US dream factory staggers under $37b deficit burden

If you want to look at the world's tallest tree up close, then don't delay - unless you have an utterly irrational faith in the financial sanity of the state of California.

The giant redwood tree, standing over 112m, is to be found in Humboldt Redwoods Park, one of some 200 state parks due to be shut under the ever more desperate attempts of Arnold Schwarzenegger, the Governor, to tackle a projected state deficit of more than US$24 billion ($37.4 billion) for the budget year that starts on July 1.

Like almost everywhere in America, California has been laid low by the Great Recession of 2008, but its case is special.

Once upon a time it was the Golden State, land of the perfect climate, of opportunity, and the eternal second chance. It was the national dream factory, where apart from the odd earthquake life was an idyll.

If California were a country, its US$1.8 trillion ($2.8 trillion) economy would be among the 10 biggest on earth. As it is, nowhere else has launched as many trends that have swept the globe.

But as Paul Krugman, Nobel economics laureate and New York Times columnist, tartly put it the other day: "If California is still the place where the future happens first, God help America."

This time the dream factory has produced a real-life nightmare. Unemployment in California has hit 11 per cent, while last year overall personal income declined for the first time since 1938.

California's credit rating is the lowest of any state; almost certainly it will need federal loan guarantees to stay solvent. The parks closures, saving a paltry US$70 million or so over the next 12 months, are a mere drop in the ocean of Californian misery.

The Governor is about to ask state employees, who have already had their pay cut by 10 per cent, to take a further reduction of 5 per cent.

Last week Schwarzenegger proposed taking 500,000 families off the state's welfare rolls, and removing health coverage for almost a million children.

The state has long been a beacon of educational excellence; now it is about to achieve the distinction of being the first state to eliminate student aid entirely - even as the University of California, with world-famous campuses such as UCLA and Berkeley, raises annual fees by 10 per cent. Other budgeting cuts are even closer to the bone. To help bridge the budget gap, Schwarzenegger plans to raise US$2 billion from California's municipal governments - a theft from Peter to pay Paul that, if implemented, will force Los Angeles and other cities to lay off police, firemen and other essential public employees.

But don't blame Schwarzenegger for the mess. Yes, the Governor has made his share of mistakes. However, Schwarzenegger has had his successes, too, most strikingly his championing of energy conservation measures and fuel efficiency standards that have led the country.

At one level he is victim of the classic vicious circle of hard times. Unlike the federal Government, states are generally obliged to balance their budgets. When the economy slumps, so do tax revenues, forcing cuts and/or tax increases that only make the downturn worse. A few months ago Schwarzenegger was facing a deficit of US$21 billion; now it is US$24 billion.

In truth, though, even a statesman who combined the virtues of Solomon, Pericles and Marcus Aurelius couldn't put California to rights. As matters stand, the state is next to ungovernable.

If you want to see those redwoods, book a ticket soon.

A FISTFUL OF DOLLARS

The good: US$1.8 trillion economy.
The bad: 11 per cent unemployment.
The ugly: US$24 billion projected state deficit.

- INDEPENDENT