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Bad Spell, Not Apocalypse

August 17, 2003

Recall proponents and candidates who want Gov. Gray Davis' job are portraying California in apocalyptic terms -- as a former utopia now plagued by high taxes and onerous regulations, with businesses fleeing to other states and the state suffering catastrophic unemployment. All this is fueling the effort to eject the Democratic chief executive from office, as if that alone would right the foundering ship. Candidate Arnold Schwarzenegger, for one -- picking up the steady line of the California Chamber of Commerce -- claims that more businesses are leaving California than ever before.

The fact is that the state of the state is not nearly as grim as the doomsayers claim it is. In unemployment, California is no worse off than the rest of the country, says Stephen Levy, director of the Center for the Continuing Study of the California Economy.

Most of the job losses occurred in Silicon Valley with the collapse of the high-tech boom, which also was a major factor in creating a massive state budget deficit. But the jobs didn't move elsewhere, Levy said. They just disappeared. Texas lost more high-tech jobs than California.

At the end of July, state unemployment was 6.6%, down slightly from June. Much of the joblessness continued to be in Santa Clara County, the heart of Silicon Valley. The jobless rate in Orange County was only 4%, San Diego County 4.5%, Ventura 5.5% and Los Angeles County 6.8%. The big loser in jobs in July was the government sector, which must be good news for those who believe the bureaucracy is bloated.

How bad has it been in comparison with the early 1990s, when the state faced its last recession and big budget crisis? More than 293,000 jobs have been lost since the peak employment of March 2001. But more than 500,000 jobs evaporated during the corresponding period of the earlier recession.

As for businesses leaving the state, there were some highly publicized moves, both in the 1990s and now, sometimes triggered by mergers and acquisitions. But a study after the 1990s recession found no widespread business flight. And in 2000, the latest year for which statistics are available, the number of businesses increased. And that was in the midst of the energy crisis.

Taxes? State tax rates are lower now than they were 10 years ago or even 20 years ago. Schwarzenegger's new economics advisor, billionaire Warren Buffett, suggested in Friday's Wall Street Journal that California property taxes were too low. He noted that he paid only $2,264 in property tax on his $4-million Laguna Beach home compared with $14,401 on his $500,000 Omaha residence.

Buffett, in a quote that made only some editions of the paper, also said, "California has a vibrant economy."

There is no doubt that soaring workers' compensation insurance costs are a drag on business and that the state unemployment compensation fund faces insolvency. The Legislature must deal with both issues soon. The structural causes of the budget debacle also must be fixed. But shrill exaggeration or downright misinformation will not help California solve the real problems it faces.

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