It seems appropriate that the city where America’s movies are made has enjoyed such a dramatic trajectory. Los Angeles began the twentieth century with barely 100,000 residents. By century’s end, 4 million people were living there, making it the nation’s second-largest city, while another 6 million were occupying the rest of Los Angeles County.

But in the new century, Los Angeles has begun to fade, and it can’t blame its sorry condition on the recent recession. The unemployment rate is one of the highest among the nation’s largest urban areas. Streets are potholed. Businesses and residents are fleeing. In virtually every category of urban success, from migration of educated workers to growth of airport travel, Los Angeles lags behind not only such fast-growth regions as Dallas, Houston, and Raleigh-Durham, but also historical rivals like New York.

Perhaps worst of all is the perception, both here and elsewhere, that Los Angeles no longer matters as much as it once did. “I’ve traveled the world, and there was once a great mystique about L.A., but it’s gone,” says Robert Hertzberg, a former mayoral candidate and onetime speaker of the California State Assembly. “And I look at the leadership, and it’s gone. No one much cares.”

Such pessimism, commonly heard these days, is an unwelcome development in a city that once epitomized the promise of twentieth-century America. L.A.’s greatness stemmed from its willingness to be different. Other New York rivals—Chicago, Denver, Kansas City—tried to turn themselves into mini-Manhattans. The Los Angeles metro area, by contrast, was boldly designed not around a central core but on a series of centers, connected first by railcars and later by the freeways: Pasadena, the San Fernando Valley, West Los Angeles, Culver City, Burbank, West Hollywood, and others. Los Angeles was also one of the first cities in the nation to impose comprehensive zoning.

The result was what the early-twentieth-century clergyman Dana Bartlett called “a better city,” a dispersed metropolis where most people occupied single-family houses in middle-class neighborhoods. Here, said geographer J. Russell Smith, the differences among “city life, suburban life and country life” blurred. Blessed with a mild climate, clear vistas, ample land, and a lightly industrialized economy, the city, Bartlett predicted, would become “a place of inspiration for nobler living.” Los Angeles, said journalist Carey McWilliams, was “the first modernized decentralized industrial city in America”—and it would not be the last, as anyone familiar with Dallas, Denver, or Houston will recognize.

But Los Angeles wasn’t satisfied with just being a better place; its turn-of-the-century business leaders saw the potential for greatness. Business leaders have always been key to cities’ economic growth, whether in New York’s overcoming Boston and Philadelphia as the country’s most important city in the early nineteenth century or, some years later, in Chicago’s conquest of St. Louis for midwestern dominance. In Los Angeles, forward-looking and often ruthless men, such as Harrison Gray Otis of the Los Angeles Times, pushed a city with no natural port or secure water supply ahead of its two more naturally favored rivals, San Francisco and San Diego. In a move enthusiastically endorsed by its business leadership, L.A. secretively purchased land in the southern Sierras to lock up mountain glaciers and the water that flowed from them. The region also created artificial ports, one at Long Beach and another, inside the city limits, at San Pedro. Needing electricity, it turned to its large oil supply and to federal hydroelectric plants (and, much later, to coal-fired electricity imported from distant Utah).

The strategy, a combination of vaulting ambition and careful planning, worked brilliantly. Lured by the pleasant climate and a business-dominated political economy, industries and entrepreneurs flocked to the Los Angeles area. Initially, the growth came largely from oil and agriculture, but by the 1920s, the nascent movie industry had settled in Hollywood, putting Los Angeles on the world map. By 1940, the county’s population, barely 300,000 in 1900, had grown fivefold, bumping San Francisco off the top of the list of California’s biggest urban areas. The L.A. region as a whole had grown even more rapidly, to 3.5 million people.

