New Year’s Resolution for California: Let Economic Freedom Ring

SACRAMENTO – The year certainly boasted some highlights, including the Olympics and a much anticipated national election, but as 2008 winds to a close, the mood is not exactly upbeat in California. The economy has cooled off, and the “Golden State” finds itself staring down the barrel of a two-year deficit of $40 billion, or more. The state needs to thrive again, and there is a way to bring that about.

California stands in need of a boost in economic freedom, the right of individuals to pursue their interests through voluntary exchanges of private property under the rule of law. This freedom forms the foundation of market economies but stands in short supply in California. Our high-tax, high-regulation, high-spending and highly litigious state ranks a dismal 47th out of 50 states, according to the U.S. Economic Freedom Index, 2008 Report. The rankings measure states on their friendliness toward free enterprise and consumer choice. In 2004, California ranked 49, above only New York, which remains last. So there is much room for improvement.

Economic freedom, as it happens, is not an academic issue but practical, the flywheel of an array of benefits for individuals and governments alike. The Sizzle of Economic Freedom: How Economic Freedom Helps You and Why You Should Demand More, a forthcoming publication from PRI, outlines these benefits, including higher personal income. Many Californians could use more money in their pocket, and their spending power will help the economy.

That kind of spending helps to generate jobs, which do not exactly abound in California right now, with unemployment in the neighborhood of eight percent. More jobs flow from more business start-ups, another benefit of economic freedom. That would be a welcome change from businesses closing down, a current trend in the Golden State. Economic freedom attracts investors, innovators and entrepreneurs alike, and they generate activity that attracts skilled workers. California can always use more of those.

Californians, meanwhile, should not fear that more economic freedom threatens the environment. This ignores the reality that a cleaner environment is another benefit of more economic freedom. As Steven Hayward, author of PRI’s Index of Leading Economic Indicators, has pointed out, it is the affluent society that does not want to be the effluent society.

Greater economic freedom also promotes economic stability, something California desperately needs. The current strategy of targeting high earners leaves the state on a revenue rollercoaster. The sharp downturn is particularly evident at the onset of 2009, but a high rate of income tax remains in place. One does not have to be a millionaire to hit the highest rate. It should be noted that South Dakota, currently leading the nation in economic freedom, imposes no personal income tax, no personal property tax, no business inventory tax, and no inheritance tax.

The Sizzle of Economic Freedom outlines other benefits but cautions that “The price of infringements on economic freedom is substantial.” At the end of 2008, California is paying that price. Only a return to strong economic growth can pull California out of its current financial difficulties. Gimmicks and accounting tricks will only make things worse.

In 2009, California legislators should resolve to let economic freedom ring and keep doing so until California ranks number one among 50 states, not number 47. That would make the economy sizzle, improve the quality of life, boost government revenue, and make the Golden State a leader rather than a follower.

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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