A Wirtschaftswunder for California

Gov.-elect Arnold Schwarzenegger has a historic opportunity to create a Wirtschaftswunder – an economic miracle – for California just the way West German Chancellor Ludwig Erhard did in West Germany after World War II when, as finance minister, he decontrolled prices, eliminated rationing, lowered tax rates and deregulated commercial activity. But it really wouldn’t be any more of a miracle in California than it was in Germany. It would simply be the predicable result of a free people unburdened by the state acting in their self-interest to pursue the American dream. My friendly advice to you, Mr. Governor-elect, is to call Art Laffer, Steve Forbes and Tom McClintock and ask for their ideas about how to rejuvenate California’s economy. If you haven’t already done it, read fellow Austrian economists Ludwig von Mises and Frederick Hayek, on whose ideas the Wirtschaftswunder was based, and study Erhard’s recipe for growth in the how-to book he authored, “Prosperity for All.” When the economic experts descend on you to warn how wrongheaded your proposals are, remember what happened when Erhard implemented his reforms. The military commander of the American-occupied zone, Gen. Lucius Clay, told Erhard that his American economic advisers thought Erhard’s free-market reforms were a “terrible mistake.” Erhard replied, “Herr General, pay no attention to them; my own advisers tell me the same thing.” Throughout the recall campaign, the media and pundits on the right and the left were lambasting not only the Schwarzenegger campaign but also the recall itself as a “circus.” With all due respect to my fellow columnist George Will, who mockingly referred to the recall as a “riot of millionaires,” it was no such thing. The recall was truly a revolt of the people similar to Proposition 13, the property-tax referendum that touched off a national tax revolt in 1978. The anti-business policies of Gov. Gray Davis were simply unacceptable to Californians of all stripes. Arnold was right when he said, “The problem is not California; it is Sacramento.” As governor, Davis increased state spending by nearly 40 percent; he did an end run around the two-thirds voting requirement for tax hikes and tripled the car tax by executive fiat. He signed a bill imposing a crushing mandate on employers to grant paid family and medical leave; he kept in place one of the nation’s highest sales tax rates; and he added 44,000 employees to the government payroll despite a hiring freeze. There was also the electricity debacle with continued controls on retail energy prices and a workers’ compensation system near bankruptcy. The California recall illustrated that voters no longer will fall for politicians professing to love workers while crushing employers with taxes and regulations. It also puts to rest any notion Democrats may have had of trashing business with the slime of Enron in hopes of riding to power on a populist wave of anti-business sentiment. If Schwarzenegger’s and McClintock’s votes are added together, 60 percent of voters in California voted center-right. American voters are beginning to demand the same thing of their political leaders that German voters are demanding of their politicians: klartext, or straight talk. The cumulative weight of California’s taxes is stifling, to individuals and to businesses. The top personal income tax rate is 9.3 percent, the fourth highest in the nation; the top corporate income tax rate is 8.84 percent; the state’s top capital gains tax rate for both corporations and individuals is 9.3 percent, the second highest in the country; and the California sales tax rate ranges from 7.25 percent to 8.5 percent in some localities. It’s not just the tax policy that is pulling down the California economy and driving businesses out of the state. Government spending is out of control; the regulatory burden has grown to obscene proportions; the court system has been turned into the trial lawyers’ personal piggy bank; and the now-lame-duck Davis is adding insult to injury by piling on midnight job-killing regulations and mandates such as forcing small businesses to cover all workers’ health care. I haven’t talked to Laffer, Forbes or McClintock lately, but here is what I would recommend for starters, and I’ll bet they all would agree. Enact an income tax amnesty for all delinquent taxpayers to generate an immediate influx of revenue. Rescind the car tax and roll back the outsized pay raises for state-government employees. Then repeal California’s capital gains tax and cut corporate income tax rates in half. Reduce the top personal income tax rate to 3 percent. Immediately terminate as much of the recent budget expansion as the governor’s authority permits. Likewise, exercise gubernatorial authority to the limit and rescind burdensome health-care mandates where possible. Then appoint a special commission to report back in three months’ time recommendations to slash the overall regulatory burden on businesses. If Arnold flexes his gubernatorial muscles from the first day in office, the way Erhard did in Germany, we will be talking about the California Wirtschaftswunder in a few years. And once again, Adam Smith’s observation that “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and a tolerable administration of justice” will be vindicated.