California has unapologetically invested in liberalism - and has reaped a toxic asset. The Golden State is headed towards the kind of public-sector meltdown usually reserved for third-world banana republics. Unemployment has skyrocketed to nearly 10%. The public education system is one of the nation's five worst. California has the country's dirtiest air and most gridlocked roads. And we have a government so dysfunctional that even sober onlookers are considering the merits of a constitutional convention. It's often said that California's present determines the nation's future. If that's true, Americans may need to begin stocking up on firearms and canned goods.

Nothing demonstrates this dysfunction more clearly than the recent budget struggle that left the state teetering on the edge of bankruptcy. After Republican resistance finally melted last Thursday, California legislators managed to shore up a $42bn shortfall with billions in new taxes, billions in spending cuts to education, health care, and social services and billions in accounting tricks that ensure the charade will repeat itself in the near future. This only after the state became so cash-strapped that it began planning to lay off 20,000 public employees and send out IOUs instead of tax refunds. Call it the "everybody loses" model of governing.

California is at a crossroads. Within the next decade, it will either settle for the kind of enduring failure that marks states like Michigan or New Jersey, or it will experience a renaissance in good government along the lines of Rudy Giuliani's New York City or Bobby Jindal's Louisiana. Whether the GOP shows up for the fight will be the determining factor.

Republicans can return to dominance in California if they follow three steps in the midst of this maelstrom.

First, they need to take a deep breath and stand still. When governor
Schwarzenegger's successor is elected next year, the odds are better than not that a Democrat will emerge victorious. The prospect of complete Democratic ownership of the state's collapse combined with a more dynamic electorate will breathe new life into the GOP's political future.

Second, the party needs to create an agenda that unifies Republicans and draws in independents and disaffected Democrats.

Third, Republicans can dispose of the social divisions that fracture the party by kicking hot-button cultural issues to the forum in which they have always been the most successful: the ballot box.