What Should the Role of State Government be in the California Economy?    

David Kersten
David Kersten is president of the Kersten Institute for Governance and Public Policy (www.kersteninstitute.org). Kersten is also an adjunct professor of public finance and economics at the University of San Francisco.

Perhaps the most important underlying question with regard to both political science as well as economics is what should the role of government be in the economy?

At the same time, this central question is rarely given the objective attention, study, and public debate it deserves, particularly in California.

The best analysis and conclusions I have found on this subject can be found in the works of Nobel-prize winning economists Milton Friedman and F.A. Hayek, who have widely been characterized as two of the most influential economists of the last 100 years.

Friedman and Hayek were both very influential in the revival of the conservative intellectual movement in the post-war period as well as providing the intellectual underpinnings of the “Reagan Revolution” in the United States and a similar movement in Great Britain under Prime Minister Margaret Thatcher in the 1980s.

Much of these same ideas are still at work in today’s politics under the Trump Administration and, like it or not, are the reason the United State’s economy has reached a 3% annual economic growth rate—a bar that President Barack Obama said was impossible to achieve unless you have a “magic wand.”

But to be great is to also be misunderstood, in the words of Ralph Waldo Emerson, and that is why critics have tried to reduce the vast intellectual insights of these two Nobel prize economists to little more than a series of supposedly debunked catchphrases, buzz-words, and half-truths.

The real reason is that the left has no real answer to sound economics and the fact that the economic benefits of a well-functioning “free market” capitalist system will always vastly exceed that of a “socialist state” characterized by more regulation and much higher taxes.

As the famous Reagan economist Arthur Laffer argues you never get good economic results over the long-term with bad economic policies, and good economic policies always produce positive economic results.

What does all this economic theory and the economists of the past have to do with the California economy and California government today?

In a word, everything.

The beauty of sound economic theory is not that it provides universal truths that are sometimes true, and other times not, on the contrary, what sound economic theory gives us is universal truths that are always true.

So what are these universal economic truths and what do they mean for California government?

They are essentially buried in the economic treaties of F.A. Hayek, Milton Friedman and many others, which were written over the past several hundred years going back to Adam Smith.

Unfortunately, most of these ideas are given little if any treatment in modern economics textbooks which essentially provide fragments and a curated view of economic theory that is intended to justify more government and less economic and personal freedoms.

After studying the raw economic theory, as opposed to the state-filtered version, it quickly becomes clear that most of the modern conventional wisdom regarding the government’s handling of economy is just plain wrong, particularly in California, and lacks a solid theoretical and factual foundation.

Specifically, over the past 100 years, California government has strayed from many of the founding principles embodied in both the United States Constitution, as well as the California Constitution, which was modeled after the U.S. Constitution but has become completely unrecognizable from its last major wholesale revision and ratification in 1879.

Moreover, the history of both U.S. Government and California government has been marked by a steady, yet significant, departure from the founding principles and embodiment of a free society based on the protection of personal and economic freedom for the individual through limited government.

In short, the role of government, both in the United States and at the state level (i.e. California), should be to develop a framework for a well-functioning market economy based on private property, the rule of law, and private enterprise.

Unfortunately, in California, we have quite the opposite—a government that continues to encroach on the private sector through the enactment of higher and higher taxes, reduced personal and economic freedoms, and higher and higher regulatory costs that have made the state largely unaffordable to the middle and lower classes.

What California needs is not necessarily less government, although that is true too, but a government that actually serves the people and their economic wellbeing, not just the political stakeholders who control our government.

The newly elected CAGOP chair Jessica Patterson conveyed this point well when she recently wrote in the OC Register that “Republicans do not oppose government, but we believe it should be smart, strategic and focused on creating opportunities so that all residents can achieve their goals.  By contrast, Democrats prioritize government and policies that stifle innovation, limit competition and ultimately hurt middle-class families.”

California Democrats, on the contrary, love to talk about having a plan for the government to run everything—government run health care, government run housing, government run schools, and the government run energy sector.

But what California government really needs to do is provide the legal and regulatory framework for the private sector to provide health care, housing, education, and energy.

De facto government control of these key economic sectors produces monopoly results by serving to drive up costs, restrict supply and reduce the quality of service.

California government needs to essentially become more like an impartial arbitrator or umpire of the state’s economy, to ensure fairness and competition in the private economy, as opposed to monopolizing the private sector through a more heavy-handed, state-run collectivist economy.

Moreover, our nation’s founders saw the clear connection between economic freedom and personal freedom, and the whole underlying design of the U.S. Constitution intended to protect these freedoms from the encroachment of government or anyone else.

The type of government we now have in California looks a lot more like the “Winchester Mystery House” than the type of government that makes sense based on sound economic theory and what the framers of our system of government had in mind.

And that’s just plain bad for business, society, and anyone who does not have a beneficial financial stake in the current system.

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