Rupert Cornwell: Arnie's California goes bust – and even the trees face the big squeeze

Out of America: Democracy is a wonderful thing, but you can have too much of it, as Schwarzenegger is finding out to his cost

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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 370 feet, 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 $24bn for the budget year that starts on 1 July.

Like almost everywhere in America, California has been laid low by the Great Recession of 2008, but its case is special. This is a wretched time for American icons. Half the country's biggest banks have been on life support, and General Motors, once the greatest manufacturing company on earth, is expected to file for bankruptcy tomorrow morning. If states were companies, California would be doing the same thing.

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 $1.8trn 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 $70m 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 economies cut even closer to the bone. To help bridge the budget gap, Schwarzenegger plans to raise $2bn 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, like his even more famous recent predecessor Ronald Reagan, the erstwhile Terminator is a child of the ultimate dream factory called Hollywood. And yes, the Governor, whose approval ratings currently stand at levels that would make George W Bush blush, 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 $21bn; now it is $24bn. 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.

Democracy is a wonderful thing, but California surely has too much of it. In most places, the job of proposing and passing laws is left to elected governments and legislatures. In California the people can propose laws too. All that's required is a submission fee of $200, and the validated signatures totalling a minimum of 5 per cent of the number who voted in the most recent election for governor, and the proposal becomes a ballot initiative. The most notorious of these initiatives, and the one held largely responsible for the present mess, is Proposition 13 of 1978, which not only capped property taxes but required that not a simple but a two-thirds majority of assembly votes was required to pass any increase in state taxes.

As usual, California was playing trendsetter; the success of Proposition 13 is widely viewed as first sign of the national "taxpayers' revolt" that paved the way for Reagan's presidential victory two years later. But the measure was a disaster for the fiscal management of California. Unable to increase property taxes, the state had to rely on income tax to raise money. When incomes plunged in 2008, this source of revenue shrank.

Nor does California's political make-up help. Democrats dominate state politics, but fall short of the two-thirds majority they need to sideline a local Republican party whose patron saint these days is not so much Ronald Reagan as Rush Limbaugh, demagogue of conservative talk radio. Tax increases thus are even harder to achieve in California than in Congress in Washington, where the idea of them is no less unpopular – but where 51 per cent of the votes is sufficient to make them law.

Earlier this month, Schwarzenegger tried to enlist voters to help do his dirty work, promoting ballot initiatives to raise taxes and boost borrowing to cover the deficit. But the voters said no. The Governor was left with no alternative but to launch draconian spending cuts that will deprive a million or more of welfare benefits and health coverage. And they'll close the state parks too. So if you want to see those redwoods, book a ticket soon.

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