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California

Tom Gray
From Rich State to Poor State
California’s decline will only get worse unless lawmakers loosen regulations.
5 October 2011

By now, it’s clear that California’s state budget, which Governor Jerry Brown signed to great fanfare in June, was a bet that didn’t pan out. It assumed a national economic recovery that isn’t happening. In August, state controller John Chiang reported that revenues for July, the first month of the new fiscal year, were running 9 percent below the budget assumptions. The unemployment rate spiked back over 12 percent in August, the second worst in the nation, and all Brown could do was appoint a “jobs czar” to help come up with answers.

At the same time, the strategy once touted as part of a solution to California’s economic funk—the creation of “clean- technology” and “green” jobs, such as manufacturing and installing solar panels—has proved a bust. A Brookings Institution study found that clean-tech jobs made up just 2 percent of jobs nationally and 2.2 percent in the Silicon Valley, a supposed hub of the new green economy. In fact, the San Jose area lost 492 jobs in the renewable-energy sector between 2003 and 2010. Not an auspicious start for a field that Brown promised would generate 500,000 jobs in California by the end of the decade. To drive home the futility of hoping for a green-jobs boom, the much-hyped and richly funded solar company Solyndra went into bankruptcy at the end of August, taking 1,100 Bay Area jobs with it.

Amid this convergence of bad news, leading California Democrats have begun to entertain the notion that business just might be over-regulated. Darrell Steinberg, the president pro tem of the state senate, announced that regulatory reform would be at the top of his legislative agenda. Brown has charged his new jobs czar, former Bank of America executive Michael Rossi, with improving the business climate. Lieutenant Governor Gavin Newsom came out with his own “Economic Growth and Competitiveness Agenda” for making the state more business-friendly.

As the legislative session wound down in early September, several bills with a pro-jobs tilt landed on Brown’s desk. Assembly Bill 29, sponsored by Assembly Speaker John A. Pérez (D-Los Angeles), would set up a new Governor’s Office of Business and Economic Development, described in a press release as “a one-stop shop for businesses seeking assistance with state agencies.” Senate Bill 617, sponsored by Ron Calderon (D-Montebello) and Fran Pavley (D-Santa Monica), would require state agencies to consider the impact of proposed regulations on jobs and business formation, starting in 2013. AB 900, sponsored by Assemblymembers Joan Buchanan (D-Alamo) and Rich Gordon (D-Menlo Park), which Brown signed on September 27, allows the governor to fast-track major projects—such as the proposed football stadium in downtown Los Angeles—rather than navigating the typically long and tortuous legal-review process currently required under the state’s environmental law.

But these bills are just a start. California has plenty of history to live down before it sheds its reputation as a terrible state for business. More than 500 executives polled by CEO magazine for its 2011 business climate survey said California was once again the worst of all 50 states to set up shop. Texas was judged the best. Requiring an economic review of new rules is better than nothing, but why not review existing rules, too? After all, these are the regulations that make the current climate as bad as it is. And why not start applying SB 617 next year, rather than waiting until 2013? How about going a step further and placing a five-year limit on all regulations? That would force legislators and policymakers to reexamine whether the rules are doing more harm than good. Sunset clauses are not unheard of in California. The concept has been applied in the past to tax increases in order to get the necessary two-thirds vote. And AB 900 has one. The measure self-repeals on Jan. 1, 2015, restoring the dispositive power of the California Environmental Quality Act (CEQA). The legislature can’t bring itself to pass a reform that actually sticks.

If any law needs to be permanently revised, it’s CEQA, which enables some of the state’s worst abuses of regulatory power. Enacted in 1970 to protect the environment from runaway development, CEQA has morphed into the Swiss Army Knife for NIMBYs—an all-purpose tool to stop the building of almost anything, public or private. It’s not just about development anymore. Los Angeles County Economic Development Corp. President Bill Allen and Maura O’Connor, the group’s former chairwoman, point out that the CEQA process is now used “for purposes that have absolutely nothing to do with protecting the environment,” such as blocking competitors and helping “unions squeeze businesses for concessions.”

