Economy & Budget

California’s bad dream: Budget deficit hits $16B, unemployment 11%, businesses exit

What happened to the California of John Wayne and Ronald Reagan? Where’s the Golden State, where young men and women flocked to pursue the California Dream—a variation of the American Dream but with better weather?

It still thrives in Silicon Valley, as this week’s expected Facebook IPO demonstrates. By some estimates, Facebook, which was founded in a Harvard dorm room but moved West, now is worth $100 billion. Otherwise, the dream has become something of a nightmare. Even Hollywood is eager to move movie production to Michigan, Louisiana and New Zealand.

As recently as a decade ago, California was attracting hundreds of thousands of migrants from other states every year, along with hundreds of thousands of immigrants, legal and illegal, from foreign countries. No more. According to the 2012 edition of the “Rich States, Poor States” survey by the American Legislative Exchange Council, “California suffered a net loss in domestic migration of 1.5 million people from 2001 to 2010, as well as a 2.5 percent non-farm employment loss. Unfortunately for the Golden State, economic decline is unlikely to stop anytime soon.”

Even immigrants from Mexico have started returning home, despite the horrible violence in that country, because the economy South of the Border is growing faster than California’s.

Unemployment rises to 11 percent

Bucking national trends, California’s unemployment rose in March to 11 percent. That’s almost 3 percentage points above the national 8.2 percent rate. As recently as the mid-2000s, California’s rate was only 1 percentage point higher. The last time the state’s unemployment rate was below double digits was in 2008. And California vies with Illinois as the state with the worst credit rating on the bond markets.

State finances in shock

As a result, the state’s finances are in shock. Last week, Gov. Jerry Brown announced that the state’s budget deficit, according to Department of Finance estimates, had soared to $16 billion from the $9.2 billion predicted in January. So the deficit rose by 74 percent in just four months.

Brown is using the budget gap as a boogeyman to scare voters into passing a $9 billion tax increase initiative on Nov. 8. The initiative would increase the top income tax rate 3 percentage points, making it the highest in the nation at 13.3 percent. And it would boost the state sales tax a quarter-percent, to 7.5 percent. Many cities add more sales taxes on top of that.

The problem is clear: The state doesn’t suffer from tax rates that are too low, but too high. It also has the most anti-business regulatory climate in the country. To cite but one example, then-Gov. Arnold Schwarzenegger signed into law Assembly Bill 32, the Global Warming Solutions Act of 2006.

It mandated a reduction in state greenhouse gases by 25 percent by 2020. A 2009 study by California State University, Sacramento estimated that AB 32 would over time kill 1 million jobs statewide. They’re already dying.

Businesses head for Texas

Joseph Vranich, a business consultant in Irvine who tracks business movements, estimated that 254 companies fled California in 2011, landing in such pro-business states as Texas.

“I see nothing that would slow departures because the state maintains harsh attitudes toward businesses,” he told us of the California business climate in 2012. “One example is that the legislature again failed to pass reforms to California’s burdensome overtime law,” which mandates that overtime must be paid for hours worked above eight hours a day, rather than above 40 hours a week in more sensible states, a practice allows for worker and workplace scheduling flexibility.

“I don’t know of a single business owner or corporate executive saying that things are getting better because of any action by the state,” he said.

Brown’s proposed higher taxes? “Every time I compare taxes here versus other states, the numbers for California are almost always the worst,” Vranich said. “Additional taxes will only reinforce our inferior position.”

So, California’s loss is other states’ gain—for now. Joel Kotkin, a fellow at Chapman University in Orange, Calif. recently warned that President Barack Obama’s “domestic policies have been shaped by California’s progressive creed” including “Energy Secretary Steve Chu—an open advocate of high energy prices” and the $550 million blown on subsidies for since-bankrupt Solyndra.

As California approaches bankruptcy, four more years of President Obama would mean California’s progressive policies creeping further across the country. Now that’s scary.

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