While the new Obama administration is commanding global attention, America's future may be written – as so many times before – in and by its largest state. Once the lodestar for American optimism and achievement, California now illustrates the difficulties confronting the US – and how much more can still go wrong domestically.
The most populous and wealthiest of America's 50 states, California has long been a beacon of opportunity for talented and enterprising people from all over the world. One in every four California residents was born in a foreign country. California's two most famous industries, Silicon Valley and Hollywood, depend on infusions of talent from abroad. Its robust agricultural sector is a massive exporter of food, benefiting from the growing appetites of consumers in developing countries.
Yet California's technological and entrepreneurial might – standing alone, the state would be the world's eighth largest economy – coexists with a dysfunctional political system that has brought it to the edge of fiscal bankruptcy. On 19 May, the state's voters, in a special election, rejected an array of tax increases and spending cuts required to balance its budget. Now, California faces either an embarrassing federal bailout or a prolonged period of rule by judges, who under California law have the power to vacate labour agreements, abrogate contracts, and generally restructure the state's financial commitments.
For President Barack Obama, California's crisis imperils his own reform agenda. Because other American states also face tough fiscal conditions, the political price of bailing out California may be bailing out dozens of other states too.
A massive state bailout, while adding enormously to pressure on Obama's government, would expose the weak link in the US system of governance. So-called "unitary" nations such as Britain, France, China, or Kenya essentially have a single set of government obligations: one national police force, one employer for all public school teachers, one overall pension system, etc. By contrast, the US has an "asymmetric" form of government, which allows many overlapping government entities – 7,000 in California alone – to incur debts, hire and fire employees, and impose taxes.
Making sense of these asymmetries is difficult. When financial markets concentrate on the fiscal health of the federal government, they miss the extent of government obligations as a whole.
The complexity of American governance threatens the benefits of Obama's decision to stimulate the economy through deficit spending. While the national government expands, state governments, such as California's, contract.
