Learning Lessons

Those Who Don't Learn From Mistakes are Condemned to Repeat Them

New Zealand could learn a lot from California and Texas as case studies--if it were of a mind. California is rapidly becoming a basket case; Texas is prospering. In our neck of the woods, Australia is Texas; New Zealand is California. Politicians talk glibly about "narrowing the gap" between wealth and prosperity between NZ and Australia, but it is just talk. Wishful thinking does not reality make, despite the fact that modern generations have been assured that to think is to reify.

So, since Texas is booming (even in a time of national recession), and California is languishing it would be smart to have a look at these two states of the Union as case studies. We, in NZ, might learn something.
City Journal, in a recent edition, does just that. William Voegeli, in a piece entitled The Big-Spending, High-Taxing, Lousy-Services Paradigm. The parallels between California and New Zealand are eerie.

People are leaving California in droves, and heading to Texas. They are voting with their feet. Why? In a nutshell, taxes are much higher in California and public services are lousy. In Texas, on the other hand, taxes are lower and people have the opportunity to get ahead. And, wonder of wonders, public services are better. Their prospects are definitely superior.

Now the traditional defence of the high taxing, big spending government model which has been practised in this country since the 1930's, with only marginal variation across administrations and successive governments, is that whilst taxes may be higher, the benefits are also commensurately higher, so it is a win-win. However, it is now becoming obvious that a point is reached where the high taxing, big government model becomes self-perpetuating. Government crowds out competitors and becomes a monopoly supplier: once that occurs, the costs and spending on government rise, whilst quality of service declines drastically. Moreover, the beneficiaries of the government services become the government employees themselves. Sound familiar?

We know that people vote with their feet and move out of high-tax jurisdictions. Low tax jurisdictions create jobs faster, and incomes increase more quickly.

(A)s Arthur Laffer and Stephen Moore wrote in the Wall Street Journal earlier this year: “People, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.”

Summarizing the findings of a report they wrote for the American Legislative Exchange Council, Laffer and Moore pointed out that between 1998 and 2007, the states without an individual income tax “created 89 percent more jobs and had 32 percent faster personal income growth” than the states with the highest individual income-tax rates. California’s tax and regulatory policies, the report predicts, “will continue to sap its economic vitality,” while Texas’s “pro-growth” policies will help it “maintain its superior economic performance well into the future.” The clear implication is that California should become more like Texas.

But, if public services are better in the high-tax jurisdictions, why don't people stay there and accept the trade off? Why do people tend to move out of high tax jurisdictions to lower tax jurisdictions, as indeed New Zealanders move to Australia.

The high-benefit, high-tax model can work, but only if the high taxes actually purchase high benefits—that is, public goods that far surpass the quality of those available to people who pay low taxes.

And here, California is decidedly lacking. The biggest factor accounting for California’s loss of population to the other 49 states, bond ratings that would embarrass Chrysler or GM, and state politics contentious and feckless enough to shame a banana republic, has to be its public sector’s diminishing willingness and capacity to fulfill its promises to taxpayers. “Twenty years ago, you could go to Texas, where they had very low taxes, and you would see the difference between there and California,” Joel Kotkin, executive editor of NewGeography.com and a presidential fellow at Chapman University in Southern California, told the Los Angeles Times this past March. “Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California’s government and the middle class is constantly being renegotiated to the disadvantage of the middle class.”

Which is another way of saying that the public sector and its employees gets richer and richer by sucking more and more blood from the middle class. All the while the state services decline--so that the cost of compensating for the failing state services doubles up everywhere. Listen to one California CEO:

Similarly, the CEO of a manufacturing company in suburban Los Angeles told a Times reporter that his business suffered less from California’s high taxes than from its ineffectual services. As a result, the company pays “a fortune” to educate its employees, many of whom graduated from California public schools, “on basic things like writing and math skills.” According to a report issued earlier this year by McKinsey & Company, Texas students “are, on average, one to two years of learning ahead of California students of the same age,” though expenditures per public school student are 12 percent higher in California.

This has its exact parallel in New Zealand: we pay ever higher taxes to fund a state education system which does not educate, only to have businesses pay again to educate their work forces in basic literacy and numeracy.

In Texas there is a far more exacting scrutiny on the recipients and quality of public spending.

