Your eyes on California Government

John Seiler:

Dan Walters is the dean of California columnists. I’ve learned more from him about California politics than from anyone else. But sometimes he gets one wrong. Such as today. He writes:

“The last big recession to hit  California was in the early 1990s and largely centered in  Southern California, as the  aerospace industry was clobbered by the end of the Cold War.

“Los Angeles County alone lost 437,000 jobs between 1990 and 1994, at least half of them directly tied to military spending. The result was a massive exodus out of the state.

“Economists believe that at least 1.5 million Californians, and perhaps as many as 2 million, left the state, with defense workers and their families in the lead. As UCLA economist Jerry Nickelsburg put it: “As their economic opportunities diminished in Los Angeles, they packed up and moved to Texas, Massachusetts, Georgia, or wherever their skills were in demand.

“The exodus made recovery from the recession much easier, simply because it reduced the ranks of the unemployed by several hundred thousand.”

Walters wrote that we could use a similar exodus to reduce the number of those seeking jobs:

His description of the situation 20 years ago is partly true. The defense reductions did hit those industries. But cuts in defense spending don’t necessarily have to lead to recession and unemployment.

He makes the mistake of following Keynesian economics in emphasizing spending as the most important factor in economics. That’s the same mistake both President Bush and President Obama have made, along with Federal Reserve Board Chairman Ben Bernanke, with their many “stimulus” programs. But stimulus and spending aren’t the problem.

The problem is production, which needs to be nurtured by making production easier. The way to do that is to reduce taxes and regulations, while stabilizing the currency (instead of debasing the currency, as Bernanke has done; and Alan Greenspan before him).

In 1946, the U.S. federal budget was slashed greatly because World War II had ended and millions of G.I.’s were sailing home and leaving the service. The cuts were much bigger than California experience in 1990-91. Economists worried that the Great Depression would return.

It didn’t. Why not? Because Republicans and conservative Democrats insisted on huge tax and regulation cuts to accompany the cuts in spending. Major tax cuts were passed in 1946. Wartime wage and price controls mostly were abandoned (unlike in England, which put in charge the socialist Labour Party and soon became the “sick man of Europe”).

Why No 1946 Depression?

According to a study last year by Jason E. Taylor and Richard K. Vedder:

“In August 1945, the Office of War Mobilization and Reconversion forecast that 8 million would be unemployed by the spring of 1946, which would have amounted to a 12 percent unemployment rate. In September 1945, Business Week predicted unemployment would peak at 9 million, or around 14 percent. And these were the optimistic predictions. Leo Cherne of the Research Institute of America and Boris Shishkin, an economist for the American Federation of Labor, forecast 19 and 20 million unemployed respectively — rates that would have been in excess of 35 percent!”

So, what really happened? The professors describe it:

“Labor markets adjusted quickly and efficiently once they were finally unfettered — neither the Hoover nor the Roosevelt administrations gave labor markets a chance to adjust to economic shocks during the 1930s when dramatic labor market interventions (e.g., the National Industrial Recovery Act, the National Labor Relations Act, the Fair Labor Standards Act, among others) were pursued. Most economists today acknowledge that these interventionist polices extended the length and depth of the Great Depression. After the Second World War, unemployment rates, artificially low because of wartime conscription, rose a bit, but remained under 4.5 percent in the first three postwar years — below the long-run average rate of unemployment during the 20th century. Some workers voluntarily withdrew from the labor force, choosing to go to school or return to prewar duties as housewives.”

“But, more importantly to the purpose here, many who lost government-supported jobs in the military or in munitions plants found employment as civilian industries expanded production — in fact civilian employment grew, on net, by over 4 million between 1945 and 1947 when so many pundits were predicting economic Armageddon.

“Household consumption, business investment, and net exports all boomed as government spending receded. The postwar era provides a classic illustration of how government spending “crowds out” private sector spending and how the economy can thrive when the government’s shadow is dramatically reduced.”

Wilson Tax Increases

So, what went wrong in California in the early 1990s? The whole nation first was slammed into a recession in 1990 when President George H.W. Bush broke his “Read my lips! No new taxes!” solemn pledge that got him elected in 1988. He raised taxes.

Then California Gov. Pete Wilson and the Democratic California Legislature — along with a handful of Republican legislators — enacted a record $7 billion state tax increase in 1991.

The result was that, in 1992, when the country was coming out of the recession, California remained in one. And the California recession didn’t end until the California tax increases expired in 2005.

Worse, the predicted revenue increases from the tax increases never materialized. State general-fund revenues actually dropped from $42 billion in fiscal 1991-92 to $41 billion in 1992-93; then dropped again, to $40 billion in 1993-94.

It was especially depressing because a Republican governor pushed the tax increases, meaning taxpayers couldn’t turn to anyone for protection. Since then, Wilson aides have told me he regretted the tax increases. But the damage was done, to the state and to his presidential chances.

That’s the reason so many residents exited the state. If Wilson had held the line on taxes, the state would have recovered at the same rate as the whole country, and the net exit of productive workers would have been zero.

Expelling Taxpayers

Those exiting also were the kind you want to keep: Highly skilled folks who, when employed, work hard and pay their taxes. They also were enterprising enough to pack their SUVs and head to better tax climates, much as their ancestors once had moved in the opposite direction for the same reason. They could have stuck around and collected California’s more-than-generous handouts, but didn’t.

These also tended to be Republican voters, who turned many nearby states — Arizona, Montana, Idaho, Utah, Nevada — more Republican. No doubt many Democrats are saying, “Good riddance!”

But the exodus of these taxpayers/Republicans mortally wounded the GOP in California, especially tilting the Legislature to the far Left. All balance is gone.

Since the mid-1990s, in state-level elections, only two Republicans have won: Arnold Schwarzenegger, really a Kennedy Democrat taking a break from adultery. And in 2006, Steve Poizner won for insurance commissioner when his opponent, Cruz Bustamante, was embroiled in a scandal, and campaigned on his weight-loss program. No kidding. Cruz’ campaign statement: “I want to become an example to others to lead healthier lives by losing weight myself. Obesity in California costs $7.7 billion a year.” His Web site include a recipe for “Cruz’s Healthy Breakfast Frittata.” It’s a nutty state.

Anyway, chasing out achievers is no way to build a foundation for future prosperity.

As Joseph Vranich has tallied, the jobs and businesses just keep leaving California.  And there’s no relief in sight. In 2012 or 2014, Democrats will seize two-thirds of the seats in the Legislature, meaning they will go on a tax-increasing binge. Any businessman smart enough to stay in business knows that.

With fewer producers and more people taking money, including the large number in the $100,000 pension club, the state is headed for bankruptcy.

See you in Texas.

– Oct. 17, 2011

Tags: Arnold Schwarzenegger, Great Depression, Jerry Brown, John Seiler, Pete Wilson, Richard K. Vedder, Taxes