It is a clash of civilizations that had festered for decades before it erupted just months after President George W. Bush was inaugurated, seven years ago. Though not a war in the conventional sense, it is a generational struggle that is likely to determine the future of American democracy. And it isn’t the war on terror. It’s the historic showdown between California and Texas.

Call it the War Between the Megastates. This conflict burst into the national headlines on May 17, 2001, when then-governor Gray Davis told reporters that California, reeling from chronic blackouts and the bankruptcy of his state’s largest power company, was “literally in a war” with “price gouging” Texas energy producers. The dustup was soon portrayed by both the media and the principal antagonists as a battle between two great stereotypes: California liberals who had preferred flower power to new power plants suddenly finding themselves under the boot of the J. R. Ewings at Houston energy trader Enron. Davis received no sympathy from the former Texas oilmen at the top of a Republican ticket that had recently lost California by more than a million votes. Vice President Dick Cheney, who had earned his private-sector spurs and eight-figure stock options at Texas oil field giant Halliburton, dismissed the governor’s allegations (which ultimately proved to be correct) as “goofy” and described his plan to contain the crisis as “harebrained.”

For the most part, however, Texas versus California has been a cold war, a simmering ideological feud between two great powers. And we’re talking about real global power, not the quaint, old-fashioned states’ bragging rights that used to be framed by football rivalries and wagers of Texas barbecue against California oranges. Of our past eight presidents, five of them forged their political careers in California or Texas. Today America’s two most-populous states— California is number one, Texas number two—boast world-beating economies: Individually, either one’s gross domestic product is bigger than Russia’s or India’s; combined, the states’ GDP is greater than that of every nation except Germany, Japan, and, of course, the United States.

But evolving most rapidly, and most portentously, is the role megastates like ours play in this federation we call the United States. We’re now seeing the fruition of the “federalism” that conservatives have touted for decades as the antidote to the smothering nanny state of the New Deal and the Great Society. The irony, however, is that the notion of states’ rights has undergone a radical twenty-first-century evolution. The erstwhile battle cry of knuckle-dragging Jim Crow segregationists has become the anthem of progressives of all stripes, from alternative energy entrepreneurs to gay rights advocates. Where once the federal government took an enlightened stand against prejudice and poverty and dragged the South kicking and screaming into the civil rights era, today Washington stands in the schoolhouse door while forward-looking states invoke their right to solve problems like global warming and spiraling health-care costs.

To an extent, this is what Supreme Court justice Louis Brandeis was talking about in his famous 1932 opinion: “It is one of the happy incidents of the federal system that a single courageous state may … serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” But the “laboratories of democracy” Brandeis envisioned have clout he couldn’t have foreseen back when the entire national economy was considerably smaller, even in inflation-adjusted dollars, than that of either California or Texas today. The challenges the two megastates face are commensurate in scale: California and Texas boast the nation’s largest undocumented populations, the most polluted skies, the most residents lacking health insurance, and the most pressing water and energy demands. Despite the theme of change in the 2008 election, the days of Washington getting the lab results and formulating national panaceas are probably over; paralyzed by red-state-blue-state gridlock, the federal government gives every appearance that it no longer has the agility to get the big things done in a rapidly changing world. So even when we’re not firing political potshots at each other, California and Texas are already in an existential race to arrive at creative solutions to our nation’s most intractable problems. The loser will end up buried beneath those problems. The winner will own the future.

In many respects, Texas comes into this competition as the clear underdog. Aside from our smaller population and GDP, the average California family makes about 20 percent more than the average Texas family. But even more fundamentally, California gets its muscular new nation-state status in a way that Texas, despite its unique history as an independent republic, just doesn’t. California’s first leading-man-cum-governor, Ronald Reagan, transformed American politics by declaring big government the problem and “devolving” power back to the states; now Arnold Schwarzenegger is using his star power to promote the idea that the states can, in effect, do big government better than Washington.

The Governator, who said on a trade mission to Canada that California has a “power of influence … equivalent of a nation, or even a continent,” is trying to outflank the feds on multiple fronts: insuring the uninsured, researching embryonic stem cells, reducing greenhouse gases, and producing renewable energy. “The federal government is standing in our way and ignoring the will of tens of millions of people across the nation,” Schwarzenegger said late last year when the Bush administration’s Environmental Protection Agency rejected California’s plan to reduce carbon emissions from new cars. “We will continue to fight this battle.”

Texas governor Rick Perry presented a distinctly different worldview when he addressed the California Republican Party’s convention last September. Schwarzenegger keynoted the event by appealing to a state party “dying at the box office” to reclaim the “abandoned middle political ground.” Voters, Schwarzenegger said, “want this party to do something more about climate change than simply doubt it. If it is the policy of the Republican party to ignore the great majority of the world’s scientists . . . then that is a party at odds with the future.” Just minutes later, in a scorching rebuttal to Schwarzenegger’s plea for moderation, Perry invoked the usual mantra of tax cuts and downsized government while wondering, “Since when did the field of science become the sole purview of left-wing politicians?” Our governor pretty much answered his own question when he went on to report that “virtually every day another scientist leaves the global warming bandwagon, but you won’t read about that in the press.”

