California’s Economy: Boxer And Krugman Get It Wrong

California’s Economy: Boxer And Krugman Get It Wrong

New York Times columnist Paul Krugman argued in a May 25th column that California’s economic problems are rooted in a dysfunctional government that finds it “extremely hard to raise taxes, even in emergencies.”

On May 28, California’s junior Senator, Barbara Boxer made a similar argument on MSNBC’s Morning Joe. Both are right that the state is in economic distress but wrong about the causes and thus the solutions.

Krugman, a recent Nobel laureate, argues that the “seeds of California’s current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13, a ballot measure that placed the state’s budget in a straitjacket. Property tax rates were capped, and homeowners were shielded from increases in their tax assessments even as the value of their homes rose.”

California’s own Senator Barbara Boxer repeated this misdiagnosis on May 28. She specifically attacked the two-thirds majority requirement for the budget as an impediment to improving the state economy. Both Boxer and Krugman made the mistake of linking the state’s economic weakness with the general national recession. The reality is that the state’s economy was underperforming well before the current recession.

Over the last five years, California ranked 24th out of the 50 states on its ability to grow the economy and increase the incomes of residents in the state. California drops to 48th spot for its ability to create private sector jobs, and maintain low and short unemployment over the last five years. The state even struggles when it comes to business creation, an area most Californians self-perceive as a point of strength. The state ranked 16th over the last five years in creating small and medium-sized businesses.

The weakness of the state’s economy has been most evident as more than one million residents left the state compared to those choosing to enter it over the last five years. At the same time, every other state in the region was attracting new residents. The other Southwest states, for instance, attracted more than 900,000 new residents.

The notion that the state’s debt and deficits are a result of too-low taxes is divorced from reality. The fiscal problem facing the state is largely a result of punitive taxes and excessive regulation. This burden has chased away the very entrepreneurs, businesses, and innovators the Golden State needs.

California’s top personal income-tax rate is the second-highest in the country and our second-highest personal income tax rate is the fifth-highest in the country. Our corporate tax rate is the ninth-highest and our state sales tax is also one of the highest in the country before considering the addition of local sales taxes.

In fact, California tax rates are high in almost every meaningful category. Adding yet more taxes, as Paul Krugman and Barbara Boxer advocate, is like pouring gasoline on a fire. Those who offer the wrong diagnosis can’t deliver the right solution. We don’t need more of the same tax-and-spend policies that got us into this mess.

California needs to reduce and reform government spending dramatically in order to ensure value-for-taxpayer money instead of largesse for powerful vested interests like unions. The state must also simultaneously reduce taxes, particularly those linked with incentives for work, savings, investment, and entrepreneurship.

Simply put, we need real tax relief and less government spending. With no apology to Paul Krugman and Senator Barbara Boxer, those are the real solutions to California’s economic problems.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.