World War II fattened Los Angeles still further. The city was a staging ground for the war against Japan, with a defense industry built up from nothing. Between 1940 and 1944, over $800 million was invested in 5,000 new industrial plants in the region, and the county’s industrial output grew from $5 billion to $12 billion during the war. Afterward, L.A.’s manufacturing firms seized opportunities in the emerging market for commercial planes and then the new military requirements of the Cold War, such as electronics-based aircraft and missiles. This fostered the growth of a vast industrial base for the city—oil and gas companies like Getty Oil, Atlantic Richfield, and Occidental Petroleum, utility giants like Southern California Edison, and eventually a garment industry. These firms attracted both high-end engineers and a large cadre of skilled and semiskilled blue-collar workers. From 1940 to the mid-1970s, the number of technical and professional workers statewide jumped at five times the rate along the East Coast.

As these opportunity-seeking newcomers rushed to L.A., the city experienced a remarkable real-estate boom. That, in turn, ignited the growth of scores of ancillary industries to serve the needs of the new residents, such as the manufacturing of auto parts, plumbing fixtures, and furniture. These industries were widely dispersed, and so were their employees, who could commute great distances at high speeds along the newly built freeway network. East Coast urbanists hated the form; Jane Jacobs, for instance, denounced Los Angeles as a “vast, blind-eyed reservation.” But people continued to move to a place that offered the promise of urban opportunity along with a single-family house, a swimming pool, and access to beaches and mountains.

By the 1980s, Los Angeles had surpassed New York as the nation’s largest port and Chicago as the nation’s leading industrial center. And by the 1990s, its garment district—fed by immigrant entrepreneurs and workers—employed more people than New York’s did and increasingly dominated even the fashion side, particularly in the growing sportswear market. Add to this the glitter of Hollywood, and you saw a city of superlatives.

True, the region hit a rough spot in the late 1980s, as the end of the Cold War led to massive federal cutbacks in aerospace, hammering the city’s economy. Los Angeles County lost nearly 500,000 jobs between 1990 and 1993. The high unemployment was accompanied by a climate of rising political dysfunction under Mayor Tom Bradley. In 1992 came the infamous Rodney King riots, which damaged the city’s reputation as a place of multicultural tolerance.

But Los Angeles, unlike post-riot Detroit and post-industrial Cleveland, recovered from its tough times. Between 1993 and 1999, the county regained nearly 400,000 of its lost jobs. Though aerospace never fully recovered, other parts of the industrial belt, including the port and the apparel and entertainment industries, gained jobs. Perhaps even more important was that an entrepreneurial class of immigrants—Middle Eastern, Korean, Chinese, Latino—began nurturing new businesses in everything from textiles and ethnic food to computers. The pro-business mayoralty of Richard Riordan and the governorship of Pete Wilson restored confidence among the city’s beleaguered businesses.

Yet around the beginning of the millennium, this progress stalled. Employment stayed relatively flat from 2001 until 2005, when Mayor Antonio Villaraigosa was elected, and then started to drop, falling back to the levels of the troubled early nineties. As of March, the unemployment rate was over 12 percent in the county, while in the entire L.A. metropolitan area, which includes adjacent Orange County, it was 11.4 percent—the third-highest unemployment rate of the nation’s 20 largest metro areas.

Job losses, too, were more severe in Los Angeles than in all but two of the nation’s top ten urban areas. Between 2001 and 2011, the number of jobs in the county contracted by 7.1 percent. According to research from the California Lutheran Economic Forecast, the decline was particularly marked in manufacturing, with the hemorrhaging of more than 150,000 jobs since 1990; only New York has lost more industrial jobs over the past 20 years. So it isn’t surprising that Los Angeles County’s share of the nation’s employment has dropped by a fifth since 1990 and is now just 4 percent, the lowest level in decades. That decline in share of national employment has taken place in virtually every high-wage industry except entertainment.

Perhaps even more troubling than the economic data is the city’s demographic profile. The recent census showed that over the last decade, the population of Los Angeles County grew from 9.5 million people to 9.8 million—a growth rate of just 3.1 percent, far lower than the national average of 10 percent, and also the smallest number of new city residents in any decade since the turn of the last century. The reason is a steady outmigration of residents. Over the last decade, Los Angeles County, once a magnet for newcomers, has lost more migrants to other domestic locales than any of the nation’s other top 20 metropolitan areas. It also doesn’t do well with the most educated of its residents. If you look at the nation’s largest 52 metropolitan areas and the percentages by which their populations of college graduates grew between 2007 and 2009, you’ll find that L.A. ranks just 37th.

