Political Decisions Matter in State Economic Performance


California has pending legislation, AB 2529, to require an economic impact analysis of proposed new regulation. Its opponents correctly point out that AB 2529 will delay and increase the cost of new regulation. There will be lawsuits and arguments over the proper methodology and over assumptions. It is not easy to complete a thorough and unbiased economic impact analysis.

Should California incur the costs and delays of economic impact studies?

California should, because political decisions matter and too many California politicians don’t believe it. I’ve had a State Legislator, sitting in her office in the Capital, tell me in essence that decisions made in this building won’t impact California’s economy.

She’s not alone. It is common to hear politicians or their advisors claim that “California will come back” or something similar. They believe that California’s climate and abundant amenities are enough to guarantee prosperity. They are wrong.

Consider North Dakota, and its booming economy. As of July 2010, North Dakota’s unemployment rate was 3.6 percent, and in 2008, the most recent year for which we have data, its economy grew at a 7.3 percent rate. California’s unemployment rate was 12.3 percent in July 2010, and its 2008 economic growth rate was an anemic 0.4 percent.

That’s a very big difference. If California had North Dakota’s unemployment rate, it would have over 1.3 million jobs than it has today. That is almost the entire population of Sacramento County and 30 percent more than the entire population of Northern California’s Contra Costa County.

Why the big difference? Why is North Dakota booming, as the United States suffers its most devastating economic decline in over 70 years? Why is California’s economy, with almost 30 percent higher unemployment than the United States, performing so poorly?

Does North Dakota have some naturally endowed advantage over California? If so, nobody has noticed it before. It is not climate. California has a friendly Mediterranean climate, while North Dakota has a Northern Continental climate. North Dakota’s mean minimum temperature is below freezing six months of the year, and it gets as low as -60F! Many Californians, living on the coast, can go decades without witnessing a freezing temperature. I remember when we had a multi-day freeze in my hometown of Ventura, sometime in the 1980s. I was freezing; a North Dakotan would be walking around in a t-shirt.

California has oil and gas. North Dakota has oil and gas. California has over 2,000 miles of beaches. North Dakota doesn’t have beaches. California has magnificent mountains. North Dakota doesn’t have any mountains and only a few hilly areas. Over 20 species of trees reach their largest size in California. Most of North Dakota doesn’t naturally grow many trees.

Let’s face it. Most Californian’s consider North Dakota to be a cold, windy, God-forsaken piece of dirt best left to the bison. North Dakota’s natural endowment doesn’t explain why it has been growing with vigor while California has been stagnating.

Maybe North Dakota has been lucky while California has been unlucky? Luck can play a part in economic performance, and North Dakota has almost surely been luckier than California over the past few years, but that can’t be the only explanation.

It’s hard to point to a single source of North Dakota’s prosperity. Its taxes aren’t particularly low. It has a reasonable safety net for the unfortunate. It does have a booming oil and gas business. Its agriculture sector is doing well. It has a small, but dynamic, tech sector. Its universities remain well funded since the state is actually running surpluses. It has a hardworking, well educated, Midwestern population. Governments and politicians in both parties tend to be business friendly, willing to support business and enter into occasional partnerships. North Dakotans have done lots of things right, and they’ve probably also been a bit lucky.

It’s just as hard to point to a single source of California’s dismal performance. California hasn’t maximized the economic potential of its oil and gas resources, but its economy is large, and oil and gas alone can’t explain the differences between California and North Dakota. California hasn’t updated its ports to accommodate the most recent and planned ships, but those ports see lots of activity. Many California communities are not business friendly, but some are, particularly some smaller ones inland. California has lost some military bases, but many remain. California is a relatively expensive place to do business, because of taxes and regulation, but California’s workers are more productive, even after adjustment for industrial composition and capital, and California’s consumers still constitute a huge market.

California’s economy is dying the death of a thousand cuts: a tax here, a regulation there, an unfriendly city council in Coastal California, a lack of infrastructure investment everywhere. These things add up to a significant net negative for California, its businesses, and its workers.

Californians have done lots of things wrong, and they’ve been a bit unlucky.

