California ranked as least business-friendly state

As reported by the San Jose Mercury News:

If you think California is a tough place to do business, you’re not alone.

A new report from CNBC confirms what scores of companies have long suspected — California is the least business-friendly state in the nation.

CNBC’s 10th annual America’s Top States for Business study places the Golden State at the bottom of the list for 2016. California was also found to be one of the costliest places to do business, with a favorability ranking of 49 out of 50.

Those figures don’t surprise Clay Harrison, co-owner of Vidcam, a Burbank business that rents cameras, lighting and audio equipment to the TV industry. …

Click here to read the full story

Even Tax Breaks are Torture for California Businesses

tax signCalifornia has a terrible reputation of being unfriendly to business, but that’s just because some people don’t have a sense of humor.

If you love comedy, check out the website of the Governor’s Office of Business and Economic Development (GO-Biz) at www.business.ca.gov.

There you’ll find all the incentives, programs and helpful information that the state of California has created to help businesses grow and stay in California. There’s not much, but brevity is the soul of wit.

The state offers advice on “Setting up a Facility,” under the category of “Start a Business.” Here, in its entirety, is the section titled, “Acquiring Office Manufacturing Equipment”:

“Office furnishings can be rented or bought through businesses that deal primarily with office occupants. These companies are easy to locate through local telephone Yellow Pages under ‘office furniture and equipment, dealers or rental.’ Companies that sell telephone and computer systems, copy, fax and mail machines and other technical equipment can also be located through the Yellow Pages. Companies selling other office supplies such as pens, paper, tape and staples can be found through the Yellow Pages listed under ‘office supplies’ or ‘stationers,’ or through catalog sales.”

Daunted by the task of shopping for office furnishings? The state suggests a business incubator program.

It doesn’t have one, unfortunately. But “universities, cities or counties, ethnic or industry associations, or private companies” run business incubators, and “generally they offer an individual office, cubicle or at least a desk for the businessperson.”

Let’s just pray they have a copy of the Yellow Pages.

The bureaucrats at the Department of Business Friendliness don’t just sit around all day fielding inquiries on where to buy fax machines. They also administer the California Competes Tax Credit, a program that allows businesses to plead for the chance to keep a little more of the money they earned.

During the current fiscal year, these tax credits will total about $200 million statewide, which is probably less than we’re spending on the latest new watercolors of the bullet train. Those paintings should be hanging in the Louvre for what they’ve cost us.

So, how does a business qualify for the California Competes tax credit and how much money can it save on taxes?

There doesn’t seem to be a clear answer. “Tax credit agreements will be negotiated,” the website states.

The negotiating is done by the governor’s appointees at GO-Biz, then approved by the California Competes Tax Credit Committee.

The CCTC committee is made up of the state treasurer, the director of the Department of Finance, the director of GO-Biz, one person appointed by the Assembly Speaker, and one person appointed by the Senate Rules Committee.

They meet several times a year to consider applications, and the minutes of their meetings are fun reading if you’re a fan of the Inquisition.

One after another, company representatives are brought before the committee to be grilled about their application for a tax credit.

The questions are harsh. Why are your wages so low? Do you provide health benefits? What does your company do? Why do you need this money? What are you doing to get more women on the production floor? Do you have a training program? Will you hire through an employment agency? What is your outreach plan to achieve a diverse workforce?

This kind of thing caused the committee to get a visit from the legal counsel for California Competes, who explained at their meeting last November that under the law, “the sole function of the committee is to approve or reject the agreements” recommended by GO-Biz.

The lawyer said the committee has no authority to collect demographic data, like race and gender, about an applicant’s workforce. The committee also has no authority to require the applicant to collect and turn over that demographic data, and no authority to “promulgate regulations” about diverse work forces.

But that didn’t sit well with the political appointee from the Assembly, who hired an attorney independently and insisted that the intent of the legislature was to use the California Competes tax credits to pursue other “underlying goals.” The interrogations will continue, the committee member made clear, because even if there’s no legal authority for action, “Simply asking the questions sends a message.”

