Tom Campbell

A Look At The California Economy With Tom Campbell

Tom Campbell is no stranger to Northern Californians, having served as a lawmaker, educator, and state administrator for decades. He most recently completed a stint as the dean of Berkeley’s Haas School of Business. Campbell has been director of finance for the state; he is also a former congressman and state senator who is now considering a run for governor. Tom has a PhD in economics from the University of Chicago, where Milton Friedman was his faculty advisor, and a law degree from Harvard University.

I talked with Tom on several occasions recently about the state of affairs in California, most recently after a Rotary presentation in Los Altos.

Rick Glaze: Everyone is concerned about the economic recession we’re in. Have past downturns been this severe? How can we compare this one to the past?

Tom Campbell: The 1980–82 recession saw national unemployment above our current levels, of over ten percent for almost a year. [U.S. unemployment is currently 8.5 percent.] The California jobless rate, however, at 11.6 percent, is the highest it’s been since the end of WWII. Since then, recessions have tended to average about two years ten months in duration. If that pattern holds true now, we should be seeing recovery by the end of 2010. There is reason to be optimistic, especially in comparison with the 1980–82 recession. The easing of money supply by the Federal Reserve [while carrying a long-term inflation risk] helps us recover faster this time, than when money was being constricted back then. The price of gasoline has been falling substantially since last summer, so that will also give consumers more disposable income. Most economists see us matching, if not beating, the recovery rate of 1980–1982.

What can we expect the jobless rate to do around the country and specifically in California?

Unemployment will slowly diminish as we move out of the recession. History teaches that the stock market recovers first, then employment begins to grow, as companies make plans for the coming expansion. California, however, and sadly, will lag the rest of the country. That is because of three factors: litigation, regulation, and taxation. California has made itself a less favorable place to expand employment because we sue ourselves so much. Our state also imposes regulations on companies far above the federal standards in many areas. Flexible work hours are restricted by regulation, for example, costing employers more money. Businesses are finding that nearby states like Texas, Arizona, Nevada, Oregon, and Washington do not have these costly restrictions. That kind of excessive regulation makes it unlikely that we’ll come out of this recession ahead of the rest of the country.     

Employers have to work in the cost of taxes when figuring out how much they have to pay employees, and how much of their own profits they get to keep. Once again, California is an unattractive alternative. Our top income tax rate is the highest in the country [Texas and Nevada don’t have an income tax]; our state sales tax is also number one in the country [Oregon doesn’t have a state sales tax]; our state business tax is number eight in the nation [Nevada and Texas don’t have business tax]. Because of high valuations, our property tax is at number ten in the nation.       

Lastly, our state budgeting process is boom-and-bust. Those with jobs to offer worry that when we hit a down year, business taxes will rise in California. That has, indeed, been the case. We will continue to be perceived as an unsafe bet to expand business, until we fix our wildly fluctuating system of state revenue.

Can you speak to the mantra popular in every election, “raise taxes on the rich, they should pay their fair share.”

In California, the top three percent pay fifty percent of all state income tax. That’s a higher share paid by a smaller percentage than in any other state. Sales taxes are paid by all, but we exclude food and medicine, so the impact on the poor is less severe than if those necessities were taxed. Sometimes we hear complaints that corporations don’t pay even more taxes, but that’s misleading. Corporations are made up of employees and shareholders, and they sell to consumers. Each of those groups pays more, or receives less, because of the tax on corporate earnings. Further, if a corporation does not pay as much tax in a given year, it’s most often because it had unusually high expenses, or did not make any profit that year. If we increase taxes more, desperately needed jobs will be driven away to other states.

In your opinion, what is a viable, practical approach to revenue generation for government?

Make taxes much simpler. To a much greater extent, we should allow California income tax forms to be just a percentage of the federal form. The state should offer to fill out income tax returns for the millions of Californians who have only wage income.  

A federal budget proposal is on the table that would borrow trillions of dollars in order to create stimulus this recession. How much of that spending is actually stimulus versus plain old everyday spending?      

I have evaluated the 789 billion in the “stimulus package,” and found only about 90 billion related to investment that will get jobs started again. All the rest is what economists call “transfer payments”; that is, one-time expenditures to help unemployed and other low-income people. Important as those expenditures might be, they are not investments, and they will not stimulate economic recovery. A much larger share of the 789 billion should have been directed to lowering capital gains taxes, and increasing the investment tax credit—steps that would stimulate employers to expand their operations, and hire more employees.      

Rick Glaze’s first novel, The Middle Fork, was published in May. He is the president of Glaze Capital Management of Los Altos as well as a General Securities Principal offering securities through First Allied Securities.