Jerry Brown Fights the Laws of Economics…and California Loses

Politicians, being what they are, tend to have an inflated view of what they can do. Some claim to create jobs while others claim to raise taxes. In truth, they are limited to passing political laws. Once enacted, those laws run into the laws of economics – which have never been repealed and have been largely the same since the beginning of time. The results are often different than those intended – and so it is for Jerry Brown, whose policies fly in the face of economics and Californians are paying the price.

Few can doubt the magnitude of the economic problems facing our once Golden State. Unemployment is above 12% and underemployment is above 20%. Over 1.3 million less people are employed today than a decade ago. California homeowners have lost over $1.7 trillion in equity in the last 4 years – an amount nearly equal to the entire state economy. That combination has resulted in California suffering the worst of the nation’s foreclosure crisis including startling figures such as in Fresno, where 46.7% of the mortgages are under water, i.e. the mortgage is larger than the home value.

California businesses face taxes among the highest in the nation, even higher regulatory burdens and, just around the corner, potentially large workers’ compensation rate increases. It’s no wonder CEO Magazine ranks California 51st in the nation (behind Puerto Rico) as a place to do business.

All combined, these economic problems have resulted in revenue problems for California governments because people without jobs don’t pay taxes; homeowners without equity spend and borrow less; and businesses with mounting costs have lower profits. That’s economics – not politics.

For Jerry Brown, however, economics remains a mystery to say the least.

How else can you explain, amidst those bad statistics, his signing of a bill to force utility companies to obtain 33% of their electricity from “renewable” resources? No one can doubt that will increase energy costs significantly and reduce business profits — and therefore tax revenues — even more. Yet Jerry is completely undeterred. Of course, Brown’s budget proposal also seeks to extract over $60 billion in taxes from California employees, homeowners and businesses despite their dire condition.

Brown is pressing ahead as if the pieces of papers he signs magically and automatically result in higher revenues or a better standard of living. The laws of economics, however, overrule Brown’s political laws.

In the real world, when people already faced with economic uncertainty are told they will have less money in the future (higher or long term taxes), they spend less today – resulting in lower tax receipts today and tomorrow. Businesses, which are comprised of people, do the same.

In other words, when Jerry Brown signs into law higher energy costs today, those costs dampen economic expectations for tomorrow. His threat of sustained, high tax rates has the same bad economic results and works to compound our existing problems.

In order to change the economic conditions of California, Brown must accept the laws of economics and understand this analogy as told by John Maynard Keynes:

“Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.

“For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”

No business faced with declining sales raises its prices. Whether Jerry Brown understands it or not, California is in the exact position as manufacturer in Keynes’ analogy. Jerry Brown should heed Keynes’ advice, heed the laws of economics and stop gambling with our future in the form of higher taxes and more regulations.