Learn from new Jersey's mistakes

William McGurn begs President-elect Obama to learn from the mistakes that New Jersey has made in ruining its economy. New Jersey should be learning from its adventures in high taxation, but probably that lesson is lost on Governor Corzine and the legislature there.

In some ways, we are a mini-California. That is to say, where New Jersey was once a national leader in terms of economic growth and job creation, more recently we have become a national laggard.

It seems not to have dented the consciousness of our political class that New Jersey's dismal economic performance might be linked to the state's tax policy. According to the nonpartisan Tax Foundation, New Jersey is home to the most hostile tax environment for business in the nation. We also bear the nation's highest burden of state and local taxes. And on the list of the 10 counties with the highest median property tax, we claim seven of them.

During the last recession, we began to feel the full weight of these burdens. Other states responded by cutting back on spending and getting their houses in order. Not New Jersey. Then-Gov. Jim McGreevey added to the burden by borrowing and spending and raising the corporate tax -- including the imposition of an alternative minimum tax on business. And we've been paying for these bad choices ever since.

Mr. Obama might pay special attention to what these measures have meant for jobs, especially given his expressed concern for the struggling middle class. Though the state did ultimately emerge from recession in 2003, private-sector job creation since then has been a pale shadow of what we enjoyed after the recessions of the 1980s and 1990s.

Of course, there was one area where jobs did grow. From 2000 to 2007, says the New Jersey Business & Industry Association, the government added 54,800 jobs. To put that in proper perspective, that works out to 93% of all jobs created in New Jersey over those seven years.

It should be a fairly simple rule to learn that, if over 90% of your new jobs are government jobs, your economy isn't going to grow. Obama should pay attention to such a rule as he mulls over the possibility of saving the economy through public works projects. As Jim Powell, author of FDR's Folly, reminds us, public works projects have some inherent problems that prevent them from boosting the nation's economy as hoped.

First, "stimulus" spending is temporary, and, as such, has a very limited impact on people's spending habits. As Nobel laureate Milton Friedman explained, people generally base their spending habits on their anticipated stream of income - their regular paychecks. The one-time "stimulus" checks mailed out earlier this year had negligible impact on the economy. Public works projects are unlikely to do any better. And the money that government gives to some people comes from taxing other people, borrowing money (which must be repaid from future taxes) or inflating the currency (another kind of tax). People take this into account when making spending decisions.

Second, "stimulus" spending, particularly the kind of unprecedented program that Mr. Obama is calling for, tends to distort local spending priorities. For instance, Mr. Obama has suggested making money available to upgrade computers at schools. Schools will probably apply for computer-upgrade money rather than have it go someplace else, even if they don't need it and would spend any extra money differently.

Third, there is waste because people tend to be less careful with other people's money than they are with their own money. Members of Congress are so careless with other people's money that they often don't even read the spending bills they vote for. Every year, the U.S. Treasury reports "unreconciled transactions" - billions of dollars of expenditures with little to no documentation or explanation. Maryland, for instance, lost track of more than $80 million received from the federal government.

"Stimulus" spending is also likely to involve waste because government is a high-cost intermediary in transferring money from one group to another. Government overhead absorbs a hefty percentage of revenue collections so $1,000 of tax revenue doesn't mean $1,000 will be available for "stimulus" spending. This overhead includes 2.6 million federal employees, of which the Internal Revenue Service alone employs 100,000.