A narrative that is often heard in terms of comparing the economies of California and Texas is that Texas is doing so much better now than California due to the “business friendly” conservative policies of the former and the “business unfriendly” liberal policies of the latter. Indeed, the unemployment rate is much higher in my home state of California (11.8 percent in June) than in Texas (8.2 percent). Anecdotal stories abound of California companies leaving the state due to a poor business climate and relocating in Texas. According to the Federal Reserve Bank of Dallas, Texas accounted for 237,000 or 48 percent of the 496,000 jobs created in the entire United States between June 2010 and April 2011. Figures like that will undoubtedly be touted by Texas governor Rick Perry as part of his presidential campaign.
Paul Krugman in his column today and others do a good job poking holes in the myth of the Texas economic “miracle.” But analysis by Chris Thornberg of Beacon Economics shows that California’s liberal policies may not be as negative as the narrative would indicate. Some of the key findings follow:
1. Net job losses due to relocations from California to other states vs. relocations into California are insignificant (less than one percent of job losses in California). Despite Perry conducting “hunting trips” into California to lure try to lure businesses away, the state is not losing a significant number of jobs to Texas, a finding confirmed by UCLA’s Anderson Forecasting project.
2. Texas’s economy appears to be growing faster in nominal terms, but when corrected for inflation, the growth of the two states is roughly the same in the last 15 years. And California has and continues to outperform Texas in terms of manufacturing output. Indeed, a report earlier this year by the Public Policy Institute of California shows that California's "employment, wages, and output continue to grow at or above the national average" despite our relatively low business climate rankings (due to the state's "liberal" policies).
3. The states have two different types of economies. California has a better educated workforce (in terms of the percentage of its workforce with college degrees); as a result, more of its economic output is in higher skilled jobs such a professional, scientific, and technical services, information, and management. Even the manufacturing jobs in California are concentrated in high skill sectors such computers, electronics, and transportation equipment. By comparison, Texas has a higher portion of its economic output in mining/extraction (related to energy), wholesale trade, transportation, and manufacturing. Of the Texas manufacturing, there is a higher representation in areas requiring lower education and skills such as fabricated metals, machinery, petroleum, and chemicals (largely petroleum based). The net result is that the median household income in California is more than $10,000 a year higher than in Texas.
4. We Californians need that extra income because housing prices are sky high in coastal regions of the state when compared to Texas. The Beacon Economics report shows that housing prices in the Silicon Valley (San Jose-Sunnyvale-Santa Clara) are three times what they are in Austin. That more than government policy is the cause of Texas doing better than California in terms of job growth. Businesses can buy or lease property at a much lower rate in Texas, and have lower wage costs as workers will accept lower wages due to the lower cost of living. And the higher housing prices meant that California was more adversely affected by the housing bust than Texas, as the proportion of economic output related to real estate is nearly double in California as compared to Texas (16.0 percent vs. 8.9 percent).
5. Government is larger in California than in Texas in terms of state and local expenditures as a percent of Gross State Product (GSP). But California’s percentage is roughly the same as the rest of the country. And in terms of employment, Texas actually has more government employees as a proportion of its workforce than California. One reason why expenditures are less in Texas is that government workers there are compensated much less than those in California, again, largely due to the cost of living. Another reason is that California spends more on social services, public safety, and the environment. As a result, we have a smaller proportion of our population living in poverty (14.2 percent in California vs. 17.2 percent in Texas), our property crime rate is roughly a quarter lower than Texas (the violent crime rate is about the same), and environmental standards are higher. Texas did increase taxes in the 1980s to invest in education, which probably helped fuel today’s economic growth. But California students still have higher SAT scores and more students going on to higher education, even though a slightly smaller percentage of the state’s GSP is spent on education than in Texas. This gap will probably increase due to the ridiculous standards that are being set by the conservative Texas State Board of Education.
So yes, we have economic problems in California. But only a small part of those are caused by the state’s liberal policies. We have a different type of economy and a different type of workforce, which makes it more conducive for us to focus on higher level, higher income jobs. We’re not in a position to generate the masses of lower income jobs that Texas has created, although we can do better. We’re at a disadvantage because of our high property costs, and unless they can create more land in coastal California, there isn’t much that public policy can do about that.