Hoping to rescue his troubled campaign, the swaggering governor says he’ll do for America what he did for Texas. Is that a promise or a threat?

“Here is what you need to impress upon your readers,” Rick Perry said, putting down his barbecue to jab a finger at me. “What happened in Texas over the last decade is not a miracle. Miracles are things that happen, and they’re unexplained. Miracles are what God does.” He grinned. “That’s not what we did. What we did happened because of our philosophical refusal to spend money we didn’t have or raise taxes.” He glanced around the table at his aides and cocked another grin. “Now, you’re welcome to call it that,” he said. “But just say that the governor didn’t agree.” Everybody broke up laughing.

Only Perry wasn’t really joking. He would return to this theme again and again during our September lunch at a Texas-style barbecue restaurant he’d chosen in New York—Perry doesn’t shy from stereotype—because his claim on the White House rests on his record as the three-term governor of Texas. Over the last two years, as the U.S. struggled to emerge from recession, Texas created half the new jobs in the country. Perry’s supporters have dubbed this the “Texas Miracle,” although many other people, including some of the state’s top business leaders, are less rapturous. When the governor got in the race in August, he shot to the top of Republican Presidential polls on his reputation as a potential savior whose know-how and conviction could turn the economy around. That’s Perry’s promise: He’ll do for the country what he’s done for Texas. “I’m the guy who led what many would consider to be the greatest resurgence in America during the 2000s,” he told me. “That’s why I think Americans look at us and go, ‘You’re the guy we want leading America.’ ”

At the time, Perry was enjoying his fleeting moment as the front-runner. He had not yet collapsed in the polls after struggling to defend tuition breaks for illegal immigrants and mandatory vaccines for schoolgirls, and none but a few rural Texans knew of the “Niggerhead Ranch.”

His allure was easy to see. Perry swept into the restaurant with a phalanx of Texas Rangers, security men, drivers, and aides—16 in all—dressed identically in dark suits and white shirts, many wearing earpieces. He looked great. Perry has the dark, slightly exaggerated good looks of the villain in a daytime soap opera and puts more effort into personal grooming than most politicians would dare. He wore a fine charcoal suit with pick-stitched lapels, gold Star of Texas cuff links, and a cornflower-blue silk tie that he tucked into his shirt before he ate. His cowboy boots were polished to a high sheen. He oozed self-confidence. It was easy to imagine him convincing some beleaguered CEO, probably in an overregulated hellhole like California, that he’d be richer, happier, and much better off were he to relocate his company to Texas. This is one of Perry’s favorite things to do, and a big part of his success story.

He hadn’t gotten a chance to talk about that during the Republican debate a few days earlier, and this bothered him. In fact, he’d been knocked around. Michele Bachmann hit him with charges of cronyism. Mitt Romney said he was frightening seniors by calling Social Security a “Ponzi scheme.” Perry has never lost an election and rarely gets challenged at home. He seemed annoyed at even being compared to the likes of Bachmann and Romney. “Every person on that stage is a minor player in the grand scheme of job creation,” he said. Romney, his chief tormenter, was “an abject failure.”

As lunch progressed, it became clear that his frustration over this lack of recognition extended clear back to Texas. Perry has served longer than any other governor in the state’s history, but until recently he had almost no profile beyond its borders. Even now, when most people think “Texas governor,” they think “George W. Bush.” After just six years as governor—half of Perry’s time in office—Bush had already set himself up for a successful Presidential campaign. I asked Perry if he ever felt overshadowed by Bush. “Listen,” he said. “Nobody ever served 11 years as the governor of the state of Texas. Now the individual who follows me, they’ll be the one living under a shadow.”

ems quaintly archaic. Bush had to work with Democrats to get anything done. His major achievement, and the basis of his Presidential campaign, was an education reform law that’s a good illustration of how Texas once worked. In the 1980s, business leaders led by H. Ross Perot began pushing for tougher curriculum standards to ensure access to skilled workers in the future. This became a major issue in the legislature for many years. The law that Bush ultimately signed with support from Democrats and Republicans improved the public schools, which helped not just business owners but everyone else too.

Perry, by then lieutenant governor, inherited the top job when Bush went to the White House. He quickly signaled that he had no interest in cutting deals. In June 2001, just months after taking office, he vetoed 78 bills on a single day in what became known as the “Father’s Day Massacre”—a blunt assertion of power that marked an end to the comity of the Bush years. Today, Texas is a one-party state—Republican—and the fight is between the Establishment and the insurgent right wing. At the time Perry took over, it wasn’t yet clear just how much the relationship between business and Texas was about to change.

