Saturday, January 28, 2012

California Exercising Freedom to Fail

No Longer a Land Worth Finding

In a recent Op-Ed in the Wall Street Journal, former Florida Governor Jeb Bush reminded us that true freedom includes the freedom to fail.  As he put it:

"We have to make it easier for people to do the things that allow them to rise. We have to let them compete. We need to let people fight for business. We need to let people take risks. We need to let people fail. We need to let people suffer the consequences of bad decisions. And we need to let people enjoy the fruits of good decisions, even good luck. That is what economic freedom looks like. Freedom to succeed as well as to fail, freedom to do something or nothing."

Bush, of course, was referring to the economic freedom of individuals and the businesses they own and create to compete in a free market.  But similar considerations apply to states in a system premised upon competitive federalism.   In such a system, states are free to make fiscal and regulatory decisions, so long as those decisions do not interfere with the authority of other states.  (For instance, Virginia is free to raise taxes on its own citizens; it may not raise taxes on citizens of New York.)  This freedom also empowers states to compete with one another for citizens and investment capital.  Thus, a state that offers an attractive mix of fiscal policy and regulation will presumably attract individuals and investment capital, while those that offer unattractive fiscal and regulatory policies will see individuals and capital flee.

Just as individual economic freedom must include the freedom to fail, so too must competitive federalism include the freedom of states to fail if they embrace detrimental fiscal and regulatory policies.  Like individuals, states should suffer the consequences of their actions. 

California seems to be exercising this freedom to fail with a vengeance.   According to Bloomberg News, California Governor Jerry Brown has proposed yet another significant increase in state spending, at a time when the State is already running a large deficit and holds an "A-" credit rating from Standard and Poors.  This rating is significantly lower than that held by Virginia (AAA), Indiana (AAA), the United States of America, (AA+),   France (AA+), Japan (AA-), and Chile (A+), to take but a few examples.   Sovereigns sharing California's credit rating include Botswana, Malaysia, and Malta.   (Go here for a comprehensive list of nations and their credit ratings.)  Indeed, according to this source, California is tied for last among American states with Lousiana when it comes to S & P's rating of its debt.  Brown would finance part of this new spending with yet another increase in state income taxes, raising the rate on individuals earning over $250,000 per year a full percentage point, to 10.3 percent. 

California already has the third highest income tax rates in the nation, behind Hawaii and Oregon, both of which stand at 11 percent.  Its sales taxes are also among the highest in the nation.  At the same time, the state imposes burdensome regulations on business that inhibit job creation and economic opportunity.  It's little wonder, then, that California currently suffers from an unemployment rate over 11 percent, compared to a national average of 8.5 percent.  Nor is it surprising that the state has recently seen a net outflow of citizens, as more and more Californians leave the Golden State for states like Texas.  While those who found California cried out "Eureka" ("I have found it"), more and more are crying "let's get out of here."  Hopefully Americans will resist calls by some to force citizens in more responsible states to bail California out.