Tuesday, August 04, 2009

Another Thing About Texas-California

In a follow-up on the previous post that I analyzed here, Krugman now argues that economic policy really doesn't matter and that differences in economic growth are simply the result of presumably coincidental differences in economic structure.

Saying that economic policy is irrelevant is very interesting coming from him since he operates under the opposite theory when it comes to federal policy making. Even so, he is partly right as different states are affected in different ways by for example Fed policy making and other factors that states have little or no control over. However, it should be noted that for example the relative success of Texas is not entirely a cyclical phenomenon. Texas grew faster than California before the start of this recession and had a lower unemployment rate.

Moreover, part of the reason why California saw a much bigger increase in house prices (and therefore also a bigger housing bust now) despite the fact that growth was higher in Texas, was because of the building restrictions enacted in California but not in Texas. The reason why California had such restrictions was related to the environmentalist ideology of California's ruling Democrats, meaning that the bigger bubble related problems in California are in fact partly related to local policy.


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