhere.

This isn’t good news for Democrats, who control the Legislature and occupy every statewide office. Worse, even if the stock-market collapse and national slowdown caused part of the problem, California’s economic slide serves to reinforce the public perception that Democrats are less friendly to business than Republicans.

But there is opportunity in the party’s monopoly on power. If Democrats can reverse the state’s economic course, the triumph will be theirs alone and may go a long way toward changing the state’s reputation as the country’s most notorious “job killer.” With California one of the few remaining Democratic strongholds, success here can also boost the party’s national reputation. Democrats can begin this week when state leaders are scheduled to meet in an emergency session to deal with the budget deficit.

The first step should be to enact policies that will stimulate private-sector investment and jobs. True, proposals that reduce revenue at a time when the budget deficit is huge stand little chance of passage. But they could be enacted now and phased in later when the revenue shortfall is more manageable. The point for Democrats is to send a message that California aims to be more business friendly.

The state has, at best, a confusing mishmash of business “incentives” that are either too complex or too limited in scope to overcome the state’s significant cost and other perceived disadvantages. What’s needed are unequivocal economic benefits for companies that commit to stay and grow in the state. One example is a recent proposal, pushed by the California Manufacturers and Technology Assn., that would eliminate the state’s 5% sales tax on purchases of new manufacturing equipment.

California manufacturing is suffering a truly epic contraction, and the loss of hundreds of thousands of relatively high-paying production jobs accounts for much of the state’s chronic budget woes. Personal income taxes account for the vast majority of state revenues and are nearly 10 times the amount paid by corporations and banks. Encouraging new-equipment purchases by waiving the sales tax on them is predicted to generate about 50,000 new jobs a year and more than offset any tax losses within five years, according to a study done by the Milken Institute. Similar measures exchanging tax breaks for significant long-term growth and investment should be offered as broadly as possible throughout the state economy.

Democrats in Sacramento should also reduce out-of-control regulatory costs that profoundly disadvantage California companies in national and worldwide competition. Politicians have dismissed most of the complaints about the state’s regulatory regime as so much corporate grousing. But many of the gripes deserve serious attention. In particular, California has to fix programs that are tainted by crapshoot litigation and by virtually unbounded intervention by bureaucratic and special-interest groups.

A prime example is workers’ compensation. Although the program was modestly reformed during the 1990s’ recession, state legislators never corrected its most important flaw. Unlike almost every other state, California does not compensate injured employees with specified payments for each kind of work-related injury. Instead, trial courts are allowed to set compensation. The result is all too predictable. While employers elsewhere can more or less anticipate workers’ compensation and insurance costs, in California they tend to view their employees as ticking, legal-liability time bombs waiting to explode. Small wonder employers are reluctant to hire.

Urban land development in California is another astonishingly complex regulatory process. Many states have precisely defined cleanup standards for previously developed property. Businesses know exactly what they need to do to buy and clean up such land and eventually open a factory, office park or store on it. But in California, state regulators and a potentially unlimited range of community, environmental or other interest groups can exploit the state’s regulatory process and insist on unique, if not draconian requirements for a project. This dramatically increases the risks and costs of urban development and drives countless jobs from the state.

A third priority for Democrats is to allay widespread fears that basic, everyday resources such as water and power are unreliable. In part, this perception stems from the state’s energy debacle, but environmental restrictions, more limited Colorado River allocations and economically weak utilities reinforce business anxieties about the future of California’s water and gas supplies.

State Democrats can help alleviate these anxieties by adopting an emergency water-supply program that would reallocate water from low-valued agriculture to urban uses during critical droughts. This would assure businesses and workers that, no matter what the weather might bring, water will be available for the state’s core economic activities. Similarly, Democrats should resolve as quickly as possible what appear to be legitimate claims of energy-market manipulation and secure stable electricity and gas supplies at reasonable prices. The message California urgently needs to send global markets is: No business need fear that investments in the state will suffer for lack of reasonably priced water, gas and electric power.

Finally, California’s leadership, and its governing Democratic majority in particular, should channel the state’s progressive and reformist political impulses in a more responsible manner. Much of California’s negative economic reputation arises from the dramatic increase in the volume of anti-business legislation and regulation proposed in Sacramento. Www.Jobkillers.org, for example, is a Web site maintained by the California Chamber of Commerce and other business groups. It chronicles pending and often singularly ill-conceived legislative proposals.

One way to reduce risks is to impose a significant measure of economic discipline on the state’s trigger-happy legislators by subjecting any proposed bill or regulation to a detailed cost impact and benefit assessment. Both the Clinton and the Bush administrations imposed such requirements on the federal government, and they have exposed particularly misguided legislation.

Especially during tough times, California’s lawmakers should not be reluctant to analyze exactly what their proposals would accomplish, and at what price, before saddling taxpayers with another costly mandate. Cost-benefit assessments, for example, would almost certainly show that efforts to improve automobile-fuel economy and reduce exhaust emissions would generate significant net benefits for California regardless of what auto manufacturers might claim. Such policies would significantly cut air pollution and reduce what are now excessive pressures on major statewide employers to achieve otherwise unattainable air-quality goals.

In contrast, programs that would force cash-strapped municipalities throughout the state to construct and operate multibillion-dollar storm-water treatment facilities would almost certainly fail any sensible cost-benefit analysis. Many are based on poorly defined and scientifically moot water-quality standards.

If California’s majority Democrats act quickly to reward business employment growth and investment, repair the state’s worst regulatory and resource problems, and focus on the most pressing, defensible social and environmental goals, they can prove their party’s economic mettle just in time for the 2004 elections. But if they blindly do nothing and allow the nation’s largest state to suffer further investment and job losses, they may soon find themselves in a fight for their political survival.