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The Economic Perils of Waiting for Washington : California: The budget ordeal teaches us that size and diversity are not rewarded on Capitol Hill, so it's time to develop our own devices.

August 08, 1993|David Friedman | David Friedman, an L.A. attorney, is a visiting fellow at the MIT Japan program.

Even as Washington's budget drama mercifully drew to a close, the real import for California lies less with the economic details than with the failure of the process itself. That so much effort could be spent on a plan promising so little--especially for California--provides powerful evidence that the federal government is fundamentally incapable of dealing with its own pathologies, let alone help the nation's largest state.

Washington works best for relatively undeveloped, unpopulated states dominated by monolithic interests--oil in Oklahoma, hotel operators in Nevada--that their representatives can singlemindedly support. California's size and diversity, however, means that its congressional representatives, especially in the Senate, cannot speak with a similar degree of clarity or define a coherent set of priorities. By default, federal policies are all-too often designed by and for constituencies that have nothing in common with California.

Bill Clinton's economic plan provides a perfect example. Rather than start with the needs of the growth companies and new markets on which California's--if not the nation's--future depends, his proposals focus primarily on stimulating politically sensitive, but economically less relevant Wall Street financial markets. At its core, the plan raises taxes to lower interest rates, draws billions of dollars out of low-return bank accounts into stocks and facilitates large-company debt refinancings--the primary group of industrial borrowers--to improve corporate balance sheets and raise blue-chip prices.

But booming financial markets, as the experience of the '80s demonstrated, do not necessarily create high-wage, high-quality jobs. Many larger corporations, including some of California's brand-name aerospace and computer firms, use lower interest rates to improve their financial positions even as they lay off thousands, shrink R&D and market products made in Asia or Latin America under their logos. That's one reason why a big majority of fast-growing firms--companies that, typically, don't borrow and care relatively little about cheap credit--express little or no confidence in the President's economic stewardship.

California's representatives, moreover, stayed mostly on the sidelines once Congress began gutting the President's proposals, in no small measure because they were unable to agree on priorities. Small-state politicians fearlessly eliminated provisions that equitably imposed tax and spending burdens and substituted levies and cuts that disproportionately harm California.

Most of the California delegation and key Administration officials, to be sure, care deeply about the state, but their good intentions are frustrated by their lack of clear goals and the inherent pitfalls of the federal system. The key to future success is to take Washington out of the equation and equip California with the resources and institutions capable of solving its own problems, including three initiatives:

* Equitable burden sharing . Virtually all credible studies agree that California's per-capita federal-tax burden is much greater than the benefits it receives. In line with most assessments, the nonpartisan California Research Bureau recently concluded that California would bear more than 15.5% of the total Clinton deficit-reduction costs, while receiving just 13% back from the federal government. Among Democrats and Republicans, the California delegation's top priority should be to staunch this financial drain through such means as earmarking defense, immigration or other funds for their constituents, or indexing personal tax rates to reflect the state's higher cost of living.

* Devolve program funds and authority . Hard experience teaches that federal programs, especially in large, diverse states, more often than not fail to help their intended beneficiaries. There are already signs that the two most ballyhooed California "recovery" efforts--worker retraining and defense conversion--will be to the 1990s what the ineffective, discredited War on Poverty was to the '60s and '70s. Many defense firms, for example, are receiving substantial Department of Labor grants to retrain laid-off employees even though they have no idea what to train them for.

Federal economic and social programs can be effective if the public-policy "customers" themselves define and work closely with the managers of the package of services. Rather than let Washington bureaucrats choose retraining-fund recipients and run California programs from afar, support should be awarded locally on the basis of competitive proposals from companies, unions or other appropriate groups that provide detailed, enforceable commitments to create new industries and jobs. Devolution of resources and program authority must become a central strategy for California.

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