A common talking point on the conservative right is that Texas is an example of why conservative policies fix everything. Governor Rick Perry's low-tax, deregulatory stances, they argue, have made Texas a job-growth engine that is pulling companies away from higher-tax states and into Texas. Paul Krugman takes a stab at evaluating that claim on his blog. But before moving on to the argument, it's useful to look at the facts.
First, the heart of the claim: is Texas adding jobs faster than the rest of the county? Simply put, the answer is "yes, but". As with any claim that something is fantastic in Place A and terrible in Place B, the "Liberal policies did it!" or "Conservative policies did it!" arguments tend to be overly simplistic. Texas is certainly adding jobs faster than the vast majority of other states. But it's also useful to peek under the hood and see what kinds of jobs Texas is adding, and at what cost. The "what kinds of jobs" argument is pretty straightforward: lots and lots of minimum wage ones. As Texas Observer editor David Mann points out, 37 percent of the jobs Texas added last year paid minimum wage or less. Now, there's nothing wrong about that per se (the "or less" part is, of course, due to illegal immigration, but a job is a job), but it does become helpful in fully evaluating the claim later on. The "at what cost" part is something Mann looks at as well. As is inevitable with a low-tax state, Texas also has crummy schools and social services. Graduation rates from schools are low, dropout rates are high, and the rate of people without health insurance is the highest in the country.
Second, it is useful to look at what the state's "pro-business" policies actually mean. If low taxes and deregulation are truly the magic elixirs Texas's defenders claim they are, we should see a boom in productivity. That is, the economy shouldn't just be getting bigger, it should be getting bigger relative to the size of its population. This is the key number to look at because it shows whether lives are actually improving. There's a good way to think about this. Say a country with extremely low productivity (we'll call it "Somalia") experiences a population boom. The size of the working population doubles in 10 years. And the size of the economy doubles in those ten years. That's 7% annualized growth! Unbelievable! Right? Well, not really. Take a step back and think about it. The size of the economy doubled... but so did the lack of workers. If Somalia had a million starving people at point 1, it had two million starving people at point two. It produced more, but it produced more because there were a heck of a lot more people. So nothing really improved. By contrast, imagine a country with good productivity (we'll call it "Germany") has an economy that grows 30% over ten years, but the working population grows by 1% annually in that time. In absolute terms, Germany will have added WAY fewer jobs than Somalia. But its people's standard of living will have improved because its GDP will have grown substantially relative to the size of the working population. Which means they will have become more productive.
So is Texas Germany or Somalia? Well, really it's not quite either, but it's closer to the latter. In fact, as The Economist's Ryan Avent points out, Texas's per capita real GDP grew by just 2% from 2000-2009, according to the Bureau of Economic Analysis. Now, compare that to the Right's favorite whipping boy, California. Which grew... by about 9% in the same time frame. Both experienced downturns during the recession, but at the peak of the boom, in 2007, California had grown by almost 14% since 2000, while Texas had grown by about 7%. So California's workers have, in fact, become significantly more productive, despite their state's high tax, "anti-business" policies. As an aside, the reason that looking at productivity growth is a better way to evaluate economic performance than pure job growth is that business-"friendliness" depends on increased productivity. If high taxes and regulation are dragging down business growth, it will be reflected in productivity numbers, as the heart of the Right's claim is that tax and regulation policy is dragging down the growth of states like California.
How, then, to understand the Texas job-creation machine? Well, there are two elements to that claim. First is the claim that businesses are relocating because of Texas's deregulatory policies. And that's true. But, as the productivity numbers indicate, they're not actually, you know, being more productive there. Rather, the math is simple. Lower taxes mean more cash in business's pockets, which means higher profits. That's why pretty much every major US corporation is incorporated in Delaware. But, in a single country, a company moving to Texas from California is just moving money from one pocket into the other. So this claim is unremarkable and uninteresting.
