Thirty years ago, Joel Kotkin and Paul Grabowicz celebrated “California, Inc.,” a state that would set the pace for the next American century, thanks to its growing population, robust economy, innovative spirit, proximity to the Pacific Rim, and sunny climate. The Golden State had everything going for it. The California of 2010 is a basket case. The unemployment rate is one of the nation’s worst, people and firms are fleeing, and the budgetary outlook is bleak. Pundits wonder if it might be America’s first “failed state.”

So what happened? Blame public-sector unions for much of the mess, argues Steven Malanga in “The Beholden State,” the first of our cover stories on California’s crisis. Malanga retraces the history of how union power transformed California into a place where politicians must do labor’s bidding. No surprise that government workers have come to thrive at the battered private sector’s expense. With the U.S.’s highest-paid teachers, absurdly generous deals letting cops retire in their mid- or even early fifties with fat pensions, and prison guards bringing home six-figure salaries, California has increased spending to stratospheric levels, requiring prosperity-killing taxes and other fees and unsustainable budget deficits to pay for it all. Meanwhile, infrastructure crumbles, classrooms are overcrowded, and towns like Vallejo, out of money, have to slash basic services. As Malanga’s essay underscores, California’s plight is a warning to the rest of the nation, including New York, where the same union capture of politics is taking place. The good news: Californians are fed up and may force salutary political change this November.

Ask liberals what’s wrong with California, and they’ll often say, “Proposition 13,” the 1978 state ballot initiative that shrank property taxes and made it tougher for lawmakers and assessors to hike taxes in the future. Not so, responds William Voegeli in “Don’t Blame Proposition 13”: California government still has lots of money—indeed, its revenue per capita is well above the national average. The real problem is excessive state and local spending and the lousy use made of those substantial funds.

If California’s economy has a bright spot, it’s Silicon Valley, where high-tech wizardry and entrepreneurial energy abound. But for how long? In “The Silicon Lining,” Guy Sorman interviews venture capitalists, business leaders, and industry watchers and finds some optimism about the future—but also growing concern that California’s antibusiness policies may drive many Valley firms to friendlier climes.

Back on the East Coast, urban economist Edward L. Glaeser’s “Preservation Follies” shows how the extension of landmarking from unique, aesthetically beautiful buildings to whole districts, filled with commonplace architecture, has hurt New York City’s growth and increasingly made Manhattan a preserve of the prosperous. Glaeser recommends a more reasonable balance of preservation and dynamic change.

“Can New York Clean Up the Testing Mess?” That’s Sol Stern’s big question. Statewide math and reading tests have shown wildly implausible gains lately, so much so that in some districts the number of students scoring above proficient has hit nearly 100 percent. (Stern calls this the “Lake Wobegon Effect,” a reference to Garrison Keillor’s stories about a town where “all the children are above average.”) Stern examines the sources of the test inflation—perverse incentives from the No Child Left Behind act, failed state and local leadership, and the desire of officials to celebrate seemingly miraculous school achievements—and shows how the distortion cripples meaningful education reform and harms kids. Thankfully, two top New York education officials are tackling the problem. If they succeed, they could make New York a standard-bearer for educational honesty.

Honesty about the past is the theme of two brilliant pieces of investigative journalism in this issue. Claire Berlinski’s “A Hidden History of Evil” looks at unexamined Soviet archives smuggled out by dissidents and wonders why no one seems to care about the shocking things they reveal about the Cold War’s closing years. Judith Miller’s “When Germ Warfare Happened” revisits Japan’s use of bioweapons against China generations ago, the effects of which continue to be felt in the Chinese countryside.

—Brian C. Anderson