That’s a statement that could give all the old Russians living in the Fairfax District a nasty flashback.

And this is the business incentive program. Imagine if it was the penalty phase.

This piece was originally published by the L.A. Daily News.

Prop. 13 is California Taxpayers Only “Saving Grace”

Proposition 13 is certain to continue to be a hot topic in 2016 and beyond as “reformers” continue to work on mobilizing a statewide effort to enact a “split-roll” that raises billions of dollars in increased property taxes from California businesses.

I have worked in and around Prop. 13 in one form or another for my entire career and have collected more data and research on its impacts that anybody else I have ever come in contact with.

I have since ended that research for the “reform” side, because I came to appreciate Prop. 13 for what it truly is–the last line of defense that California taxpayers have against elected officials who refuse to control “unsustainable” and “unaffordable” spending at both the state and local levels of government. 

For those new to Prop. 13, it is a California ballot measure passed in 1978 that places a 1% limit on local property tax rates, unless a “change in ownership occurs,” and limits assessment increases to 2% per year.

At the state level, Prop. 13 requires that any measure which would raise revenues to be enacted by a 2/3 vote of the Legislature.  At the local level, Prop. 13 requires taxes raised by local governments for a designated or special purpose to be approved by 2/3 of voters and a majority for general tax increases.

Sure, Prop. 13 is not perfect, far from it.   But the reality is that there is perhaps no public policy in California that is more effective at safeguarding taxpayers against the inability of California politicians, particularly those of the Democratic stripe, from overspending and then sticking taxpayers with the bill.

With the State of California $400 billion in the red, and most local governments in the same situation, you don’t hear anyone arguing with the fact that California government has a huge spending and debt problem.

Moody’s Investor Services agrees with this assessment, having prepared a report that finds California to be the least prepared state to weather a financial storm due to its fiscal policies and inability to reform its tax system.

Without Prop. 13, California elected officials would have “carte blanc” to push the state’s $1 trillion and growing pension problem onto state and local taxpayers, serving to further exacerbate the problem.  A whole host of other state and local taxes and fees would inevitably become viable proposals overnight in the absence of Prop. 13’s protections.

The ongoing explosion in fees and tax exactions on businesses at the local level is perhaps the best indicator of what would happen if Prop. 13 did not exist—turning an already steady and increasing flow of new local taxes and fees into the equivalent of an unchecked dam-break flood of new taxes and fees on California taxpayers.

Stanford University economist Roger Noll says that the problem of ever increasing, burdensome local taxes and fees is the single most legitimate concern that California businesses express about the state’s system of state and local finance.

Opponents of Prop. 13 cite tax equity and fairness as reasons to “reform” Proposition 13 by switching away from a “change in ownership” trigger for market reassessment to a “periodic reassessment of commercial property at market value.”

Furthermore, reformers say Prop. 13 is not “fair” because it heavily taxes new investment and rewards  “long-time” landowners—resulting in heavily disparate property tax amounts.

They say that the only fair way is to bring all businesses who receive a “tax break” under Prop. 13 up to market value and then send billions of dollars in increased property tax revenues to Sacramento to spend as they please.

My primary issue with this line of reasoning is that Sacramento has already proven that it cannot manage the existing tax dollars it gets from the state’s property tax responsibly so why on earth would we send them a flood of new tax dollars?

Second, the entire state and local tax system is riddled with similar inequities so why are reformers choosing to single out Prop. 13 for “reform”?  California’s major taxes are all characterized by extremely high rates and a very limited or loophole-ridden base.

The result is that those who pay the tax pay full boat, and those who can take advantage of loopholes get a break.  The reality of the situation is that all tax “reformers” in California want to increase tax revenues by leaving the rates the same, closing the loopholes, and sending billions of dollars in increased revenues to Sacramento to poorly manage.

True tax “reform” would be to close the loopholes and lower the base to make the change revenue neutral—but there is not a single tax “reformer” in California that I know of who is pushing for revenue neutral tax reform.

This is the method that nearly all significant successful attempts at tax reform utilized including President Reagan’s 1986 tax overhaul—widely lauded as one of the most successful tax reform efforts of all-time.

