Slipping Into the Sea in California


By Ronald Grover and Chris Palmeri Forget Hollywood's would-be blockbusters. While the studios turn out one clunker after another, the real summer thriller is the race to replace California Governor Gray Davis. Will Arnold Schwarzenegger quit flexing and come crashing into the fray? Will political talking head Arianna Huffington stop talking and start running? Will Senator Dianne Feinstein put the good of the party ahead of a cushy job in Washington and ride to the Democrats' rescue?

Indeed, with the Aug. 9 deadline approaching for candidates to register, the cast of governor wannabes is growing longer by the minute. Some 90 candidates are jostling for the spotlight, including Bob Dole -- not the former Senator but a Golden State son who's a self-described avid bowler -- and a shapely, 26-year-old computer programmer who figures to fund her candidacy by selling "Georgy for Governor" thongs on the Web.

"WRONG DIRECTION." Even for California, which seems to relish its reputation for fruits and nuts, this is democracy gone loopy. The state that popularized voter revolts with the tax-cutting Proposition 13 in 1978 now seems captive to the whims of its fickle electorate. In the past four elections, voters have approved 20 ballot initiatives, including four last November that instructed the legislature to boost annual state spending by $1.2 billion to build schools, homeless shelters, and water projects. On Oct. 7, voters will decide whether Davis should be recalled, and who will succeed him should he be recalled.

So is the recall effort a new populist uprising? Hardly. To mount the campaign, conservative Republicans spent more than $2 million to bring in political professionals, who gathered 1.2 million signatures -- about 6% of eligible voters. The biggest contributor: an obscure conservative congressman named Darrell E. Issa, who put nearly $1.7 million of his own money into the effort so he could put his name on the ballot.

Republican-turned-Democrat Leon E. Panetta -- who knows a thing or two about politics, having served in Congress for decades and later as Bill Clinton's White House Chief-of-Staff -- recently wrote in The Los Angeles Times that this effort is "the culmination of direct democracy run amok."

SHIFT OF FOCUS. Issa will have plenty of company in this three-ring circus, even if Schwarzenegger -- as has been widely rumored -- decides not to join the fray. Among those already figuring to run are millionaire GOP candidates such as former Los Angeles Mayor Richard J. Riordan and businessman William E. Simon Jr., beaten by Davis is in November.

Davis plans a $20 million TV blitz that will try to shift the focus from removing him from office to showing how bizarre the recall effort is. And he seemed to get a a boost when a deeply divided state assembly finally passed legislation to cut spending and close California's $38 billion deficit -- the largest in any state's history.

Yet the state's fiscal plight is so dire that the bill also authorized borrowing an additional $11 billion and put off decisions on funding $8 billion in state costs. Bond agencies have dropped ratings on California's $33 billion in debt to near-junk status.

DRAWN KNIVES. Not surprisingly, Wall Street isn't taking too kindly to the notion of the state pushing off its huge budget problems to next year. California "seems to be going in the wrong direction," David Hitchcock, director of state and local government ratings at Standard & Poors, told reporters in a conference call. Hitchcock said the state is relying on "massive borrowing" and one-time fixes while ignoring the fact that shrinking revenues can't keep up with statewide spending. (Standard & Poors, like BusinessWeek and BusinessWeek Online, is a unit of The McGraw-Hill Companies.)

The governor isn't likely to get any benefit from a budget compromise -- especially one as suspect as this one. Indeed, the knives are already out in his own party for Davis, a lonely figure who has never done much to cultivate ties to his fellow Democrats. With his approval rating hovering at 23%, Davis' only hope may be to keep other Dems from running against him, which he's trying to do with help from labor and from San Francisco Mayor and Democratic powerbroker Willie Brown.

That hope is fading fast. Lieutenant Governor Cruz M. Bustamonte and Insurance Commissioner John Garamendi -- Democrats who initially said they would stay out of the race -- are now rumored to be conducting their own polls. And Feinstein is getting pressure from other Democrats to run. "It's no secret that Governor Davis is in trouble, and I seriously doubt that he can survive the recall effort," says one Dem, U.S. Representative Cal Dooley of Silicon Valley. "We need to get behind a strong candidate."

MINORITY BOOST? Don't count Davis out, say his supporters. The Vietnam vet is a tough fighter and a champion fund-raiser who spent nearly $60 million to get himself elected the last time. He has already raised $2 million to fight the recall drive, and he has pledged to spend $20 million in the next two months to portray the entire effort as a right-wing conspiracy that will undo programs for the poor, women, and environment.

And through a fluke of timing, Davis may get a break. A proposition to scale back affirmative action in California will also appear on the Oct. 7 ballot. That could energize minorities, who support affirmative action and tend lean Democratic in their voting habits, to turn out at the polls. "It isn't over till the fat lady sings," says Art Pulaski, executive secretary/treasurer of the California Labor Federation.

Pulaski hopes to marshal 5 million union members, environmentalists, and others to save the governor. In the end, democracy-on-steroids may be the only thing that can rescue Davis from democracy-run-amok. Grover is BusinessWeek's Los Angeles bureau chief, and Palmeri is a correspondent in the bureau


Reviving Keynes
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