Golden bear? California's surprising economy.

IF THERE'S ONE thing the 135 candidates for California governor could agree on before the October 7 recall election, it was that the state economy is a shambles, thanks to Gov. Gray Davis.

"Of course, the first thing he did in office is enact that massive tax increase that broke the back of California's economy," tax-cutting Republican candidate Torn McClintock said on the Roger Hedgecock radio show in late August.

But has the Golden Spine truly snapped? Several recent studies, academic and journalistic, suggest not, though there are storm clouds on the horizon.

Senior Economist To Lieser of UCLA's respected Andersen Forecast predicted in a June report that the state's recession likely would end by the third quarter, "because it is time for it to end." As Lieser and others point out, the great sucking sound in California's economy (and state budget) is coming from just one Silicon Valley hole, where the dot-com collapse has vaporized 250,000 higher-end Bay Area jobs. "The overall forecast for Los Angeles County and Southern California remains positive," an Andersen press release stated.

In fact, argues Palo Alto's Center for Continuing Study of the California Economy, outside the burst bubble the state has outperformed the rest of the country. "The California regions outside the Bay Area actually added jobs between January 2001 and January 2003" the center reported in March.

Though the employment outlook is positive, the wealth wipeout was all too real. The California Department of Finance reports that inflation-adjusted personal income dropped 3.4 percent from January 2001 to July 2003, the worst drop seen in any state. This, of course, helped bust the budget: As the Los Angeles Times reported in a relatively rosy assessment of the economy, "In fiscal 2002, personal income tax revenue in California plunged 26% to $33 billion, down from $44.6 billion the year before."

Which leads to the real monster in the closet: the government's massive debt habit. The most recent state budget, passed at the end of July, includes a staggering $14 billion in long-term borrowing at a time when California's bond rating has been downgraded to just one level above junk--the lowest of any state. With an unprecedented campaign underway in which few candidates have spelled out what kind of tough medicine they'd apply to the estimated $8 billion annual "structural deficit," it's hard to imagine the state avoiding massive finance charges that will divert government money and perhaps eventually require a heavier tax burden on residents and businesses.

"Until the recall election," Joe Mysak wrote in the Los Business Journal in August, "the California story will be all about politics. After the election, it will be all about the municipal bond market."