Tuesday, July 13, 2010

Texas versus California

The regional variation in economic performance during this Great Recession has been fascinating to watch, especially here from Texas where the economic slowdown has been relatively mild. This state's economic performance has been especially remarkable compared to other big states like California. In this case, the contrast can be easily seen by comparing total employment in California and Texas. Below are the employment numbers for the two states along with some added commentary. First up is Texas:

Now California:

These striking differences naturally lead to discussions of why so much regional variation? Awhile back, The Economist magazine tackled this question for the two states of California and Texas. Now, Fortune magazine has joined the discussion. It argues that (1) Texas has a more diversified economy than California, (2) Texas has more business friendly environment, (3) Texas has done better relying on sales tax rather than on income and capital gain taxes found in California, and (4) the power of the people has backfired in California. In addition to these structural differences maybe California needs its own monetary policy.

Update: In the comments Muirego wonders if Texas is a net recipient of federal tax dollars and whether this explains the discrepancy.  According to the Tax Foundation the answer is no: between 1981 and 2005 Texas on average received 90 cents of federal expenditure for every federal tax dollar paid. See here for more.


  1. Why don't you write a book about the differences in the economies of the states? People such as myself would find this quite interesting.

  2. Did you see the article about Llano County being among the top five destinations for affluent Americans who are changing locations these days?

    There is really only one affluent "pocket" in that county, Horseshoe Bay on Lake LBJ,which I guess is where the growth must be,although I have no data to back that up. I have a house on LBJ and I know that the local restaurants seem crowded with upscale looking folks on Saturday nights.

    I think it's all about the perception that state and local taxes in most of the country are about to get truly onerous.

    The demographic change in central Texas, particularly,seems to be on the fast track as we speak.jmho.

  3. A graph of the two states' home price-to-income ratios probably has the most explanatory power. The real question is why California had a housing bubble and not Texas (as an aside, I remember neighbors of mine in SoCal going to "flipper safaris" in Texas and finding "incredibly cheap" houses there). Some people point to land shortages in California due to zoning rules there. I'm sure that was part of it. In the end, though, it might have been just two historical accidents.

    First, California was riding a tech boom before house prices spiked, and therefore, perhaps, people there had a natural inclination for optimistic forecasts.

    Second, the subprime, Alt-A and Option Arm industries were all concentrated in Southern California. Firms like Downey Savings (Option Arm); New Century and Long Beach Mortgage (subprime); and Indymac financial (stated income)--all within an hour's drive of each other--were simply at the right place at the right time.

    One factor I would discount is migration. San Diego County's population was falling during the latter part of the housing bubble. This made sense given the high cost of housing there.

  4. There was an interesting letter to The Economist in response to this. The letter author pointed out that in the most recent technology quarterly, CA companies were mentioned over and over again while Texas companies were mentioned as frequently as companies from Slovenia. This is hardly an anomaly, California remains a hot-bed of innovation in just about any high-tech industry. The only "innovation" I'm familiar with from Texas is Enron.

    California has always been a boom-bust economy, and the booms have historically been what powered America forward. Conservatives can whoop and dance over California's current bust, but for their own sake, and the sake of America as a whole, they should hope that California recovers.

  5. TX has a ways to go to catch up with the Dakotas - unemployment there is sub-4%. Heck, even Canada and Australia have lower numbers than TX! But yes, TX is lower than CA, and Spain, which is now close to 20%

  6. There are 700,000 people in ND. In spite of their wonderful banking system,the small numbers of people living there make their relative prosperity pretty much irrelevant in the larger scheme of things.

  7. Maybe you should have looked into which states get more federal support ... especially in comparison to what they contribute. I'd argue that dwarfs all the other explanations given for the discrepancy.

    The Red states in general are overwhelmingly the welfare recipients of federal dollars in proportion to what they give. California is in the top 10 of donor states.

    To paraphrase what Texan Phil Graham once said, " It's time for Texas to get out of the cart and to start pushing for a change.


    Here... yeah let them declare independence... it'd save us some money.

  8. Muirego:

    The Tax Foundation data shows the opposite--Texas gets less than it pays out in federal taxes.

  9. David,

    Texas has been receiving about 0.95 cents on the dollar. California is closer to 0.78 cents on the dollar. Had California been reimbursed even at the rate Texas was it would have received ~$30 billion or more in just one year 2005. We are talking over a hundred billion over 10 years. Deficit problem solved!

    Texas...We're #1!