Perry set out to do bold things that resembled Bush’s education reform in benefiting business and the broader public alike. His early speeches identified three areas where problems had to be fixed to ensure the state’s future prosperity: water, power, and roads. This diagnosis showed foresight. Texas has always been driven by the rapid growth of its population, which spurs economic development but imposes ever-increasing demands on the state’s resources and infrastructure. Without much fanfare, Perry’s predecessor had signed a landmark bill to create a system of reservoirs over 50 years designed to prevent the shortages and attendant feuds that plague Western states. The next task was to fortify Texas’ aging power grid and improve its highways. Just before Perry became governor, Texas had suffered a humiliation when Dell (DELL), one of the state’s premier corporations, opted to build a new factory in Nashville, rather than near its headquarters outside Austin, because Texas roads were too congested.

Perry’s solution was grand, even visionary. In 2002 he proposed a Trans-Texas Corridor, an idea dreamed up by an old friend from his statehouse days, Ric Williamson, who became his transportation commissioner. A sort of mad genius, Williamson foresaw a 4,000-mile network of roads weaving together the state’s large urban areas. The crisscrossing paths would combine highways for commercial and passenger vehicles with commuter and freight rail, pipelines, and high-voltage power lines, all crammed into a 1,200-foot-wide corridor. “The idea was that if we’re going to make a transportation investment, we’d make sure that it’s big enough to encompass all of our needs,” says Timothy J. Lomax, an engineer at Texas A&M’s Texas Transportation Institute.

It was the largest engineering project in state history, designed to encourage the private sector to take on much of its $183 billion cost. At first it looked like nothing could stop it. The bill approving the project sailed through the legislature.

Then the details began to emerge, and everything fell apart. The corridor would include toll roads, which were rare in Texas and unpopular, but necessary because Perry wouldn’t agree to hike the gas tax to pay for it. “There’s no road fairy,” he and Williamson said. Some people were upset that the project was contracted out to a Spanish corporation. The greatest objection was to the government’s plan to seize thousands of acres of land to build the roads, infuriating farmers and ranchers. Before there were Tea Parties in Texas, Toll Parties sprang up to fight the corridor.

Perry made several futile attempts to save his project, but the legislature, fearing a backlash, turned against him. In 2007, Williamson died of a heart attack. The corridor plan was set aside, then broken into pieces, and finally killed off altogether.

Perry’s electricity initiative met the same fate for similar reasons. In 2006 the state’s largest electric utility, TXU Energy, announced plans to build 11 coal-fired power plants. This would have helped meet an obvious need. Texas is unique in having an electricity grid separate from the rest of the country’s, built that way in the 1930s to avoid federal oversight. But this makes it difficult to import power when there are shortages. Rolling blackouts are a continual problem.

The source of the new power—coal—guaranteed an outcry. Rather than go out and try to build support, Perry bypassed the public and the legislature and issued an executive order accelerating the permits, thereby intensifying the opposition. He argued, correctly, that the state needed to generate more power. But he either didn’t anticipate or didn’t care who would object—not only environmentalists but also whole swaths of suburban Republicans. Perry’s order was challenged in court and found unconstitutional. A private equity group later bought TXU and scrapped most of the plans.

Both episodes reveal a lot about how Perry governs. He recognized problems and acted on them. He wasn’t afraid to stick his neck out. He was also impulsive and disinclined to work at winning others to his side. And when things did not go his way, he moved on, leaving the problems to linger.

Perry has fared much better in situations where success depends upon his own formidable charm. The leading example of this, often touted by the governor and his campaign, is the Texas Enterprise Fund. In 2003, even as the state was facing a $10 billion budget shortfall, Perry persuaded the legislature to commit $295 million to lure businesses from out of state.

He has taken on the role of chief corporate raider with great relish, traveling as far as South Korea and China to pitch companies, and even individual scientists, on the wonders of Texas. Often these companies wind up with multimillion-dollar grants. “He has believed very much in being a hands-on player,” says Mike Rollins, who runs the Greater Austin Chamber of Commerce. In the last few years, Facebook, EBay (EBAY), and General Electric (GE), to name just a few, have set up operations in the state after being awarded grants. The fund has had some problems. A few recipients were busts, notably Countrywide Financial, which promised 7,500 jobs but collapsed in the housing crisis. A whiff of cronyism has attached to several deals that benefited donors to Perry’s campaigns. But overall the fund has been a boon for Texas. At his urging, a similar one has been established to invest in emerging technologies.

Perry has also taken advantage of the steady erosion of the Texas Democratic Party to protect business. In 2002, after Republicans captured the statehouse, he steamrolled the trial bar, a pillar of the Democratic Party throughout the South, capping lawsuit damage awards. This year he added a “loser pays” provision on lawsuits.

By now much of his power in Texas derives simply from his having been around for so long. Nearly every agency and commission, the state supreme court, and the university boards of regents are stocked with his loyalists, and he’s built up a network of rich donors. This gives Texas politics a certain transactional flavor which hadn’t hurt him politically until recently, when it became an issue in the Republican debates. Perry had trouble answering Bachmann’s accusation that he mandated HPV shots for girls in Texas after taking campaign contributions from Merck (MRK), the vaccine’s maker. He shot back that he was “offended,” but Bachmann got the better of him.

