Labor Day fix: cut taxes, spending, regulation

For Californians, this Labor Day may not be a cause for celebration. The federal government recently reported that the state’s unemployment rate reached 11.9 percent in July, its highest level in more than four decades.

Many have blamed the ailing national economy for these dismal jobs numbers. Although there is obviously some truth to this, the sad fact is that the Golden State’s economic health has flagged since well before the recession began.

To get California back on track, lawmakers must reform the state’s restrictive economic climate. Not only do government policies hamstring the entrepreneurship for which California is known, they’re also causing people to leave the state in droves.

The current unemployment rate is certainly high. But a large out-of-work population is nothing new for the Golden State.

A new study from the California Prosperity Project examined economic trends from 2004 to 2008 and found the state’s average unemployment rate to be 5.8 percent — the eighth-worst in the nation. Twenty percent of unemployed Californians during that period were without a job for at least 27 weeks. In other words, the years prior to the recession weren’t exactly the “good ol’ days” for California.

These high unemployment numbers are unsurprising, as job growth has long been anemic in California. For example, private-sector job growth ranked 33rd over the past five years for which data were available, and 42nd over the past three.

The manufacturing sector has been hit especially hard. According to researchers at the Milken Institute, California has lost more than 80,000 manufacturing jobs in the last five years while neighboring states expanded their manufacturing base by 62,000 jobs. Overall, the California Prosperity Project study ranked California’s labor market a dismal 48 out of 50 states.

The lack of jobs for ordinary workers in California is a primary cause of the massive amount of migration out of the state. Between 2004 and 2008, more than one million residents, net, left the state. Only six states experienced a more severe population outflow.

Earlier this year, Forbes magazine called Los Angeles America’s “fastest changing city.” It wasn’t meant as a compliment. The publication observed that “if you add up all the households abandoning Detroit, Miami and New York, it’s still less than the net outflow of Los Angeles.”

How could this be? California is home to some of the finest universities in the world, as well as world-class technology, entertainment and agriculture industries.

The answer? California’s once vibrant economy has been undone by poorly conceived policies. Chief among them is the state’s whipsawing income tax rate. Over the past 30 years, surges in migration out of the state have corresponded with increases in the top personal income tax rate.

After yet another state tax increase earlier this year, small business owner Lee Mowrey wrote an angry letter to Gov. Arnold Schwarzenegger listing the 23 separate state taxes his businesses pay. “Small business is the engine for economic growth,” Mowrey wrote to the governor, “and California is doing everything the politicians can to run us out of business.”

Of course, cutting taxes alone won’t turn the economy around. Getting spending under control is also crucial if Californians wish to avoid recurring budget crises. It would also help if the Sacramento politicians reduced the number of impediments to starting a business and streamlined the regulatory process for businesses.

It’s sad to see Californians flee for more economically promising locales. Fortunately, the Golden State’s private sector is more than equipped to rescue the state from its economic malaise. All lawmakers need to do is make sure they stay out of the way. If they do, Californians will surely have some good economic news to celebrate next Labor Day.

Murphy is a senior fellow and Clemens is the director of research at the San Francisco-based Pacific Research Institute. They are co-authors of the California Prosperity Project, which released its first study in August.

In the Union-Tribune on Page B5

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.

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