On July 1, a sweeping government mandate on consumer privacy takes effect, impacting thousands of businesses across the country and perhaps around the world. The order has to do with security breaches, or more specifically, what happens when names are stolen out of a database along with Social Security or credit card numbers. It used to be that when a company's computers got hacked, whether by an insider or an intruder from the outside, the company could keep it a secret. Not anymore. Now, because such personal information can be used for identity theft, that company will almost certainly have to disclose such an infringement to anyone whose data is accessed by an unauthorized person.

Although this mandate reaches across state and international borders, it wasn't passed by Congress, written by federal regulators or handed down as an executive order from the president. Rather, it was passed by the California legislature. Any civics textbook will note, of course, that laws made in Sacramento apply only to Californians and that national policies are set in Washington, D.C. Lately, however, those clear lines of authority are blurring as regulated parties feel they have no choice but to apply California's standards in a larger forum.

The disclosure law is a good example of how Sacramento, on certain issues, is setting de facto national policy. Say a shop in Atlanta sells T-shirts via the Internet to all 50 states, storing customers' names and credit card numbers in a database. And say a hacker plunders that database. Technically, the law only kicks in if data on Californians is revealed, requiring the T-shirt shop to notify those customers by e-mail, postcard or through newspaper advertisements. Yet Californians in the database are most likely jumbled together with people from every other state. Not only might it be difficult to pick out the Californians from everyone else but doing so would inevitably raise the ticklish question of why people in only one state are being told about the incident. As a practical matter, the T-shirt shop would probably want to notify all customers nationwide.

This privacy law flies in the face of a new conventional wisdom that says the Golden State, long the national trendsetter, is growing increasingly irrelevant. In April, The Economist called California the "left out coast," citing its power crisis, the technology bust and the war on terrorism's focus back East. Add to that the state's crippling $35 billion budget deficit and you may well wonder whether California has lost its edge. Yet, in fact, it seems that California is asserting itself more than ever before. On a number of national issues, Sacramento sees a void in Washington that it is trying, for better or for worse, to fill on its own.

When President Bush pulled the United States out of the Kyoto accord on global warming, for example, California came up with its own alternative. A state law passed last year intends to force automakers to build cars and SUVs that emit less in greenhouse gases. Since California accounts for more than one-tenth of the American car market, the move could eventually alter the cars all Americans drive.

Another example is stem cell research. When Bush put strict limits on federal funding for research using cells derived from human embryos, Sacramento shot back with a law that explicitly encourages all kinds of stem cell research. The law doesn't set a national policy per se, but California is home to so much of the U.S. biomedical industry that it could, in time, render Bush's decision moot. Since the "safe haven" law passed last year, private donors have already pumped $17 million into California universities (much of it specifically for embryonic stem cell research), and the state is toying with the idea of selling $1 billion in bonds to fund even more.

Even California's public pension funds are sticking it to Washington. The fund for state employees, known as CalPERS, and the fund for teachers, known as CalSTRS, are the largest and third-largest pension funds in the country and are well known for boardroom activism. But as Washington responded lethargically to the recent corporate scandals, both funds stepped up their efforts on corporate governance, especially in the area of executive compensation. Meanwhile, both funds acted when it became clear that a bipartisan plan to stop U.S. corporations from avoiding taxes by setting up an offshore mailbox was dead in Congress.

Teaming up with labor groups and other pension funds, they've publicly campaigned for offshore companies in their portfolios-- including Tyco International, McDermott International and Ingersoll- Rand--to "come home to America." They earned surprisingly favorable votes on the matter from shareholders at Tyco and Ingersoll-Rand, although none of the companies has yet agreed to repatriate. "This is something the federal government should've cracked down on," says California Treasurer Phil Angelides, who sits on the board of both pension funds. "But the Republicans in Congress and the Bush administration keep blocking the effort. So we say to ourselves: If they won't, we will."


In many ways, Sacramento, a modest town on the flat green plains of California's central valley, is emerging as Washington's shadow capital. Not that there's any coordinated effort going on to poke the feds in the eye. But whether you read the Los Angeles Times, the New York Times or the London Times, you've probably noticed that the political gulf between Sacramento and Washington is huge and only growing wider. The recent tensions started with California's power crisis, when policy makers in Sacramento complained that Washington turned a blind eye to market manipulation by energy companies.

