Texas Vs. California

I don’t have to look very far to see how Texas is transforming. Twenty five years ago, visiting my grandmother in the sleepy town of Round Rock, my biggest worry was hitting one of the five or six traffic lights in town. Now that I live in the same area, I can barely recognize the place. It’s currently the fastest-growing city in America.

And Round Rock isn’t unique. Looking at a survey of the fastest-growing cities in the country, one notices that a dramatic number of them are in Texas. McKinney has nearly doubled its population since 2000. Houston, Austin, Dallas and San Antonio are all close to the top of the list for large cities.

Texas is booming, and has been for nearly a decade. Buoyed by a strong economy fueled by low taxes and low regulations, the Lone Star State has continued to buck the national trends on jobless claims and its government has stayed in the black when the vast majority of states were in the red.

Many liberals like to claim that it’s a coincidence, and point to oil and gas prices as one reason Texas’ economy is so strong. But that’s hardly a credible argument. Unlike the 1980s, when oil reigned supreme and had the power to take down the entire Texas economy when it went south, petroleum in the 2000s hardly has such a power. There isn’t much natural gas in McKinney. There, the black gold has been supplanted by gold of the fiber-optic kind. If there was any oil in Austin, you could rest assured that the environmentalists wouldn’t let anyone touch it. They’d probably invent a new endangered species if they could, just to spite Exxon. 

Texas’ economy, which used to be one of the most one-dimensional in America, is now heavily diversified. We have engineering, biochemical, wind generation, computer software development and more start-ups than Texas leaders even two decades ago could have imagined. In 2008, more jobs were created in a six-month period in Texas than in all of the other states combined. The Lone Star State is also home to more Fortune 500 companies than any other state in America.

California Nightmare

At the same time that Texas grows, the state which redefined the word “boom” is now going completely bust. A number of items in the news this week showed that in even stark detail.

As The Economist put it: 

“It is easy to find evidence that California is in a funk. At the start of this month the once golden state started paying creditors, including those owed tax refunds, business suppliers and students expecting grants, in IOUs...As budgets are cut, universities will let in fewer students, prisoners will be released early and schemes to protect the vulnerable will be rolled back.”

Texas, in contrast, seems to be the poster child for how to do things right: 

“Chief Executive magazine, to take just one example, has ranked California the very worst state to do business in for each of the past four years. By contrast, Texas was the best state in that poll.”

The article continues: 

    “It has coped well with the recession, with an unemployment rate two points below the national average and one of the lowest rates of housing repossession. In part this is because Texan banks, hard hit in the last property bust, did not overexpand this time. But as our special report this week explains, Texas also clearly offers a different model, based on small government.”

The Economist points out that the relative fiscal strength of Texas is only partly a result of oil and gas. It points out that like Texas, the other eight states with a net domestic migration were all states with no income tax. The nine states with the highest outflow of workers are states with the highest marginal tax rates. California, moreover, has a high tax on capital gains, which is very volatile and more likely to create budgetary disasters like the one hitting the Golden State now. When the economy is doing well, it rakes in the money like an ace gambler. When the economy tanks, the money vanishes in corresponding proportion to the gamblers’ losing hand.

Unions too, are a big reason for California’s woes. But Texas, of course, is a right-to-work state. Where unions are present, the decks aren’t stacked in their favor. That makes the difference, ultimately between negotiation and dictation of union terms.

Finally there is the state’s budget. People build economies. Governments so often tear them down. By sticking to limited government and avoiding the urge to splurge, the Texas legislature has allowed the Texas workforce not only to weather the storm, but to thrive. Not only do these low tax policies soften the recession in Texas, they become magnets to businesses across the nation. Hence the dramatic growth.   

Michael Quinn Sullivan of Texans for Fiscal Responsibility, says that Texas’ economic position is strong if for no other reason than that it is “not California.”

“For years the grow-government crowd has prodded Texas lawmakers to follow California's lead in expanding welfare, creating new government programs and imposing every tax known to man. Now the bills are coming due,” he said. “Texas has business-growth, a better-than-elsewhere employment climate, and a state government surplus.

California is hemorrhaging jobs, is imploding by every known economic measure, and cannot even pay its bills.”

Texas as a Model

But of course, Texas is more than just an alternative to California, it’s also becoming an alternative to Washington. As evidence continues to roll in to indicate that the federal stimulus spending has not turned around the ship of state – or at the very least is responding about as slow as the rudder of the Titanic – Texas becomes a model for the entire nation. Rick Perry’s comments about secession aside, one begins asking not can Texas survive without America, but rather, can America survive without Texas?

Taking the Lone Star State out of the equation, the current recession looks more like a depression. If all those businesses that moved to Texas had to stay in California or Michigan or New York, they would have to cut back on their expenditures, lay off employees or increase cost of goods and services to deal with the tax burden.

With Texas – and other pro-growth states – as an alternative, companies will move from high tax areas to low tax ones just as certainly as winds will travel from a high pressure zone to a low. 

The real danger to our economy comes when those zones are equalized, or raised to a level that they may as well be. The stimulus so far looks like a bust, and even if it does slowly turn the ship around, question is not will the stimulus get the economy back to where it was two years ago, the question is will the stimulus even generate enough tax revenue to pay for the debt incurred by the stimulus in the first place.

But what Washington does is out of Texas’ control, and legislators aren’t looking over their shoulders. With a fiscally conservative budget that kept spending low and avoided the temptation to touch the state’s “Rainy Day Fund” Texas looks poised for even further growth in the future. As California begins paying its state employees in IOUs, more and more people across the country will begin to take notice.