Reagan’s 1986 tax reform was “revenue neutral” but hailed by politicians of all stripes for simplifying the tax code, broadening the base and reducing the rates—a win win for everyone, not just those who want more tax dollars.

Kersten Institute for Governance and Public Policy

Originally published by Fox and Hounds Daily

Current One-Party System is Bad for California

californiaTechnically speaking, California’s political system is a “two party system,” but that is largely in name only in most places in the state.

California has become a “one party state” controlled by the California Democratic Party and California Democrat politicians.
Two key drivers was the decline of the Republican Party in the wake of Pete Wilson’s Prop. 187, and the redistricting deal in the early 2000s that helped Congressional Republicans and Republican incumbents by making most of California’s districts solidly Democrat or solidly Republican, according to a conversation with the late Allan Hoffenblum, legendary GOP strategist and former publisher of the California Target Book.

Republicans are not competitive in the vast majority of districts, and once the 2016 election is over it has been reported by David Crane, Stanford University, that there will be no open Assembly seats in the state until 2024. Campaign consultants are already sulking over the lack of potential competitive elections in the years following 2016.

This lack of party competition will primarily hurt California working families and the declining middle-class and help powerful special interests. The reason is that the lack of a viable political opposition in the vast majority of districts allows politicians to pander to their “core constituencies” and ignore the vast majority of voters including independents and the political center.
The one bright spot is the passage of the “top two primary system” as the result of a back door budget deal which has enabled the rise of the “moderate democrat” in California politics which tend to be less tied to the Democratic pro-labor base and more sensible on business and independent voter issues (i.e. taxes, government regulation).

Republican challengers, and their backers, tend to be the ones who can challenge California Democrat politicians on their weakest policy stances including taxes, out of control government spending, and onerous and costly government regulation.
But in most legislative races in California the Democrat establishment candidates do not have a viable Republican challenger. The result is that many of the key issues facing California are not even debated in the campaign. This is bad for the state’s political system and its voters.

Most competitive legislative races in California are characterized as a race between a far-left “progressive, pro-labor” Democrat, and a more moderate “pro-business” Democrat. This trend is the result of the state’s relatively new “top two primary system” and is surely better than having no competition but does not provide the same benefits as a true two party system.
Most “moderate Democrats” are still pro-labor, just not as far left as the organized labor establishment–backed Democrat candidates. And most “moderate Democrats” stick to the California Democratic Party platform on most economic and social issues. They are essentially Democrats, with a pro-business slant, which is good for the state and its political debate, but does not tend to challenge the Democratic status quo on most important issues in the state.

For example, take the example of Senator Bill Dodd (D), running as a moderate Democrat in the Sacramento valley in 2016. He is selling himself as a reasonable centrist Democrat who can work with both Democrats and Republicans to get things done. But he is still “pro-labor” and tied to the Democrat labor base on most issues including environmental regulation and state spending issues–perhaps the state’s two most important current policy issues.

Perhaps most alarming, is that after 2016 many of the “moderate Democrats” may not even have the threat of a viable moderate pro-business challenger, which makes it likely that they could sway back to the left, even the far-left, staked out organized labor and California Democratic Party.

In conclusion, there are really two potential paths to bringing back electoral competition to California politics.
First, the Republican Party and its candidates could move closer to the political center to better challenge Democrat candidates. This is unlikely to happen because the state’s Republican candidates are simply a reflection of the state’s Republican voters who tend to be very conservative.

Second, the more likely scenario is that you will see an increasing split in the California Democrat Party between its “pro-labor” base and “moderate Democrats.” This split has increased dramatically in the last year, and likely to continue.
If one considers voting data, one finds that the political center is huge, larger than either party, and there is really a lot of room for new varieties of Democrat candidates to stake out a more centrist positions that appeal to independent voters who tend to be more fiscally conservative than the Democratic base yet still pro-environment. These voters tend to be more reasonable on regulatory issues and other common sense policy positions, such as keeping a lid on the state’s rising tax burden and expansion of the welfare state.

