Capitol Deserts Private Sector

For the second time in a decade, California’s economy seems headed for calamity. The state’s budget shortfall is approaching $40 billion, companies are shedding jobs, government employees face imminent layoffs and the costs of doing business continue to rise. In some business circles, California is rapidly reclaiming its early-’90s reputation as one of the worst places in the country to invest in and grow a business.

There is also bad news for the state’s dominant liberal leaders. By refusing to slow government spending and relentlessly pushing an onerous regulatory agenda, they have managed to bankrupt the very public sector that is their pride and joy. To an extent conservatives could once only dream about, continued expansion of state government seems all but impossible because there is simply no new pot of Sacramento-mined gold to spend. City managers and councils may have to look to the private sector to rekindle economic growth, local job creation and tax revenue.

Until recently, California’s current crop of political, media and business leaders unabashedly indulged in the fantasy that basic economics didn’t apply to their decisions and actions. It’s a mind-set that starkly distinguishes them from the leaders who guided California through the recession in the early 1990s.

Overcoming often deep-seated differences, politicians like former Assembly Speaker Willie Brown and Gov. Pete Wilson pushed reforms that reduced skyrocketing business costs and countered damaging publicity about California’s business climate. Workers’ compensation laws were reformed to save businesses billions of dollars. “Red teams” of local business and state economic development officials were formed to help companies untangle state regulations. Tax incentives for businesses were passed. By the middle of the decade, virtually every economic sector in the state -- aided by a general upturn in the national economy -- was turning around. Unemployment, near double-digit rates at the start of the decade, dropped dramatically.

By contrast, today’s crowd of largely inexperienced, ideologically motivated legislators seems oblivious to the public-private relationship. Their cluelessness became even more ingrained during the bubble economy of the late 1990s, when billions of windfall tax dollars flowed into state coffers and Democrats and Republicans spent them as if there were no fiscal consequences. As state Sen. John Vasconcellos (D-Santa Clara), one of the few remaining legislators who directly participated in solving the state’s last budget crisis recalls, “There was a euphoria that California would grow on forever.”

There is plenty of blame to go around. Exhibiting none of the skills that enabled Wilson to find common ground with political rivals, today’s Republican leaders offer almost no positive vision of how to stimulate business growth and upward mobility. They are one-note politicians, the note being no new taxes. Their allegiance to the anti-tax principle knows no fear, whether it be a slumping state economy or falling bond rating. Even mortgaging California’s future revenues to Wall Street doesn’t seem to scare them. This GOP habit of mind may be partly generational. Yesterday’s Republicans were, in part, friends and promoters of businesses that created new wealth. Today’s increasingly represent aging baby boomers determined to protect old economic gains.

Yet, the most telling failures belong to Democrats. Under Gov. Pat Brown, Democrats were the party of economic growth, the party that built the state’s famed infrastructure: the State Water Project, the freeway network, the best public university system and so on. All this depended on friendly government-business relations. By contrast, even the most serious fiscal challenge in state history hasn’t softened some of today’s Democrats’ hostility toward the private sector, despite the fact that income taxes remain Sacramento’s principal source of revenue.

According to former Assembly Speaker Bob Hertzberg, most of these Democrats give less priority to keeping jobs in their communities than serving such dominant Sacramento constituencies as public employee unions and trial lawyers, their biggest campaign contributors. This atmosphere of economic unreality in Sacramento has taken some bizarre turns. On their way to missing the June 16 deadline for a budget agreement, California’s legislators were preoccupied with such issues as legalizing imported ferrets for household pets, defining “fatherhood,” protecting cross-dressers in the workplace and assuring that drivers caught by photograph running red lights received due process.

Yet, Democratic disconnect is most evident -- and ironic -- in the party’s stated political ambitions. For example, Democratic leaders continue to push four health-care bills that mandate universal, employer-funded benefits that would impose what the California Chamber of Commerce has called a “new, multibillion-dollar cost” on the state’s struggling private companies. Despite widely publicized business relocations to other states and an economy that lags the rest of the country’s, the chamber’s most recent list of “job-killing” bills was the longest in its history.

All this undermines the private-sector growth that most significantly contributes to the social advancement and equity that Democrats say they desire. A 2002 report published by the state Economic Development Department showed that rapid job growth in the 1990s generated significant income increases for even the poorest workers. It further suggested that when the California economy slowed, much of this enormous social achievement was imperiled.

Many Californians see the persistence of otherworldly economics in Sacramento as evidence that the current budget crisis may be chronic. By so grossly mismanaging government finance, state leaders may have significantly diminished their capacity to extend their control over the economy. New government mandates, such as requiring publicly funded projects to pay higher than prevailing wages, may be more difficult to achieve if there are no additional public funds to spend. In Southern California, many cities, counties and public agencies adamantly oppose new state water-discharge regulations that they believe will divert funds from or severely compromise basic public health and safety. Government layoffs, should they occur, would hurt Democratic constituencies the most.

Until legislators develop the courage to deal with the long-term structural problems feeding the budget mess, responsibility for economic policy may increasingly devolve to the county, city and municipal authorities who make important land-use and business-regulatory decisions. Wealthier, anti-growth municipalities are realizing that Sacramento won’t be able to finance their desires for more recreational facilities, open space, roads and other public amenities. Their only realistic funding option lies in working with private interests to generate fees, taxes and other public revenues to pay for improvements.

Local governments are well positioned to adjust. Their officials are far more in tune with small and medium-size firms, the backbone of the state’s economy. Los Angeles leaders, for example, recently proposed to exempt certain housing projects from a plethora of politically correct requirements piled onto public development projects during the boom years and that add as much as 30% to the cost of a home. The cities of San Fernando, Glendale and Burbank have revised their zoning laws to allow for denser, mixed-use development. Rather than exclusively rely on luxury businesses or big-box retailers, urban planners in Ontario seek to attract businesses that employ their burgeoning populations.

In light of the incompetence in Sacramento, these cities’ more practical, economically balanced approaches to development may become the norm in the state’s communities.

The transformation of local economic policy could reshape California politics. Just as the state’s economy has decentralized and diversified, Sacramento’s political stalemate may force local leaders to assume primary responsibility for assuring that public policies are consistent with growth and social advancement. It is at the pragmatic local level that hope for California’s future must be reborn.