California dream, current edition

IN THE SWELTERING June of 1852, two years after California became a state and at the height of the Gold Rush, August Schuckman “came to the first sand desert” on the trail to the land of his dreams. It stretched for 41 miles. His wagon trek entered “at night and rode 19 hours in it”, Schuckman recorded in his journal. By the time they reached the next desert, the oxen died of thirst. “Thousands of cows, horses and mules were lying about dead,” Schuckman wrote. “The discarded wagons by the hundreds were driven together and burned.”

In his matter-of-fact tone, Schuckman, a German immigrant, described what many of the pioneers endured as they pursued the first incarnation of the California dream, a dream of El Dorado, of a Golden State. Hardship and risk-taking, hopes and crushing disappointments have been part of Californian lives ever since, through booms and busts, euphorias and depressions.

Indeed Mr Schuckman, one of hundreds of thousands who came to California during the Gold Rush, was so typical that he might have remained anonymous, had he not sired an impressive line of Californians. One of his grandsons was Pat Brown, governor from 1959 to 1967. Brown played a big part in defining that generation's California dream—a vision of prosperous middle-class living—by building many of the freeways and aqueducts that today connect and irrigate the vast and dry state, and by turning its public universities into some of the world's best factories for talent and innovation.

And one of Schuckman's great-grandsons is Jerry Brown, Pat's son. This Brown was one of California's youngest governors between 1975 and 1983. This year he again became governor—at 72, California's oldest. And, commencing his third term during one of the worst economic crises since the second world war, Mr Brown chose to quote from his immigrant ancestor's journal in his inauguration address.

In doing so, Mr Brown wanted to remind Californians to keep dreaming and enduring as August Schuckman had once done, and to put today's troubles in perspective. Yes, many Californians have lost their homes, jobs, health care and welfare services, Mr Brown implied. But they are not burning wagons and their lives will improve again, as Schuckman's did.

It is striking that such a reminder should even be necessary in a state that once symbolised optimism. But such is the Californian state of mind today. Superficially, California might still resemble its old self. In becoming governor this year, Mr Brown succeeded a former Hollywood star (Arnold Schwarzenegger), just as he did in 1975 (Ronald Reagan). The palm trees, surfers and redwoods are still there. So is Disneyland. But the state has, at least for the time being, ceased to be the world's dream factory.

Instead, California is now called a “dysfunctional”, “ungovernable” and even “failed” state. When Mr Brown began his first stint as governor, California had an AAA credit rating, the best there is. Today its rating is A-, the worst among all 50 states and not much better than “junk”. The boss of JPMorgan Chase, America's second-largest bank, last year told investors that he was more worried about California's solvency than Greece's. For three years and counting, California has been mired in a budget crisis. At its nadir, the state was paying its bills in IOUs instead of cash.

California is extremely unlikely to default on its bonds (if only because its constitution ranks bondholders ahead of everybody except schools to get paid). But it has already defaulted on the expectations and dreams of many of its citizens. Since the recession began, California has had to cut its spending by more than the size of the entire budget in most states. And it will have to cut a lot more.

Behind these cuts is human hardship—poor families who will no longer get subsidised child care to allow the parents to work, old and sick people who no longer receive visits from carers, pupils who sit in larger classes and get less attention, young people who can no longer afford to pay the higher tuition fees of the state universities. And things will get worse before they get better. California will face structural deficits of about $20 billion a year for quite a while, according to Mac Taylor, the state's non-partisan legislative analyst.

The immediate cause for this cataclysm was the recession. The housing bust and foreclosure crisis struck hardest in the “sand states” of the south-west—California, Nevada and Arizona—and in Florida. At 12.2% as of February, California now has the second-highest unemployment rate (after Nevada) of all American states, compared with a national figure of 8.8% in March.

At first blush, the current crisis might appear to be just another iteration in the endless Californian story of boom and bust. To count just the gyrations since Mr Brown's previous governorship, there was the defence boom of the 1980s that made swathes of southern California (an aerospace centre at the time) prosper, which turned into a bust (the “peace dividend”) in the early 1990s from which the region never fully recovered. There followed the dotcom boom in the late 1990s, which promised to make silicon the new gold in the San Francisco Bay Area. It became the dotcom bust after 2000. Then came housing.

