Bad economic lessons from New York and California

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Politicians love to talk about expanding exports as an economic plus. But growth in at least one kind of export is a clear negative: people.

Individuals, including entrepreneurs and investors, follow economic opportunity. If that opportunity is being restrained or squashed by costly public policies, then chances are pretty good that a state will be a net exporter of people.

Two states — New York and California — have ranked as the nation’s top exporters of people for quite some time now, and judging by proposals offered by their governors, they have no clue how to stop exporting people, never mind becoming people importers.

Between 1990 and 1999, for example, New York came in second worst in the nation, losing 1.9 million people in terms of net domestic migration (that is, the change in population less births, deaths and international migration). In the following decade, from 2000 to 2009, New York ranked as the worst state, losing 1.7 million in net domestic migration. New York maintained its biggest loser position in 2011, with -90,342 in net domestic migration. (The Census Bureau did not provide 2010 data.)

As for California, no other state drove more people away from 1990 to 1999, with -2.2 million in net domestic migration. Over 2000 to 2009, California registered second worst, with a loss of 1.5 million people to other states. Last year, California managed to come in only third worst, behind New York and Illinois, with a net domestic migration loss of 50,684.

It’s important to understand that just because California and New York rank first and third, respectively, in state population does not dictate such high levels of population losses. For example, Texas and Florida, the second and fourth largest states, were big net gainers in terms of net domestic migration.

Quite simply, significant numbers of people wanted to move to Texas and Florida, and move away from California and New York. It’s no secret why. Texas and Florida welcome people, businesses and investment, while California and New York punish people, businesses, and investment. On the 2011 “Small Business Survival Index,” which ranks the states according to their public policy environments for entrepreneurship and investment (I write this report for the Small Business & Entrepreneurship Council), New York ranked 50th and California 46th, while Texas came in third and Florida eighth.

Taxes, regulations and the overall size and scope of government are far too burdensome in both New York and California. Unfortunately, New York Governor Andrew Cuomo and California Governor Jerry Brown are pushing economic development schemes based on even more government activism, while increasing burdens on entrepreneurs and investors.

In December, Governor Cuomo announced $785 million being spent statewide on so-called economic development projects. He loftily declared, “For the first time, we are putting the power of the state government behind the innovation of our people, giving them the tools to rebuild our economy.” But the list of projects is the same old story of government doling out grants and subsidies for politically preferred efforts and entities.

In his January State of the State, Cuomo emphasized additional subsidies for select businesses, increased spending on infrastructure, a massive convention center at Aqueduct Racetrack in Queens, and expanding gambling beyond Indian-run casinos, with state government in on the potential take.

Meanwhile, Cuomo abandoned his no-tax-increase pledge, raising income and capital gains taxes at the start of 2012 by 29 percent on high-income earners, with barely measurable cuts tossed in as bones to lower-income earners.

On the opposite coast, Governor Brown uses the same playbook. A document from the governor’s office titled “2011: Milestones and Accomplishments” highlighted $757 million in subsidies to certain businesses, along with public funding for various projects, such as a high-speed rail and the 2013 America’s Cup yacht race in San Francisco.

At the same time, Brown wants voters to approve $6.9 billion in annual new taxes, including an increase in the sales tax and hiking the top income tax rate to 12.3 percent, which would be the highest state rate in the nation.

Governors Cuomo and Brown fail to understand that government sucking up and doling out dollars to subsidize convention centers, fast trains and yacht races are not the genesis of economic growth. After all, if economic development and job creation actually came via government spending, subsidies and pouring concrete, then places like New York and California would be importing, rather than exporting large numbers of people.

Real economic growth and job creation come from entrepreneurs, businesses and investors being free to take risks and compete. Government hurts this process by having politics replace market-driven decisions, or by draining resources away from productive private-sector efforts through high taxes, only to be wasted by politicians. That’s an agenda for exporting businesses, capital and people elsewhere.

In the end, New York and California serve as unfortunate examples for the rest of the nation as to what not to do in terms of economic development.

Governor Brown signed legislation establishing a Governor’s Office of Business and Economic Development, nicknamed GO-Biz. New York should do the same. After all, given the misguided policies in New York and California, “GO-Biz” is a fitting message to GO somewhere else to live, work and do business.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.