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Economic growth, deficit disasters, and public floggings
On the day he was named to his new state post, Tom Campbell spoke to alumni on California finances and the election’s outcome

| 10 November 2004

Just two days after the presidential election, Tom Campbell spoke candidly with a gathering of 50 Berkeley alumni about the consequences of that vote, as well as California’s political and economic situation. The keen interest in Campbell’s talk, one of the events in UC Berkeley Extension’s Marin Lecture Series, was heightened by that day’s news that he would be taking a leave from his position as dean of the Haas School of Business to try his hand at fixing California’s budget crisis as state finance director, a job he said he has committed to for the next two budget cycles.

In his talk, the Republican former congressman and state senator covered the current climate for business in California, the pros and cons of outsourcing jobs, the effects of raising the minimum wage, the impact of President Bush’s tax cuts, and the dangers of the growing national deficit.

“Economics is more psychology than science,” Campbell said. “How well our economy performs has as much to do with optimism as interest rates.” And for California business, there has not been much reason for optimism. Noting that a survey of business owners conducted by the Orange County Register last December ranked California 51st among states in which they would want to locate — with even Washington, D.C. faring better — Campbell speculated that the costs of workers compensation and energy are two of the primary culprits behind the survey results.

Potential for state coffers

While Campbell did not offer any ideas on fixing California’s workers-comp costs — which are triple neighboring Arizona’s — he indicated that the cost and availability of energy may both be improving. The state’s energy crisis of a few years ago effectively eliminated opposition to building new energy plants, he said, which has eased availability, while the state may yet be able to renegotiate expensive long-term energy contracts, reducing future costs. Campbell suggested that the state may also have grounds to seek treble damages from energy companies that violated the Sherman antitrust laws during the crisis — though he emphasized that litigation would be the responsibility of the state attorney general, Bill Lockyer. But the economist and former law professor (whose area of specialization has been antitrust regulations) made it clear that he is likely to urge Lockyer to pursue that option.

Campbell next outlined the positives he sees in the outcome of several California ballot measures, including changes in liability law, rejection of gambling initiatives and mandated employer health care, and funding for stem-cell research. From his perspective, these could all aid the state’s economy. Keeping consumer liability litigation in the hands of the state attorney general should help with the perception of California’s business climate. Rejection of the initiative to require employers to provide health care once they had more than 50 employees eliminates a potential barrier to job growth. The defeat of the gambling initiatives means the governor has a strong position for bargaining with California’s tribes for contributions to state coffers. And the billions of dollars approved for stem-cell research promises to make California the center for such research, not just in the United States but possibly the world, with a real potential for additional biotechnology growth and new startups.

With all of that, however, Campbell still sees the budget challenges confronting California as daunting. With $20 billion in state deficit spending, out of a total budget of $100 billion, he does not expect that making ends meet will be easy. New or expanded taxes will not be part of the solution, Campbell said. But with roughly 30 percent of the budget allocated by law to education, and repayment of debt obligations looming large, he knows finding places to cut will be tough.

Clear choices, distinct consequences

Having outlined the challenges of his new position and how he intends to meet them, Campbell turned his attention to the economic consequences of the national election. The policy differences of the two major candidates were clear on issues of outsourcing, taxes, minimum wage, and the deficit, he said. And, except for the deficit, Campbell sees positive harbingers for the economy in Bush-administration planning — echoing with approval the campaign slogan that “outsourcing is good for America.” Citing statistics on increased American productivity between 1995 and now, Campbell said the improvements were the result of companies being able to use the “cheapest methods of production.” But he also said the government should be providing “compassionate help for those who lose their jobs” by using trade adjustment assistance — transfer payments made to workers who will be hurt by the move to free trade — to expand job training.


John Edwards and John Kerry erred by not emphasizing jobs and the economy in their failed campaign, says Haas Dean Tom Campbell.
Increasing the minimum wage, which John Kerry pledged to do, is good for low-wage earners with jobs but bad for those without them, Campbell said, since higher costs to employers discourage them from hiring new workers. Increasing the earned-income credit to support low-wage earners would be fairer, he suggested, since the benefit to minimum-wage workers is the same, and it spreads the cost out among all taxpayers rather than placing an additional burden on employers.

Campbell also sees President Bush’s tax cuts as good for investment. Noting that the wealthiest 1 percent of Americans earn 15 percent of the national income yet pay 34 percent of the taxes, while the top 5 percent pay 50 percent of income taxes, he argued that the tax code remains highly progressive. But he conceded that Bush’s cuts have clearly contributed to “the huge growth” in the national debt.

“The deficit worries the bejeebers out of me,” Campbell said. He acknowledged that as a percentage of the economy the deficit is not as bad now as it was under President Reagan — running at 3.6 percent of GDP, as opposed to 6 percent then — but he sees it crowding out private investors and, more importantly, creating economic and political vulnerability for the U.S. The Reagan deficits were different, he said, because at that time foreign investors had nowhere else to put their money. With the euro outperforming the dollar in recent years, that is no longer true, Campbell believes. A decision by China, Japan, or OPEC to diversify their holdings to include the euro could lead to an immediate doubling or tripling of interest rates in the U.S., a potential economic disaster. China has already used that economic leverage for political purposes, announcing a week before elections in Taiwan that they were considering such a move — a clear effort, in Campbell’s view, to get the U.S. to squelch Taiwan’s inclinations toward independence.

Are deficits important? Campbell said he defected from the Democratic Party of his parents largely because the Republicans seemed to be the party of fiscal responsibility. But, he said, “Darned if it wasn’t a Democratic president who was the first to balance the budget.” And President Bush’s record of never having vetoed a bill suggests to Campbell that, for this administration, deficits may indeed really no longer matter.

Socially moderate fiscal conservatives may no longer matter to the Republican leadership either. “The [Bush team’s] strategy was not to get my vote,” Campbell said. “Karl Rove showed a new method” by going to the religious, conservative base of the party. “We’ll see [more of that strategy] in the future,” he predicted, “and I’m not happy about it.”

He had equally sharp criticism for the strategy employed by the Kerry campaign. Moral values, terrorism, and the economy were the things that voters identified as mattering most to them, yet Kerry and John Edwards ran on Iraq and Vietnam, not jobs — even though history shows that (until this election) every incumbent since the New Deal has been re-elected when joblessness was down and defeated when it was up. For missing the opportunity to make the election about jobs and the economy, Campbell suggested, John Kerry should “take his campaign staff out and publicly flog them.”

In most of his remarks, Campbell showed the affable humor and easy manner that won him many elections. Before taking questions from the crowd, he related an anecdote about his battle with the Cal marching band, which holds afternoon practices across the street from the Haas School’s faculty offices. Confronted not only with the daily distraction of the band striking up “Sons of California” but with a petition from faculty urging him to act, Campbell went to meet with the chancellor to see if band practice could be started later, to allow his faculty a few more hours to work. But by then the Cal football team had won its first several games and nearly beaten number-one-ranked USC. “I understand your problem,” Campbell recalled the chancellor saying. “But you’ll just have to start your day earlier.”

An annual series of five lectures by distinguished Berkeley faculty, the Marin Lecture Series was developed to give Berkeley alumni in Marin County the opportunity to hear first-hand from the campus about new ideas and current issues, as well as to strengthen their ties to Berkeley and fellow alumni. The 2004 speaker program concluded with Tom Campbell’s presentation; 2005’s schedule will be announced soon.