That’s why AB 2529 is a good idea for California, why it’s worth the costs and delays. The analysis will require regulators to consider the economic costs of regulation, something many green activists and Sacramento politicians simply ignore. Perhaps if this regulation had been in place over the past few years, some of California’s 2.2 million unemployed workers would have jobs and once Golden State would not be on the verge of becoming, as historian Kevin Starr has noted, “a failed state”.

Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found at clucerf.org.

Photo by Willem van Bergen

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North Dakota, so cold and

North Dakota, so cold and bison-friendly, is a very easy place to leave. If you don't have a job in North Dakota, you're not going to stick around for the weather. I think that makes a difference when you look at these sparsely populated agricultural states and their anomalously low unemployment rates.

The population of North Dakota is around 600,000 so whatever natural endowments exist there are shared among a much smaller population base. In fact, the small population combined with large amounts of federal dollars flowing into the state can probably explain a lot of North Dakota's advantage over California. Agriculture and military are big industries in ND - probably $1 billion per year in federal agricultural subsidies and military spending in the state.

I've got to disagree with

I've got to disagree with you on this one. I certainly agree that policy decisions and the enactment of new regulations produce recurring economic and fiscal impacts on the state and local economies (which yes, are often not considered to the extent they should be). But as a likely beneficiary of AB2529 myself, I can assure you that it will end up as a complete disaster. Good intentions are not always followed by successful execution (especially in California). More impact studies will just equate to another bargaining chip and PR ploy in the political wheelhouse. Do you really have faith in consultants, attorneys, and state analysts to set proper guidelines for a type of analyses that very few really know much about??? Unless the bill is to require tedious and expensive situational and geographically-specific surveys to identify the inter-industry linkages that underly any economic impact analysis...are we all really going to spend the exorbitant amount of time/money to rely on an IMPLAN or REMI models for future policy decisions???

Look at the CEQA process (which I recognize does not relate to new policy) that has been in place for a number of years. It requires competitive economic impact analysis for major redevelopments and large scale land development projects, yet, have any real benefits resulted to justify the extensive costs (which are passed on to consumers) and time required to complete them?? No, in many cases it is used as a tool in CA's commercial real estate industry to ward off competition (albeit unintentional). I'd expect a similar mis-use to evolve out of AB2529 (except you'll end up with various gov't agencies and their private sector supporters battling one another to preserve jobs and funding).

Another layer of bureaucracy will not ensure the long-term prosperity of California and its taxpayers. They're trying to legislate something that is next to impossible...

Neoford is correct

The short answer is that if you want to get North Dakota's results, act like North Dakotans. North Dakota doesn't require an economic impact assessment before regulation.

The 2nd short answer is that you can't legislate smarts. See "Financial Sector".

I spend some time in California for family reasons. Meet people, talk about their jobs. You will meet lots of people in some otherwise unknown level of government with a good middle class income and unheard of beneifts. While asking what they do, it looks like their position, and the entire bureaucracy they work for, doesn't exist here, in Colorado, as far as I can tell, anywhere else.

To use biblical references (please excuse, but it works here)California, and a few other states, have elected to become the prodigal sons, or unprepared sleeping wedding maids, or grasshopers, or any other parable of what happens when a political class takes its eye off the economic ball, to pursue whatever visions of a better life attracts them. No law will wake them.

Our Federal system allows this to happen. Those impacted economically leave, those who benefit, stay, until they retire of course, and take their pension to a better place. The game plays out until the bond window closes.

The California Experience

Bill - You've got most of the basics right about the two states. Yup, it does indeed get cold here. One thing you have not mentioned is that North Dakotans understand that a hockey stick is for playing hockey and not a graphical representation for all economic projections. Consequently, our governments (at all levels) and our businesses have not relied on the hopes of perpetually skyrocketing returns or expectations of continuously and exorbitantly appreciating real estate assets. In other words, North Dakota has governed and managed to live within its means.

I was once told that California's severe lack of affordable housing, as measured by the high ratio of housing prices to incomes, was simply the price of the California experience. I guess they were right in more ways than one.