California or Texas: Which model works best?
Kurt Brouwer July 13th, 2009
I think this article in the Economist on the current situation in California versus Texas is worth reading. The Economist is known as an erudite publication that seeks out the underlying dynamics in a given situation. As a publication, it also tends to a more measured tone in the content, but it also goes for rather flashy front covers and internal imagery.
In terms of how the Economist views the current trend in the two states, this image says it all:
Source: Economist / Illustration by KAL
California v Texas: America’s Future (Economist, July 9, 2009)
…Plenty of American states have budget crises; but California’s illustrate two more structural worries about the state. Back in its golden age in the 1950s and 1960s, it offered middle-class people, not just techy high-fliers, a shot at the American dream-complete with superb schools and universities, and an enviable physical infrastructure. These days California’s unemployment rate is running at 11.5%, two points ahead of the national average. In such Californian cities as Fresno, Merced and El Centro, jobless rates are higher than in Detroit. Its roads and schools are crumbling. Every year, over 100,000 more Americans leave the state than enter it.
The second worry has to do with dysfunctional government. No state has quite so many overlapping systems of accountability or such a gerrymandered legislature. Ballot initiatives, the crack cocaine of democracy, have left only around a quarter of its budget within the power of its representative politicians. (One reason budget cuts are inevitable is that voters rejected tax increases in a package of ballot measures in May.) Not that Californian government comes cheap: it has the second-highest top level of state income tax in America (after Hawaii, of all places). Indeed, high taxes, coupled with intrusive regulation of business and greenery taken to silly extremes, have gradually strangled what was once America’s most dynamic state economy. Chief Executive magazine, to take just one example, has ranked California the very worst state to do business in for each of the past four years.
By contrast, Texas was the best state in that poll. It has coped well with the recession, with an unemployment rate two points below the national average and one of the lowest rates of housing repossession. In part this is because Texan banks, hard hit in the last property bust, did not overexpand this time. But as our special report this week explains, Texas also clearly offers a different model, based on small government. It has no state capital-gains or income tax, and a business-friendly and immigrant-tolerant attitude. It is home to more Fortune 500 companies than any other state-64 compared with California’s 51 and New York’s 56…
Is the California Dream sustainable?
These are dark days for residents of California. Once, we had the finest public school system in the country. We had good infrastructure and strong credit ratings. No more. Some believe that we just need to spend more in order to fix these problems. Unfortunately, we have been doing just that for years, but the problems were not fixed.
In fact, during the fat years of growing state tax revenues, our legislators and our governor managed to spend more than we had coming in. Did our schools improve or our highways? No. Now, during a very lean year, we have no resources to tide us over.
The State of California has to be one of the most badly-run in the nation. We have the biggest population in the country, an economy that would be one of the biggest in the world if California was a nation. The state has tremendous natural and human resources, a great climate and a position as the main port for Pacific Rim exports and imports. California is the home to many of the world’s leading technology companies and it is famous around the world as the Golden State. Despite all those advantages, this state is a fiscal basket case.
The state legislature has been unwilling to keep spending even within shouting distance of revenues, which until recently were climbing steadily. And, as many observers have been warning for years, the state has relied heavily on tax revenues from capital gains on sales of real estate, businesses, stocks and other assets. Obviously, capital gains were pretty scarce in 2008 and, as a result, capital gains tax revenues have fallen considerably. Finally, our legislature has recognized that this is a problem, but that’s small comfort now.
Does Texas have a better economic model?
By contrast to the high tax, nanny state model we have created in California, there is the Texas model. Now, I know that many in the Golden State might groan at the idea of looking favorably on anything Texan. And, no doubt, many Texans think California is nothing but a collection of nuts. Nonetheless, Texas has stuck with a proven model for solid economic development and California has gone in a different direction. The results speak for themselves.
As we saw in the article above, Texas has no state income tax. That’s quite a contrast to California because we have the second highest income tax in the country and our legislators and many in the media continually say we just need to tax ourselves a bit more…and more and more.
