Thursday, July 09, 2009

Texas vs. California

Texas and California are in many ways very similar, being first of all very big states (second and third respectively in terms of geographic size, second and first in terms of population and output), also having roughly similar climates and both having very large Hispanic immigrant (to a large extent illegal immigrant in both states) populations.

Yet, economic performance differs greatly. The unemployment rate in Texas is significantly below the national average, whereas it is significantly above in California. While both California and Texas has significant net immigration from abroad, Texas also receives a net inflow of people from other states, whereas native born Americans are fleeing California. And while California's severe budget problem seems like a never ending story, Texas, while suffering from the general cyclical downturn, has only limited budget problems.

So why is Texas so much more successful than California? When it comes to the budget deficit, many blames California's constitution that allows voters to approve spending projects without approving the kind of tax increases (or spending reductions in other areas) which are needed to finance them. That is to some extent true when it comes to the budget problem, but since California already has higher taxes than just about all other states and since normal budget rules given the overwhelming Democratic majority would simply mean even higher taxes that is not the solution to its underlying economic problems.

In addition to high spending, California also suffers from excessive regulation, including a much higher minimum wage and far more draconian "climate change"-related regulations.

In its latest issue, The Economists highlights the greater relative success of Texas and readily acknowledge that fact and the causes of it, yet still throws in a disclaimer of "it still seems too early to cede America’s future to the Lone Star state".

The first reason for this is their claim that the growing Hispanic population in Texas will make it more left-liberal, and so end Texas' low tax policies. Perhaps, but I don't think it will happen soon, given the overwhelming majority against for example a state income tax today, and at any rate California is also changing in that direction so it too will become even more leftist. And at any rate, regardless of whether politics change in the future, there can be no denying that Texas low tax policies have been more successful.

The other argument is that there are still a lot of bright people in California. Which is true, but there are also many in California which are not so bright, and there are a lot of people in Texas that are bright. And returning to what should be the point of the story, California's policies are causing a net outflow of people, while Texas's are causing a net inflow of people.


Blogger t said...

er, oil???

9:18 AM  
Blogger stefankarlsson said...

What do you mean, "er, oil?"? If it is meant to suggest that high oil prices could be behind Texas greater relative success then that is obviously not true given the fact that the price of oil has gone down dramatically.

3:39 PM  
Blogger Jakob K said...

California also has a significant oil industry, third in the US behind Texas and Alaska. Texas produced ~30 mil barrels of crude oil in February, Alaska ~19 mil and California ~17 mil. On top of that California has a large oil refining industry, so just as Texas California's economy depends (in part) on oil.

7:08 PM  
Blogger stefankarlsson said...

Thank you Jakob for that reminder, though it doesn't change that Texas relies more on oil than California. However, the difference is not really that dramatic, and as I wrote before it canät explain why Texas has remained more succesful than California despite the oil price drop we've seen in the latest 12 month period.

Also, it can be added than oil extraction faces a lot greater hurdles in California than in Texas, because of the more widespread belief in Al Gore's teachings in California compared to Texas.

9:49 PM  

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