Why has Los Angeles lost its mojo? A big reason is a decline in the power and mettle of the city’s once-vibrant business community. Between the late 1980s and the end of the millennium, many of L.A.’s largest and most influential firms—ARCO, Security Pacific, First Interstate, Union Oil, Sun America—disappeared in a host of mergers that saw their management shift to places like London, New York, and San Francisco. Others, such as the Los Angeles Times and the Dodgers, were sold to outsiders. The most influential business leader downtown today, according to a recent Los Angeles Downtown News ranking, is Timothy Leiweke, president and CEO of AEG Entertainment—a subsidiary of the Anschutz Company, which is controlled by Philip Anschutz, a Denver billionaire. The fact that essentially a regional manager is so influential would make the city’s past leaders spin in their graves.

Meanwhile, says David Abel, a Democratic Party activist and publisher of the influential Planning Report, once-powerful groups like the Los Angeles Chamber of Commerce and the Los Angeles County Economic Development Corporation (LAEDC) have atrophied. Today, there is virtually no business leader who speaks for the city’s broader economic interest. Yes, a few individual Medicis, such as David Geffen and Eli Broad, support their pet causes, notably the arts. But Abel says that these people don’t make up for the lack of a cohesive, independent, and committed business leadership. The most influential businesspeople, he adds, are professionals, or corporate vice presidents charged with sending earnings from L.A. back to their headquarters. As a result, they have little independence and few resources to challenge what he calls “the public emperors.”

Those “emperors” are the leaders of L.A.’s public sector. As business retreated, power in Los Angeles, largely by default, shifted toward the government and its workers. Through the long decline that started in the 1990s and accelerated after 2005, government employment has climbed. Back in 1990, 13 percent of employed Angelenos worked for the government; by 2008, that figure had jumped to 16 percent. Even after a deep recession, the public sector—both county and city—continues to pull in big payouts. Today, almost 18,000 county workers earn more than $100,000 annually. The city has followed a similar path, with its city council the highest-paid in the nation. In L.A., as in much of California, public employees’ pensions have risen at unsustainable rates.

The machine that controls Los Angeles these days consists of an alliance between labor and the political leadership of the Latino community, the area’s largest ethnic population. Once virtually powerless in the region, Latinos elected to office now control many of the smaller municipalities along the industrial belt that stretches from downtown to the county line. But since they serve at the whim of labor interests, they seldom speak up for the area’s many small businesses and homeowners. It’s a familiar story: because Democrats are almost assured of victory in L.A.’s general elections, candidates must win only the low-turnout, union-dominated party primaries. John Pérez, a longtime union political operative and now speaker of the California State Assembly, won the Democratic nomination in 2008 with fewer than 5,000 votes and then easily crushed the GOP candidate. Pérez’s predecessor as speaker was Fabian Núñez—another L.A. labor official. No wonder the Sacramento Bee’s Dan Walters calls the labor movement “the closest thing to an omnipotent political machine anywhere in the state.”

The Latino-labor machine has two major priorities: expanding the power of labor unions, particularly in the public sphere; and self-perpetuation. Unsurprisingly, it cares little, and seems to understand less, about L.A.’s economic environment. An excellent example is Mayor Villaraigosa himself, another former labor organizer, whom the machine elevated first to the city council and then to the mayoralty.

A common complaint about Villaraigosa is his governing style, which many see as detached from long-term issues and focused on cultivating powerful friends, perhaps in preparation for a future Senate run. But a far greater problem has been the mayor’s single-minded emphasis on downtown development, especially high-density residential development. He has supported heavy subsidies and tax advantages for L.A. Live, a downtown entertainment complex, as well as for other projects in the area, and he has backed public investment in the surrounding infrastructure. He’s currently supporting a push to build a massive new downtown football stadium, even though L.A. has no professional football team, and to displace much of the taxpayer-backed Convention Center, which would presumably need to be rebuilt with public funds. And his biggest priority is to build the so-called subway to the sea, a $40 billion train that would connect downtown with the Pacific. All these government contracts feed the machine and its supporters.

