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California's golden economy tarnishes and a recall effort is born

'A story of boom and bust'

By Sean Loughlin
CNN Washington Bureau

California Gov. Gray Davis faces an unprecedented recall vote less than one year after being re-elected to a second term.
California Gov. Gray Davis faces an unprecedented recall vote less than one year after being re-elected to a second term.

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Gray Davis

(CNN) -- The Golden State's golden days seem to be a thing of the past for many California residents.

Poll after poll shows widespread dissatisfaction among state residents with the economy and frustration with a strained state budget mired in partisan politics. The tech boom that give birth to a new generation of millionaires has long since gone bust, replaced by a state jobless rate of roughly 6.6 percent.

Come October 7, Gov. Gray Davis may pay the price for this discontent, blamed by many residents for poor stewardship of the state economy. Less than one year after being re-elected to a second term, he faces an unprecedented recall vote.

How did the country's most populous state -- among the top 10 world economies -- get to this point? Experts point to several factors, some distinct to California -- such as ballot initiatives which restrict taxing authority -- but others shared by the nation as a whole.

"It's a story of boom and bust," said Tom Lieser, senior economist with the Anderson School at the University of California-Los Angeles. The state enjoyed an unprecedented technical boom, particularly among industries in the San Francisco Bay area, but its fortunes sank, along with the nation's in 2000.

A lot of the compensation enjoyed by employees in the tech industry was in stock options and bonuses and when the stock market dropped, state coffers took a hit. The pain was compounded in California because it relies disproportionately on income-related taxes -- as opposed to property taxes.

Why is that?

Proposition 13, a ballot initiative passed in 1978, severely restricted the state's ability to raise property taxes. That means the state is more vulnerable to economic downturns that come with a loss of jobs or income.

And the state's ability to deal with economic hardship is constricted by other ballot initiatives. For example, the state budget must be approved by two-thirds of the state Legislature, as opposed to a simple majority. Only two other states -- Arkansas and Rhode Island -- require a supermajority to pass the budget.

A lot of the state's spending is mandated or protected, particularly in the area of education, meaning state legislators and the governor are limited in what they can cut.

Some experts believe that California's problem is less of an economic one than a budgetary and political one.

They point out that while California's economy is hurting, the same is true for many states and the nation as a whole.

"It's just false that we're in some sort of economic catastrophe," said Stephen Levy, director of the Center for the Continuing Study of the California Economy. He said the state's job loss during the recent recession was proportionately inline with what the nation suffered.

"This is not a strong period in our economy or the national economy, but unlike a decade ago, we're not doing worse," Levy said.

start quoteIt's just false that we're in some sort of economic catastrophe.end quote
-- Stephen Levy, Center for the Continuing Study of the California Economy

Republicans -- who have led the recall effort -- see things more critically. They blame Davis and Democrats for not reining in state spending when it was clear the state's economy had hit the skids. And they say the state has created an anti-business environment, with high workers' compensation costs, driving businesses out of the state and straining the economy.

The state's energy crisis of two years ago -- with rolling blackouts and rising utility bills -- also contributed to frustration with Davis. Economists, however, say that crisis has had little impact on the state budget, as those costs ultimately are borne by consumers.

What is the outlook for California?

In the short term, the economic growth will remain tepid, according to an analysis by UCLA's Lieser. He cites a "slow, but improving trend" for income and sales, but also notes "a pattern of continued job loss" for the rest of 2003.

Wilma Chan, the Democratic majority leader in the California Assembly, thinks that whoever is governor will face challenges in both bringing the state budget under control -- which faces an $8 billion deficit next year -- and turning the economy around.

"We haven't dealt with our structural problems and the real solution," Chan said. "Instead, we're all caught up in this recall."

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