When I met him, Perry was still irritated by the exchange, which he frankly conceded he had bungled. “Here is the answer,” he said. “Even Ben Bernanke is not spending enough money to buy my influence.” Even so, the charge raised doubts about Perry’s relationship with donors. “George Bush’s close friends were businessmen from the oil patch,” says Tom Banning, who heads the Texas Academy of Family Physicians in Austin. “Perry’s close friends are all lobbyists.”

Perry excels at the tactical side of politics, and over the past two years he has veered sharply right. He spotted the rise of the Tea Party movement well before most others and aligned himself with it. He became a budget warrior, more invested in cutting government than using it in the traditional Texas way to fuel economic development. By the beginning of this year he looked like a man planning to ride a Tea Party wave to the White House. “We must cut spending to keep our economic engine on track,” he said in his 2011 inaugural address.

When the legislature convened in January, it confronted a massive budget shortfall of $27 billion from the collapse of sales tax revenue in the recession. Offsetting this grim figure was a $6 billion rainy day fund that the business community, the Democrats, and many Republicans wanted to use to protect school budgets. But Perry refused to touch the money and made preserving the fund a litmus test of conservatism.

Instead, through a combination of deep cuts and audacious gimmickry, the shortfall was erased. This entailed cutting $5 billion from the public schools and breaking a commitment, dating back to World War II, to budget for the thousands of new students who enroll every year. The state’s population is rising at twice the national rate. Its schools will absorb 85,000 new students this year alone, and for the first time without any new money to pay for them.

The legislature made another $5 billion disappear by pretending the state’s population isn’t rising. The budget assumes no growth in Medicaid claims, although these track population growth. Lawmakers allotted enough money for 18 months but declared that it will last 24 months. Of course, Medicaid is an entitlement, so eventually the state will have to pay up. It is universally understood this will claim the entire rainy day fund. But that bill, and others, won’t come due until the next legislature convenes in January 2013. By then, Perry intends to be in the White House.

This is not the record Perry highlights when he urges people to look at what he’s done as governor. The idea of a Texas Miracle is based on a single alluring fact: Texas managed to create jobs when other states were losing them. Historically, Texas unemployment has not been dramatically higher or lower than the national rate. But in early 2007 it dropped below and has stayed there ever since.

Texas has fared better than most other states for a number of reasons. Its energy-intensive economy has been sustained by high oil prices. Crossborder commerce with Mexico and its rising middle class helped Texas businesses. Also, the state doesn’t have a large concentration of financial-services companies and avoided the worst excesses of the housing bubble thanks to state regulations limiting the size of home equity loans. As Don Baylor, senior policy analyst at the Center for Public Policy Priorities in Austin, says: “We didn’t have a lot of the things that precipitated the Great Recession.”

Perry’s low-tax, pro-business policies have certainly helped, too. The state became an even more desirable destination for companies and job seekers. During the 18 months of the recession, Texas grew by 800,000 people, the equivalent of adding everyone in San Francisco.

Government has also played a large role in sustaining the state’s economy. The federal stimulus saved or created 210,000 jobs in Texas, according to Baylor’s analysis of a national study by economists Mark Zandi and Alan Blinder. A quirk of state government also helped. Unlike most other states, Texas is on a two-year budget cycle. The effects of the recession didn’t begin to register there until the end of 2008, about a year later than the rest of the country. So there hadn’t yet been much of a drop-off in revenue when the legislature wrote the 2009 budget, and by then the state had begun receiving federal stimulus funds. Consequently, while other states had already slashed spending, Texas was carried through the next two years with a budget that was much more robust.

This is the big reason why Texas kept adding jobs during the recession, even as the rest of the country lost them: 65 percent of the net new jobs there since the beginning of 2007 were government positions. That puts an entirely different cast on the Texas Miracle than the one Perry promotes.

It’s also why the “miracle” is evaporating. The deep cuts in this year’s budget have already begun kicking in. Baylor estimates they’ll cost up to 50,000 public-sector jobs. Unemployment in Texas is now on the rise. In fact, the state is one of only a dozen with growing unemployment since the end of the recession. In August joblessness in the state hit 8.5 percent as Texas experienced a net loss of 1,300 jobs.

In Austin, I went to see Bill Hammond, president of the Texas Association of Business, at his office near the state capitol. Bluff and friendly, Hammond is a former Republican representative and chairman of the Texas Workforce Commission, whose walls are lined with portraits of Ronald Reagan and Barry Goldwater. He personifies the old business establishment wing of the Republican Party, the opposite side of the widening ideological divide with the Tea Party.