Only time will tell, but one thing is for certain, the state’s current one-party system is bad for California and the average voter, particularly independents, who in many cases do not even have the option to vote for a candidate that fits their political and policy preferences.

Kersten Institute for Governance and Public Policy

This piece was originally published by Fox and Hounds Daily

New Overtime Rules Burden CA Small Businesses

Money

The Department of Labor’s new overtime rules come at a jarring time for California businesses which have seen recent changes in California laws to increase both the minimum wage and mandated leave. Small business employers can’t catch a breath before a new mandate comes down affecting their employees and ultimately their bottom line.

The Department of Labor’s new rule allows workers earning $47,476 annually time-an-a-half for every hour they work beyond 40 hours. The previous annual salary threshold for requiring time-an-a-half pay was $23,660.

National Federation of Independent Business California State Executive Director Tom Scott said in a release responding to the new rule, “We see this as particularly troubling here in California where the cost of doing business is already prohibitively high. Small businesses are still grappling with the news of a $15 minimum wage; now they have to go through each salary exempt position and decide which employees they have to shift to hourly workers. This will adversely affect workplace morale as many will view this adjustment as a demotion.”

However, there is a way for employees of all stripes to get a pay increase without affecting a businesses bottom line. Unfortunately, because of the increased burdens California businesses face more businesses are looking at this benefit for their employees: Move to a state with no income tax.

If an employee receives the same wage in, say, Texas or Nevada, which have no income taxes, more money stays in the employees’ pocket. It’s like a pay raise without the companies increasing payroll.

Too many California businesses are doing the math because of the constant attack on their bottom line.

Originally published by Fox and Hounds Daily

Hurting Business Owners Is No Way To Help The Poor

PovertyWhen George Washington was on his deathbed, his doctors tried to save his life by bleeding him, which was considered good medicine at the time.

California businesses must feel like the father of our country did when he tried to stop the bleeding but the well-intentioned practitioners wouldn’t be stopped.

With California’s income taxes, sales taxes, energy prices and other costs at or near the highest in the nation, plus a regulatory and legal climate that escalates costs and creates high-risk uncertainties, many businesses have left the state, reduced hiring or cut hours and wages.

California’s poverty rate is 23 percent — 27 percent for children. There are now 12 million Californians enrolled in Medi-Cal, the safety-net health insurance program for low-income people.

This is a crisis, and California has to take action to address it. But we shouldn’t take actions that are inspired by the medical beliefs of George Washington’s doctors.

A proposed ballot initiative called the “Lifting Children and Families Out of Poverty Act” is exactly that kind of action. The measure would open a hole in Proposition 13 and start to draw money out of California real estate valued at more than $3 million.

The proposed mechanism is a property tax surcharge. It would begin at 0.3 percent on assessed property values over $3 million and rise to 0.8 percent on values greater than $10 million. Although it would apply to both residential and commercial property, its greatest impact would be on California businesses.

Property taxes bring in about $55 billion to the state treasury annually, and the state Legislative Analyst’s Office estimates that the surcharge would collect between $6 billion and $7 billion in its first year. But the money would not go into the general fund. None of the cash would be available to pay for Medi-Cal and none of it would be allocated toward Proposition 98’s minimum funding requirement for education.

Instead, the billions would go into a new special fund called the Lifting Children and Families Out of Poverty Fund, which would be used to fund programs and make grants to organizations that provide services.

Which programs? What organizations? Where? These decisions would be made by the California Department of Education. The measure would put the CDE in charge of reviewing plans and annual reports submitted by communities that apply to become “California Promise Zones” eligible to receive money from the fund.

The ballot measure would increase funding for cash grants to the poor and for subsidized tax-refund checks to low-income workers. It would spend billions on subsidized child care, loans for child care providers, grants for students studying to be child care providers, and loan forgiveness for child development professionals. It would also pay for preschool in designated areas, and for home nursing visits to check on families with young children.

About 10 percent of the money raised would be spent on job training, including tax credits for businesses that participate in the training programs.

But education, training and child care, while important, are not going to lift people out of poverty unless they can find good jobs.

