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State Government's Extra-Territorial Reach

By

Jock O'Connell

(This article originally appeared in the Sacramento Bee Forum section on Sunday, February 25, 1990.)

It would seem to be the destiny of Assemblyman John Vasconcellos, the political godfather of California's Self-Esteem Task Force, to provide people with every opportunity to misunderstand him. The Santa Clara Democrat's latest inspiration, first aired some two months ago, assumes the shape of a "California Peace Package" featuring a multi-million dollar state-funded assistance program for Eastern Europe.

To be sure, the Vasconcellos' proposal, hatched in concert with his Assembly colleague Sam Farr (D-Carmel), is principally concerned with converting the state's defense industries to civilian use now that the Cold War seems over. But the most intriguing elements of the initiative pertain to the dynamic role the two Assemblymen are proposing that California play in the post-communist economic recovery of Eastern Europe.

Appearing at a capitol press conference on December 12, Vasconcellos and Farr called for $75 million in outright cash grants and another $75 million in California goods for East Germany, Poland, Hungary, and Czechoslovakia. They also recommended that the state open a trade office in Warsaw, create two advisory groups (one for high-technology, the other for agriculture) to help with economic development in Eastern Europe, and establish an educational exchange program that would eventually involve 5,000 students.

Their proposal that the State of California get into the business of dispensing foreign aid offered a predictably easy target. Indeed, Vasconcellos soon found himself under attack by his district's most influential newspaper, The San Jose Mercury-News. With an impeccably ironic sense of timing, the newspaper argued in a Christmas Eve editorial that "charity should begin at home."

The irksome prospect of having journalists lecture them on what the state could or could not afford was scarcely the only problem for the initiative's authors, however. They also appear to be skating on some rather thin ice with respect to the U.S. Constitution, which assigns sole responsibility for the conduct of foreign relations, including the regulation of international commerce, to the federal government. By suggesting the State of California provide financial aid to foreign governments, Vasconcellos and Farr seem to be straying a bit off the reservation. Still, their scheme does fit into an increasingly familiar, if distressing pattern.

With growing regularity, public officials at both the state and local level in California have been exceeding their normal mandates by tackling national and even international issues. City councils throughout the state routinely take stands of national security questions, and municipal foreign policies are not uncommon. At times, one almost expects that cities like Davis or Berkeley might have actually retained the services of holistic foreign affairs counsellors. All of this must seem mildly amusing to the great majority of Californians who doubtless believe that local officials as well as state legislators ought to keep their eyes on California's business and their noses out of foreign affairs.

But is the line at which the responsibilities of state officials end really as distinct as most of us assume? In today's shrinking world, developments routinely occur far beyond California's borders which directly impinge on the state's interests. Should our responses always be limited to what federal authorities think appropriate? In this respect, Vasconcellos and Farr are like those overly aggressive lead-off hitters in baseball games who soon obliterate the chalk lines defining the rear of the batter's box. Even if it's not their intention, their Eastern European initiative raises some intriguing questions about the role of state government in dealing with matters which, although arising beyond our shores, nonetheless directly affect California's welfare.

The states have traditionally left the business of foreign relations to the federal government. California, though, is in a rather unique position, having acquired in recent years something of an identity problem that complicates this customary division of responsibility. No longer content to think of their state as merely the largest and most prosperous of the fifty states, Californians now tend to regard the Golden State as a nation-state.

Some of the blame for this presumptuousness can be attributed to those state Department of Commerce officials who discovered about three or four years ago that the total value of all of the goods and services Californians produced (our gross "state" product) is actually larger than the Gross National Products of all but a handful of nations. Not surprisingly, Governor Deukmejian's speech writers soon made this point a staple ingredient of their boss's public utterances. While flattery of this sort may help boost a chief executive's reputation (not to mention an entire state's self-esteem), it also had an unhappy consequence. People started to behave as though California actually were an independent nation capable of conducting its own foreign relations.

The Vasconcellos-Farr initiative is by no means the first manifestation of state government's "extra-territorial" impulse. For several decades, California's tax collectors have been reaching beyond the "water's edge" in levying the so-called Unitary Tax on multinational corporations doing business in the Golden State, despite the objections of foreign firms that the state was imposing an unconstitutional burden on international commerce. Efforts to repeal the Unitary Tax brought legions of high-ranking business executives and government officials from the capitals of Europe and Asia to Sacramento, if nothing else contributing to the flourishing impression that California had acquired at least a semi-sovereign status in world affairs.

State officials even found a means of expressing their contempt for other nations by imposing economic sanctions, as in 1986 when the Legislature enacted and the Governor signed a bill restricting the investment of state pension fund monies in companies doing business with South Africa. The threat of invoking this form of "least-favored-nation" status is no idle gesture since the state public employees' retirement system (PERS) and the state teachers' retirement system (STRS) have a combined investment portfolio valued at around $85 billion.

The most visible symbols of California's extra-territorial reach are its five overseas trade and investment offices. Located in Tokyo, London, Mexico City, Frankfurt and Hong Kong, these offices represent one of the Deukmejian Administration's few second-term accomplishments. Yet, even though state export promotion activities are generally encouraged by the federal government, there is some ambiguity as to how far states may legitimately go in efforts to develop their own export markets. For example, notwithstanding constitutional prohibitions against states conducting their own foreign relations, a recent report by Governor Deukmejian's office proudly notes that "communicating California's interests to leaders in the host countries" is among the functions performed by our overseas offices.