Like others in the California business community, Allen and O’Connor would like to see fundamental changes to CEQA, such as an end to the now-unlimited right of any group to file a lawsuit against a project that has already gone through the review process. But it will take a sea change in the legislature to put such a reform into law. The Democratic majority is in lockstep with two groups for whom the status quo works just fine. One is the environmental lobby, which defends CEQA’s power to stop development. The other is organized labor, which will use CEQA and any other law it can find to maintain or expand union membership. Labor and the green lobby often work together to devise new legislation to crimp business. For example, SB 469, by Sen. Juan Vargas (D-Chula Vista), would require local governments to prepare an “economic impact report” before any proposed “superstore retailer”—i.e., Wal-Mart—can open a new store in the community. The bill’s transparent purpose is to preserve union supermarket jobs. And it has no sunset clause.

True, some of the legislature’s worst ideas—like the bill that would have required hotels statewide to switch to fitted sheets—don’t make it into law. That bill wound up sidetracked in committee. But such small victories are like a hit in Whack-A-Mole. Business lobbies know a new threat will pop up soon enough, because they know the legislature is not on their side. Left to its own devices (and obeying its own masters), it would impose new burdens on business with no thought of the cost. Labor and the green lobbies play offense. Business plays defense. It’s been that way for decades.

We’ll know real change is in the offing when politicians stop talking and acting as if California’s economic woes are temporary. That kind of thinking lies behind AB 900’s sunset clause. As Steinberg explained to the Los Angeles Times, “This is a recession. People are hurting, and we have to use every tool in our disposal to help people get back to work, and do so in a way that does not undermine our very important environmental laws.” He seemed to suggest the state’s economic ills will blow over in a few years, and then lawmakers can resume their old habits—making rules and pretending to save the planet. In reality, California’s problems are long-standing. The state has been a chronic underperformer for the past two decades, ever since then-governor Pete Wilson in the early 1990s called the state’s business climate a “bad product.” Its unemployment rate has consistently outstripped the national average since that time, and it has seen a steady erosion of its economic leadership among the states.

California is still somewhat richer than the average state, at least on the basis of per-capita income, but it is far from the wealthy dynamo it was 50 years ago. As of 2010, the U.S. Bureau of Economic Analysis estimated California’s per-capita income at $43,104, about 6 percent above the national average of $40,584. Texas was still a shade below the average (at $39,493), but it has been gaining ground. It was 6 percent below the average in 2000. California has been trending the other way. Its per-capita income had been 10 percent above average in 2000, 18 percent above average in 1980 and 24 percent above average in 1960. Some of this slippage toward the mean could be explained by wealth becoming more equal among regions, much to the benefit of once-hardscrabble states like Mississippi. But the decline wasn’t inevitable, and it didn’t have to be so great. New York, a state just as rich as California 50 years ago, still boasts a per capita income 20 percent above average.

California still has some major assets, including plenty of venture capital, a second-to-none base of technology infrastructure and talent, and access to the Pacific markets. And don’t dismiss the weather. The Golden State also still has some muscle in manufacturing, energy, transportation, and logistics. (Younger Californians may not remember, but the state’s great wealth of the past was built on not-so-green industry, including a huge defense sector.) California’s mechanized, highly efficient agriculture is another vital economic resource. These are not “green” activities. Moving, making, and even growing things at industrial scale creates pollution. Nurturing them requires some adjustments in the state’s ultra-strict standards. The Obama administration recognized that fact—and did California a favor—when it announced just before Labor Day a delay in tightening federal ozone limits. Manufacturing, logistics, and agriculture also happen to generate well-paid blue-collar jobs. As economist John Husing points out, these industries can be a godsend to the areas, mostly inland, that have “large numbers of marginally educated workers.”

At this point, California is like a middle-aged wastrel who finally has run through his trust fund and has to get a real job. Or more like a million jobs, which is roughly what the state lost in the recent recession. This heir to a once-great fortune has devoted much time and energy to hobbies and causes, some more worthy than others. But he barely remembers what it was like to work. And his taste for work runs to genteel and low-paying pursuits, like green energy. But real poverty lies down the road if he doesn’t learn fast and get it through his head that money doesn’t grow on trees, even in the Golden State.

Tom Gray is a former editorial page editor at the Los Angeles Daily News and a former senior editor at Investor’s Business Daily.

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