The Governor's Role in a Global Economy:The Lilliputian-in-Chief?

By Jock O'Connell

(This is the author's text of an article published in the Sunday Forum section of the Sacramento Bee on November 1, 1998, alongside economic policy statements from the campaigns of California's gubernatorial candidates, Gray Davis and Dan Lungren.)

If, as many political observers expect, Pete Wilson makes a run for the presidency in 2000, he will doubtless begin the beguile of New Hampshire's voters by mesmerizing them with harrowing tales of how he almost single-handedly engineered California's comeback from its worst economic recession since the 1930's.

Such a message could very well resonate powerfully with an electorate two year hence, when the nation's economic plight is apt to be a good deal less congenial than it has been in recent years. But Wilson's pitch may also backfire in the Granite State, where voters might be reminded of the luminous but ultimately ludicrous claims another aspirant, Michael Dukakis, made about the "Massachusetts Miracle" of the 1980's.

There is, of course, nothing new about political leaders taking credit for prosperity. Presidents, governors and mayors all like to boast about the numbers of new jobs they created. But in a global economy where fully sovereign nations seem at the mercy of factors well beyond their control, claims by mere governors seem almost preposterous.

Pete Wilson had the misfortune to take office just as California's economy slid off its foundations. During his first term, he seemed just plain snake-bit, as they say in the old westerns. On top of the state's profound economic woes, Wilson was obliged to declare so many states of emergency because of fires, earthquakes and floods that he must have been on a first-name basis with the Four Horsemen of the Apocalypse.

The fault for California's economic slide during the early 1990's had infinitely more to do with the end of the Cold War than with any aspect of state policy. As a state that had grown rich on defense contracts and had prospered from the presence of so many military installations, it followed that California suffered disproportionately from defense cuts occasioned by the collapse of the Soviet Union. To make matters even worse, the entire nation went into recession.

But this was not Wilson's approach. Instead, he sought to blame the state's business climate for the disaster, even though California's governor during the preceding eight years had also been a Republican.

Just as the Golden State's doldrums were brought on by developments beyond Sacramento's jurisdictional reach, its subsequent recovery had little to do with the measures state officials took.

What's most likely to happen is that all but the most obsequious economists will dismiss such claims as sheer pretension. After all, the lesson of the recent past is how little influence fully sovereign national governments seem to have over their own economies. And this seems especially true in a global economy where, as recent events have amply demonstrated, distant and seemingly irrelevant developments can have a profound impact on our lives and livelihoods.

So the claims of governors seem outrageous. Or are they? In some respects, For example, it is not exactly the fault of the federal government that California's schools are so bad or that the state's vital high-tech industries must import skilled labor from abroad. Nor can anyone else be blamed for the under-investment California has made in its physical infrastructure of highways, bridges, sewers, etc. which are indispensable to the functioning of a civilized, industrial society..

Commentators and editorialists like to contrast California now with the California of Pat Brown's era when the state was so aggressive in education and infrastructure. What most observers fail to see, though, is that the 1950's were a far different era. Government, especially the federal government, enjoyed an image (at last outside of the South) as a positive force in society. And why not? It had just engineered America's victory in World War II and, in the process, had brought the Great Depression to an end. Even the Republican Eisenhower administration was a major proponent of massive public works projects such as the interstate highway system and the St. Lawrence Seaway. It would be no much of an exaggeration to say of the era in which Pat Brown held office that we were all Keynesians.

Brown's tenure ended about the same time that the Vietnam War began to undermine popular faith in government. A decade later, with Watergate, we were in full retreat. It was a period of discontent and suspicion that gave rise to Pogo's famed lament: "We have met the enemy and he is us."

There is much more to economics than Economics.

Four years ago, both major candidates for governor in California were actively peddling detailed economic recovery strategies. Indeed, before Pete Wilson decided it was more profitable to bludgeon Kathleen Brown for being insufficiently antediluvian on immigration and capital punishment, the state of the state's economy loomed as a potentially decisive campaign issue.

All of this raises the question of how much influence a governor really has over a state's economy.

