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Commentary

Reviving California


     
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Not all of California’s disasters are natural. Take, for instance, the state’s flagging economy; it Is the result of a number of manmade, public policy blunders.

The recent unemployment report for August highlighted California’s problems. The Golden State had an unemployment rate of 9 percent, more than two points above the national average of 6.7 percent, and about three points higher than the unemployment rates of such Rust Belt states as Michigan and Ohio.

There is no reason why California should not always have a dynamic economy. California has plenty of resources, space, infrastructure and human capital. The problem is that California also has a political and bureaucratic establishment intent on micromanaging the state’s economy, a prescription in any state or country for economic decline.

Compare California to Hong Kong. Unlike California, Hong Kong is extremely crowded and so resource poor that it is the only major economic area in the world that has to import its own drinking water. And if that were not enough, in four years Hong Kong will be swallowed whole by a Communist nation with 200 times its population.

Yet Hong Kong’s economy is booming. The unemployment rate in Hong Kong is under 2 percent and the economic growth rate weighs in around 6 percent. Employers are complaining of labor shortages. Hong Kong’s stock market also hit an all time high recently, and property values are up 30 percent over the past year.

The secret to Hong Kong’s success is very simple: let the people unleash the spirit of enterprise —and keep taxation and regulation to a minimum.

The recent analysis of the 1993 Hong Kong budget prepared by the accounting firm of Peat Macwick also makes clear the still British colony’s commonsense approach to the public purse: "Over the last few years, the government has been reporting substantial budget surpluses. A substantial portion of those surpluses has arisen from under spending by government departments… In framing his budget the financial secretary indicated that he had adopted the two strategies of ensuring that public spending did not grow faster than the economy and of maintaining an adequate level of reserves to meet known commitments and provide a buffer against abrupt changes in the world political and economic conditions."

The financial secretary’s budget declares that the maximum rate for income tax on any Hong Kong resident shall be 15 percent, and that the top corporate tax rate in Hong Kong will be 17.5 percent, but with generous deductions allowed for partial expensing of new plant equipment and expenditures.

The typical professional worker in Hong Kong has no deductions from his or her paycheck, the most direct and bureaucracy free form of economic empowerment a government may arrange for its citizens. And financial freedom for workers in Hong Kong also has been good for business, which has drawn on expanded savings and investment funds to fuel economic growth.

Now contrast Hong Kong to California, where some individuals this year will face a total federal state and local marginal income tax burden approaching 50 percent, and where the corporate tax burden, counting federal taxes, is well over double that of Hong Kong.

The high California tax burden reflects government spending increases in excess of the rise in incomes and output. For example, from 1984 to 1990 spending from the state’s general revenue fund rose more than 10 percent a year. The 1990-92 recession merely intensified a financial crisis that was already building during the relatively prosperous 1980s, a crisis brought about by legislative surrender of fiscal controls to various special interest groups interested in the transfer of income from taxpayers’ pockets to their own.

One major beneficiary of booming government spending was California’s public employees. Wendell Cox and Samuel Brunelli of the American Legislative Exchange Council recently demonstrated that real earnings of local government employees rose three times as fast as those of private sector employees in California from 1980 to 1990 (state government employees also did better than those in the private sector).

Cox and Brunelli also estimate that if local and state government employees had merely earned salary increases equal to those in the private sector, the total annual costs of local and state government would have been reduced $5.4 billion annually by 1990.

My own statistical research suggests that California would have had about 50 percent more economic growth (increase in income per capita after allowing for inflation) in the 1980s if it did not have the burden of taxes associated with financing the pay premium for public employees as well as other increases in spending beyond the growth in the economy. Excessive growth in government spending during the 1980s also lowered the income of the average Californian by more than $1,000.

Simply put, the private sector is more efficient than government. Big corporations are downsizing to stay competitive, efficient and profitable. By contrast, Big Government has neither competition nor worries about profits. As for efficiency, the typical government bureaucrat tries to increase staff — thus lowering productivity — rather than reduce staff as would a private sector administrator.

And in California the prospect always looms of more debilitating and arbitrary regulation — a form of disguised taxation — from scores of government bodies micromanaging environmental, land use and worker safety issues in ways unknown in Hong Kong. Unlike in Hong Kong, government in California is a growth industry more concerned with redistributing resources than with allowing resources to be put to creating abundance for all.

Small wonder then that Hong Kong capital formation is at historic highs while California now must contend with the programs of more than 20 US. states trying to lure businesses away.

And small wonder that many Californians— both individuals and families — are voting with their feet. Hong Kong is turning people away even with the prospect of a looming Communist takeover. In contrast, some 600,000 Californians left the state last year after188,000 jobs were eliminated, producing a net outmigration or loss of 150,000. In Utah, moving companies have to advertise in newspapers for drivers to return hauling vehicles to California to be reloaded to take the next family out.

Not only are people leaving California but so are businesses — taking jobs with them. And while everybody reads about such high profile departures as Hughes Aircraft Co. from Canoga Park, equally important are the unreported losses of potential jobs by smaller California firms that are simply not expanding because of the profit squeeze brought about by excessive government taxation and regulation,

But still the state government seems oblivious to the damage it has done for it continues to impose the same tired authoritarian policies based on that most fallacious notion, government knows best how to spend other people’s money.

Some $1.5 billion in new taxes will be imposed as a consequence of the 1993 stale budget, after allowing for the ploy of the state expropriating revenues traditionally collected by local governments. Another $1.5 billion in taxes will deal another savage blow toss already battered California economy. Even lower economic growth, layoffs and fewer jobs should be expected.

Individuals, families and businesses put their money to more productive use than do bureaucrats, regulators and government in general. It is a lesson a booming Hong Kong has taken to heart but a California in decline obviously has not. We are approaching the Pacific Century; let’s just pray California is invited to remain in the game.


Richard K. Vedder is a Senior Fellow at the Independent Institute in Oakland, Calif., Distinguished Professor of Economics at Ohio University, and co-author (with Lowell Gallaway) of the award-winning Institute book, Out of Work: Unemployment and Government in Twentieth-Century America.

Can Teachers Own Their Own Schools?From Richard K. Vedder
CAN TEACHERS OWN THEIR OWN SCHOOLS? New Strategies for Educational Excellence
In Can Teachers Own Their Own Schools?, Richard Vedder examines the economics, history, and politics of education and argues that public schools should be privatized. Privatized public schools would benefit from competition, market discipline, and the incentives essential to produce cost-effective, educational quality, and attract the additional funding and expertise needed to revolutionize school systems. Learn More »»






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