SYNOPSIS:

Mario Cuomo is either the most cunning or the most confused politician in America. For the past two months, he has publicly fantasized about running for president and asked voters to share his dream. While he deliberates -- or dithers -- Cuomo uses New York's mounting budget woes as a shield, claiming that no decision on higher office can be made until his state's financial crisis is resolved. Meanwhile, in Washington, Republican Party operatives are busy analyzing Cuomo's fiscal policies. The GOP hopes to portray New York's governor as the worst kind of tax-and-spend Democrat, a clone of Massachusetts's Michael Dukakis, who was crushed by George Bush in the 1988 election. New York does have deep and troubling economic problems. Unemployment, for example, has climbed to 8 percent, well over the 6.8 percent national average. But for the most part, these difficulties are not Cuomo's fault, although he often ran New York as if the 1980s boom would last forever. Today, recession-wracked America is plagued by a fiscal crisis that has spread to 40 out of 50 states, each of which is struggling to make ends meet. New York's financial woes -- slashed revenues and increased demands for services -- are similar to those of every other large, urbanized state in the nation. And, in many ways, they replicate the problems faced by the most populous state, California, which now has a 7.4 percent unemployment rate. Ironically, the Golden State has been run during much of the past decade by Republican governors whose philosophy calls for less government involvement than that sought by the unabashedly liberal Cuomo. The similarity of the California and New York budget predicaments tells us that the massive tide of red ink now drowning state governments runs far deeper than the ideologies of our politicians.

The crippling economic downturn has reversed an era of prosperity in both New York and California. From 1980 to 1988, economic growth in the Empire State outpaced the country as a whole, with per capita personal income rising from 6.4 percent to 13.7 percent above the national average. As income soared, unemployment plummeted: New York's jobless rate was only 4.2 percent in 1988, more than a full percentage point lower than the country's overall 5.5 percent rate. During most of the 1980s, California's unemployment rate hovered near the national average of 7 percent, but as usual the state led the nation in job creation, adding nearly 3 million positions between 1980 and 1989.

Boom and bust. One of the reasons that California and New York find themselves mired in recession today is their dependence on the wrong industries at the wrong time. New York's service-based economy boomed along with the national service sector in the 1980s, and the financial business of New York City mushroomed during this freewheeling-and-dealing era. The stock-market crash of 1987 slowed that growth and has led to the loss of 46,300 jobs on Wall Street over the past four years. The financial industry's steep slide, in turn, has dragged down incomes in the entire New York City region.

California's special engines of prosperity in the 1980s were the defense industries of greater Los Angeles and the high-tech powerhouses of Silicon Valley. Victory in the cold war has decimated military contracting, and the number of defense-related jobs in California declined from 7.1 percent of the state's labor force in 1985 to 5.4 percent in 1990. Meanwhile, the once hugely profitable semiconductor industry continues to face unrelenting competition from Japan. The two states also suffered from speculative real-estate frenzies. Developers on both coasts, believing that property prices could only rise, borrowed billions to build offices and malls. Their activities pushed up costs of land and labor in New York and California, driving many manufacturing jobs to less expensive locales. By the time the bubble burst, vacancy rates had shot up, leaving a legacy of empty structures and falling real-estate values that have paralyzed many banks. Last week, the FDIC reported that 24 percent of California's banks lost money during the first nine months of 1991; during the same period, 11 percent of the nation's banks showed losses.

Heavy spending in both New York and California during the 1980s was part of a national pattern. Over the past decade, while real federal domestic spending per capita fell slightly, per capita spending by state and local governments rose 16 percent. In all states -- whether they were run by liberals or conservatives -- Medicaid costs surged, growing as a share of personal income by 21 percent from 1979 to 1989. This dramatic increase occurred partly because of rising medical costs, partly because of growing poverty and partly because the federal government forced states to expand Medicaid coverage. Spending on prisons also soared across the country, increasing 75 percent over the decade as a share of personal income. For the most part, these huge expenditures were made in response to the soaring crime rate; but they also were mandated by federal judges, who forced many states to improve the horrifying conditions at existing prisons. Meanwhile, spending on education, welfare and highways stayed level or declined as shares of personal income.

