October 8, 1992
"Economic Slave, If Not Salvation - California Must Improve Its Business Climate By Doing Things Smarter, Beginning with Worker's Comp Reform, Creation of Better Pathways from Schools to Jobs, and Helping Defense Companies to Turn in Civilian Directions"
San Jose Mercury News
By Timothy Taylor
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THE RECIPE for California's economic woe is clear enough. Start with a national recession; about three-quarters of fluctuations in the California economy are because of the national economy, according to research at the Federal Reserve Bank of San Francisco.

Stir in cuts in defense spending, which have hit especially hard in Southern California. Mix with weakness in the real estate and construction sector; although average home prices haven't collapsed here, they haven't increased for the past three years either. Pour on some problems with the banks and savings and loans, making it harder for businesses to get capital.

As if all that weren't enough, shake this up with a nearly biblical series of disasters -- drought, flood, earthquake, fire -- and state government's inability to agree on a budget.

Little wonder that the California economy is in its deepest recession since the Great Depression, and has lost half a million jobs in the last two years. California hasn't the power to fix the weather or the national economy, and the federal and state governments seem unlikely to be ladling out new funds anytime soon. And anyway, economic resurgence must ultimately come from the private sector, not government action.

So the public policy trick is to find ways for the state to improve its business climate on the cheap. That means doing things smarter, rather than spending more money.

There has been no shortage of suggestions for such reforms in the past year. In the list that follows, I drew heavily upon suggestions from the April report of the Council of California Competitiveness, appointed by Gov. Pete Wilson and headed by Peter Ueberroth, and a new report by the Assembly Democratic Economic Prosperity Team, ADEPT, led by John Vasconcellos of San Jose. The Republicans and Democrats don't agree on everything, of course, but the amount of overlap is impressive.

1. Reform worker's compensation.
California's system of worker's compensation is a mess. The Ueberroth commission calls it an "embarrassment, inefficient and fraud-ridden."

Consider this odd juxtaposition. From 1981 to 1991, the California workforce increased in size by 25 percent, while the rate of disabling injuries per 100 workers actually decreased. Over that same period, the amount business paid for worker's compensation premiums nearly tripled.

To make matters worse, California ranks an abysmal 47th among the states in what it pays to the totally disabled. Instead, these soaring premiums are going to litigation, conflicting doctors' reports and questionable claims. By some estimates, one-quarter of all the worker's comp claims involve fraud.

While other claims are legitimate under the current rules, those rules need to be reworked. California is one of only six states that allow claims for "stress," and almost any injury here, even if it is only slightly related to the workplace, makes the injured worker eligible for benefits. Worker's comp should be limited to those who are really hurt by an event in their workplace.

2. Better business-government interface.
Most businesses don't complain about the substance of California laws -- whether they involve the environment, health and safety, land use, or building permits -- but about what they endure in trying to comply with those laws.

For example, listen to a recent report for the California Business Roundtable: "For most other states, it is not regulatory standards which business perceives as more favorable in the long term, but the process of compliance itself. Many other states, especially in the West, have agencies and processes that focus on business as a 'customer'... California's perceived receptivity to business is largely a result of the way in which the business-government interface is organized and administered." This image of business as a "customer" is becoming common; the ADEPT report is subtitled: "A Customer Satisfaction State!"

California has had Republican governors, presumably friendly to business, running the executive branch of the state government for a decade -- but business still sees state government personnel as insensitive. Wilson should make the interface between government and business a top priority, and if necessary, shake the state bureaucracy until its teeth rattles.

3. Better transition from schools to business.
OK, so money for schools is short. But that doesn't mean standing still. One option being pushed by business, for example, is to start career programs in 11th and 12th grade to provide apprenticeships and other pathways from schools to jobs.

Business must also consider and enunciate what skills and backgrounds it needs from future employees, so that kids can pick up those skills while still in school. A certification program might be developed, for example, as a way of encouraging students to develop certain skills, and for business to be able to find those students.

4. Revenue neutral tax reform for business.
Companies all over the state are short of funds for future investment. One intriguing solution from ADEPT is for the state to reform its business tax code. The idea would be to collect the same amount of overall revenue from business, but to collect it in a way that encourages research and development, investment, and environmental protection.

Exactly how this magic will be done remains to be seen. But a deal does seem to be there, if business interests can choose a trade-off they're willing to make.

5. Invest in infrastructure.
Money spent on roads, bridges, water treatment plants and telecommunications helps business to become more efficient. And even though California is short of funds, it still has the power to issue bonds for these sorts of long-term expenditures.

6. Reform tort liability.
In 1991, Californians filed 850,000 lawsuits. When these reports call for an emphasis on innovation, they don't mean a focus on inventive new legal claims. This withering legal crossfire is bound to discourage business.

The Ueberroth commission report suggests, for example, that only judges be allowed to award punitive damages, not juries; that suits for "emotional distress" be discouraged; that product liability suits be limited to cases where the producer was truly negligent; that lawyers who bring frivolous lawsuits be punished; and that arbitration be used wherever possible.

7. Plan for defense conversion.
California has overcome large defense cutbacks before. Back in 1968, for example, defense accounted for more than 14 percent of the state's production, compared with about 7 percent today. Yet as the Vietnam War wound down and defense spending dropped, the rest of the California economy took up the slack. This current decline in defense spending has implications for land use, and for many companies and workers. Should old military bases become new branches of the University of California? Or parks? Or some mixed use of housing, recreation and business?

Many defense-dependent firms are small- or medium-sized companies that acted as contractors to the big guys like Lockheed and General Dynamics. The big companies would probably find it hard to leave defense work, even if they wanted to try, but the smaller companies might be willing to take on other opportunities, if the state helped to point them out.

Since this list of policies focuses on improving the business climate, it naturally leaves out many other policies that should be important to California: environmental issues, more resources for schools, fighting crime, reform of health and auto insurance, water policy and much more. But at least a healthier state economy would make it easier to address these issues.

The ADEPT report, released Tuesday, notes that in the six months that have passed since the release of the Ueberroth report, "we have seen almost no sign at all of any explicit efforts to translate its recommendations into legislative or, for that matter, executive action."

The agenda for refurbishing California's business climate has plenty of items. The real challenge is for state government to set aside apathy, complacency and special-interest gridlock and get moving on what needs to be done.

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