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Capitol Deserts Private Sector

The spirit that addressed '90s crisis appears lost.

June 29, 2003|Joel Kotkin and David Friedman | Joel Kotkin is a senior fellow at the Davenport Institute for Public Policy. David Friedman is a senior fellow at the New America Foundation. Both are contributing editors to Opinion.

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.

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