Although the Governor's trade offices may be stretching the bounds of constitutionality, legislative actions in the area of foreign affairs are sometimes even more adventurous. One difficulty is that legislative behavior is too frequently guided by a rule which holds that the amount of serious scrutiny given a proposal is in inverse proportion to the likelihood that proposal will have any material impact on California voters. In some instances, this rule coincides with another law of legislative behavior which advises that flashy new programs are always preferable to the fine-tuning of existing programs. The Vasconcellos-Farr proposal regarding Eastern Europe offers a clear example of what happens when these two rules coincide.

What do the two Assemblymen expect to achieve through their Eastern European initiative? According to Vasconcellos, aid to Eastern Europe represents an investment in peace that would ultimately pay dividends for Californians in the form of reduced military budgets and presumably greater spending on social programs.

Apart from general uncertainty regarding the size and eventual use of any "Peace Dividend," there are two soft spots in Vasconcellos' line of reasoning. The first involves the remarkable elasticity of his logic. As journalists have long known, virtually every story has a "local angle," no matter how geographically remote. In the Global Village, one could conceivably relate the welfare of Californians to virtually any major development anywhere in the world. Where, then, do the responsibilities of the California Legislature end?

The second shortcoming of the plan is that it would very simply establish a bad precedent. Giving state aid to Eastern European countries may seem both noble and proper at this extraordinary juncture in history. But if California can demonstrate its generosity toward a post-communist Eastern Europe, what is to prevent a state such from Arizona from indulging in one of its periodic spasms of illiberalism by providing funds to the government of El Salvador?

On February 12, Farr and Vasconcellos finally moved to implement a portion of their December peace package by introducing legislation to create a Global Applied Technology Extension Service (GATES). Lest one conclude the Assembly's Random Buzzword Generator had run completely amok, the scheme is not totally devoid of merit. Which is to say that its objective -- to foster economic development in Eastern Europe -- is laudable, even though the means it would establish to accomplish this aim are thoroughly impractical. As introduced, the bill suggests a facile understanding of both current economic circumstances in Eastern Europe and the entire business of trade and technology transfer.

First of all, it is not at all clear why GATES is needed. Certainly no evidence has been provided that the private sector, left to its own very considerable devices, cannot find markets in Eastern Europe for California's products, services and technologies. Nor is there is any indication why a state agency, especially one that is most likely to be inadequately funded and under-staffed, could ever be expected to master the encyclopedic array of absurdly esoteric and highly specialized technologies under development in California. Finally, by regarding "technology" as though it were a distinct and marketable commodity, the proposal introduces an artificial dichotomy between applied technology and the products and services that result from technological innovation. GATES' authors should be reminded that, from a public policy perspective, technology benefits California most directly by helping to create new jobs in the state's manufacturing and service industries, a benefit lost when technology is transferred overseas.

Unfortunately, schemes like GATES serve to distract attention away from more productive but less headline-grabbing initiatives. Genuine interest in helping Eastern Europe could be expressed through fairly modest measures. For example, funds specifically earmarked for financing California exports to Eastern Europe could be appropriated to the state's Export Finance Office. Likewise, instead of setting up a new trade office in Warsaw, additional staff could be assigned to the state's office in Frankfurt, West Germany to provide for more intensive monitoring of market developments throughout all of Eastern Europe. At the same time, the state World Trade Commission's Office of Export Development could be directed to arrange exploratory trade missions to Eastern Europe for carefully selected California firms.

But if it's boldness that state officials desire in an assistance program, they might consider investing $75 to $150 million not in outright grants, as Vasconcellos and Farr originally suggested, but in "junk currencies." Under this plan, the State of California (working in cooperation with the World Bank or International Monetary Fund) could ensure that California firms exporting goods and services essential for economic development purposes in Eastern Europe receive payment in dollars. In return, the state would obtain control of an equivalent sum in the local (non-convertible or "junk") currencies, which would then be invested in research programs or other economic development projects in Eastern Europe. In this way, the state would not only stimulate California exports to Eastern Europe, it would also play a creative role in revitalizing the economies of Eastern Europe.

Finally, state officials might give some thought to establishing a trading relationship with a part of the communist world that is much closer to home and much less likely to be dominated by competition from Western Europe: the Soviet Far East. Alaska and the State of Washington have already shown keen interest in forging commercial relations with this resource-rich region, and the private, Los Angeles-based California-USSR Trade Council is planning a mission there later this spring. Regrettably, California trade officials have thusfar demonstrated no similar enthusiasm.

While the Vasconcellos-Farr proposal has its considerable drawbacks, John Vasconcellos' ideas occasionally betray an almost manic genius whose most inspired observations often seem unintended. In this case, his willingness to redefine the role of the state in international affairs has a somewhat prescient quality to it.

Major changes are talking place in both the domestic and international economic systems which may influence how mega-states like California deal with federal authorities over economic issues in the future. Years of federal budget deficits have drastically curtailed the government's options in the area of fiscal policy, while years of trade deficits have had a similar impact on government's ability to employ the levers of monetary policy to guide the economy. At the same time, our growing dependence on foreign investors to help finance our budget deficit and supply needed capital for American industry has left our economic affairs more and more vulnerable to decisions made abroad.

If the federal government's ability to manage the national economy continues to diminish, political leaders in the larger and more prosperous states may be tempted to re- examine the traditional and constitutionally sanctioned division of responsibility over economic affairs in this country. It is distinctly possible that some future economic crisis might cause officials in Sacramento to feel obliged to test even further the limits of their own authority in international economic affairs. It is a prospect with implications worth pondering.

Copyright (c) 1990 by J. A. O'Connell
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