April 26, 2012 – In today’s Vancouver Sun, MLI’s Jason Clemens writes about the important lessons Canada and in particular British Columbia should learn from California’s tragic experience. The full column below:
By Jason Clemens, Vancouver Sun, April 26, 2012
There was a time, not so long ago, when California was truly the land of opportunity and prosperity. People across the U.S. and indeed from around the world flocked to California for a chance at a better life. While it still retains a remarkable lifestyle for those who can afford it, the state’s ill-conceived, often idealistic policies over the last three decades have ruined what should be one of the planet’s most prosperous places. There are important lessons to be learned — and policies avoided — from California’s tragic experience.
California, more so than almost anywhere on the planet, has all the ingredients to flourish and prosper. Its economy is well-diversified with everything from basic agriculture to high-tech research and development. Its coast provides incredible scenery and shipping access to the fastest growing regions in the world. California has a world-class system of universities and colleges. And its climate and environmental amenities make its lifestyle difficult to compete with. Yet despite all these advantages, California is an economic laggard.
California’s unemployment rate of 11 per cent is the third highest in the U.S. It ranks second worst on a broader measure of unemployment, with 21.1 per cent of workers in the state either unemployed, marginally employed, or only able to work part-time when full-time work is preferred.
Real GDP growth has been anemic. It was 1.8 per cent in 2010 compared to a national average of 2.6 per cent. California ranked in the bottom 40 per cent of U.S. states for economic growth in 2010, which is a fairly representative year for the state over the last decade.
Most tellingly, Californians are voting with their feet. Nearly four million more people have left California over the last two decades than have moved to the Golden State from other places in the U.S. Simply put, families are choosing to leave California for better opportunities.
How could a region with such a wealth of opportunities come to be such an economic basketcase? The answer lies in the fact that incentives matter. In policy area after policy area, California has imposed laws and regulations that stifle work effort, investment, and entrepreneurship, which are the foundation for a prosperous society.
A quick review of the main taxes used by the states to collect revenues illustrates how California punitively treats work effort, investment, and success. The top personal income tax rate, which applies to income over $1 million, is the third highest in the country.
California’s second top rate (9.3 per cent) applies to income over $48,029, which is decidedly middle-class. When compared to other states’ top rates, California’s second income tax rate ranks third highest in the country. Californians pay relatively high personal income taxes regardless of their income level.
California’s corporate income tax is the 11th highest in the country; the state sales tax is the highest. Despite protection from the famous Proposition 13 referendum, California only ranks 17th for property taxes. Regardless of what tax is examined, California is a high-tax state.
The Golden State has also legitimately become known for being hostile to business. Its environmental, labour, and general business regulations are stifling and cumbersome for businesses, particularly small and medium-sized start-ups. CNBC’s ranking of the states, for example, placed California 48th for the cost of doing business and 49th for its business friendliness.
Perhaps most illustrative of the state’s ambivalence toward business competitiveness is its carbon emissions reduction regulation, known as AB 32. California unilaterally implemented a cap-and-trade system whereby emitters have been hit hard with new costs while their competitors in other states face no such cost. During the muted deliberations for AB 32, the state government was repeatedly warned that the bill would deliver almost no net environmental benefits; activities would simply shift to other jurisdictions (including employment) while hurting the state economy.
Despite the dire warnings, former Republican governor Arnold Schwarzenegger and state legislators pressed on.
A running joke in Sacramento is that if it weren’t for the state’s weather and natural beauty, there’s no way the state could have survived the lunacy of the policies enacted. This is small comfort to all those Californians struggling and unemployed.
The lesson for others is that incentives matter and when state policies encourage work effort, investment, ingenuity, success and entrepreneurship, jurisdictions thrive and prosper.
When governments pursue policies that impede such beneficial activities, such as California has done for the last two decades, economic stagnation soon follows.
British Columbia is a jewel within Canada, but like California, it is not immune to bad policies.
Jason Clemens is the director of research at the Ottawa-based Macdonald-Laurier Institute. Prior to returning to Canada in 2011, he spent more than three years in the U.S. researching federal and California policy in San Francisco.