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Is California the next Greece?
The Golden State used to be at the vanguard of the U.S. economy. Now, not so much
A broken window at an empty storefront in downtown Vallejo, Calif., a city that filed for bankruptcy protection in 2008.
A broken window at an empty storefront in downtown Vallejo, Calif., a city that filed for bankruptcy protection in 2008.
Kim Kulish/Corbis

"California is no longer the economic miracle it once was," says Bradley R. Schiller at the Los Angeles Times. Americans used to flock to the Golden State for its peerless standard of living and great schools. But now many businesses are packing up and moving out. California's unemployment rate, at 10.9 percent, is the third-highest in the country. Many of its cities are declaring bankruptcy. And the state budget, for the ninth time in 10 years, is billions of dollars in the red. "Many Americans fear the federal fiscal train wreck will turn us into Greece," say Michael J. Boskin and John F. Cogan at The Wall Street Journal. But "they need look no further than California to see what this future portends." Why is California on the ropes? Here, four theories:

1. Its taxes are too high
The climate for businesses in California has "turned hostile," says Investor's Business Daily in an editorial. Taxes are far too high, leading businesses to leave the state at a rate of five per week. California has the third-highest income tax rate in the country, the highest sales tax, and the second-highest gas tax. All told, businesses save "20 percent to 40 percent in costs" when they move out of the state, according to one study.

2. Its environmental policies are unreasonable
California's energy policies are just "bizarre," says Bill Frezza at RealClearMarkets. In its push to lead the fight against global warming, the state has "virtually shut down fossil fuel production." California was once a major oil producer, but its production has declined "by more than 30 percent over the past 20 years," depriving the state of much-needed revenue. Meanwhile, it's pumping billions of dollars into green energy projects — such as a $100 billion high-speed rail line — that are bound to bleed money.

3. It spends way too much
California has one of the strongest social safety nets in the country, says Schiller, and "many Californians take pride" in that. However, the state's generous minimum-wage thresholds and high rates of unionization can drive businesses away. "Californians tend to be complacent about these competitive risks," but they shouldn't be. They're part of the reason California is currently ranked 34th in GDP growth among the states.

4. It just needs to get its house in order
"No one should write off California," say Boskin and Cogan. The state faces daunting challenges, and has to reform deep structural flaws. But it still "ranks first in technology, agriculture, and entertainment among the 50 states." To survey the state's economic situation is to appreciate the "the agony and ecstasy of contemporary California."

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