Ronald Grant Archive

IT TURNS out that the only way to negotiate a budget for the world's eighth biggest economy is to issue politicians with toothbrushes and lock them in a building. California's legislators have spent the past three months debating how to fill a $42 billion fiscal hole. Officials have given warning of fiscal Armageddon, bureaucrats have been forced to take unpaid leave and Arnold Schwarzenegger, the state's governor, has accused members of his own party of innumeracy—all to no avail. But a few nights of indoor camping seems to have concentrated minds.

As The Economist went to press a Republican senator appeared willing to cast a decisive vote in favour of the budget, which requires the approval of two-thirds of legislators. The process has been messy, but revealing. Investors sometimes say that recessions help to reveal flaws in business models. This one has exposed deep cracks in the state of California.

The immediate cause of the budget crisis can be traced to Wall Street. California depends on income taxes for almost half of its revenues (see chart). Its tax code is so progressive—that is, rich-soaking—that in 2006 the top 1% of earners paid 48% of all income taxes. Since the wealthy derive much of their income from bonuses, capital gains and stock options, the state's fortunes rise and fall with the markets. California's economy is as wide and deep as the ocean, but much of its revenues come from froth. That froth has simply blown away.

The sudden loss of revenues would not be such a problem if public spending had been kept under control. But whenever the state receives an “April surprise” of unexpectedly high income-tax receipts, as it did during the roaring middle of this decade, it ratchets up spending on public services. This is largely the fault of the liberal Democrats who dominate both houses of the legislature. But not entirely. It was voters, for example, who by means of ballot initiatives insisted that the state spend more money on schools and stem-cell research. Pet conservative causes have forced up spending too. In the past 20 years the number of state prison inmates has risen from fewer than 80,000 to more than 170,000.

Yet the biggest enemy of fiscal responsibility is California's political culture. Thanks to a bipartisan yen for gerrymandering, virtually all electoral districts are safely Democratic or safely Republican. So the only elections that count are the primaries, which tend to favour the pure of ideology. Republican candidates promise never to raise taxes; Democrats pledge allegiance to the environmental movement and the teachers' unions. Not surprisingly, the politicians generated by such a system agree on little. “They belong to different universes,” says Allan Hoffenblum, a Republican consultant.

One of the few moderates is Abel Maldonado, the Republican state senator who appeared most likely to break with his party's anti-tax orthodoxy. In return for supporting tax increases Mr Maldonado wants support for a ballot initiative that would reform the primary system, making it more hospitable to people like him (ah, to hold the deciding vote at such a time). He may get his way, although his initiative is probably doomed. Every special-interest group that benefits from the current system, of which there are many, would fund the campaign against it.

A deal on the budget would avert impending catastrophe. California has already delayed tax refunds and payments to state contractors. Work on roads and bridges has virtually halted. Cities and counties are preparing to sue the state government for money owed to them. Earlier this month Standard & Poor's downgraded California's bond rating, which was already as bad as Louisiana's, to the worst in the nation.

Even if a budget is signed it will not be the end of the matter. The books will not balance unless California's voters permit the state government to raid programmes for children and the mentally ill which they had previously created through ballot initiatives. Voters must also approve changes to school funding and permit the state to borrow $5 billion against the future proceeds of the lottery. If they fail to do so—and the lobbying against some of the changes may be fierce—taxes will have to rise further and the budget may have to be reopened.

The mess in its biggest state is bad news for the nation. As he signed his stimulus bill this week Barack Obama declared “the beginning of the end” of the recession. Yet if California's budget passes, one in eight Americans will suffer a mood-lowering rise in their sales and income taxes. They will pay almost twice as much to register their cars, and 12 cents per gallon more to fill them up. Take that, Mr Obama.