May 19th 2009

California Dying

Berkeley - While the new Obama administration is commanding global attention, America's future may be written - as so many times before - in and by its largest state. Once the lodestar for American optimism and achievement, California now illustrates the difficulties confronting the United States - and how much more can still go wrong domestically.

The most populous and wealthiest of America's 50 states, California has long been a beacon of opportunity for talented and enterprising people from all over the world. One in every four California residents was born in a foreign country. California's two most famous industries, Silicon Valley and Hollywood, depend on infusions of talent from abroad. Its robust agricultural sector is a massive exporter of food, benefiting from the growing appetites of consumers in developing countries.

Yet California's technological and entrepreneurial might - standing alone, the state would be the world's eighth largest economy - coexists with a dysfunctional political system that has brought it to the edge of fiscal bankruptcy. On May 19, the state's voters, in a special election, rejected an array of tax increases and spending cuts required to balance its budget. Now, California faces either an embarrassing federal bailout or a prolonged period of rule by judges, who under California law have the power to vacate labor agreements, abrogate contracts, and generally restructure the state's financial commitments.

For President Barack Obama, California's crisis imperils his own reform agenda. Because other American states also face tough fiscal conditions, the political price of bailing out California may be bailing out dozens of other states too.

A massive state bailout, while adding enormously to pressure on Obama's government, would expose the weak link in the US system of governance. So-called "unitary" nations such as Britain, France, China, or Kenya, essentially have a single set of government obligations: one national police force, one employer for all public school teachers, one overall pension system, etc. By contrast, the US has an "asymmetric" form of government, which allows many overlapping government entities - 7,000 in California alone - to incur debts, hire and fire employees, and impose taxes.

Making sense of these asymmetries is difficult. When financial markets concentrate on the fiscal health of the federal government, they miss the extent of government obligations as a whole.

The complexity of American governance threatens the benefits of Obama's decision to stimulate the economy through deficit spending. While the national government expands, state governments, such as California's, contract.

Moreover, California's crisis is more than an economic one. California is the most diverse US state; more than half of its 37 million people are non-white. For believers in the benefits of diversity, California represents the largest social experiment in human history, bringing people of different backgrounds together in a way unimaginable in, say, Germany, China, or Brazil.

California's governor, Arnold Schwarzenegger, was an immigrant (from Austria) before he was a movie star. In his six years in office, he has repeatedly tried to bypass a polarized state legislature - even the annual budget requires a two-thirds majority - by appealing directly to voters. Ballot initiatives were created 100 years ago to empower ordinary citizens, but in recent decades the process has been captured by self-serving elites.

Even as California's roads fall apart and public institutions decline - the result of too little spending and public workers who are too expensive - the state continues to operate the finest set of public universities in the US. But the secret of the University of California's success is its ability to obtain ever-higher amounts of funding from private sources and the federal government.

Disengagement from the California polity also is true of the state's economic engines. Intel, the world's biggest chip maker and a Silicon Valley mainstay, hasn't built a factory in California for more than 20 years. Hollywood shoots an increasing number of films elsewhere. Agriculture relies heavily on illegal workers from Mexico, who live temporarily near the fields and take their earnings back home.

How to forge a single community out of a state so diverse remains an elusive challenge. Some influential people, including Schwarzenegger, say the state needs a new constitution that would restrict ballot initiatives and make budgets easier to pass. More radical thinkers insist that California is ungovernable and should be broken into two or even three states.

Creating more Californias would of course require the approval of the federal government in Washington, where elected representatives from California - mainly from Obama's Democratic Party - have more power today than at perhaps any time in US history. Nancy Pelosi, the House majority leader, is from San Francisco. Californians run the two most powerful House committees, Energy and Commerce and Education and Labor. Two of the most influential senators also come from California.

Why these Washington politicians are idle while their state slides towards ruin says much about what's broken in American politics. Schwarzenegger is a Republican, so Democrats privately wish him to fail. There's a deeper problem: politicians across the spectrum, beholden to special interests, are habituated to denying serious problems.

Obama will be forced to help craft a compromise to keep the state financially afloat. Yet as a condition, he may insist that Californians, who are already among the most heavily taxed Americans, pay more. If Californians refuse, Obama could face a widening revolt - against the idea of expanded government as the chief response to what ails America at home.

Copyright: Project Syndicate, 2009.

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