Since then, on one issue after another, cocksure Californians have circumvented the Washington policy juggernaut, which they see as firmly in the grip of business interests and senselessly slowed by abortion politics. Especially on environmental issues and consumer protection, California is increasingly comfortable using its clout as the nation's largest state to force changes in the way companies around the country--and around the globe--do business.

Meanwhile, critics in Washington note that California might want to fix its own problems before exporting some more. Whether the issue is greenhouse gases, privacy or corporate governance, industry lobbyists are especially wary of California, or any other state for that matter, setting different standards than Washington's. "If a government is going to take a position on climate change, it has to be done at the national level or even international level--not by individual states," says Eron Shosteck, spokesman for the Washington-based Alliance of Automobile Manufacturers.

Regardless of whether people in Washington policy circles think California is acting bravely or foolishly, they're finding they have to take Sacramento seriously. Business lobbyists who are scoring touchdowns in the nation's capital are getting trounced in California's. On flights between the two capital cities, they coordinate their offensive game with their defense. "The metaphor of the 800-pound gorilla doesn't come close to describing California," says Mark Bohannon, public policy chief for the Software & Information Industry Association in Washington, D.C. "It's the 800,000-ton gorilla because of the economy's size, the population and the fact that California is such an important customer base, even for companies that don't operate there."

If you ask policy makers in Sacramento why they and Washington are drifting apart, most will tell you it's because a conservative president is more or less getting his way with a Republican Congress. If it's true that Washington has moved markedly to the right, however, it's equally true that California is in the midst of a long, wide turn to the left. In the wake of last November's elections, Democrats now hold California's governorship and all of its statewide elected offices for the first time since 1882. Democrats control both houses of the legislature by nearly two-thirds majorities. Even at CalPERS, the 13-member board of directors is composed entirely of Democrats and labor leaders.

What's more, the current tension between Sacramento and Washington is a dynamic that may prevail for some years to come. California's GOP is in shambles and the latest round of redistricting locked in the Democrats' lopsided majorities. Even if a recall vote in September forces Governor Gray Davis out of office, that's not likely to alter the political environment that makes it easy for elected Democratic officials such as Attorney General Bill Lockyer and Angelides, the treasurer, to score political points by harping on Washington.

California's bullishness could also be viewed another way: as part of a growing power struggle between the federal government and the states. The sentiment in Sacramento is shared by the likes of Eliot Spitzer, New York's attorney general who challenged corruption on Wall Street while federal regulators sat and watched. Spitzer sees the current wave of state activism as a progressive twist on "New Federalism," the idea long pushed by conservatives that Washington's power be devolved to the states. People in Sacramento are thinking about things in exactly the same way. "It's ironic," says Fran Pavley, the Democratic assemblywoman who pushed California's global warming law through the legislature. "In Washington, the Republican leadership generally supports states' rights and less federal intrusion. Unless the states are doing something they don't like."


In the marble halls of California's capitol building, you cannot discuss these issues with lawmakers, staff and lobbyists without being constantly reminded of the same fact. California is not only the nation's largest state, they will say over and over again, but the world's fifth-largest economy, just behind the United Kingdom and just ahead of France. It's an interesting statistic, although not an altogether meaningful one since California, like North Dakota, is still just one of 50 states. But it does give a sense of the importance California assigns itself and how it sees its role in the country and the world.

On no issue is this clearer than with global warming. Since Pavley's bill on greenhouse gases came up last summer, California environmentalists buzz about the European Union more than they do about the American one. As they see it, President Bush and Congress have checked out of an important international debate on global warming. Governor Davis himself initially wavered on whether to sign Pavley's bill, but once he made up his mind, he used it as a chance to draw new lines between Sacramento, Washington and Brussels. "It is left to California, the nation's most-populous state and the world's fifth-largest economy, to take the lead," Davis said. "We can now join the longstanding and successful effort of European nations against global warming."

When it comes to regulating air pollution, California has always had a somewhat unique place in the country. The state enacted its own motor-vehicle standards years before Congress did, and when national lawmakers got around to it in 1970, they let California keep its stricter standards. Congress later gave the 49 other states the option of ditching the weaker federal standards for California's. Although only a handful has done so, regulators around the country, when they discuss vehicle emissions, talk about two separate systems: Washington's and California's. Currently 22 percent of the nation's population lives under air pollution rules made in Sacramento.

