An Autopsy of California’s Regulatory Suicide

November/​December 1994 • Policy Report

From 1989 to 1992 a third of the nation’s job losses occurredin California. The severity of California’s recession has been blamedon the North American Free Trade Agreement, illegal immigrants,and violent criminals. But the contributors to the latest issueof Regulation (1994, no. 3) say that the main problem withCalifornia’s economy is burdensome regulations. Senior editorEdward L. Hudgins sums it up: “Just as New York has become aparadigm of what not to do with tax policy, California should be themodel of which regulatory policies to avoid.”

Rep. Edward Royce (R- 1 Calif.) assails the state’sregulations that allow workers to be compensated for on‐​the‐​jobstress and have caused claims to skyrocket. Royce draws attentionto a joint report prepared by Californians for a Compensation Reform,the a California Chamber of Commerce, and the CaliforniaManufacturers’ Association that finds that “workers’ compensationbenefits … are routinely paid to workers facing the stress ofdisciplinary investigations into their misconduct; to workerswith marital problems aggravated by job stresses … to workersdistressed by boring and repetitive work.” Royce cites thecase of Ocean Specialty Manufacturing of Chatsworth, which was forcedto pay $17,000 to minimum‐​wage workers for stress‐​related traumathey supposedly incurred while packing boxes. Although somereforms have been made, Royce writes that much more needs to bedone.

In “Strangled in the Crib,” journalists Joseph Farahand Michael Antonucci take an “entrepreneur’s eye view“of California’s regulatory debacle. They find that stateregulatory bodies such as Cal‐​EPA, Cal‐​OSHA, and the South CoastAir Quality Management District have stifled job creation in the GoldenState. Exhausted by trying to hack their way through the state’s regulatorythicket, many entrepreneurs take their capital, jobs, andcreative ideas elsewhere. Farah and Antonucci cite the case of RohrIndustries, which found the approval process for opening a newplant so trying that it gave up and moved to Arkansas. Thepermit, which would have cost $750,000 in California, cost only$750 in Arkansas.

Stephen Hayward, editorial director of San Francisco’s PacificResearch Institute, identifies predatory litigation as a major sourceof California’s economic afflictions. In “Golden Lawsuits inthe Golden State,” Hayward charges that permissive liabilityrules have led to an explosion of frivolous lawsuits. According toHayward, California has become “the land of socializedfault,” where a criminal who falls through a skylight whileburglarizing a building can collect $250,000 from the building’sowner. Writes Hayward, “The [California legal] system itselfarms those who would prey on businesses as surely as would the criminaljustice system if it handed out guns and burglary tools ratherthan prison sentences.”

Rodney Smith, a professor of economics at Claremont McKennaCollege, thinks there are dry times ahead for Californians. Inhis article “Sinking or Swimming in Water Policy?” hemakes a powerful case that the California Department of Water Resourceshas significantly overestimated future water yields. Smithadvocates junking the archaic system governing water allocationand replacing it with a free market.

James L. Johnston argues that tradable emissions permits, longhailed as a market‐​based solution to environmental problems, maybe nothing more than a “myopic example of Gorbachevianmarket planning.” In his article, “Pollution Trading inLa La Land,” Johnston analyzes Southern California’s RegionalClean Air Incentives Market (RECLAIM) program and finds it deeplyflawed. He points out that RECLAIM pollution credits areexplicitly denied property rights status and are subject at anytime to arbitrary negation by the regulatory authorities. Forthat reason, trading of RECLAIM credits has been light. RECLAIMin its current incarnation is no solution, insists Johnston, itis instead “a poorly designed system that gives market tradinga bad name.”

On a more positive note, Competitive Enterprise Institutepolicy analyst Matthew C. Hoffman praises California for its enlightenedapproach to electricity regulation in “The Future ofElectricity Provision.” Last April the California PublicUtilities Commission began laying the groundwork for competitive provisionof electricity. Hoffman predicts lower prices and heightenedefficiency as a result of that policy.