Death of the Dream

For decades, California has epitomized America's economic strengths: technological excellence, artistic creativity, agricultural fecundity and an intrepid entrepreneurial spirit. Yet lately California has projected a grimmer vision of a politically divided, economically stagnant state. Last week its legislature cut a deal to close its $42 billion budget deficit, but its larger problems remain.

California has returned from the dead before, most recently in the mid-1990s. But the odds that the Golden State can reinvent itself again seem long. The buffoonish current governor and a legislature divided between hysterical greens, public-employee lackeys and Neanderthal Republicans have turned the state into a fiscal laughingstock. Meanwhile, more of its middle class migrates out while a large and undereducated underclass (much of it Latino) faces dim prospects. It sometimes seems the people running the state have little feel for the very things that constitute its essence—and could allow California to reinvent itself, and the American future, once again.

The facts at hand are pretty dreary. California entered the recession early last year, according to the Forecast Project at the University of California, Santa Barbara, and is expected to lag behind the nation well into 2011. Unemployment stands at roughly 10 percent, ahead only of Rust Belt basket cases like Michigan and East Coast calamity Rhode Island. Not surprisingly, people are fleeing this mounting disaster. Net outmigration has been growing every year since about 2003 and should reach well over 200,000 by 2011. This outflow would be far greater, notes demographer Wendell Cox, if not for the fact that many residents can't sell their homes and are essentially held prisoner by their mortgages.

For Californians, this recession has been driven by different elements than the early-1990s downturn, which was largely caused by external forces. The end of the Cold War stripped away hundreds of thousands of well-paid defense-related jobs. Meanwhile, the Japanese economy went into a tailspin, leading to a massive disinvestment here. In South L.A., the huge employment losses helped create the conditions conducive to social unrest. The 1992 Rodney King verdict may have provided the match, but the kindling was dry and plentiful.

This time around, the recession feels like a self-inflicted wound, the result of "bubble dependency." First came the dotcom bubble, centered largely in the Bay Area. The fortunes made there created an enormous surge in wealth, but by 2001 that bust had punched a huge hole in the California budget. Voters, disgusted by the legislature's inability to cope with the crisis, recalled the governor, Gray Davis, and replaced him with a megastar B-grade actor from Austria.

Yet almost as soon as the Internet bubble had evaporated, a new one emerged in housing. As prices soared in coastal enclaves, people fled to the periphery, often buying homes far from traditional suburban job centers. At first, it seemed like a miraculous development: people cheered as their home's "value" increased 20 percent annually. But even against the backdrop of the national housing bubble, California soon became home to gargantuan imbalances between incomes and property prices. The state was also home to such mortgage hawkers as New Century Financial Corp., Countrywide and IndyMac. For a time the whole California economy seemed to revolve around real-estate speculation, with upwards of 50 percent of all new jobs coming from growth in fields like real estate, construction and mortgage brokering.