This downtown push has done little to resuscitate the city’s economy, however, probably because it misses the entire point of Los Angeles, says Ali Modarres, chairman of the geography department at Cal State Los Angeles. Remember that L.A.’s economy is built on multiple cores, which operate largely independently of downtown. Downtown Los Angeles employs a mere 2.5 percent of the region’s workforce; New York’s central business districts, by contrast, employ roughly 20 percent. “To put the entire focus of development on downtown L.A.,” Modarres says, “is to ignore the historical, cultural, economic, social forces that have shaped the larger geography of this metropolitan area.”

It’s true that between 1995 and 2005, the downtown area lost nearly 200,000 jobs, many of them in the industrial sector, which has historically been concentrated in and around the central core. But Villaraigosa’s accent is on housing, not manufacturing—and as Cecilia Estolano, former head of the Community Redevelopment Agency, points out, “downtown housing simply doesn’t create the jobs that small manufacturers do.” So why hasn’t Villaraigosa worked to revive downtown’s industrial base? Because, though much of the industrial workforce is Latino, it has little influence with the mayor and his allies. “Manufacturing doesn’t contribute to campaigns,” says Estolano. “The only business interests that have any power are the real-estate interests, their lawyers and consultants.” But the price of Villaraigosa’s approach has become evident as the housing boom has petered out, leaving large numbers of condos empty or dumped on the rental market.

Meantime, business-strangling regulations proliferate. Many of these originate with the environmental movement, which Villaraigosa and other Democrats count on for political support and media validation. The city has tried repeatedly to control emissions at the port from ships and trucks, for example. Also harmful are various labor-friendly regulations, such as the city’s effort to expand unions’ presence from the docks to the entire network of trucks serving the port—essentially forcing out independent carriers, many of them Latino entrepreneurs, in favor of larger firms using Teamster drivers.

Such policies could backfire, says economist John Husing, who has done extensive research on the port sector and who calls L.A.’s port by far the largest generator of blue-collar employment in the region. They could lead shippers to transfer their business to cheaper and less heavily regulated ports elsewhere, precipitating a shift of blue-collar employment to Charleston, Houston, Savannah, and other growth-oriented southern cities. This is particularly dangerous given the planned 2014 widening of the Panama Canal, which will make southeastern ports far more competitive for Asia-based trade. “Our ferocious concentration on the environment and other issues has created a huge potential issue of social justice bigger than we might want to deal with,” Husing says. “We are telling blue-collar workers here that we don’t want you to have a job.”

When criticized for the poor economy, the mayor cites some minor changes in policies favoring business. But Los Angeles remains one of the least hospitable places for business in the country, says consultant Larry Kosmont. Companies need to hire consultants, lawyers, and other fixers to complete even small-scale projects, he says; the system is particularly tough on smaller businesses, and firms without subsidies are unlikely to locate or expand in the region. “It usually takes two to three times more to process anything in L.A., compared even to surrounding cities,” Kosmont says. “It makes a big difference if you are a major Korean airline or AEG or if you are an independent entrepreneur.” If the system doesn’t change, he predicts, “we’re going to end up like a better-looking Detroit.”

That prediction is probably too dire. Los Angeles still enjoys enormous natural advantages, including what may be the kindest climate of all the world’s megacities. The inertia of such key institutions as Hollywood and the Port has preserved them as great assets for the city. “Information” jobs, which include not only entertainment but also software and data processing, are an abiding strength: last year, information employment in Los Angeles surged by 5.1 percent, ten times New York’s growth rate and well ahead of such high-tech locales as Austin, Boston, San Francisco, and Seattle. L.A. has the largest concentration of information-sector workers in the country—200,000 workers—with New York, at 164,000, coming in second. At the same time, ocean container traffic has recovered from the dreary days of the global recession, with total container volume growing by over 10 percent since early 2010. Employment in technology, professional business services, and finance appears to have bottomed out and begun to make modest gains.

