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“Under the tarnish, still golden; Statewatch: California.” The Economist. April 4, 2009 U.S. Edition []

Its economy is dismal, its politicians worse. But nowhere can reinvent itself so capably as California PITY California. Not only must it endure an epidemic of foreclosure, a 10.5% unemployment rate and the lowest bond rating of any state. It is also suffering a critical assault. In the past few weeks Forbes, Fortune, Newsweek and the Wall Street Journal have all published scathing reviews of California. Even this newspaper has called it ungovernable. Although many other states have been knocked by the recession, none has been kicked so enthusiastically while down. The most trenchant critic is Joel Kotkin, an urbanist at Chapman University. Mr Kotkin, who defended California during the early 1990s recession, now believes it is decaying. In his view, the state has been captured by environmentalists and slow-growth zealots who are stymieing house-building and running down dirty industries like agriculture and manufacturing. They are turning California from a place of working- and middle-class opportunity into a playground for the rich and a trap for the poor. Criticism from academics and journalists is one thing. But residents seem to agree. The latest poll by the Public Policy Institute of California reveals a state ill at ease with itself. Fully 77% of likely voters believe it is on the wrong track. Arnold Schwarzenegger, the governor, may be admired outside the state, but only 33% of Californian voters think he is doing a good job. He fares better than state legislators, whose positive rating is just 11%. California has great problems, many of which are likely to intensify over the next year or so. But not all the charges levelled at the state are fair, and most of the critics have overlooked some crucial strengths. Even in a downturn it retains mighty economic advantages. It quietly plays a vital role in shaping American society. When the recession releases its grip, its strengths will again become apparent. Underneath the tarnish, the state is still golden. One charge is wholly accurate. California's politics have been dysfunctional for a long time and are getting worse. A particularly precise gerrymander in 2000 left virtually every political district safe for either Democrats or Republicans. As a result, most races are decided by the ideological purists who turn up to vote in party primaries. This means a Democratic caucus in thrall to the teachers' unions and environmental activists and a Republican posse that believes there is hardly an economic or social problem that cannot be solved by slashing taxes. Mr Schwarzenegger came to Sacramento hoping that the two camps would bond over cigars in his smoking tent. They are farther apart than ever. Such political dysfunction is especially painful when one considers California's past triumphs. By the late 1960s the state had built a vast system for moving water, turning the semi-arid Central Valley into the world's most productive farmland. It had created a chain of superb universities. In Los Angeles it pioneered a motorway-oriented, low-rise, multi-centred urban model which has become the template for many other cities in the West and beyond. It is a tough, perhaps an impossible, act to follow. If California fails to live up to its glorious past, so does every other state. Yet it is worth remembering that the golden age was not equally delightful for everyone. Many cities enforced rigid racial segregation. People buying homes in southern California are still occasionally surprised to encounter deeds banning sales to blacks and Hispanics, which must be waived. Segregation helped create vicious ghettos ruled, barely, by paramilitary-style cops. All that has changed dramatically. Los Angeles, which the rapper Ice-T dubbed "home of the body bag" in 1991, is now one of the best-policed cities in America. Last year it recorded only a shade more violent crime per person, and much less property crime, than smug Portland in Oregon. Even with more than one in ten people out of a job, the drop in crime continues. Hispanics and Asians are expected to account for nearly all of California's population growth by 2020 (see chart). But not all the newcomers will stay within its borders. One way of looking at the state is as a kind of human-processing machine. It sucks in immigrants from Asia and Latin America, turns them into Americans and then disgorges some of them, along with many natives, across the country. It is not an easy task. The mass migration of unskilled labourers from Mexico and El Salvador helps to explain California's notoriously poor schools, although it certainly does not excuse them. Break down pupils by race, and the state's schools get results as good as (or, more accurately, as bad as) those in Utah. The relentless flow of immigrants and ethnic groups into and around California has led to some ugly, racially tinged clashes. But there is a great deal of muddling along too. Listen, for example, to the extraordinary collision of Spanish and English, of Hispanic, black and Anglo musical traditions, on Latino FM, 96.3 on the Los Angeles radio dial. Californian Asians have created a new culture by mixing Chinese, Japanese, Taiwanese, Korean, Vietnamese and American cultures. California's businessmen chafe under too many regulations, some of them created with the laudable aim of protecting the environment. Small operators are being pinched by rises in sales and income taxes designed to balance the budget. Sensing discontent, cities like Denver are trying to lure businesses away from California. This is a worry but also, as Jack Kyser of the Los Angeles County Economic Development Corporation points out, a compliment. Of course others are coming to California in search of talent: that is where much of it is. Nobody has yet succeeded in breaking California's dominant position in two industries. The first is technology. Silicon Valley attracted 39% of all venture capital in America last year. It remains the heart of an industry that has become more dispersed, stretching from Boston and Texas to India and Israel. And nowhere can match the Valley for restless innovation. David Crane, who advises Mr Schwarzenegger on the economy, calls it "ground zero for creative destruction". The second, rather less glamorous, industry is international trade. The ports of Los Angeles and Long Beach are America's biggest. In 2007 they handled more than half the containers entering America, Canada or Mexico from the west. When trade is brisk, the ports support a vast transport and logistics industry and even some light manufacturing (Los Angeles County alone has more manufacturing jobs than Michigan). This twin economic engine is sputtering now, thanks to the collapse in consumer spending and, with it, world trade. But expect it to start humming again as soon as the economy recovers. California is not suffering economically because it has failed to provide jobs and build houses for people of modest education and average means. It is in trouble precisely because it has been so successful in doing so. As trade through the ports boomed in the middle of this decade, so did house-building. Between 2000 and 2008 the Inland Empire, a sprawling two-county area east of Los Angeles, added an astonishing 840,000 residents. Many were Hispanics buying property for the first time. Far from dying, the California dream thrived in the desert. The trouble was that the new residents could not really afford their houses. As prices began to fall and mortgage rates were reset, places like the Inland Empire began to suffer. A whirlwind of foreclosures demolished property values, pitched more than 150,000 builders out of work across the state, wrecked bank balance-sheets and eventually contributed to a worldwide recession. The trouble has now spread far beyond subprime mortgages. The damage has not been limited to California. Arizona and Nevada have seen similar rates of foreclosure as well as deeper job losses and bigger budget deficits. Jobs have also vanished from former economic hotspots such as North Carolina and Florida. California thus finds itself in excellent company. Although it has been extremely painful, the collapse of California's property market has solved a major problem. It was largely thanks to overpriced housing that the state lost almost half a million residents to other states between 2004 and 2008. But property prices in southern California have fallen by 39% from their peak, according to the S&P/Case-Shiller 20-city index, while prices in the Bay Area are down by 43%. As a result, estate agents report some signs of recovery in demand if not in prices. And those who buy will be inclined to stay. The state will soon get a chance to resolve some of its other problems. Last November, by the narrowest of margins, voters agreed to allow a committee to redraw the political boundaries. When that happens, in 2012, politics should become slightly less partisan. An even bigger opportunity for reform will come next year, when voters will be asked to approve the creation of open primaries. That measure is on the ballot only as the result of a late-night deal in February. With no budget agreed and with the state facing fiscal oblivion, a lone state senator was able in effect to request a rewriting of the state constitution. All rather messy, but this is how California works. The state is restless, chaotic and experimental. Few places make as many mistakes as California; fewer still have the capacity to recover from them so quickly. As John Husing, an Inland Empire economist, puts it: "California is made up of people who don't know what it is they are not supposed to do."