Hammond’s role in Texas is like Ross Perot’s 30 years ago—he’s the tribune for better schools and infrastructure because that’s what Texas business needs to thrive. Scattered about his office were pamphlets urgently calling attention to the blackout threats and high dropout rates. He looked a little worn out. “We’ve got a hell of a challenge addressing the gap between demand and income,” he said. “But I don’t think there’s support for a tax bill.” Hammond was a leading voice in favor of using the rainy day fund for public schools, and instead saw everything from pre-kindergarten Head Start and reading, math, and science initiatives to high school completion programs and graduate medical fellowships wiped out.

Not long ago, Hammond was part of a group of business and civic leaders convened by the governor’s office to examine how the state was positioned to fare in the global economy. The news was bleak. “Texas is not globally competitive,” it reported. “The state faces a downward spiral in both quality of life and economic competitiveness if it fails to educate more of its growing population.”

The truth is, Hammond and the business lobby no longer have the power over Texas politics that earlier generations did. The old system, whereby business leaders could compel the necessary changes, has stopped working. That’s apparent from the state’s worsening infrastructure. After the Trans-Texas Corridor collapsed, federal stimulus money helped build some roads and bridges, but that’s dried up now. Congestion has grown with the population. A couple of years ago, when it became clear the corridor was doomed, Perry assembled a commission to figure out what it would cost to bring everything up to par. The group returned with a figure of $315 billion and a report showing that the main source of revenue, the gas tax, was about to begin falling. “Everybody kind of blanched at the size of that number,” says Lomax, the Texas A&M transportation engineer, who served on the commission. Perry ordered the members to find cheaper options—but paying for even the least of these will be hard without more tax revenue.

Meanwhile, the state’s power shortages, still unaddressed, continue. Over the summer, Texas was hit with record heat and an enduring drought that strained capacity and revived worries about how it will meet growing demand. Earlier this year the state’s power generators failed again when a cold snap set off another series of blackouts and forced utilities to import power from Mexico. “Perry correctly saw the problem coming six or seven years ago,” says Harvey Kronberg, publisher of the Texas Energy Report. “But he didn’t sell the legislature on the idea that this is going to be a choke point for business growth. If we have another summer like this one, we’ll have more power failures.”

And Perry hasn’t done much at all about the dwindling water supply. Bush’s landmark law to create a system of reservoirs and pipelines was never funded but still requires the state to update its water plan every five years. The latest update arrived late last month and put the cost of the plan at $53 billion. No revenue source has been dedicated to pay for it. Shortages have forced the state to cut off water to South Texas rice farmers. They’ve also pitted Dow Chemical (DOW), based in Freeport, against nearby cities over which entity has priority in tapping the Brazos River. “When you run out of water, who do you cut off first, industries or cities?” says Kip Averitt, a lobbyist and former chairman of the state senate Natural Resources Committee. “You cut off industry, because no one is going to allow the cities along the Brazos to go dry—the folks in the cities are the voters.”

This struggle will intensify in the years ahead. “We have already given permission for more water to be withdrawn from many of our rivers than is actually in them,” says Andy Sansom, former director of the Texas Parks and Wildlife Dept. who now teaches at Texas State University. Perry’s most visible action on this front came in April when he issued a proclamation calling on Texans to pray for rain.

Although the governor gets a lot of mileage from playing the buccaneering raider who lures companies to Texas, it is rarely mentioned that things can just as easily go the other way. A company that decides it can no longer count on reliable roads or power can pick up stakes and move elsewhere. Business in Texas is more globally focused—and less dependent on the state’s general well-being—than it was in the 1980s and ’90s. “The CEOs in Texas view the world in terms of quarterly returns,” says the Texas Academy of Family Physicians’ Banning. “They’re not looking 10 years out: Will we have a competitive environment where we can provide health care to our employees? Will we have an educated workforce? Will we have water? It’s frightening.”

Perry, of course, doesn’t agree. “I’ve created an environment for the private sector to create jobs,” he says. “That’s the beauty of what we’ve done.” He brushes away any suggestion that Texas might have a revenue problem rather than a spending one, as he has often claimed. It’s a presentation that rejects any doubt or culpability.

Politically, such certitude may help him. The basis of Perry’s appeal is the idea that he is an uncompromising conservative, sure of what he knows. And what he knows best is that America would be a lot better off if it were a little more like Texas. “We’re gonna translate what’s happened in Texas to Washington, D.C.,” Perry says.

But look closely at Rick Perry’s Texas and it seems less like an answer to Washington’s problems and more like a reflection of them—rising poverty and unemployment, too many people without health insurance, serious long-term challenges, and not nearly enough revenue to meet them. Texas, like America, has postponed this reckoning, and confronting it will take leadership and a willingness to prepare for the future. Absent that, it may take a miracle.

By Joshua Green/Bloomberg Business Week