As the world's fifth largest economy, what happens in California matters greatly and makes the race for governor fascinating. Just last week in the primary, a citizen politician and progressive conservative, Bill Simon Jr., trounced former Los Angeles Mayor Richard Riordan, who mistakenly thought he had to move the Republican Party to the left to beat a failing liberal governor. Simon's values are conservative, and his forward-looking ideas of reform are progressive, positive and optimistic.
Many of California's problems can be laid at the doorstep of Gov. Gray Davis. Simon promises to reform an education system that two-thirds of Californians believe is worse today than it was three years ago when Davis took office. He promises to reform the tax code, which has some of the highest tax rates in the nation and is so burdensome it is driving capital, businesses and jobs out of the state. He pledges to reform water and energy policies and to replace unreasonable regulations and Malthusian environmental restrictions that limit affordable housing, stifle economic growth, retard job creation and punish risk-taking and entrepreneurialism.
Davis' "solutions" to the energy crisis -- price controls, increased government regulation and extremist environmental restrictions -- turned a manageable energy crisis into a debacle. By letting state spending get out of control during the economic good times -- it grew by 37 percent during the last three years while the population grew only 5 percent -- he set the state up for a huge $17 billion budget shortfall when the Greenspan-induced recession hit.
Although Davis contends he wants to avoid raising taxes, he has also said he may have to "go back in and make adjustments." Translation: Davis intends to raise taxes. Ironically, California's budget shortfall can only be solved by cutting tax rates, reducing excessive regulations and easing up on unreasonable environmental restrictions in order to increase output and generate more revenues -- Simon's policies.
The Small Business Survival Committee ranks California 44th out of the 50 states in how it treats small business and entrepreneurs, and on taxes in particular, the Golden State scored even lower. California's top personal income tax rate of 9.3 percent is tied for second highest in the nation, and it has the highest capital gains tax, 9.3 percent.
A high capital gains tax rate doesn't soak the rich, it keeps capital out of the hands of the low- and moderate-income folks who want to move up the ladder of wealth creation. Hernando DeSoto, a leading expert on developing economics, calls the lack of access to capital the greatest deterrent to the elimination of poverty in the world today. That's why Simon is right to propose cutting the top capital gains tax rate and eliminating it altogether for enterprise and empowerment zones in the ghettos and barrios.
When Riordan said it is a bad idea to cut capital gains tax rates, he fell into the same trap the national Republican Party falls into by clinging to a static view of the economy and cowering before the liberals' class-warfare tactics, which are based on a static view of both the economy and the electorate. This view represents a kind of "demand-side," zero-sum politics where a candidate assumes voters are stuck at their current economic status and the "supply" of voters is fixed. Simon sees California's human capital as its greatest resource.
He is running a "supply-side" political campaign, expanding the electorate by giving new voters in the vast center of the political spectrum a reason to turn out and support him.
Conventional wisdom holds that with the growing Hispanic and minority voting populations in California the Democratic Party has a lock on the Latino and black vote because it offers them a growing menu of social services and public-sector jobs that Republicans refuse to support. Given a choice between government handouts or a job in the bureaucracy and no job at all, of course voters of all ethnic backgrounds would choose the government solution. And they will vote against politicians who threaten to cut their social-service benefits or reduce the size of public payrolls without offering them an alternative vision of hope and economic opportunity in the private economy.
If given a choice between more government handouts and the opportunity to work in the private sector, create personal wealth, start a business and own a home, voters of all races and backgrounds will more and more choose ownership over handouts, and they will vote for the candidate who pledges his life and career to offer them that kind of vision. That's why Simon will defeat Davis, who is stuck in the tired and failed liberal nostrums of the past.