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Texas v. California: The Real Facts Behind The Lone Star State's Miracle

Commentary

This article originally ran in Forbes on 07/03/2013.

Politicians and economists alike are invested in promoting or debunking the “Texas Miracle”—the contention that Texas is better off economically due to policies that favor lower taxes and less regulation.

New economic data provides more grist for this discussion.

If Texas is doing well and does offer a model to the nation, then one set of policy choices ought to be followed. Or, if Texas isn’t doing all that well or does not offer a useful model to follow, then Texas can be ignored in the larger, national discussion of what policies work best for general prosperity.

There are two arguments frequently deployed against Texas: Texas’ economic growth is driven by population increases due to the attractiveness to business of cheap labor and a warm climate; and energy production plays the main role in Texas’ economy.

Texas’s relative success is best measured against a peer: California.

California and Texas are the most populous states. They both have diverse populations, large numbers of immigrants, abundant energy and natural resources, long coastlines and a border with Mexico.

Most importantly, California and Texas, alike in many ways, have diametrically opposed public policies. California’s state and local tax burden ranks as America’s 4th-highest compared to Texas at 45th.  California taxes a 42 percent larger share of state income than does Texas, California’s restrictive energy policies discourage oil extraction, even though it has the largest proven shale oil reserves in the nation; while its industrial electrical rates are 88 percent higher than in Texas.

These policy differences contribute to a divergence in economic performance.

In June, the U.S. Bureau of Economic Analysis released new data on state real per capita gross domestic product for 2012. Performance for 2009-2011 was also revised, with California seeing a downward revision of 2.6 percent and while Texas’ performance was revised upward by 0.5 percent. The new figures show that in 2011 Texas surpassed California in real per capita gross domestic product while a separate report showed Texas expanding its lead in real per capita personal income.

What’s remarkable about this data showing Texas’ prosperity relative to California is how counter it runs to prevailing notions that California, with Silicon Valley and Hollywood, is a land of wealth and opportunity while Texas, part of the South, is mired in low wage poverty. In fact, Silicon Valley, as important as it is to California, only amounts to 10.4 percent of the Golden State’s economy while employing 6 percent of Californians. The mining industry in Texas, of which oil and gas extraction are the main part, generated 9.8 percent of Texas’ GDP in 2012 significantly less than manufacturing’s share of 14.5 percent—the Lone Star State’s economy is more diversified than its critics contend.

As for population and job growth, from 2000 to 2012, California grew 11.9 percent. Texas more than doubled California’s growth at 24.4 percent. The U.S. population expanded 11.3 percent in that time. Much of Texas’ growth came from domestic migration, while California lost residents to other states, Texas being the most common destination; this alone should cause pause to those who say that migration to Texas is driven by the weather. From January 2000 to April 2013, nonfarm payroll grew an anemic 2.6 percent in California compared to Texas’ 19.7 percent. U.S. job growth over that time was 3.6 percent.

If, as the critics opine, Texas is adding jobs simply because it is adding people, then the ratio of jobs added to population increased ought to be roughly the same there as in the U.S. as a whole. The data shows the opposite. Texas added one new job for every three people from 2000 to 2013, while the nation added one job for every seven people, meaning that Texas outperformed the U.S. job creation rate by more than two-to-one. In the same period, California added one job for every 11 new residents.

No amount of taxes will allow one worker to support 11 people indefinitely, no matter how robust the welfare state.

Taking into account official measures of regional price parity, Texas’ real personal income was about 4.6% higher than California’s in 2011. But this data reflects Texas’ far lower unemployment rate.

California’s wages, for those who had jobs, were higher. But wages are used to buy goods and services. Once California’s higher costs for housing, food, transportation and health care are considered, Texas workers end up with the advantage: $47,413 in cost of living adjusted average wages compared to California’s $41,680—before taxes.

The policy differences between the two biggest states result in vastly different outcomes for the most vulnerable of residents. The U.S. Census Bureau recently published a new, more comprehensive measure of state-by-state poverty that took into account cost of living as well as the value of government assistance. This survey showed that California had America’s highest poverty rate, 23.5 percent, with proportionately 42 percent more people living in poverty there than in Texas.

Call it what you will, the “Texas Miracle” or the “Texas Model.” The results speak for themselves and show that liberty fosters prosperity.

 

The Hon. Chuck DeVore represented 500,000 people in the California legislature from 2004 to 2010 and is vice president of policy at the Texas Public Policy Foundation where he authored the book, “The Texas Model: Prosperity in the Lone Star State and Lessons for America.”