Californian dreaming brings bankruptcy

By Stephen Evans BBC North America Business Correspondent

How can it be that the richest part of the planet is bankrupt?

How did the world's most affluent, most innovative, most confident people run out of money?

California: famed as America's idyll

How on earth can the state which contains the combined imaginations of Hollywood and Silicon Valley contrive to go bankrupt?

The answer lies, as ever, in politics as much as economics.

California is split down the middle between Democrats, including the current governor, Gray Davis, who have some belief in public spending, and Republicans for whom tax rises are anathema.

Spoilt by choice

On top of that, any government there has its hands tied by what's known in America as "direct democracy" - the right of the electorate to petition for ballots and then to vote for specific measures.

California's economy GDP: $1,392bn World's fifth largest economy Manufacturing exports: $111bn Population: 35.6m Median family income: $54,000 Unemployed: 1.16m Employed: 17.4m source: State of California

In the last decade or so, more than 50 measures have been passed through plebiscite, each one binding the hands of the state government in Sacramento.

One decision, for example, confined the state's ability to levy taxes on property; another committed the government to spend 40% of its income on education.

And you don't need to be a mathematical genius to know that a ceiling on revenue plus an insistence on spending adds up to penury.

Silicon Valley punctured

However, economics as well as politics are in play.

Whoever wins the governorship faces tough choices

The internet bubble that California gave the world boosted the state's revenues, but when it burst it deflated the state's income in a similarly spectacular fashion.

What soared up came crashing down and the pieces are only just landing.

The difficulty is that California's politicians didn't seem to understand this basic law of economic gravity.

In the general hubris of the 90s, they too were infected by the belief that there was a "new economic paradigm" where growth would be relentless and incomes only ever rose.

As California senator John Vasconcellos, a Democrat from Santa Clara, put it: "There was a euphoria that California would grow for ever".

The current debate - or division would be a better word - is the classic Right-Left argument over public spending versus taxes.

Reality bites

Should legislators raise taxes or cut spending to close a gap of $40bn in the state budget?

Beyond that, Republicans charge that the Democrat governor has failed to realise that business needs to be profitable before it can generate the taxes that he needs to spend on public projects.

Democrats, the Republicans assert, fiddle while California's money burns away.

Legislators, it is alleged, were pre-occupied with politically correct measures to do with protecting cross-dressers in the workplace or with other peripheral issues far away from the core economic reality, namely that spending exceeded income big time.

Democrats reply that public spending has served the state well, creating, for example, perhaps the finest widely-available university education in the world as well as an excellent transport system.

But rhetoric is cheap. The word-slinging is about to culminate in an election, after which reality will intrude.

Whoever wins will face the tough economic situation: a collapse in California's great money-spinner in Silicon Valley plus rules that tie the governor's hands.

Perhaps the real problem is not the government but the governed: high public spending plus low taxes is a sum that doesn't add up.

Californians may want both but they have to make a choice.