For a campaign in which economic issues promise to loom large, it is odd that the two candidates embraced economic policies that are remarkably similar. Both emphasize the use of tax incentives to spur private enterprise, both aim to make government more user-friendly for businesses and both, not surprisingly, reject new taxes.

For one thing, what really determines the ebb and flow of the economy are macroeconomic forces (such as interest rates and federal spending decisions) over which state policy-makers have little say. More critically, though, whoever is sworn in as governor next January will be too shackled by fiscal, ideological, political and bureaucratic impediments to have any positive impact on the state's economy.

Consider the state's ability to fulfill what is widely thought to be its most important function in promoting economic growth - providing for a well- educated, highly skilled workforce together with a well-maintained infrastructure of roads, ports, bridges, dams, sewers and other public utilities upon which businesses depend.

High-tech firms have had to reach overseas for workers with the skills needed by such firms. Visa issue. Also report on lack of trained workforce.

An April 1994 report published by the Washington-based Center on Budget and Policy Priorities observed that "California stands out as having the worst record of all 50 states in developing infrastructure from 1960 to 1988." In every major infrastructure category - streets and highways, sewers and other sanitation systems, utilities, higher education, K-12 education - the report found that California's investment in infrastructure had lagged behind the rest of the nation between 1960 and 1988. It wasn't just a matter of other states spending more. Between 1974 and 1988, the value of California's infrastructure on a per capita basis actually fell by 18 percent. Since 1974 this state's infrastructure has not kept pace with rising population, let alone other growing demands.

Especially in a state that celebrates its image as the avatar of high technology, no amount of tinkering with the "business climate" issues that tend to preoccupy policy-makers at the state Capitol can reverse the consequences of this pattern of disinvestment.

As a 1992 report by the California Business Roundtable pointed out, low public sector investment is impeding private sector productivity growth. More recently, the California Chamber of Commerce has been expressing renewed concern with the declining caliber of the state's community college system as well as its public universities and colleges.

Doubtless, a great many of those who toil under the Capitol dome would like to reverse the decades of disinvestment in education and infrastructure. Yet, apart from having to cope with an electorate skeptical of an activist government, entrenched interests that resist meaningful reforms, and those of their colleagues who remain intent on shrinking government's role in the economy, the biggest obstacle they face is a sheer lack of money.

After the spending demands of various constitutional provisions, federal mandates and other statutory requirements are met, no more than a sliver of the state budget is left over for what is euphemistically called discretionary spending, a term that implies significantly more leeway than actually exists. Indeed, when it comes to setting budget priorities, we no longer have a representative government in Sacramento. What we have is a collection of mandated formulas for distributing revenue - and not very good formulas or very much revenue, at that.

Nor, for a variety of reasons, should we bank on the assumption that continued prosperity will tide us over.. First of all, education, worker training and infrastructure projects will certainly not be the only public programs standing in line to receive any new revenues. The commitment to "three strikes" legislation will ensure that prison construction will continue to have first dibs on new revenues.

Second - and more ominous - many budget experts doubt that economic expansion will bring much fiscal relief unless accompanied by a far-reaching reform of the tax system.

One reason to expect that revenue growth will lag behind in an expansionary economy is that services are largely exempt from the state sales tax, even though each year more and more of the state's economic output occurs in the service sector.

Similarly, although prosperity has brought higher business profits, competitive pressures to streamline business operations and cut costs are likely to retard both future employment growth and wage increases. As a result, personal income tax collections are likely to show very modest increases in the near term.

Frustrated by a gnawing sense of impotence, many state policy-makers have succumbed to the notion that our economic problems can be traced largely to a hostile business climate. Among the specific villains are excessive workers' compensation costs, high taxes and exorbitant fees, onerous regulations, hostile bureaucrats, bewildering and expensive permitting procedures and local zoning laws that discourage business expansion.