But perhaps the region’s most hopeful harbinger is its vibrant ethnic economy. Many of the city’s largest banks are either run by local ethnics—Korean, Chinese, Armenian, Israeli—or controlled from Asia. (These play a far larger role in Los Angeles than in established financial centers like New York and Chicago.) Scores of vital shopping and business districts, particularly the huge Asian economy in the San Gabriel Valley, have withstood the recession. L.A.’s self-made, immigrant-run businesses include garment firms like Guess, Jonathan Martin, American Apparel, Koos Manufacturing, and Bebe; supermarket chains like the Iranian-run K. V. Mart and Mexican Vallarta; low-budget fashion retailer Forever 21; yogurt chain Pinkberry; and a host of Chinese-American firms involved in everything from computers to noodles to wastepaper.

Los Angeles greatly outperforms its big-city competitors in ethnic entrepreneurship. The percentage of minorities who are self-employed is the third-highest among the 52 largest America metro areas, behind only Atlanta and Miami. In contrast, New York ranks 27th and Chicago 43rd. Part of the reason for this, Modarres says, is the city’s multipolar geography. Dispersion allows entrepreneurs to access large specialized markets in modestly priced strip malls and commercial centers.

But the Los Angeles region will never fully recover unless there is a huge shift in its political culture. Even liberal Democrats are beginning to realize that the current system isn’t sustainable. Writing recently in the Los Angeles Business Journal, Roderick Wright, a Democratic state senator from south Los Angeles, compared the state and local governments with the Mafia. The “vig” that government took from local businesses, Wright argued—both in taxes and in the cost of regulation—was undermining job creation, particularly in working-class districts like his. He also warned that renewable-energy mandates recently imposed by the state would boost the cost of energy in the region, already 53 percent above the national average, by an additional 20 to 25 percent.

So L.A. needs a challenge to the machine and its ruinous economic policies. That challenge isn’t likely to come from the city’s enervated business sector, but there are other potential sources of reform. One may be the state and federal governments themselves, whose budget crises may finally start depleting the machine’s pocketbook. For instance, Governor Jerry Brown wants to save money by eliminating the state’s redevelopment agencies (see “California’s Secret Government,” Spring 2011), and L.A.’s agency has been a major source of funds for downtown developers, who in turn have heavily backed the machine. In Washington, the GOP Congress may put an end to Villaraigosa’s subway to the sea, which relies heavily on federal funding.

Another possible challenger to the machine is the city’s network of 93 “neighborhood councils,” local groups that receive some city funding. “The city establishment has no use for the NCs or any other meaningful source of public input,” says Greg Nelson, former chief of staff for Councilman Joel Wachs. “If just one leader comes along, NCs could emerge into a major force.”

Challenges to the machine might also come from the city’s working and middle classes, says Ron Kaye, former editor of the San Fernando Valley–based Daily News. He points to the city’s remaining middle-class homeowners, who are concentrated in the Valley but who also occupy scores of other neighborhoods, from black Leimert Park to white sections of the west side to the Latino east side. “These are the places that reflect the whole idea of L.A., as opposed to the Villaraigosa vision of a city of apartment dwellers,” Kaye says. However, homeowners are becoming rarer in Los Angeles; since the 1970s, he estimates, they have dropped from 60 percent of the population to roughly 40 percent. Further, it will surely be difficult to persuade voters on the city’s Latino east side to oppose the machine: “The ethnic communities are all walled off and have trouble challenging the elite center that wants to siphon off their wealth and move it downtown.”

Still, for evidence that homeowners might mount real opposition to the machine, Kaye indicates recent local elections. Despite the machine’s nearly total power over the city council, voters last year rejected Measure B, a well-financed insider deal that would have given control of the city’s solar installations to unionized workers from the Department of Water and Power. Similarly, the machine-favored candidate for city attorney, Jack Weiss, was defeated in 2009 by an outsider candidate, Carmen Trutanich. There are even signs of rebellion from the usually complacent city council, some of whose members are questioning the idea of having the city provide help for the proposed downtown football stadium.

Will Los Angeles get the Sunshine Revolution that it so desperately needs? Only time will tell. What’s certain for now is that only when the machine and its masters no longer dictate L.A.’s fate can this diverse and dynamic region resume its ascent toward greatness.