The Stanford economics professor suggests taking a three-pronged approach.

Question: What are three things California should do to fix the economy? (Dan Indiviglio, The Atlantic Business Channel)

John Taylor: Three things California should do to fix its economy. I think first you've got to recognize, California has enormous potential. It has -- it's a great environment, it's very open to new ideas; Silicon Valley. It's got great universities; both the University of California and the private universities. So, the potential is tremendous.

What we really need to do in California is to deal with the serious budget problem, which means spending grows too much, and then taxes rise and that tends to drive out businesses and ultimately is harmful to the state. So, I'd say number one in terms of the question is put some limit on the growth of spending; population growth plus inflation is one way to do it. That would prevent the ups and downs, and the deficit spending usually rises when the tax revenues rise and then tax revenues fall off and you've got this huge deficit. So, control the growth of spending is number one.

Number two, put in some tax reforms that prevent the ups and downs in revenues to be so great. And here we've got a huge cyclical performance in tax revenues. So, I would adopt some of the proposals of the recent California Tax Commission that Governor Schwarzenegger introduced.

And third, education; K-12 it’s slipping in California. I think it's not a matter of spending; a lot is spent in California. It's really demanding more accountability. I'd like to see a program where there's more for teachers and less for administration. I think that would do a lot of good.

Recorded on December 21, 2009