The greenhouse-gas law isn't California's first foray into prodding Detroit to build cars differently. Past efforts inspired the use of catalytic converters and onboard diagnostic computers. But with global warming, the board is on new regulatory ground. Typically, when California cracks down on air pollution, the problem is smog and the target is local, or possibly regional, in scope. Greenhouse gases, however, are a global problem. "We're aligned with the rest of the world on climate change," says Alan Lloyd, chairman of the California Air Resources Board, the agency in charge of implementing the climate- change law. "We can't control what happens in Washington, but we can control what happens here."

How will California exercise that control? CARB has two more years to figure this out. It's an important question, because it speaks directly to the power struggle between Sacramento and Washington. The main culprit in global warming is carbon dioxide, and the best way to reduce CO2 emissions is to build more fuel-efficient cars. Regulating fuel efficiency, however, is a power that Congress, by law, explicitly reserves for itself.

The automakers have played this federalism card against California before. Last year, General Motors and DaimlerChrysler successfully argued in court that CARB illegally stepped on federal turf when it asked Detroit to make zero-emission vehicles. In fact, the Bush administration joined that suit on the side of the automakers, signaling a likely federal stance should the greenhouse gas law also land in court. Everyone involved expects it will.

There's another argument that the car manufacturers sling at Sacramento. For all its size, California cannot by itself make a dent in such a worldwide problem as climate change. "Even if you abolished all motor vehicles in California, the level of greenhouse gases in the world would be unaffected," says Phil Isenberg, Detroit's lobbyist in Sacramento.

Lloyd insists that CARB's rules will "lead to real reductions" in gases that cause global warming, although he is elusive about how CARB will do that. His hope is that other states will copy California's rules for greenhouse gases, as they have for smog, and that Washington will be surrounded by world capitals on one side and state capitals on the other. "There's no action--or, in fact, questioning--going on at the federal level," Lloyd says. "California is again in a leadership role on the environment, a role we're accustomed to."


California is also emerging as the nation's primary battleground on privacy issues. On one level, this reflects the state's historically strong leanings toward consumer protection. That culture is now converging with the new realities of the Internet economy, much of which, despite the tech bust, is still based in California's Silicon Valley. As personal information flows ever more freely through computer databases and across borders, California more than any other state and more than Washington has sought to address privacy problems and identity theft, often with national reverberations.

For example, California passed a law in 1997 that helps identity- theft victims clear their credit reports; at least one of the three credit bureaus has decided to apply the rule nationally. Another California law, which takes effect 18 months from now, may change the way consumers around the country log into the Web sites of insurance companies. California doesn't want people to have to type in their Social Security numbers unencrypted, and since so many of the insurers' customers are in California, they'll likely make that change for everyone.

The database-breach disclosure law was conceived in the same spirit. Early last year, it seems, a hacker broke into a government computer system, compromising the payroll data of some 250,000 California state employees. While no actual cases of identity theft or economic damages were traced to the incident, the political damage was significant. As news of the infraction dribbled out, frustrated state workers wanted to know what data the hacker had gotten to, and on whom. Only months later did the state tell them. Lawmakers responded with the disclosure law, knowing full well that it would force businesses located in other states--and perhaps other countries--to comply. Companies that ignore the law risk facing class-action lawsuits in California courts.

High-tech businesses think California is taking a dubious approach. They would much rather see this sort of issue handled in Congress, not just because it affects national and international commerce but because their chances of either killing it or at least shaping it to their liking are better in Washington. "We're constantly telling legislators the Internet doesn't stop at the California border," says Roxanne Gould, a Sacramento lobbyist for the high-tech trade association known as AeA. "We regularly argue that it makes no sense to regulate these issues state by state when they should be dealt with at the national level or even the international level. That doesn't carry much weight in this legislature."

Joe Simitian, the bill's sponsor in the Assembly, sees it differently. Simitian is a tech-savvy legislator who represents part of Silicon Valley. He also chairs the legislature's select committee on privacy. He agrees that interstate issues of this kind should be handled in Washington. But he's tired of waiting. "I sympathize when the industry says it doesn't want 50 state standards," Simitian says. "But that's not an excuse for inaction. Many of the folks who testify in Sacramento for a single national standard are the same folks who testify in Washington for no standards at all."