Monday, October 5, 2009

Picking the wrong model

In the late C19th Australians had a higher average income than Americans. As country rich in natural resources with a small population and effective institutions, with no legacy of slavery or Civil War, Australians were well placed.

Australia suffered badly from the 1890s Depression, particularly Victoria. But the newly federated Commonwealth of Australia was still the highest average income country in the world. In the early part of the C20th, Australia faced the policy choice of following the model of protectionist Victoria (which had had a very bad 1890s Depression) or free trade New South Wales (which had done much better). For various reasons, including the use of tariffs to fund the new Commonwealth Government, the connection between protection and wage arbitration and that Melbourne was the national capital until 1927, the public policy model of protectionist Victoria was followed, not that of free trade New South Wales.

The wave of economic reforms from 1983 onwards were a delayed acknowledgment that the adoption of the Victorian public policy model had been a mistake. That Victoria in the early 1990s managed to repeat many of the policy failures of the 1890s just unscored the point. The prolonged economic expansion after the 1992-93 “recession that we had to have” and that Australia now handles economic shocks (the 1997 Asian Crisis, the current Great Recession) better than comparable countries (a major turnaround from its previous history) further reinforce the point.

This history came to mind after reading a recent piece on the travails of California.
California is seriously dysfunctional: on balance, more dysfunctional than Victoria was in 1900, even though Victoria was deeply indebted, had created no net new male jobs in almost 10 years and lost population to Western Australia due to the Kalgoorlie and other gold fields:
California's percentage of adults without at least a high-school education is the second-highest in the nation (and the fact that 72% of those without diplomas are immigrants only fuels the state's growing problem of social stratification). The Commonwealth Fund has ranked the quality of California's health care lowest of the 50 states. The state has the highest rate of criminal recidivism in the country. It has six of the ten worst cities in the country in air pollution. Los Angeles and San Francisco have some of the most congested roads in the nation, which costs the state's employers billions in lost productivity each year. The state is seriously discussing mandatory water rationing, and has in recent years experienced severe disruptions of its electricity supply. Unemployment is over 11%, and a recent survey of corporate CEOs ranked California the worst state in the country in which to do business. It is losing native-born ­citizens faster than any other state.

Between a fairly disastrous system of referendum initiative (not a problem in itself, Switzerland manages to run such a structure just fine) and deeply uncompetitive politics:
Because California's political districts are thoroughly uncompetitive (in 2004, 153 state or federal legislative seats were up for election, and none changed parties), members of the legislature tend to come from the parties' ideological poles.
California has a very dysfunctional political system.

Note, California’s problems are not from a lack of government spending. Rather the opposite:
state government spending has nearly doubled in just the past decade, while the state's population has increased by about 10%. …
… the Golden State has 12% of the nation's population, but 30% of the country's welfare recipients …
Union power has made both its education and prison systems deeply dysfunctional—hence the US’s second-lowest rate of school completion and highest rate of criminal recidivism. Its bloated regulatory structure is rife with corruption and costs driving businesses elsewhere. As one business blogger writes:
In California, where such behavior is rampant (and where the state unemployment agency has established penalties for employers who even think about asking the state to investigate one of his ex-employees for fraud) I pay over 7% of wages in unemployment taxes, vs. less than 1% in states without such fraudulent behavior.
(Comparison by relevant States is here.)

People may have heard of NIMBY (Not In My Back Yard). California has pioneered BANANA (Build Absolutely Nothing Anytime Near Anyone), such as with dams or new power stations. As the author of Who Killed California? writes:
In 2006, the Golden State passed the Global Warming Solutions Act, essentially a statewide ratification of the Kyoto Protocol. Under this regime, California will have to lower its greenhouse-gas emissions to 1990 levels by 2020. With the state expected to add 15 million net new residents in that 30-year period, California is unlikely to meet its reduction targets without massive economic regression. Estimates of the plan's eventual costs to California families have been as high as $3,800 a year. Yet California's politicians continue to insist that the Solutions Act will be an economic boon, sparking a revolution in "green jobs." Such is the fate of Californians: to live in a state where environmentalism is a religion and economics a superstition.
Except, of course, locally-born Californians (and associated businesses) are fleeing California at higher rates than any other State is suffering. They can, for example, go to Texas which has overtaken California in the number of Fortune 500 corporate headquarters, created more jobs last year than the rest of the US put together and where houses are only about three times median household incomes (pdf) having avoided any housing bubble. (So, if you move your corporate HQ to Texas, your secretaries can afford to buy houses and the children and spouses of your staff can get jobs.)

In his conclusion, the writer draws explicit attention to how much of President Obama’s domestic policy program represents repeating what has already failed in California:
There is little in President Obama's legislative agenda that hasn't already been tried in California. Need a model of runaway spending with no regard for growing debt? Look to California, whose bonds currently hover just above junk status. Want to insist on restrictive carbon-emission controls? Note the example of California's 2006 greenhouse-gas law, which is expected to reduce the state's economic output by 10% and destroy 1.1 million jobs. Want to put the government in charge of health care? Look at California's repeated legislative pushes for a single-payer system of health-insurance coverage, each of which ended in failure.
Surely a country cannot repeat nationally a public policy model that has already failed in one of its States? Sure it can: Australia did in the early part of the C20th.

No comments:

Post a Comment