Lockyer Lives In State Of Delusion

DEC. 26, 2010

California Treasurer Bill Lockyer raised eyebrows last week by arguing in a newspaper column that “California isn’t broken,” but it’s not allaying the fears of the state’s hard-pressed taxpayers. If the state’s top financial official is in deep denial about California’s precarious situation, then it’s time for the rest of us to be very concerned indeed.

Jointly written by Lockyer and Stephen Levy, a lefty Palo Alto economist and longtime advocate for higher taxes, the piece dismissed criticisms that California has a hostile business climate and denied businesses are leaving the state. They argued that the state’s government is relatively lean, and that California is, in many cases, in better economic shape than other states.

Our budgetary problems and nation’s highest unemployment rate are not the result of governmental policy, in Lockyer’s and Levy’s view, but “have been caused by the devastation visited on our revenue base by the recession.”

This confirms what I have long argued —- California’s Democratic leaders don’t see any fundamental problems in the way the state spends tax dollars or regulates the economy. There’s nothing going on that won’t be fixed by an economic recovery and higher tax rates.

Apparently, the authors never considered that the state’s private sector is so energetic that the golden goose survives despite efforts to kill it.

“We’re still an economic engine,” Howard Jarvis Taxpayers Association President Jon Coupal told me. “As bad as our policy makers have been, it takes a long time to totally screw up a state.”

Lockyer and Levy apparently believe that incentives and disincentives don’t matter.

California has the nation’s eighth-highest corporate tax rates, the third-highest top personal income tax rate, and the highest state and local sales taxes in the country. Except for property taxes (32nd, thanks to Proposition 13), California is at or among the worst in virtually every tax and regulatory measure. Yet this supposedly has no effect on the economy and job-creation decisions.

The authors offer as proof of their rosy scenario that there is “no chance” California will default on its bond payments. As they correctly point out, “debt service has second call on general fund dollars” after the school-funding mandate imposed by Proposition 98. Well, yeah. Just because California isn’t about to default doesn’t mean that its government is a model of efficiency.

Their column fails to mention the state’s massive unfunded pension liabilities or its retiree health obligations, which pose long-term financial threats to the state.

Arnold Schwarzenegger’s top pension adviser, David Crane, schooled me on this debt issue —- arguing correctly that pension reformers ought not to focus on the risk of default, which is minimal. The real risk is to the state’s already hobbling infrastructure, to more fundamental government programs and to taxpayers’ wallets. The bond markets, he argued, are not going to force the state to become more fiscally responsible because they know they will get paid, but the government has to cut programs or find more money somewhere.

The Lockyer/Levy column criticizes the “echo chamber of insults” that national writers and California critics have directed our state’s way. But Levy’s Center for Continuing Study of the California Economy and other liberal think tanks have created their own echo chamber of denial.

They argue that companies are not leaving California while steadfastly ignoring the obvious: While few large corporate entities pick up stakes and move their headquarters elsewhere, these companies expand elsewhere. Many businesses don’t bother getting started here.

“CEOs like to live in California,” said Jack Stewart, president of the California Manufacturers & Technology Association. “It’s nice to have a corporate headquarters in Silicon Valley or San Diego. But they do their manufacturing someplace else.”

Lockyer and Levy argue that the rest of the nation hasn’t fared any better than California with respect to lost manufacturing jobs. But Stewart notes that although California has 12 percent of the nation’s population, it accounts for only 1.3 percent of its manufacturing growth.

Yes, the recession is a national problem, yet it’s having far more devastating effects in some places more than others, and it’s not random. It’s about government policy.

The state’s high unemployment rate “is largely due to a bleak time for the construction industry,” according to the column. Here again they neglect the obvious. California was ground zero for the bursting housing bubble, which has led to the devastated construction industry given that few home builders are putting up new developments in a market awash in foreclosures. We all agree on that point. But the housing bust was far more pronounced in California than most other places.

“Between 2000 and the bubble’s peak, inflation- adjusted housing prices in California and Florida more than doubled, and since the peak they have fallen by 20 to 30 percent. In contrast, housing prices in Georgia and Texas grew by only about 20 to 25 percent, and they haven’t significantly declined,” explained the Cato Institute’s Randal O’Toole. This was not because people didn’t want to live in Georgia and Texas, he wrote, which remain among the nation’s fastest-growing areas.

“The most important factor that distinguishes states like California and Florida from states like Georgia and Texas is the amount of regulation imposed on landowners and developers.” Basically, when demand went sky-high, highly regulated states made it difficult for builders to respond to that demand so prices for existing housing stock soared.

In the Lockyer/Levy view, none of these problems is caused by government policy, only by a bad economy and by the state’s voters, who need to “assume more responsibility for deciding what they want government to do and how much they’re willing to pay for public services.”

Translation: Government is doing a great job in California, but voters need to decide to pay higher taxes to pay for all this great stuff!

No matter how bad things get, it’s always more of the same.

–Steven Greenhut