Tuesday, May 10, 2011

California – Where the Dream Went Wrong

By J. Mac Holladay, Market Street founder and CEO. 

This past week I traveled to beautiful Monterey, California to speak to the California Association of Councils of Governments. The drive from San Francisco passes Silicon Valley and Stanford University and is beautiful all the way to the waterfront in downtown Monterey. No state has suffered greater job loss during the Great Recession than California. Every MSA in the state has an unemployment rate above the US average. Many have lost over 40% of their home values. The state’s budget disaster is well known across the country.

Interestingly, as I was preparing talk on economic development in these difficult times, The Economist magazine featured California on its cover and with a 15 page special section called “The People’s Will.”As it always does, when The Economist dedicates the time and effort to produce a special section, the report is complete and thoughtful. That is certainly the case with this report.

The clear blame for California’s problem lies directly with the long history of “direct democracy.” Yes, the beginning of the end of the California miracle was Proposition 13. The magazine chronicles the wave of ballot initiatives over the past 30+ years that have made the state unmanageable. It has gotten so ridiculous that neither the Governor nor the Legislature has any power to set things right. In fact, they have little control over serious budget or policy matters. America was created to be a representative democracy not an extreme direct democracy. The mutation began with Proposition 13 in 1978 and has continued unabated until now. Every successful initiative is irreversible. No one can change it. An entire “initiative culture” has been created over time. As The Economist states, “more than 100 initiatives of the past two decades promised something for nothing or, such as cutting a tax or expanding a service.” More than two thirds of those passed and now the Legislature has control over only 10% of the budget. 

Sadly, one key victim of all this is California’s world class education system. Once the nation’s finest (and one of the lowest cost) university system is being ripped apart and its K-12 system is now 47th in per pupil funding. It ranks last in pupils per teacher and 42nd in graduation rates.

John Fund of The Wall Street Journal wrote a recent column about jobs in California and Texas that completely misses the point. I guess Mr. Fund is too busy to understand California’s governance problem or to read The Economist. He blames everything on regulation and the tax structure. Not only is his answer too simplistic, he apparently has no idea how it got that way. 

While a constitutional convention may work in a perfect world, it is probably too risky in this environment. So what California has begun to do is to turn the system on itself. The Think Long Committee for California is on the right track. They are working on a coherent set of initiatives for 2012 and beyond that will reverse the damage a step at a time.

In spite of all its problems, California remains our largest and most populous state. Its economy is rebounding with 90,600 net new jobs in the first quarter of 2011. Employment went up 1.2% faster than the US average of 1.0%. The unemployment rate dropped to 12% and technology jobs went up 5.3% and outpaced all other sectors. The nation needs a prosperous and proactive California. Let’s hope the dream can become reality again.