As a legislative strategy for gaining a measure of tax and regulatory relief for businesses, this attack on the state's business climate is nothing short of brilliant. Orchestrated principally by the California Chamber of Commerce, the California Manufacturers Association and the California Business Roundtable, it plays at once on the public's anti-government mood and on politicians' fears that California has been losing industry and jobs to other states. Most importantly, it gives frustrated legislators a package of specific measures on which they can act purposefully.

No matter that no one has found credible evidence of an unusually large exodus of companies from California in recent years. No matter that business owners throughout the country grouse about the very same business climate issues as do their California counterparts. No matter that, as a consequence of this fixation with business climate issues, a state that once fancied itself in competition with Japanese and German industry now not only frets about the competitive threats posed by economic juggernauts like Utah and Nevada, but also devises its economic development policies accordingly.

To be sure, business in California has legitimate beefs with public officials at all levels. But there are few economists who sincerely think that eliminating pointless regulations or reducing especially onerous business taxes will revitalize the economy of a state whose schools and infrastructure are increasingly below par. If anything, there are real concerns that liberal doses of business tax incentives will only deprive the state of the revenue needed if it is to invest in California's economic future.

So what's a governor or, for that matter, a gubernatorial candidate to do?

What seems obvious is that the real test facing the next governor is much more political than economic in nature. For without a new consensus about state government's role in building the kind of prosperous and equitable society most Californians say they want, it is pointless to propose any economic development strategies that involve a more activist role for state government.

It is equally obvious that neither gubernatorial candidate seems eager to concede, at least in public, that a resolutely anti-government posture is a dead end for constructive public policy. Needless to say, electoral campaigns are not appropriate venues for educating voters about the complexities and contradictions inherent in much of public policy.

The need to economize with words - to compress messages into pithy slogans, 30-second commercials or even briefer sound bites for the evening news - inevitably leads candidates to economize with the truth. For that reason, perhaps we voters ought to forgive candidates for most of the inane things they think they have to say to win our support.

At the same time, though, we should also expect them to indicate in some fashion that they understand that the economic programs they are offering will have little positive impact on our economic prospects unless a political solution is first found to the economic policy paralysis that has seized state government.

Given the current level of popular antipathy toward government, convincing the voting public that state government can and should serve a key role in promoting economic growth may seem an impossible task. The irony is that those who most benefit from state and local government services are among the least likely to participate in the electoral process. These tend to be younger adults (many of whom are attending public colleges and universities), minorities. The disenfranchised silent majority in contrast to the 20 percent of the electorate who turned up at the polls on Primary Election Day last June.

Conversely, those Californians most likely to vote are disproportionately older and whiter than the general population. As a group, these voters have shown definite signs of being less than enthusiastic about supporting the idea of a more creative and activist state government making major new investments in the future of an increasingly multiracial and multiethnic California with which they do not readily identify.

Still, things may not be as bleak as they seem. What made the last four years of recession and corporate restructuring so distinctive was not its severity as much as its pervasiveness. White-collar as well as blue-collar workers felt its brunt. Tens of thousands of middle-aged, middle-class workers who might earlier have backed pro-business policies and GOP candidates saw their careers come to abrupt and premature ends. Even those who managed to cling to a job were often robbed of any sense of job security.

As a result, fewer and fewer Californians see their interests being served by government policies that explicitly and chiefly benefit businesses. At a time when corporate profits are rising but employment growth and wage increases remain stagnant, a cynical populace can be excused if it questions whether the benefits of tax credits and other taxpayer-financed incentives to businesses will necessarily trickle down to the workforce in the form of jobs that pay the wages needed to maintain a decent middle-class existence.

By the same token, the towering indifference with which most registered voters regarded the June primary suggests that much of the electorate is weary of the same old drills and is instead waiting to hear a different message from political candidates, a message that provides new sense of purpose and clear direction in public policy, a message that offers solace and hope to the economically alienated and disenfranchised, and a message that speaks to the real problems of dealing with rising income disparities, a growing class of working poor, an increasingly widespread sense of despair and a genuine fear that the California dream is fast disintegrating into a gritty nightmare. Thus far, it's a message left unarticulated.

Copyright 1998 By J.A. O'Connell