AB32 Empowers State Regulators

OCT. 18, 2010

By SUSAN M. TRAGER

As we head down the stretch to the November 2 election, Proposition 23 has become the top initiative people are talking about. The debate mainly focuses on whether it would create or kill jobs.

Prop. 23 affects AB32, the Global Warming Solutions Act of 2006, which cuts greenhouse gas emissions in the state by 25 percent by 2020. If Prop. 23 passes, AB32 would be suspended until state unemployment, currently 12.3 percent, drops to 5.5 percent or lower for a year.

Proponents cite studies, such as one by the state Legislative Analyst, showing that AB32 would put too many new burdens on business, thus killing jobs. Those backing AB32 insist that it is encouraging companies to create “green” jobs, giving California an edge in a vital new field.

A better way to look it AB32 is to see it as a type of industrial policy. According to the Concise Encyclopedia of Economics, industrial policy gives “government officials additional authority, as well as the necessary fiscal and regulatory powers, to directly alter national industrial structures.”

That’s what AB32 attempts to do at the state level. On the day he signed AB32, Gov. Arnold Schwarzenegger promised, “Some have challenged whether AB 32 is good for businesses. I say unquestionably it is good for businesses. Not only large, well-established businesses, but small businesses that will harness their entrepreneurial spirit to help us achieve our climate goals.” Specifically, AB32 sets up “cap and trade” emissions market that would be overseen by the California Air Resources Board bureaucracy.

But such industrial policy has not worked well. In Japan in 1982, the Ministry of International Trade and Technology (MITI) began the Fifth Generation Computer Systems project, involving government and industry and costing $400 million over the next decade. It was supposed to leapfrog Japan over American companies in research and development. But it failed badly, beaten by the more nimble Sun, IBM, Intel and other American private firms.

In 1995, Michigan established the Michigan Economic Growth Authority (MEGA) to promote high-tech jobs through targeted tax incentives, such as for advanced batteries for hybrid cars. A 2009 study by the Mackinac Center for Public Policy, a state think tank based in Michigan, found that, “[F]rom 2001 to 2007, every $1 million in MEGA manufacturing tax credits awarded in a county was associated with the loss of 95 county manufacturing jobs…. MEGA credits are not working to improve manufacturing employment.”

And MEGA certainly hasn’t helped Michigan’s overall unemployment rate, which was the highest in the nation for four straight years, 2006-2010. Only in July 2010, the last month for which data are available, did Michigan drop out of first place, to 2^nd place with a 13.1 percent unemployment rate. In first place was Nevada at 14.3 percent; California was in third place at 12.3 percent.

The reason why industrial policies fail is that governments cannot predict which industries, companies or products will succeed, and which fail. Even entrepreneurs have a difficult time of it, failing often. Remember the Microsoft Bob program?

In his book “Competition and Entrepreneurship,” economist Israel Kirzner wrote about the role of what he called the “pure entrepreneur … a decision-maker whose entire role arises out of his alertness to hitherto unnoticed opportunities.” In California more than anywhere, we have such men and women creating the world’s economic and technological future.

But the definition obviously precludes the politicians who made AB32 a law, and the bureaucrats who will implement it. These men and women have different skill sets. When they get involved in economics, they produce industrial policy failures such as those cited above.

Their proper economic role is to provide the political and legal structure in which entrepreneurs, and others in the private sector, operate and thrive. In matters of the environment, regulations on pollution, for example, have been enacted that have produced an environment cleaner than it was in the 1960s.

But these were not industrial policies. Industrial policies don’t work. If Prop. 23 fails, California will find that out.

Susan M. Trager has more than 30 years of experience in water law, public agency law, municipal law, right of way acquisitions, environmental law and eminent domain law, including the valuation of water rights. She also edits Trager Water Report, a new site on California water. Her opinions are her own and do not represent those of her law firm, Smith Trager LLP.