A more interesting claim is that people are moving TO Texas FROM other states to take advantage of the job-creation engine. And it turns out there's a useful way of thinking about that claim, too. The first premise to start with is that, within the US, all companies pay wages in the same dollars, but what a dollar will buy you varies by region. A Euro costs the same number of dollars on the ForEx market, whether you buy that Euro in New York City or in El Paso, Texas. But $10 will buy you a significantly different amount of gasoline at a Shell station in New York than it will in El Paso. And I've never been to El Paso, but I'd bet a cheeseburger at El Paso's McDonald's costs less than a cheeseburger at a Manhattan McDonald's. Now let's apply that principle to corporations. If, say, Boeing operates a factory and needs unskilled labor, a worker in Manhattan is going to demand a significantly higher wage than a worker in El Paso. Simply put, $25,000 a year in El Paso will buy the worker a 2-bedroom house, internet and electricity. That same amount in Manhattan will buy the worker a mattress to lug to the church shelter. So the Manhattan worker will demand a wage premium, which Boeing won't want to pay because it still pays wages in the same dollars. And the five workers it can hire for $100,000 in El Paso are going to get more work done than the two workers it can hire for that amount in Manhattan (without taking into account the differential amount of investment they'd need to make in factory space, etc.). So, for the same amount of money, it's a lot cheaper to create jobs in El Paso than it is in Manhattan.
So what is it that drives job creation in Texas? Well, in large part it's two factors Krugman outlines: demographics and land-use regulations. Simply put, there are a lot of illegal immigrants in Texas. Those illegal immigrants work cheap. As I noted above, working cheap allows you to hire more workers for the same amount of cash. Voila! But why do workers in Texas come cheaper? The answer is, again, intuitive: land scarcity and zoning laws. As Texans know, Texas is big. And there's a lot of spare land in Texas. And Texas law has fairly loose land-use regulations. This means that residential housing can be built in a lot more places than in a place with more restrictive land-use policies like New York. That means there's a lot of housing supply, which in turn drives down the price of housing. And where housing is cheap, everything else is cheap, too. Which explains why someone with a $50,000 salary living in Manhattan is probably right around the poverty line, while someone with the same salary in El Paso is comfortably middle class. So people from states with high unemployment flood to Texas to take the newly-created low-wage jobs because those low wages buy you a lot more in Texas than they might elsewhere.
The intuitive question now becomes why everyone doesn't just allow wages to drop to get them in line with Texas's and create jobs. And the reason for that is, again, twofold. First, there's the debt overhang problem. Households in the US are overindebted as is, and that debt is in constant dollars. So a $40,000 a year job cleaning a hotel in Manhattan is going to look a lot better to someone nursing $100,000 in debt than the same job for $15,000 a year in Texas, whether those jobs are scarce or not. Second is that people with high wages still want to live in the same places, and convincing competent people to move is hard. Yes, Goldman Sachs could do a lot of the same things it does in Dallas that it does in Manhattan, given advances in technology. But it can't have an entire company full of people working from home. And, even if its employees would enjoy significantly more buying power making $500,000 a year in Dallas than they would making double that in Manhattan, workers like living in Manhattan. They like the city, they like the social services they get from the state, and they like their location. If Goldman were to move to Dallas tomorrow, its best talent would jump ship to Morgan Stanley the next day. And, lower cost of labor or not, Goldman wouldn't be Goldman anymore.
So how should we measure the success of Texas's model on its own terms? I still think the best way to do it is, as Krugman does, by the job-creation trend. If a state is creating more jobs, and it is doing so in a way that bolsters real growth (Germany- rather than Somalia-style), we should expect to see a lower unemployment rate in Texas than in a higher-tax state like New York or California or Maryland (where I'm from). So let's look at the Bureau of Labor Statistics numbers. Texas's seasonally-adjusted unemployment rate in May was at 8%. And that's substantially better than California's, which was 11.7%. Victory? Not quite. New York's rate was 7.9% that same month, despite being a high-tax state. And Maryland's was at 6.8%, despite similarly high taxes. So not quite the miracle Rick Perry claims. What we've got is neither a productivity boom nor an absolute job-creation boom. Instead, we've got above-average job performance compared to the country as a whole, to be sure, but nothing special compared to plenty of relatively high-tax states.
This whole thing could probably use plenty of editing, but it's more or less a stream-of-consciousness take on my thinking on the issue.
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