Can Arnold Save California's Economy?

Arnold Schwartznegger may have been able to bench press 400 pounds when he was Mr. Universe, but he’s about to face his most Herculean task ever: lifting California out of its severe economic rut. California today may well be the most fiscally disabled state in American history. When Schwartzenegger is sworn in as governor in a few weeks, he will inherit a $100-billion budget that has grown by nearly 40% in the last five years. He will inherit a state budget deficit that is larger than all the deficits of the other states combined. He will inherit a state industrial base that has lost one-quarter of a million manufacturing jobs since 1999. Worst of all, he will inherit an entrenched left-wing Democrat-dominated legislature whose members, by comparison, make U.S. Representatives Charlie Rangel (D.-N.Y.) and Barney Frank (D.-Mass.) seem like guardians of conservative values and free markets. Says former California GOP State Chairman Shawn Steel: “The Democrats in Sacramento are the most left-wing collection of people ever to gather in one place at one time in North America.” That’s no exaggeration. California State Assemblyman Ray Haines has assembled a Bad Business Bill Watchlist containing all the anti-capitalist legislation that has been proposed in the California house and senate. It runs on for so many pages that it resembles a medium-sized city phone book. On it are such absurdities as so-called living wage requirements, anti-global warming tax hikes, mandatory employer health coverage, paid parental leave requirements for employees, domestic partnership employee benefit laws, and even anti-discrimination laws that cover cross dressers. This last proposal is symptomatic of the looney leftist culture that has captured Sacramento over recent years. The bill would impose fines of up to $150,000 on employers (including, for example, religious businesses and Boy Scout councils) if they “refuse to hire individuals on the basis of gender or perceived gender, which could include cross dressers, and transsexuals.” Honest, I am not making this up. In fact, this utterly absurd bill actually passed the senate this past July. Difficult Role So, as he prepares to take over the statehouse, Schwarzenegger is taking on the most difficult role of his career. There is much skepticism among many of my conservative friends as to whether Arnold will adopt the right economic policy course for the state. I believe that he will. I have consulted with Schwarzenegger on several occasions over recent months and I believe he is committed to keeping his word to lower, rather than raise taxes, in the Golden State. Though he is socially liberal, I am persuaded that he is instinctively a believer in the power of free markets—though some of the people he consults with, such as Warren Buffet, most certainly are not. His favorite economist, however, is Milton Friedman, and he even filmed an introduction to Friedman’s classic video “Free to Choose.” The economic rebuilding job ahead is daunting, but far from hopeless. In the 1980s and throughout most of the 1990s, California was the most dynamic place on the globe. The economy grew to become the 6th largest in the world; the state GDP surpassed $1 trillion. It became the high-tech, international trade, and entertainment capitals of the world. The economic slide began in Gray Davis’s term and although the bursting of the high technology bubble contributed to the resulting depression, Davis bloated the state budget, raised taxes repeatedly, passed scores of new business regulations, badly fumbled the electricity crisis, converted the governors office into a campaign financing operation, and allowed the leftists in the legislature to rule the roost. Arnold was right when he said during the last days of the campaign that “the good news is our economic problems are not due to a failure of our people, but of a resounding breakdown of our political leadership in Sacramento.” What should Arnold do to fix the budget mess and reclaim the prosperity of the’80s and ‘90s? Here is a partial list of “must do” economic reform items:

  • Adopt a California flat tax. At 9.3%, the top tax rate on businesses and workers is the third highest in the nation. This has driven employers and high wealth individuals from the state to places such as Nevada and Washington that have no income tax. A 6% flat rate income and sales tax will bring some of those job producers back.
  • Fix the workers compensation system. Businesses in California pay workers compensation costs that are more than double what businesses in nearby Arizona pay. Republican State Sen. Tom McClintock was right when he argued that California should muzzle the trial lawyers and adopt the Arizona plan. This would save businesses billions of dollars.
  • Void Gray Davis’s electricity contracts. Davis’s bungling of the 2001 electricity crisis locked California into long term energy contracts in which the state pays twice the market price for power for years to come. The cost to the state and California homeowners is expected to be more than $2.4 billion over the next several years.
  • Adopt the set of work-based welfare reforms that most all other states have. The California legislature is one of few in the nation that has failed to conform to the federal welfare reform law requiring a five-year time limit on welfare benefits. For all intents and purposes, California still offers a lifetime on the dole. Along with New York, it also has the most lenient work-for-welfare requirements. These policies cost the state at least $1 to $2 billion a year in higher welfare costs. They also explain why California has been one of the least successful states in the nation in reducing welfare caseloads in the ‘90s.
  • Balance the budget through a constitutional spending cap. Lew Uhler of the National Tax Limitation Committee has drafted a new spending cap measure that would limit the growth of the state budget to the rate of population and inflation. Increases. That is a vital reform. If taxes and outlays had risen only as fast as inflation and population growth since 1990, the average California family would be paying some $2,000 less per year in state and local taxes today and the budget would be balanced.
  • Most importantly, Gov.-elect Schwarzenegger must go to war against the Democratic dominated legislature. This governor will be handicapped by the fact that he must lead a legislature in Sacramento that may be more loony left in its ideology than any party in the free world outside the French socialists. The socialist Democrats still control almost everything that is politically determined in California, except for the governorship. Just shy of two-thirds of the legislature is Democratic. This monopolization of power has radicalized the party, thus adding to the state’s fiscal woes. Arnold must go over their heads and appeal to the voters who put him in office if he is to succeed.
  • If he does all of these things, Arnold has a chance to put the bloom back in the rose in the state that was once California.