Culturally, Californians seem to accept such feast-or-famine living more than others. Their northern neighbours like to remind visitors of the famous fork (somewhere in today's Idaho) in the Oregon Trail that led the wagon trains to the Pacific coast. The builders and settlers, goes the story, followed the Snake and Columbia rivers and became Oregonians and Washingtonians. The gamblers and risk-takers turned south on the California Trail over the Sierra Nevada, ready to strike it big or not at all.

Indeed, California even today amplifies its boom-bust cycles. Consciously or not, it has built a tax system that is not only incomprehensible to its citizens but unusually volatile, relying disproportionately on income taxes, and especially on the capital-gains taxes of its wealthiest residents. When times are good, taxes spout. When times are bad, revenues disappear. The state, constitutionally barred from running deficits (as the nation as a whole may), thus expands and contracts in an automatic and anti-Keynesian wave pattern that exaggerates ups and downs.

But to conclude from this history that California merely needs to wait for the economic tide to turn once again would be disastrously wrong. Warren Buffett, renowned as much for his aphorisms as for his investing, has said that “you only find out who is swimming naked when the tide goes out.” And each ebb during the three decades since Mr Brown's first reign has revealed California less dressed than before. Each flood then briefly restored its modesty. But this latest ebb has shown the state to be stark naked.

The rip tide of democracy

That nakedness, the result of a gradual stripping over decades, has nothing to do with housing or foreclosures or internet shares. Nor is it the fault of individual governors. Instead, it has to do with governance. For what is unique about California is not its set of challenges (pupils, pensioners, prisoners, to list just the Ps), which differ in scale but not in kind from those elsewhere. It is its brand of democracy, as this special report will show.

California's democracy is not at all like America's, as conceived by founders such as James Madison. The federal constitution is based on checks and balances within and among three and only three branches of government—executive, legislative and judicial. That is because Madison feared that popular “passions” would undo the republic, that majorities might “tyrannise” minorities, and that “minority factions” (ie, special interests) would take over the system. America's was therefore to be a representative, not a direct, democracy. “Pure democracies have ever been spectacles of turbulence and contention,” Madison wrote, “and have in general been as short in their lives as they have been violent in their deaths.”

This notion did not travel well to the vast emptiness of America's frontier. The likes of August Schuckman were rugged individualists who trusted themselves more than any representative to run their affairs. So they instinctively embraced a direct and participatory form of democracy which they imported (with consequential alterations) from Switzerland, adding a fourth branch of government to the three existing ones.

For much of the 20th century the resulting governance structure did no harm because voter initiatives were used sparingly. But then, starting in 1978, the culture and system mutated. Jerry Brown was governor when Californians passed Proposition 13, ostensibly an anti-tax measure but in reality a fundamental constitutional change with vast, and mostly unforeseen, consequences. It led to hundreds of ballot measures as citizens increasingly legislated directly and in tense competition with their own representatives.

This special report will chronicle how such voter legislation stripped California naked, leaving it unable to respond to external shocks such as the current economic crisis. This story is of global interest, for California has inadvertently made itself a negative model for other democracies. As Nathan Gardels, an adviser to the Think Long Committee for California, a new and promising reform effort, puts it, California has become a “diet-Coke civilisation of consumer democracy, of services without taxes, like sweetness without calories, of rights without duties”.

What is unique about California is not its set of challenges, which differ in scale but not in kind from those elsewhere. It is its brand of democracy

California thus stands as a rare, and perhaps unique, counterpoint to the many countries whose main problem is a lack of democracy. At a time of turmoil in the Arab world, California is a reminder that democracy, like capitalism, can take many different forms, and that it is intended as a means to an end, the end being liberty. Should it ever mutate into a counterproductive form, reform becomes necessary.

Fortunately, such reform has now become not only possible but likely. For the state retains a potential unsurpassed elsewhere. It has the most diverse population and economy in America. From Stanford and Apple to Hollywood, it is a magnet for talent, which is why venture capitalists invest about as much money in California as in all other states combined. Californians still have the imagination and frontier spirit that August Schuckman once had. And they know that sometimes one must burn the wagons to keep dreams alive.

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