Different strokes. Despite their striking similarities, New York and California aren't exactly bicoastal twins. State and local government combined spent about 30 percent more per capita in Cuomo's New York than in the California run by former GOP Gov. George Deukmejian, who served from 1983 through 1990. The biggest contrast was in welfare and health care, where New York outspent its West Coast counterpart. This spending gap probably owed more to the vast social problems of New York City than to tighter-fisted policies in California, although the Golden State's current governor, Republican Pete Wilson, last week announced plans to hack away at welfare payments. Infrastructure spending, on the other hand, clearly shows the difference in governing styles between Cuomo and Deukmejian. California's former governor tried to spend as little as possible; under Cuomo, New York's capital spending per capita was about 40 percent larger than California's. Most surprising of all, perhaps, is the fact that during the 1980s New York spent 60 percent more per capita on highways than car-crazed California.

Now that the day of reckoning has come, both states are in trouble. California's budget shortfall for fiscal year 1992 could run between $ 2 billion and $ 3 billion, which represents 5 to 7 percent of its general revenues. New York's fiscal year 1992 red ink is expected to total $ 875 million, or approximately 3 percent of general revenues. Despite this deficit differential, bond markets view New York's financial problems as more serious; the state's credit is ranked only slightly above that of deeply troubled Massachusetts, while California retains its AAA rating. Both states have employed gimmicks to help balance their budgets: New York sold and leased back a prison while California attempted to ''borrow" funds from a state employee pension fund. Each state is also raising revenues to cope with its budgetary problems. California's Governor Wilson has pushed through $ 6.4 billion in new taxes for fiscal year 1992, and Cuomo has upped tax collections by $ 1.2 billion during the same period.

Ironically, the biggest criticism one can make of Cuomo is that he was too eager to cut taxes on the rich. A 1987 tax revision substantially lowered taxes for the well-off in New York, and the state now sorely misses those revenues. Cuomo argues that a governor cannot effectively tax the rich without driving them to other states. For that reason, he implies, a really liberal program cannot be implemented at the state level. Instead, the only place where Mario Cuomo's liberalism can really be tested is in the national political arena.

Bicoastal pain

This recession has hit New York and California harder than the rest of the country.

Civilian unemployment rate

Federal slippage

Most state and local governments were forced to assume a greater fiscal burden as domestic federal spending was trimmed in the 1980s.

Domestic per capita spending, 1989 dollars

Budget busters

Required spending on prisons and Medicaid has wreaked havoc on state budgets across the country.

State expenditure growth as a percentage of personal income, 1979-89

Corrections 75 pct.

Medicaid 21 pct.

Education 1 pct.

Highways -7 pct.

Welfare -8 pct.

Note: Capital improvements figures reflect state and local spending.

USN&WR-Basic data: National Conference of State Legislatures, U.S. Depts. of Labor and Commerce

Big spenders

New York and California have both spent heavily on social services and capital improvements.

Per capita spending, 1988

New York California

Education $ 680 $ 841

Welfare $ 683 $ 478

Highways $ 102 $ 97

Health $ 239 $ 143

Capital

improvements $ 548 $ 393

Note: Capital improvements figures reflect state and local spending.

USN&WR-Basic data: National Conference of State Legislatures U.S. Depts. of Labor and Commerce

Tax bites

New York's tax increases have been smaller than the revenue hikes in most large states.

Percentage increase in tax collections, 1990 versus 1992

Pennsylvania 24.0 pct.

Connecticut 20.2 pct.

California 14.7 pct.

Illinois 5.7 pct.

New York 4.2 pct.

Originally published, 12.23.91