Some of the world’s largest economies are in a shocking state (USA, Japan, UK) while others are just in a terrible state (Germany, Spain, S. Korea etc). Now the world’s eighth largest economy is teetering on the edge of — what has been threatening for decades — falling into a financial abyss.

California often foretells the future that the rest of us will eventually experience — Just look last week at Obama’s nationwide adoption of California’s strict vehicle fuel standards. For this reason, not to mention its role as the biggest state of the most important economy on the planet, it is fascinating to the rest of us and perhaps of more than just passing interest.

Many countries/societies look enviously at the astounding entrepreneurialism in Silicon Valley, the huge creative industries of film and music, many of the world’s greatest universities (Stanford, UC-Berkeley, UCLA, UCSF, CalTech) and dominant industries in aerospace and agriculture. But it seems that being the richest most innovative democratic society on the globe cannot prevent troubles of a matching scale. It is now widely accepted that the state has overdosed on (direct) democracy and moves are afoot to have a constitutional convention to change the rules — for the first time in 130 years — to rescue the state from ungovernability.

For example the current financial woes are made intractable by the fact that the state budget must be passed by a two-thirds majority in both houses of its legislature, then it needs to pass a special ballot by the voters. Of six budgetary measures proposed to rescue the state’s finances only one passed (and this was a regressive populist one). Due to these events, some vicious cuts will be forced on the state such as loss of health insurance to a million children, closing women’s shelters and cuts to public education.

The Golden State represents a distillation of the problems that plague America. Despite almost unimaginable wealth, public finances are bankrupt. By virtue of its size, high house prices and large poorer immigrant population it has the worst subprime housing mess in the USA. It has one of the nation’s worst unemployment at 10.5%. It has the developed world’s largest prison population, which is such a drain on finances that early prisoner release was part of the proposed solutions to the state budget woes. It has recurrent energy and water supply problems and transportation issues.

Despite having a moderate Republican governor (Arnold Schwarzenegger) who generally works well with the Democrat majority, there is a fractious hardline obstructionist Republican minority that nevertheless can and does obstruct orderly government. The democrats are not much better being divided by geography, ethnicity and ideology across this large diverse state. Then there are the voters who have to approve almost everything the politicians propose. Witness the irony of this most liberal of states, the home of Harvey Milk and the heartland of gay liberation, rejecting same-gender marriage last November, upheld by the courts last week.

Paul Krugman (Nobel Prize Economics 2008) wrote a piece in The New York Times in which he discussed many of these points. No economic discussion of California can leave out the infamous Proposition 13 (passed in one of those “taxpayer revolt” ballots in 1978) that cripples the states’ ability to raise taxes as outlined above.

What was more interesting was the reader response. Krugman’s OpEd received 733 Comments (before it closed after about 12 hours), which is high but not exceptional for the NYT. What was exceptional was the quality of detailed argument, anger, unanimity and candour in those comments. The top comment was 500 eloquent words which presented the problems more vividly and convincingly than Krugman; this comment itself received 642 Reader’s Recommendations (The NYT website is a kind of instant direct democracy of journalism and blogging.)

Obviously NYT readers and those who write these mostly very polite blogs are a highly self-selected bunch but here they have thrown political correctness aside and discussed everything. One can understand the raw frustration of the problems caused by the state’s rampant illegal immigration, mostly from Mexico, and — of course — the largest in the nation.

While parts of the economy, particularly agriculture and the low end of the service industry, are heavily dependent on these illegal aliens, they overwhelm public hospitals because they have no choice but to use the ER as their only source of healthcare, and the public school system deteriorates due to their children’s poor English and erratic attendance. California once had the highest but now has one of the nation’s lowest high-school graduation rates. These factors force many Californians into expensive private health care (or of course no health care) and private schooling.

As with the election of Obama bringing a rethink of what has gone wrong with America, so it is even more evident in California. Many believe Prop 13 must go. Many are questioning the long held American allergy to taxes and the proper role of government — 30 years after they gave the country former governor Ronald Reagan and his (or the Hoover Institute’s) mantra of small government. Many have even admitted that the European way seems more functional.

The heart of the financial problem lies in inadequate taxes but the really fundamental issue is in the philosophy that allows such growing inequality. The richest 3% of state taxpayers pay approximately 60% of all state taxes and possess even more of the wealth. The wages of the illegals are so low that they pay no taxes as is true for the whole bottom tier of workers. These low wages stop native-born Americans from taking these jobs.

Poorly paid workers effectively see California heavily subsidising the agricultural products the rest of America depends on (not to mention the massive water subsidies to BigAg, another story). And all Californians pay the price — deteriorating schools, healthcare, infrastructure, high incarceration rates and unaffordable housing.

As Krugman observes, with its huge human and financial resources there is no reason why California should be on this precipice to chaos — in fact close to banana republic status (his words and repeated by many of the bloggers). With a relatively modest increase in taxes, which are considerably below European and most other developed countries, it could easily solve the budget problem.

Back to the opening point. Are there lessons to be learnt by us? Perhaps all this seems a million miles from the Australian experience but the 12 years of the Howard era moved our country inexorably closer to the American model — for example on taxation and two-tier healthcare and education. Work Choices was a major step to more extreme income distribution and creation of an underclass of a casualized, underpaid workforce living on the margins. We even had our own housing bubble, if not subprime but tying up an unproductive one trillion dollars in private debt — half of which is foreign debt — that could still cause big problems if this recession deepens and persists.

For the libertarians or the die-hard neoconservatives, California should show that inadequate taxes and small government does not work except in the short term for the well off minority.

It shows that the richest state in the richest country in the world is nevertheless unsustainable and ungovernable with too much direct democracy.

It suggests we should get more serious about 4-year fixed terms of office, the media could examine its focus on short-term trivia (in turn provoking furious government spin) and the opposition could observe how the Republican obstructionism is digging that party into an unelectable niche role.

If a society depends too much on an underpaid underclass it is counterproductive because of inadequate tax revenue combined with high public service costs (health, education, justice system, ultimately retirement costs) with inevitable decline in those services, not to mention increasing social tensions. Even if one’s ideology embraces such a brutal system of survival-of-the-richest it is clearly unsustainable. We should thank California for this great natural 30-year experiment and hope that we are smart enough to learn from it.

Michael James is an Australian research scientist who has worked in California. These are the author’s personal opinions and do not represent the views of any organisation or institution with which he is affiliated.