Ronald Reagan has staked the success of his economic policy on a single premise: that cutting taxes and government spending will stimulate economic growth. We don't know yet whether the policy will be successful, though many Americans have their doubts. But we do know that the underlying premise runs directly contrary to the experience of the state in which the president lived for more than 40 years.
Make no mistake about it: California has had some of the most astonishing economic growth the world has ever seen. Jerry Brown likes to say that if California were a nation it would have the seventh or eighth largest economy in the world. A better way of suggesting California's growth is to say that since 1945 California's economy has grown about as rapidly as Japan's. Part of California's growth, to be sure, came from immigration; but migrants would not have come, or could not have stayed, if economic growth had not occurred. Nor was it obvious in, say, 1940, that California would have such growth. Some Californians, like Earl Warren, expected it, but other men with wisdom and foresight did not. After all, California then was near no major markets, and though it had agriculture and a little oil (not enough for itself, however, since 1946) it did not otherwise have much more in the line of natural resources than Japan. Yet California grew. What was its secret?
One thing that we can say was not its secret: low taxes. California has always been a high-tax state--before the 1940s, during the last 40 years, and even after the Proposition 13 tax cut of 1978. In 1980, for example, California was seventh among the states in per capita state and local government revenue. Industry has not come flocking to California seeking low taxes, or if it has it has been sorely disappointed.
California is a high-tax state not by historical accident, but by conscious decision. During World War II, California was full of war industry workers and was generating high revenues. Gov. Earl Warren was under pressure to lower taxes; the state was running a big surplus. Warren allowed only limited cuts and kept taxes high: he felt the money would be needed to build public services after the war, when he expected that California's population would continue to rise. Seldom has a public official been so right. California had unprecedented population growth; the surplus was needed and spent; growth was not deterred by high state taxes.
Moreover, the spending itself seems to have contributed mightily to California's economic growth. In the past 40 years, California has spent vast sums of money maintaining a higher education system of unparalleled size and distinction, in building a vast network of highways and freeways, and in building a monumental water system that transfers water from the wet and lightly populated north to the dry and economically vibrant south. Each of these has contributed to economic growth. Southern California, an area with more economic creativity than Tokyo, would not exist in anything like its current magnitude without the water projects; neither would California's exceedingly productive agriculture industry. The freeways were a necessary piece of infrastructure for economic activity.
And the higher education system has almost certainly contributed more than we can measure. California has been very generous to students: for 20 years, over half the state's 18-year-olds have gone on to some form of higher education, and most of them have paid virtually nothing in tuition. These young people in turn--despite the media hype about hot tubs and drug use--have proved to be an exceedingly productive and creative work force. Would California be as far ahead without its state colleges and universities? Almost certainly not. Consider the relatively slow economic growth in the Eastern states, where cheap public higher education has not been available to most students.
You will not hear much about any of this from President Reagan. He seems to suppose that all of California's economic growth comes from the efforts of rugged--and sometimes coarse--individuals like the members of his Kitchen Cabinet. Their achievements should not be disparaged; they have produced wealth, at least some part of which has trickled down and enriched society. But the Kitchen Cabinet members did not do it alone. And they did not do it because the state taxed them lightly. The California experience does not prove that high taxes and high spending automatically produce economic growth--there are states that have followed similar policies with very different results. But the California experience does suggest that the causes of economic growth are a good deal more complex than the supply-side theories behind the Reagan economic policies suggest, and that there are circumstances in which low taxes and low spending may retard rather than stimulate economic growth.