U.S. Economy Better Not Follow California's Latest Trend

Supposedly, trends start in California and then spread to the rest of the country, a notion that seems to be confirmed by the latest economic news. In May, California’s unemployment rate hit 11.5 percent—the highest it has been since 1941. This morning we learn that unemployment for the entire country hit 9.5 percent in June—the highest rate in 26 years.

Will the country close the economic-death-spiral gap with California? Very possibly it will, if the federal government continues to follow California’s example of crushing its economy with ever-increasing government spending, taxing, and regulating.

The latest from California is that state lawmakers cannot reach agreement on a new budget for the fiscal year which began on July 1. That failure prompted Governor Arnold Schwarzenegger to declare a state of fiscal emergency and to order a third furlough day for state employees. The state’s comptroller is now preparing to send IOUs to 28,000 California taxpayers who are owed refunds. Central to the budget impasse is the problem of closing a budget deficit that by latest estimates has grown to $26.3 billion. Some experts think California’s deficit will top $40 billion next year. Because of these budget maladies, Standard & Poors has put the state on notice for a lowering of its credit rating, which is already the worst in the nation (tied with Louisiana). California has the fourth highest foreclosure rate in the country. Of the cities with unemployment rates exceeding 15 percent, nearly half are in California.

California’s economy is imploding, and the causes are not very mysterious. While a national economic recession can be blamed for lower-than expected tax revenues, California has made things worse with policy choices that include spending every dime (and then some) as if there would never be a rainy day, and creating a poor business environment. As the Reason Foundation’s Adam Summers has pointed out, over the past decade, the state has nearly doubled its spending; and over the last 18 years, state spending has grown an average of 5.91 percent per year compared to yearly inflation plus population growth of just 4.38 percent. In other words California’s government has gotten bigger against any metric, and that has fed the demand for taxes. According to the Tax Foundation, California’s corporate tax rate is the eighth highest in the country; and overall Californians face the sixth highest state-local tax burden in the United States.

According to the Pacific Research Institute’s U.S. Economic Freedom Index Report, only three states have lower economic freedom scores than does California. The PRI index is a broad measure of how state governments impact their economies through tax, spending, and regulatory policies.

The lesson from California should be that high taxes, high spending, and lots of regulations is not a model for economic growth, yet those are precisely the policies that President Obama and Congress are pursuing. Federal spending this year will be about 26 percent of gross domestic product, the highest level since World War II. And the long-term outlook is even worse if nothing is done to reform entitlements.

Meanwhile, the House of Representatives has passed a global warming bill that will do nothing to stop global warming, but will cost the economy an average of $393 billion per year. Even here, California appears ahead of the curve, as the EPA has just approved a waiver that will allow California to impose its own tougher limits on carbon emissions from cars. It seems even Congress recognizes the danger that increasing energy prices will drive businesses to other shores. That’s why the bill creates the possibility of new carbon tariffs on goods from countries that don’t regulate carbon as strictly. (New trade restrictions on top of regulations—what could possibly gone wrong?!)

If you want a preview of where such policies are taking the country, look at California today.