A true anti-poverty agenda would be focused on improving the conditions for business expansion and job creation throughout California. It would include tax cuts, an end to lawsuit abuse, and an effort to prune unnecessary regulations, as well as funding for education, job training and child care.

We’ll never cure poverty by bleeding job creators. That’s the medically proven path to the tomb.

###

Deceptive and Misleading Claims – How Government Unions Fool the Public

Unions pension public sectorCalifornia’s public sector unions collect and spend well over $1 billion per year. When you have that much money, you can hire thousands of skilled professionals to wage campaigns, litigate, lobby, negotiate and communicate. You can hire the best public relations firms money can buy. You can commission research studies that spin facts to support your agenda. You can silence voices of dissent, voices of reason, voices of reform, with an avalanche of misinformation. And it works.

Here, then, for what it’s worth, is a “top 10” list of some of the biggest deceptions and misleading claims made by California’s government unions.

1 – Government unions are protecting the middle class.

FALSE. Government unions are protecting government workers at the expense of the private sector middle class. The agenda of government unions is more wages and benefits for government workers, and more hiring of government workers. To adhere to this agenda, failure of government programs still constitutes success for these unions. More laws, more regulations and more government programs equates to more unionized government workers, regardless of the cost, benefit or need for these programs. The primary agenda of unionized government has nothing to do with the welfare of the private sector middle class, whose taxes pay for it.

2 – Government unions are a necessary political counterweight to “Wall Street,” big business and billionaires.

FALSE. When government is expanded to serve the interests of government unions, the elite and privileged special interests are relatively unaffected, and often benefit. Large corporations can afford to comply with excessive regulations that drive their emerging competitors out of business. When governments borrow to finance deficits created by an over-built unionized government, bond underwriters profit from the fees. Government pension funds are among the biggest players on Wall Street, aggressively investing hundreds of billions each year to secure their 7 percent (or more) per year returns. Billionaires can afford to pay taxes and fees – it’s the middle-class taxpayer who can be overwhelmed by them. When powerful special interests want favorable legislation passed in California, they go to the government unions and make a deal. Government unions are the brokers and enablers of special interest cronyism. They are allies, not counterweights.

3 – Government unions represent and protect the American worker and the labor movement.

union collective bargaining public sectorFALSE. For better or worse, government unions represent and protect government workers. Government unions and private sector unions have very little in common. Unlike private unions, government unions elect their own bosses, and their agencies are funded by compulsory taxes, not through profits earned by creating products and services that are voluntarily purchased in a competitive market. Moreover, government union members operate the machinery of government, giving them the ability to harass their political opponents under cover of authority. Private sector unions – properly regulated – have a legitimate role to play in American society. Government unions, on the other hand, exist to serve the interests of government workers, not the ordinary American citizen.

4 – Public employees are underpaid.

FALSE. In past decades, prior to the unionization of government, a public worker exchanged lower base pay for better retirement benefits and more job security. But today, not only have retirement benefits been greatly increased from what was normal back in the 1980’s and 1990’s, but in most cases the base pay of government workers exceeds the base pay for private sector workers performing jobs requiring similar skills. A 2015 study by State Budget Solutions estimated the total compensation of California’s government workers to exceed private sector workers by 31 percent. But these studies typically omit lower paid independent contractors who now constitute one in three workers. A California Policy Center study that examined 2012 data showed the average pay and benefits for California’s city workers was $124,058, county workers $102,312, and state workers $100,668. And this study did not take into account the value of additional paid vacation benefits, extra paid holidays, and generous “comp time” policies, which add significantly to the total value of annual compensation. Just how much public employee pay exceeds private sector pay for equivalent jobs is the topic of ongoing debate. But they’re not underpaid by any reasonable measure.

5 – The average public sector pension is only $25,000 per year (or some similarly low number).

