California governor Arnold Schwarzenegger owes Abel Maldonaldo. He's the California Republican state senator who on early Thursday morning agreed to vote for Schwarzenegger's budget. And so Maldonaldo guaranteed that the budget--a combination of tax and fee increases, spending cuts, and borrowing meant to plug California's $42 billion deficit--will be signed into law. The Golden State will avoid bankruptcy.

The resolution to California's budget crisis was a close-run thing that holds lessons for national politics. Schwarzenegger began budget negotiations with leaders in the state assembly and senate late last year. It took months, but they were finally able to compromise on a set of tax hikes and spending reductions that the legislators thought might pass. The only trouble: California's requirement that two-thirds of the legislature vote for tax increases. This meant that at least three Republicans in each legislative chamber would have to go along with the majority Democrats. Mike Villines, the Republican leader in the state assembly, could guarantee three votes. But David Cogdill, the GOP Senate leader, couldn't unless one GOP senator stepped forward. The race was on to find the single senate Republican who would throw his support behind the bill.

It wasn't easy. Republicans staunchly opposed any tax increases. California's income and sales tax, they pointed out, were already among the highest in the country. Making taxes higher wouldn't promote economic growth. Maldonaldo was open to compromise. He'd worked with Schwarzenegger before. But his quirky demands, including an open-primary system in California, made other legislators blanch. So the Democratic leadership kept the state legislators in Sacramento in a marathon session until the Republicans gave in. The GOP caucus still wouldn't budge. In a surprise move, this week the Republican state senators dumped leader Cogdill, who helped write the budget plan, in favor of David Hollingsworth, who opposed the deal. A resolution to the crisis seemed out of reach yet again. Finally, early on February 19, the governor and majority and minority leaders agreed to Maldonaldo's demands for an open primary, a ban on pay-raises for legislators whenever California is in deficit, and scrapping the planned hike in the gasoline tax. The legislation awaits Schwarzenegger's signature. Crisis averted.

At least for now. California's problems are structural. They aren't going away. The state's high-tax, high-spending policies have lowered its bond-rating to the lowest of any state. Business and workers flee to more competitive states. Worse, the system seems immune to reform. Schwarzenegger was elected in the 2003 recall. He pledged to stop Gray Davis's plans to increase the car tax and provide driver's licenses to illegal immigrants. But Schwarzenegger only broke even. The driver's licenses for illegals didn't happen. But the car tax lives. The budget legislation that Schwarzenegger is about to sign raises it to 1.15 percent.

Nor has Schwarzenegger kept spending down. It's up by more than a third since 2002, the year before his election. Government reform? Schwarzenegger went to the people in a 2005 special election referendum designed to weaken the interest groups suffocating California. But those interests, mainly public employee unions, mobilized against him. He got clobbered. Ever since, Schwarzenegger has been conciliatory to the Democrats who run the state legislature. He's done little to promote the state GOP. This has led to a lot of bitterness between Schwarzenegger and his co-partisans. That's one reason Schwarzenegger had trouble winning Republican support for the budget deal.

What can the nation learn from California? For one thing, it's not just tax cuts that produce deficits. California's tax rates were already punishingly high before the recession led to reduced revenue. Now those rates will be even higher. California's problem is over-spending. The state government made promises during boom-times that it couldn't afford when things went bust. This is exactly the danger facing the United States at large. The huge expansion of government included in the stimulus bill won't go away when the recession ends. And the government's liabilities will only increase from its new, post-stimulus baseline. This more or less guarantees that, in time, the government will impose revenue-hikes that will hurt growth and make the economy worse.

Another lesson is that populist anger only gets you so far. A populist revolt gave Californians the recall and Governor Schwarzenegger. Similar anger gave America a Democratic Congress in 2006 and President Obama in 2008. But Schwarzenegger was unable to reform things thanks to a left-wing legislature, a truculent minority party, and a system encrusted with special interests. Seem familiar? A similar fate may await Obama. California is "a morality tale for the nation," says Republican congressman Tom McClintock.

I asked a former state legislator who won the California budget debate. There was no hesitation in his answer. "Nevada and Arizona," he said.

Matthew Continetti is associate editor of THE WEEKLY STANDARD and author of The K Street Gang: The Rise and Fall of the Republican Machine (Doubleday, 2006).

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