Governor girly-man: Arnold Schwarzenegger caves to the Democrats as his state drowns in red.(Cover story)

[ILLUSTRATION OMITTED]

CALIFORNIA conservatives greeted Arnold Schwarzenegger's ascension to the governor's office in the famous "total recall" election of 2003 with wary optimism. If anyone could make "post-partisanship" work in ever-bluer California, it would be the charismatic film superhero, immediately dubbed "the Governator." Schwarzenegger offset his social liberalism and his dubious matrimonial connection to the Kennedy family with professions of admiration for Milton Friedman (he even proclaimed an official "Milton Friedman Day") and encomiums to the American dream of opportunity and individual initiative that rivaled the depth and power of Ronald Reagan's. In his prime-time speech to the Republican National Convention in New York in 2004, he went where no Republican has dared to go for the last generation: He offered enthusiastic praise for Richard Nixon. Newly arrived in the U.S. in 1968 as an aspiring bodybuilder, Schwarzenegger said, he found Nixon's views more compelling than Hubert Humphrey's "socialism" because Nixon "was talking about free enterprise, getting government off your back, lowering taxes, and strengthening the military. Listening to Nixon speak sounded more like a breath of fresh air." It was Nixon, never mistaken for a girly-man, who made him a Republican.

At the time I admired Arnold's moxie in embracing Nixon, whom most other Republicans have shoved down the same memory hole as Herbert Hoover. But perhaps we should have seen this as a portent of trouble ahead. After all, it was Nixon who proclaimed, "I am a Keynesian in economics" before slapping on wage and price controls and letting domestic social spending shoot up faster than it had under Lyndon Johnson. Like Nixon (and George W. Bush), in fiscal matters Arnold has governed more like a Keynesian than a Friedmanite; in regulatory affairs, he governs more like a German socialist than an Austrian-school liberal. Above all, on the mean plane of political maneuvering, the Governator, to mix superhero metaphors, has been unable to overcome the kryptonite of the public-employee unions and other liberal interest groups. Today he is as much of an albatross for California Republicans as George W. Bush was on the national scene.

Now California is in the grip of its worst-ever fiscal emergency, facing a budget shortfall of more than $42 billion over the next 18 months. State workers have begun involuntary unpaid furloughs, and state offices are closing two days a month. The state controller has stopped issuing income-tax refunds and is about to issue warrants--basically IOUs--to state vendors in lieu of checks. Right before Presidents Day weekend, Arnold and the leaders of both parties in the legislature reached a compromise that would raise taxes by $14.3 billion, cut spending by $15.8 billion, and borrow money to fill the remaining $12 billion hole, which the stimulus package in Washington might backfill. The plan calls for a 2.5 percent income-tax surcharge, or 5 percent if the stimulus money isn't enough. The sales tax would go up by a full percentage point (to over 9 percent in some counties), and the gasoline tax by twelve cents a gallon. As if that weren't enough of a hit for motorists, the vehicle-registration fee would nearly double, bringing it close to the level that helped spawn the recall effort against Arnold's predecessor, Gray Davis. Like the stimulus in Washington, the complicated package was rushed to a vote with little time for lawmakers to read through it.

California's constitution requires a two-thirds vote of both houses of the legislature to pass a budget and any tax increases, so the plan needed a handful of Republican votes. Budget stalemates are a perennial feature of California government, and after a protracted round of kabuki theater there is always one final Republican who can be badgered or bribed into casting the deciding vote. Nearly all Republican legislators have signed the Americans for Tax Reform "no-tax pledge," but that's no guarantee; after the 2006 election, Arnold said he was against tax increases too. Republican assemblyman Ted Gaines of Roseville (a firm No vote) says that Arnold "is worried about his legacy, and wants to leave the state in decent shape. He's coming our way, but only after his first solution [which] is always to raise taxes."

To entice the necessary handful of Republicans, the budget deal includes a ballot initiative by which voters can impose a spending limit. Details are scarce at the moment, but it appears the limit will be based on an average of previous revenue levels rather than on the ability of the state's economy to pay, and in any case it won't restrain the many elements of the budget, such as education spending, that are on automatic pilot. Arnold threatened to lay off up to 20,000 state employees--about 7 percent of the government's total full-time workforce--if a budget deal wasn't reached, a prospect that might elicit from conservatives the sentiment best expressed by another Hollywood actor-turned-politician, Clint Eastwood: Go ahead, make my day. (Over 17,000 state employees are paid six-figure salaries, by the way.) Despite locking the entire legislature inside the capitol over Presidents Day weekend, Arnold was still one vote short at press time, though if past budget crises are any guide, eventually he will get enough Republican votes to pass a budget close to this outline.

CALIFORNIA'S current fiscal crisis has been a long time in the making and stems from two major factors. The first is the state's byzantine budget structure; the second is the changing composition of California's economy, to which the government's fiscal and regulatory structure is increasingly unsuited. Over the years, conservatives have won some significant victories through the initiative process, most notably Proposition 13 in 1978, which sharply limited property taxes and helped launch the national tax revolt. But the Left has won its own share of victories at the ballot box, especially Proposition 98 in 1988, which gutted a spending limit that had actually produced taxpayer rebates in 1987 and that essentially earmarks half the state budget for public schools, whether they need it or not and regardless of performance. The Left has also beaten back several conservative ballot initiatives that would have imposed meaningful spending limits and curbed the power of public-employee unions and trial lawyers.