FALSE. The problem with this profoundly misleading statistic is that this low average is the result of including participants who only worked a few years in state/local government, barely vesting a pension. Should someone who worked less than a decade (or two) in a job expect a pension based on a full career of service? When normalizing for 30 year careers and taking into account the uptick in retirement benefit formulas that rolled through California starting in 1999, the average state/local retiree in California collects a pension and retirement health benefit package worth over $70,000 per year. For a private sector taxpayer to collect this much in retirement, they would have to save at least $1.5 million. If public pensions weren’t so generous, these pension systems would not face severe financial challenges. Which brings us to the next myth …

6 – California’s state/local pension systems are being reformed and will be just fine financially.

FALSE. Virtually every official post-reform projection among California’s 80+ public sector pension systems are predicting eventual financial health based on a huge, extremely risky assumption – that the average annual returns of these funds over the next few decades will exceed 7.0 percent per year. Common sense should tell any unbiased observer that ongoing 7.0 percent average annual returns are not a safe bet. If they are, why are Treasury Bills only yielding 3.0 percent? What are mortgage bankers only able to get 3.5 percent on 30 year fixed mortgages? Why are bank CD’s only offering 2.0 percent? The spread between equity returns and truly risk-free returns has never been this large for this long. Pension funds are basing future performance projections on past results. The problem is that over the past 30 years, interest rates have been steadily lowered to allow people to borrow more. This borrowing stimulated the economy, creating corporate profits and driving up the price of corporate equities. But interest rates cannot be lowered any further. We are at the end of a long-term credit cycle, and pension funds are just beginning to deal with the consequences.

7 – The teachers unions care about student achievement more than anything else.

FALSE. The evidence simply doesn’t support this assertion. Consider the reaction of the California Teachers Association to the recent Vergara decision, in which a Los Angeles superior court judge agreed with student plaintiffs who challenged three union work rules. The CTA criticized the ruling and announced their support for an appeal. What does the Vergara lawsuit aim to accomplish? It would take away the ability for teachers to earn tenure in less than two years. It would end the practice of favoring seniority over merit when deciding what teachers to layoff. And it would make it easier to fire incompetent teachers. These are commonsense, bipartisan reforms that the teachers unions oppose.

8 – Billionaires are trying to hijack California’s public education system.

FALSE. To the extent wealthy individuals have decided to involve themselves in education reform and private education initiatives, they come from a diverse background of political orientations. But all of them share a desire to rescue California’s next generation of citizens from a union monopoly on education. And unlike the unionized traditional public school, public charter schools and private schools survive based on the choice of parents who want a better education for their children. And if they don’t do a great job, the parents can withdraw their children from the failing charter or private school. Introducing competition to California’s unionized K-12 education system is a healthy, hopeful trend that gathers support from concerned citizens of all incomes, ethnic groups, and political ideologies.

9 – Proponents of public sector union reform are “anti-government workers.”

FALSE. This sort of claim is a distraction from the reality – which is that public sector unions have corrupted the democratic process and have been attempting to inculcate public employees with the “us vs. them” mentality that is the currency of unions. Sadly, the opposite is the truth – government unions alienate the public from their government, and, worse, alienate government employees from the public. They have created two classes of workers, government employees who have superior pay, benefits, job security and retirement security, and everyone else in the private sector. They know perfectly well that this level of worker comfort is economically impossible to extend to everyone. Government unions have undermined the sense of common rules and shared fate between public and private individuals that is a foundation of democracy. Those who oppose government unions recognize this threat. It has nothing to do with their support and respect for the men and women who perform the many difficult and risky jobs that are the role of government.

10 – Opponents of government unions are “right wing extremists.”

FALSE. The problems caused by government unions should concern everyone, and they do. Conscientious left-wing activists who favor an expanded role for government expect positive results, not failed programs that were created merely to increase union membership. They realize that unionized government is expensive and inefficient, leaving less money or authority to maintain or expand government services: Public libraries and parks with reduced hours and curtailed maintenance; pitted, congested roads; after school recreation programs without reliable funding; public schools where students aren’t learning and apathetic teachers are protected from accountability. Government has to be cost-effective, no matter how big or how small. Opponents of government unions can disagree on the optimal size of government, yet passionately agree on the problems caused by a unionized government.

