Lessons from turnaround of the Golden State

Jerry Brown's watchword in later years has been pragmatism. Photo / AP

At the Golden State's nadir the jibes came thick and fast. "California is so broke that I saw a going-out-of-business sign at a meth lab," joked late night TV host Jay Leno.

Republican presidential aspirant Mitt Romney compared America's most populous state - long cherished as the American Dream's promised land - to bankrupt Greece. The Economist warned darkly that California had become "the ungovernable state".

So it was ironic that Jerry Brown, the scion of a Californian political dynasty - his father was Pat Brown, one of the state's legendary governors - was sent in to clean up the mess. Brown, 76, also has history, serving as governor from 1975 to 1983, the "Governor Moonbeam" era (the name was bestowed by then-girlfriend, pop singer Linda Ronstadt) when he was derided for his "kooky" liberalism, including creating a California space academy, but also support for solar power, gays, women and minorities.

By the time he returned for a third term in 2010 - after a spell in the political wilderness before serving as mayor of Oakland then state attorney-general - Brown had developed a strong sense of pragmatism.

He is also fiscally conservative. This proved vital in turning around a state notorious for boom-and-bust business cycles, profligate spending and a deep aversion to taxation, as shown by 1978's Proposition 13, which slashed real estate tax, fuelling debt and atrophying public services.

Faced with the biggest real estate wipeout in the state's history, a toxic legacy of foreclosed homes, spiralling unemployment and a 2011 public deficit of US$25.4 billion ($30 billion), Brown did what most modern US politicians consider unthinkable: he persuaded voters to shoulder a tax increase. It was a bold move and it worked. Flash forward to 2014. The state budget is in the black at US$4.2 billion. Unemployment remains high at 8.5 per cent but has fallen four points, with 70 per cent of the 1.3 million jobs lost during the financial crisis replaced. Growth is still slow but business is rebounding. Even the housing market - dogged by a chronic lack of rental inventory, especially in Los Angeles - shows signs of recovery.

Credit agency Standard & Poor's has upgraded the state's outlook to "positive". And the Economist described the turnaround as "the recovery".

After years of struggle it looks like comeback time in the Golden State.

Last week, the Los Angeles Times nominated Brown for a fourth term. An open primary, contested by both Democrats and Republicans, will be held next Tuesday. The governor is seen as a shoo-in and, barring some seismic political reversal, a sure bet in November's general election.

The Times reports that, in contrast to 2010, Republican donors are thin on the ground and any GOP money is mostly flowing to the incumbent.

His Republican rivals, ex-US Treasury aide Neel Kashkari, the GOP Orange County favourite, and state representative Tim Donnelly, a Tea Party champion from Twin Peaks, are struggling for traction. Brown consistently polled over 50 per cent last year and hit 59 per cent in an April 2014 Field Poll.

"Word of California's demise was greatly exaggerated," Brown told the Guardian in December, noting the state was economically "the healthiest it's been in more than a decade". However, "significant challenges remain". Those challenges run deep. They include an epic drought and water shortages that menace the world's eighth largest economy; America's worst poverty rate, affecting 24 per cent of the state's 38.3 million residents; daunting pension time bombs, including how to fund the California State Teachers Retirement System; and tax reform to meet the needs of an urbanised population expected to reach 50 million by 2049.

So how did Brown pull it off? In large part by going to the people and bypassing politicians. Crucially, Proposition 30, his 2012 tax hike - a 29 per cent increase for those with incomes over US$1 million, plus a small jump in sales tax - has sunset clauses. He also got Californians to agree, via Proposition 25, that budgets should pass by a majority vote, dumping a constitutional requirement for a two-thirds majority. Finally, he used his political muscle to promote austerity, cutting state welfare programmes.

"California is well positioned to do better than the US overall coming out in the recession," says Ross DeVol, chief research officer with the Milken Institute, an economic think tank. He says Brown has benefited from increased tax revenues from both the booming IT sector, fed by global demand, and stock options cashed in during the bull market.

But this only hides deeper structural problems: tax revenue falls when times are tough. In addition, the state's steep marginal tax rate, over 13 per cent, drives high earners elsewhere.

The music business has its own version of Hollywood's runaway productions as artists move to Nashville, Tennessee. Clean tech could also fall prey to similar creative flight.

Despite these challenges - and at best Brown has bought California time - his budget surplus is a triumph that eluded his predecessors, Gray Davis and Arnold Schwarzenegger. It helps that Brown is a political maverick.

"No prominent player in either party is less bound by convention than Jerry Brown, whose ability to defy expectations is virtually unrivalled in modern American politics," writes John Nichols in the Nation this month.

Nichols suggests Brown's success is due to "solutions-orientated government". Amid widespread public disenchantment with partisan gridlock - especially at national level - Brown has veered right or left as issues demand, refusing to be politically pigeonholed and brave enough to take huge risks to show responsible government is part of any solution.

Tough love has been leavened by more spending on education and medical insurance for the poor, a pledge to raise the state's minimum wage to US$10 an hour by 2016 and support for immigrants' rights.

He has also shown state and national leadership by taking on climate change (Schwarzenegger paved the way), a clear and present danger that might jeopardise any recovery. The threat is a fillip for clean tech; Brown's 1970s support for solar was prescient and California boasts almost a third of US solar jobs, around 47,000, a further boost to Silicon Valley. Meanwhile, Brown's success in helping turn California into America's fastest growing economy has prompted speculation he might run for president in 2016.

"No, that's not in the cards, unfortunately," admitted Brown a touch wistfully, at a January press call (he ran unsuccessfully in 1976, 1980 and 1992).

Instead, he might think about his legacy. Tax and pension reform, water shortages, poverty, overcrowded jails - it's a long list.