Posted 11:33 AM by Robert

Regulation As State Expenditures

The New York Times runs an article lamenting the inability of States to increase their spending as much as some politicians would like. The article is a typical piece of Times spin, and most of it is hardly worth the effort to read. But it is interesting as a specimen of a current liberal mind set. Consider these passages from the article:

Over the past three years, total spending at the state level rose, at most, by one-half percent, a marked change from the record of the previous 25 years, in which spending growth averaged 6.5 percent a year. .... In California, state general fund spending in the current fiscal year, which began July 1, is projected to fall to $73 billion from $78 billion the previous year. This week, Gov. Arnold Schwarzenegger will present a budget for the coming fiscal year that must address a projected shortfall of at least $14 billion. ... California has coped with its fiscal crisis with one-time budget gimmicks and deep cuts in spending on higher education, health care and numerous programs, from parks to the arts.

Even assuming these passages are factually correct, they are in some senses rather seriously misleading. Costs imposed by state regulation are for most purposes economically interchangeable with increased state spending. If one includes such regulatory costs, California's (for example) expenditures will probably continue to soar in 2004 - a year in which the Times focuses only on the decline in cash outlays. For example, in October Gov. Gray Davis signed a bill requiring many companies to provide health insurance for their employees or pay a fee into a state fund that will provide coverage for the workers. The costs have yet to be determined (or admitted), but very conservative estimates put the cost at $1,300 to $3,500 per employee annually, for each of the One Million employees covered. So what one might call "state regulatory expenditures" under this one law are very conservatively between $1.3 Billion and $3.5 Billion annually. That's quite a substantial de facto state expenditure increase for a state with that looming $14 Billion budget "shortfall" the Times laments. The theory seems to be that a direct state tax to pay for this program would cause the state to erupt and damage its economy, but if the same economic consequence is disguised and relabled as regulation those consequences can be avoided. So goes a major current liberal mindset: Word magic will set you free from economic realities and their political consequences. Unsurprisingly, an effort being made to repeal the law by referendum has already garnered over 600,000 signatures and is tied up in the courts.

This new health insurance law - which took effect January 1, along with about 900 other new laws passed by the state Legislature in 2003 - is by no means the only example of wildly escalating regulatory expenditures. One such new law was supposed to help control soaring workers compensation premiums, which are widely cited as the biggest burden to business in California. But that law is completely ineffectual - and the insurance companies have already indicated the law will result in essentially no reduction in premiums. Regulatory expenditures from the state- mandated workers compensation program will continue to rise dramatically unless something more is done.

In addition (but by no means in conclusion), on July 1 California will become the only state to provide paid family leave to workers for up to six weeks to care for an ill family member or a new child. The six weeks leave will be available every 12 months, regardless of a company's size. Employees payroll taxes for the state disability insurance program will rise by 0.08% or a maximum of $56 annually to pay for the program - such taxes are nominally assessed on employees, but like all such taxes are just another expense to the employer. Employers will be also be obligated to swallow the resulting lengthy worker absences. For all that, the payroll tax hike probably won't be enough to pay for the benefits and will lead to financial trouble for the disability insurance program - which is already overburdened and plagued by widespread fraud.

One could go on and on.

Do all these costs create more unemployment in California? Well, some indication of their combined effect can be gleaned from the fact that California's unemployment insurance trust fund has become so depleted that the state is seeking a $1.3-billion federal loan to prop it up.

I have noted in prior posts the anti-tax-cut crowd's complaint that the recent public income tax-cut discussion should never have focused on the laws effects on people who pay income taxes. Instead, that crowd (including, of course, Herr Doktorprofessor Paul Von Krugman) insists that the public discussion of a law reducing income taxes must always be couched in terms of people who pay any federal taxes. To do anything else, they and Herr Doktorprofessor maintain, is a lie. The huge expenses imposed on the economy by regulation are economically equivalent to "hidden" taxes and expenditures. But the anti-tax-cut crowd never want those hidden costs and taxes included in tax cut debates. In fact, all efforts even to formulate "regulatory budgets" accounting for the costs imposed by regulation are savagely opposed by the anti-tax-cut crowd.

MORE: Thomas Sowell has lots more on California's ongoing regulatory immolation of its own economy.