This list of 10 myths promulgated by spokespersons for government unions only begins to chronicle their many deceptions. But each of these myths offer strategic value to these unions – giving them the ability to put reformers on the defensive, change the topic of discussion, redefine the terms of the debate. Each of them has powerful emotional resonance, and each of them – along with many others – is continuously reinforced by a network of professional communicators backed by literally billions in dues revenue.

Compensation reform, pension reform, other fiscal reforms, reforming work rules, education reform – all these urgent reforms must first go through one powerful special interest that stops them in their tracks: Government unions. Reformers must confront not only the myths these unions promote, challenging and debunking them, but they must also redefine the role of government unions, if not question their very existence.

*   *   *

Ed Ring is the executive director of the California Policy Center.

Government is hardly the solution to short-term bias

Hillary Clinton’s latest campaign salvo attacked “quarterly capitalism,” the supposedly irresponsible corporate focus on short-term results at the expense of long-term growth. She promised government fixes. But she is short on logic and history.

Is there too much short-termism in business firms? Look at participants’ incentives.

Shareholders own the present value of their pro-rata share of net earnings, not just present earnings. They do not discard good investments which raise that expected present value. Good short-term results raise stock prices not because of short-termism, but because of their implications for the likely future course of net earnings.

Share prices are a primary metric for managerial success and basis for their rewards. That makes their time horizons reflect those of shareholders, far beyond the present. Bondholders, who want to be paid back, incorporate future repayment risks into their choices. Worker and supplier relationships also reflect firms’ future prospects.

Beyond misinterpreting share price responses to short-term results, Clinton’s main evidence was increased stock buybacks, supposedly sacrificing worthwhile investments by returning funds to shareholders. She ignores that those funds will largely be invested elsewhere. But she also ignores that the buyback binge reflects the Fed’s long-term artificial cheapening of borrowed money, leading firms to shift toward debt financing. But a firm substituting debt financing for equity controls no fewer funds for investments.

Confusing business responses to Fed interventions as business short-termism only begins the list of such government-created biases. For example, constant proposals to raise corporate tax rates and worsen capital gains treatment reduce the after-tax profitability of investments. Regulatory mandates and impositions pile up, with more coming, doing the same. Energy policy threatens cost hikes, reducing investment returns. And so on.

That government will put more emphasis on the future than the private sector is also contradicted by political incentives. Owners bear predictable future consequences in current share prices, but politicians’ incentives are far more short-sighted.

An election loser will be out of office, and capture no appreciable benefit from efforts invested. So when an upcoming election is in doubt, everything goes on the auction block to buy short-term political advantage. And politicians’ incentives drive those facing the D.C. patronage machine. That is why so much “reform” meets Ambrose Bierce’s definition of “A thing that mostly satisfies reformers opposed to reformation.” The mere passage of bills in the political nick of time, even largely unread ones, can be declared victorious legacies, with harmful consequences never effectively brought to bear on decision-makers.
There is also a cornucopia of examples of government short-termism at the expense of the future, whose magnitude dwarfs anything it promises to reform.

Unwinding Social Security and Medicare’s 14-digit unfunded liabilities will punish future generations, caused by massive government overpromising to buy earlier elections. Other underfunded trust and pension funds threaten similar future atonement for earlier short-term “sins.” Expanding government debt similarly represents future punishment for short-term political payoffs. Foreign and military policy have similarly turned away from dealing with long-term issues. But serious long-run issues like immigration escape serious attention because “public servants” are afraid of short-run interest group punishment.

Political attacks on short-termism, and reforms to fix it, are beyond confused. They ignore financial market participants’ clear incentives to take future effects into account. They are clueless about what provides evidence of short-termism. They treat private sector responses to government impositions as private sector failures. They ignore far worse political incentives facing “reformers.” And they act as if the most egregious examples of short-termism in America, all government progeny, didn’t exist.
There is little to Clinton’s criticism and alleged solutions beyond misunderstanding and misrepresentation. We should recognize, with Henry Hazlitt, that “today is already the tomorrow which the bad economist yesterday urged us to ignore,” and that expanding government’s power to do more of the same is not in Americans’ interests.

