â€œWeâ€™ve been living in Fantasyland,â€ incoming California Gov. Jerry Brown announced in a December forum on the stateâ€™s dire budget situation. â€œIt is much worse than I thought. Iâ€™m shocked.â€

Amid lengthy budget crises and nationwide snickering, you might not think anybody in the Golden State could still be shielded from harsh reality. After all, spending for the current fiscal year is a mere $86.6 billion, only $300 million more than in the previous yearâ€"an increase former Gov. Arnold Schwarzenegger described as â€œessentially flat.â€

State spending is down almost $20 billion from its 2008 level, but thatâ€™s still not nearly enough to get Sacramentoâ€™s fiscal house in order. In December, less than two months after signing a putatively balanced budget that had initially come in with a $19 billion deficit, lame duck Schwarzeneggerâ€"supported by Gov.-elect Brownâ€"convened an emergency session of the legislature to close an additional $6 billion gap that became apparent after the budget was enacted. Evidence for Californiaâ€™s looming insolvency is all around: a state of fiscal emergency in Stockton, a potential municipal bankruptcy in Los Angeles, a government bond rating that is the worst among the 50 states, unfunded pension obligations that could run as high as $500 billion over the next decade.

Since the 1990s, California has gone from being a net gainer to a net loser in interstate migration. In its latest census results, its population growth was nearly flat relative to the nation as a whole; for only the second time in history the state will gain no congressional seats.

So who is living in Fantasyland?

Say hello to Democratic Assemblyman Gil Cedillo, a career politician based in Los Angeles, who returned to the Assembly this year after losing a race for the U.S. House and getting termed out of his state Senate seat. The same month that Brown was lifting the curtain on Fantasyland, Cedillo filed a claim with the California Victim Compensation and Government Claims Board. The stateâ€™s independent salary-setting commission for public employees, Cedillo complained, had unfairly cut his pay as a state senator in 2009â€"when the stateâ€™s unemployment rate hit a then-record 12.2 percent (it has since increased to 12.4) and the budget deficit was nearly $60 billion. If Cedillo doesnâ€™t get his back pay (more than $20,000, plus various benefits), he is threatening to file a lawsuit.

Also following the Lucy van Pelt principle that Christmas is gift-getting season was the union for San Franciscoâ€™s bus drivers, the second most highly remunerated transit employees in the nation. When the deficit-plagued San Francisco Municipal Transportation Agency tried to eliminate a $3,000-per-worker Christmas bonus in December, Transport Workers Union Local 250-A brought in its own lawyers. â€œThe MTA has a legal obligation,â€ the unionâ€™s president, Rafael Cabrera, told the San Francisco Chronicle. â€œThe attorneys are involved, and itâ€™s going to be a legal fight.â€

Cedillo and the bus drivers are not necessarily deluded about the stateâ€™s poor fiscal condition. People collecting taxpayer dollars know better than the rubes theyâ€™re fleecing that an apple only has so many bites.

But how do you explain the dissociative fugue state of MarketWatch.com columnist Brett Arends, who gave the Golden State a gold star for fiscal responsibility in a late November column titled â€œThe Truth About California: Maligned State Is Actually Saving the Rest of Usâ€? Launching his argument with a welcome insightâ€"that California remains a large state with good weather and clever peopleâ€"Arends goes on to posit that all this bad news is just pettifogging by conservative pundits. â€œCalifornia bashing is everywhere these days.â€ he writes.

The column is a masterpiece of decontextualization posing as perspective. Think Californiaâ€™s 10.5 percent state and local tax burden sounds high? Arends is here to remind you that this is only the sixth most punitive tax rate in the country. Later, Arends notes that California companies capture a larger percentage of venture capital now than they did a decade ago. He neglects to add that the current U.S. total, at $17 billion, is less than a fifth of what it was at the peak of the dotcom boom.

The column won applause. Brown and Schwarzenegger both tweeted it with approval. Just before Christmas, State Treasurer Bill Lockyer, along with Stephen Levy of the Center for Continuing Study of the California Economy, repeated Arendsâ€™ claims in a Los Angeles Times op-ed bearing the less-than-encouraging title â€œCalifornia Isnâ€™t Broken.â€

The stateâ€™s newspapers strain after blips of good news. A slight uptick in new private-sector hires late last year (after years of decline) and a brief easing in new mortgage delinquencies in late 2009 (subsequently reversed) were both seized as evidence that California, without having made any structural changes, was entering a period of economic recovery. Maybe this Micawberesque optimism is a reflex of cultural memory in a state where history has been driven by both real and metaphorical gold rushes.

But these days, even gold rushes are getting harder to conjure. Two mining companies have been trying without success to reopen the untapped mineral veins at Grass Valley and Sutter Creek, estimated to hold about $1 billion worth of undiscovered nuggets. Emgold, which has its eye on Grass Valley, has been dealing with paperwork, environmental regulations, and NIMBY challenges since 2003. When I spoke with Emgold CEO David Watkinson in November, he cited, among other reasons for the delay, the stateâ€™s immensely burdensome regulatory structure. â€œThe investment community looks pretty negatively on California,â€ he said. â€œItâ€™s very hard for businesses to do work here. Not just mining. Any industry or manufacturing.â€ Watkinson warns that while California remains unusually hostile to business, â€œthe rest of the country is catching up fast.â€

There is a bright spot: California provides a pure test case of interventionist economics in the United States. With effective one-party rule under the Democrats, the most restrictive environmental laws in the country, a rapidly growing public sector, and regulations on virtually every aspect of human behavior, the Golden State is the perfect laboratory for the managed economy the rest of the country rejected in November.

When the experiment inevitably fails, perhaps the self-defeating mind-set that created it will finally dissipate. Or that hope may prove to be the biggest fantasy of all.

Tim Cavanaugh is a senior editor at reason.