With tax revenues scarce and voters strongly opposed to surrendering more of their income, Texas officials devote a large share of their expenditures to basic services that benefit the most people. In California, by contrast, more and more spending consists of either transfer payments to government dependents (as in welfare, health, housing, and community development programs) or generous payments to government employees and contractors (reflected in administrative costs, pensions, and general expenditures).

Now, here is the kicker. In California state interest are so entrenched they are strong enough, powerful enough, and sufficiently pervasive that they can outlast any politician who might want to trim.

The steady deterioration of California’s public services hasn’t gone unnoticed. Shortly after his stunning ascension to the governor’s office in 2003, Arnold Schwarzenegger established an advisory commission, the California Performance Review (CPR), to recommend ways to make governance in California smarter, cheaper, and better. The commission labored through 2004 before delivering a doorstop report with more than 1,200 recommendations for streamlining this and consolidating that, along with an assessment that implementing the full list of changes could save California $32 billion over the first five years.

And then . . . nothing, really. The 2,500-page report was “dead on arrival,” according to Bill Whalen of the Hoover Institution, “because it was too complicated for voters to rally behind and legislators didn’t want to see it enacted.” Citizen Schwarzenegger may have assumed that his personal star power and the CPR recommendations’ plodding good sense would make a politically irresistible combination. Such reckoning failed to account for the formidable ability of even the most obscure and otiose governmental body to hunker down, defend its turf, and outlast mere politicians.

The CPR, for example, recommended abolishing dozens of California’s commissions and advisory boards, either outright or by folding their activities into a simpler and more rational organizational structure. Five years later, few of these vestigial organs have been removed. The many that remain include the Commission on Aging, whose lead accomplishment for 2009 is getting the legislature to declare a Fall Prevention Week (which began on the first day of autumn, naturally); the Apprenticeship Council, “which has been in place since the 1930s,” according to the CPR, and “is no longer needed to perform regulatory and advisory responsibilities”; the Board of Barbering and Cosmetology; the Court Reporters Board; and the Hearing Aid Dispensers Bureau.

The point is not that turning a flamethrower on every item in the Museum of Governmental Anachronisms would have saved California a great deal of money. It is, rather, that abolishing these boards and commissions, whose names are talk-radio punch lines, would have been the easy calls, the obvious first steps toward giving California’s taxpayers a decent return on their surrendered dollars. Yet even the low-hanging fruit proved out of reach. The path of least resistance was to do the same old thing, not the sensible thing.

We have seen exactly the same paradigm in New Zealand. The election of a more conservative, centre-right administration has not trimmed government spending one bit. Cutting wasteful government expenditure--an election promise--has only produced tokenism. The real hard-core wasteful government featherbedding remains firmly intact. The suffocating weight of ever expanding government, coupled with higher taxes, is now perpetual and permanent. Doing the easy thing with an eye on winning another term of government is always preferable to doing the right or sensible thing.

There is little hope for California. It appears well past the point of no return. As Voegeli says,

The optimistic assessment is that things are going to get worse in California before they get better. The pessimistic assessment is that they’re going to get worse before they get much worse. As is often the case, hanging around with the pessimists is less fun but more instructive. The current recession has driven California’s state government into what amounts to a five-month budget cycle, according to Dan Walters of the Sacramento Bee. He estimates that the budget deal tortuously wrought in July should start falling apart in October, because it was predicated on pie-in-the-sky revenue estimates and because so many of its spending cuts are being challenged, often successfully, in the courts.

California, like New Zealand, believes that it has a divine right and entitlement to "the good years". They will return! We will get there! Our present discontent is only a winter season. Somebody owes us the good times, don't they? California, like New Zealand, is rapidly becoming a cargo-cult state. Someone is going to come and save us, bringing the good times again.

For California’s governmental-industrial complex, a new liberal administration and Congress in Washington offer plausible hope for a happy Hollywood ending. Federal aid will replace the dollars that California’s taxpayers, fed up with the state’s lousy benefits and high taxes, refuse to provide. Americans will continue to vote with their feet, either by leaving California or disdaining relocation there, but their votes won’t matter, at least in the short term. Under the coming bailout, the new 49ers—Americans in the other 49 states, that is—will be extended the privilege of paying California’s taxes. At least they won’t have to put up with its public services.

For New Zealand there is always the World Bank to approach cap-in-hand. But as for achieving parity with Australia there is not a snowball's chance.