An Autopsy of California’s Regulatory Suicide

From 1989 to 1992 a third of the nation's job losses occurred in California. The severity of California's recession has been blamed on the North American Free Trade Agreement, illegal immigrants, and violent criminals. But the contributors to the latest issue of Regulation (1994, no. 3) say that the main problem with California's economy is burdensome regulations. Senior editor Edward L. Hudgins sums it up: "Just as New York has become a paradigm of what not to do with tax policy, California should be the model of which regulatory policies to avoid."

Rep. Edward Royce (R- 1 Calif.) assails the state's regulations that allow workers to be compensated for on-the-job stress and have caused claims to skyrocket. Royce draws attention to a joint report prepared by Californians for a Compensation Reform, the a California Chamber of Commerce, and the California Manufacturers' Association that finds that "workers' compensation benefits ... are routinely paid to workers facing the stress of disciplinary investigations into their misconduct; to workers with marital problems aggravated by job stresses ... to workers distressed by boring and repetitive work." Royce cites the case of Ocean Specialty Manufacturing of Chatsworth, which was forced to pay $17,000 to minimum-wage workers for stress-related trauma they supposedly incurred while packing boxes. Although some reforms have been made, Royce writes that much more needs to be done.

In "Strangled in the Crib," journalists Joseph Farah and Michael Antonucci take an "entrepreneur's eye view" of California's regulatory debacle. They find that state regulatory bodies such as Cal-EPA, Cal-OSHA, and the South Coast Air Quality Management District have stifled job creation in the Golden State. Exhausted by trying to hack their way through the state's regulatory thicket, many entrepreneurs take their capital, jobs, and creative ideas elsewhere. Farah and Antonucci cite the case of Rohr Industries, which found the approval process for opening a new plant so trying that it gave up and moved to Arkansas. The permit, which would have cost $750,000 in California, cost only $750 in Arkansas.

Stephen Hayward, editorial director of San Francisco's Pacific Research Institute, identifies predatory litigation as a major source of California's economic afflictions. In "Golden Lawsuits in the Golden State," Hayward charges that permissive liability rules have led to an explosion of frivolous lawsuits. According to Hayward, California has become "the land of socialized fault," where a criminal who falls through a skylight while burglarizing a building can collect $250,000 from the building's owner. Writes Hayward, "The [California legal] system itself arms those who would prey on businesses as surely as would the criminal justice system if it handed out guns and burglary tools rather than prison sentences."

Rodney Smith, a professor of economics at Claremont McKenna College, thinks there are dry times ahead for Californians. In his article "Sinking or Swimming in Water Policy?" he makes a powerful case that the California Department of Water Resources has significantly overestimated future water yields. Smith advocates junking the archaic system governing water allocation and replacing it with a free market.

James L. Johnston argues that tradable emissions permits, long hailed as a market-based solution to environmental problems, may be nothing more than a "myopic example of Gorbachevian market planning." In his article, "Pollution Trading in La La Land," Johnston analyzes Southern California's Regional Clean Air Incentives Market (RECLAIM) program and finds it deeply flawed. He points out that RECLAIM pollution credits are explicitly denied property rights status and are subject at any time to arbitrary negation by the regulatory authorities. For that reason, trading of RECLAIM credits has been light. RECLAIM in its current incarnation is no solution, insists Johnston, it is instead "a poorly designed system that gives market trading a bad name."

On a more positive note, Competitive Enterprise Institute policy analyst Matthew C. Hoffman praises California for its enlightened approach to electricity regulation in "The Future of Electricity Provision." Last April the California Public Utilities Commission began laying the groundwork for competitive provision of electricity. Hoffman predicts lower prices and heightened efficiency as a result of that policy.