Gary M. Galles is Professor of Economics at Pepperdine University

CA: Worst Place For Business, 11th Year In A Row

California’s economic recovery might be a little over stated, at least according to the people who actually create jobs.

Chief Executive Magazine has released its annual Best and Worst States for Business Survey and California ranked last – for the 11th year in a row. In the annual survey, completed by 511 CEOs across the United States, states are measured across three key categories to achieve their overall ranking: taxes and regulations, quality of the workforce and living environment, which includes things like, quality of education, cost of living, affordable housing, social amenities and crime rates.

California again placed 50th on the list, joining New York, Illinois, New Jersey and Massachusetts at the bottom. Texas remained in the number one slot followed by Florida, North Carolina, Tennessee and Georgia.

One CEO was quoted as saying, “the good states ask what they can do for you; the bad states ask what they can get from you.” Another CEO was quoted, “California and Oregon are essentially anti-business, whereas Texas and Tennessee do everything possible comfortable and more successful.”

Litigation and a state’s legal climate are one of the things weighing on the minds of CEOs as they consider states in which to do business and create jobs. California continues to be a “Judicial Hellhole,” and is tepid at best in its willingness to stop lawsuit abuse. Businesses will be discouraged from expanding and creating jobs in a state in which the lawsuit system mainly serves the interests of lawyers rather than ordinary people.

A single abusive lawsuit can cost a business tremendously. California’s leaders need to make this connection and make it a priority to enact meaningful reforms to our lawsuit system.

Originally published by Fox and Hounds Daily

xecutive director, California Citizens Against Lawsuit Abuse

L.A. Minimum Wage Hike: How Will Businesses React?

Photo courtesy of channone, flickr

Photo courtesy of channone, flickr

The Los Angeles City Council tentatively voted to increase the city’s minimum wage to $15 an hour by 2020. The business community opposed the move. How business will react is unclear but there was much discussion during the debate over issues such as lost jobs and companies eyeing more business-friendly locations.

The wage increase is to be phased in over time, so the immediate impact may not be felt. But businesses ought to keep score when the effects hit so that officials will be cognizant of the consequences. If the wage increase does not cause economic disruptions and businesses do not actually leave Los Angeles, the business community’s credibility will suffer in the face of a mere exercise in rhetoric.

The vote to pass the minimum wage increase was 14 to 1. The council gets to vote once more on the measure after an ordinance is drafted by the city attorney, but the lopsided vote indicates there is no turning back. The council even set the wage above the recommended level offered by Mayor Eric Garcetti, who initially proposed an increase to $13.25 an hour.

The city council’s version contains an inflation clause and offers an extra year for small businesses and nonprofits to comply.

However, the business community does not consider these admissions enough. Ruben Gonzalez of the Los Angeles Chamber of Commerce said, “There is simply not enough room, enough margin to absorb a 50 percent increase in labor costs over a short period of time.”

The chamber’s president and CEO Gary Toebben wrote to his members about the many small business owners who testified in various hearings on the measure. He wrote, “They also talked about the likelihood that in order to provide a wage increase for some employees, they would have to reduce hours for others.”

Toebben noted wryly, “Last week, there were banners hanging throughout City Hall celebrating Small Business Week. There are many small business owners in L.A. who don’t feel like the city is celebrating them today.”

Earlier on the day of the vote, the Los Angeles County Business Federation (BizFed) released a survey on business conditions in the area. According to a release from BizFed, “The city of Los Angeles stood out again as being cited most frequently by employers as unfriendly.  Santa Clarita and Glendale were ranked in the top 5 most business friendly cities, which is notable because officials from those two cities are actively courting city of Los Angeles businesses in light of the proposed city of Los Angeles minimum wage increase.” (Author’s emphasis.)

So what will Los Angeles businesses do? Once the minimum wage law takes effect will there be jobs lost or hours cut? How many businesses move to a different location? Business credibility is on the line. Crying wolf and not acting will damage efforts to turn around what many decry as unfriendly business policies.

Originally published by CalWatchdog.com