Yet despite a political leadership that often seems determined to continue running the wishbone against a West Coast offense, Texas remains a strong number two. Though we trail in population and GDP, in one key area we’ve eclipsed California: Texas accounts for a greater share of the nation’s exports—roughly 15 percent—than any other state, a figure that reflects the skyrocketing price of oil. With Texas ensconced as the nation’s number one energy producer, and with California as the biggest energy importer, the 2001 shoot-out over power was only the opening skirmish in a protracted economic—and philosophic—struggle.

Seven years ago we were the odds-on favorite in the energy race, even factoring in Enron’s cheating ways. It was widely observed that Texas had continued to build pollution-belching power plants and refineries, while California’s environmental regulations had imposed a near-moratorium on new construction. There was far less reporting about Texas’s new energy policies, in many areas the nation’s most progressive. Playing catch-up to rapidly rising demand, California had rushed pell-mell to let the market work its way with electricity prices. Texas, by contrast, pursued a much more cautious, phased-in deregulation of its electric utilities under a landmark bipartisan plan signed by then-governor George W. Bush in 1999. That same legislation required Texas utilities to improve their efficiency and provide an increasing percentage of their electricity from renewable sources, which propelled Texas past California as the nation’s leader in wind energy; worldwide, only Germany, Spain, and India produce more megawatts from wind than Texas.

And last year may have marked the real greening of Texas. The action began with a dramatic buyout of the state’s largest power provider, Texas Electric Utility, by private equity firms after TXU’s plans to build eleven new coal-burning power plants ran into a firestorm of opposition from environmentalists, public officials (though not Perry), and a significant chorus of influential business leaders; the deep-pocketed new owners largely mollified environmental groups by dropping most of the new plants and promising even greater efficiencies and more production from renewable sources. Subsequently the Legislature astonished a lot of skeptics by requiring the state’s utilities to cut new demand by 20 percent through energy-saving measures, along with imposing mandatory energy efficiencies for local governments, public schools, and universities.

However, California hasn’t stood still since its 2001 debacle. Long the nation’s biggest energy conservator (with less than half Texas’s per capita energy use), California continued to put efficiency at the top of its list but added ramped-up production of renewable energy, along with new gas-burning power plants. As a result, now California not only ranks number one in energy efficiency but also produces almost three times as much power from non-hydroelectric renewable sources as Texas does—despite our having, according to the U.S. Energy Information Administration, the nation’s greatest potential for non-hydropower renewable energy. California has pursued a diversified portfolio, remaining competitive in wind energy (second only to us in fact) while building the nation’s largest solar farms and offering consumers incentives to install solar panels on their roofs. Our plan focuses heavily on wind, but largely ignores our abundant sunlight. As fast as we’re moving in energy efficiency and renewable energy—much faster than our knee-jerk critics in states that lag far behind us realize—we’re now struggling to close the gap.

Texas and California are also waging an epic battle over human capital. Demographically, we are in a class of our own with our majority—minority populations, at 48 percent non-Hispanic white for us and 43 percent for California (the next most-diverse big states, New York and Florida, still have roughly 60 percent non-Hispanic white majorities). That diversity, which includes millions of undocumented workers and their families, is a source of economic strength and potential, but it produces a lot of negative superlatives for both states, including the chart-topping millions of children who live in poverty and lack health insurance. Both states will lose the future if they can’t move their immigrant workforce into the middle class; the key is converting high school dropouts into college graduates. Currently Texas does a marginally better job at educating its African American, Hispanic, and low-income K—12 students, according to the Thomas B. Fordham Foundation, which cites both states as national leaders in improving still-dismal achievement scores for our neediest children.

It’s on the high end of the intellectual achievement scale that Texas runs a distant, even alarming, second. California racks up patents at more than twice the per capita rate of Texas, and the University of California System produces four times as many patents as the University of Texas System. But the figure that should blanch the face of every Texas leader is the margin that California holds in venture capital, probably the best measure of how the markets value our high-end human resources. According to the MoneyTree-National Venture Capital Association Report, California pulled in more than nine times as much venture capital investment as Texas in 2006, and it wasn’t all just a Silicon Valley show; biotech center San Diego nearly equaled Texas’s entire tally for the year—and was running 50 percent ahead through the first three quarters of 2007.

This year Perry is convening a series of “competitiveness council” meetings to try to give Texas a long-term edge in the global economy. The question that should be at the top of the list is how a state with the nation’s second-best public university system, no state income tax, a median home price barely more than a fifth of that of the average California house, and a booming economy can’t draw more of the nation’s best and brightest and narrow the venture capital gap. We certainly haven’t previously overlooked the problem; Perry lobbied hard for his robust $200 million Emerging Technology Fund to attract new research and start-ups.

But maybe there’s a certain perception problem. We haven’t done a good job of telling the world about the success of our energy policy and the improvement in public education. Instead we’ve made our headlines with a Texas president widely regarded as hostile to science, along with a governor who spends millions to promote cutting-edge technology but has appointed an evolution-denying dentist to head the committee that will rewrite Texas’s elementary and secondary school science standards this year—certain to produce more Scopes “monkey trial” stories as Texas once again debates whether the earth is six thousand years old.

The good news is that if we find some leaders with the vision to see all the green in a green economy (and the backbone to tell our religious fundamentalists that we respect their family values but not their theological contributions to our science texts), we’ll probably change the way the world looks at us remarkably quickly. Just ask the former bodybuilder whose most notable public utterance was “I’ll be back”—before he returned as the leading spokesman for America’s future.