A better path to prosperity
We posted on this piece last year, but it is worth another look. This piece points out that there are proven principles for building and sustaining prosperity.
The Path to Prosperity (The American Magazine, August 7, 2008, Amela Karabegovic and Alan W. Dowd)
A new report confirms that low taxes, limited government, and flexible labor markets help to spur economic growth.
There are times when common sense is not so common. We may be in one of those times, which is why a new report on the power of economic freedom is so important.
Common sense tells us that low taxes, limited government, and flexible labor markets will help to spur economic growth. The Fraser Institute’s 2008 Economic Freedom of North America (EFNA) report offers a striking, yet unsurprising, picture of the benefits that flow from such policies.
In 2005, the most recent year for which data are available, Colorado, Georgia, Delaware, North Carolina, New Hampshire, Tennessee, and Texas-states with consistently strong records of promoting economic freedom-had an average per capita GDP that was more than $4,300 above the U.S. average. Their total growth from 1981 to 2005 was nearly 20 percentage points higher than the U.S. average.
In the latest EFNA index, Delaware is the top-ranked state or province in all of North America while Texas is tied for second with the Canadian province of Alberta. And for good reason: Delaware has the smallest size of government at the subnational level and ranks first among U.S. states on key taxation measures; Texas ranks first in labor-market freedom at the all-government level and has a state top marginal income tax rate of zero. Delaware and Texas also rank high in the categories of government transfers and subsidies as a percentage of GDP at the all-government level.
By comparison, West Virginia, Hawaii, Maine, Montana, New Mexico, North Dakota, and Rhode Island-states with low levels of economic freedom-had an average per capita GDP that was more than $4,300 below the U.S. average. Their total growth from 1981 to 2005 was 10 percentage points below the U.S. average.
Again, this is predictable: all of these states rank in the bottom half of the nation on taxation at the all-government level, labor-market freedom at the state/local level, and size of government at the all-government level…
More economic freedom means more prosperity
The results we see in the 50 states make this point very clearly. Some economic models work better than others, but clearly improving and enhancing economic freedom is valuable. Conversely, if you restrict economic freedom by increasing taxes or laying on more bureaucratic red tape, you inevitably reduce prosperity. Our economy is resilient, yet it should also be clear that people gain prosperity faster and find more job opportunities in areas with more economic freedom.
The Economist piece linked above concludes with this:
…The truth is that both states could learn from each other. Texas still lacks California’s great universities and lags in terms of culture. California could adopt not just Texas’s leaner state, but also its more bipartisan approach to politics and its more welcoming attitude towards Mexico. There is no perfect model of government: it is America’s genius to have 50 public-policy laboratories competing to find out what works best-just as it is the relentless competition of clever new firms from Portland to Pittsburgh that will pull the country out of its current gloom. But, to give Texas some credit and serve as a warning to Mr Schwarzenegger’s heir, at this moment America’s two most futuristic states look a lot more like equals than ever before.
In the U.S., we have a unique situation with 50 distinct states. Why not analyze what works in other states and put those principles to work in California? The Texas model is almost certainly not a perfect fit California, but elements of it are.
If we take a hard look in the mirror, we would have to face the fact that sunny California has lost its way. On the other hand, if we implement proven policies for building prosperity, then California could once more be the Golden State.
Via: Real Clear Markets
See also:
California, New York & New Jersey: What went wrong?
Will the Feds Bail Out California?
- Business , Economy , Geopolitics , Money , Personal Finance , debt , income taxes
- Comments(7)
Did you enjoy this article?
“More economic freedom means more prosperity” - not to 52% of americans who voted for BO and his big government agenda, including a much larger proportion of young adults. The game is over - we go European/Californian.
> The game is over - we go European/Californian
Not to pick on catofan, but this is a sentiment that I just don’t get. I’ll certainly grant that things look bleak right now and this recession (or depression) may go on for some time now. The Democrats also certainly seem to be in a position to hold and exercise power for a while (especially since many of the Republican inside-the-beltway types seem insistent on keeping the party as a non-alternative).
I am old enough to remember both Reagan and even more to the point Margaret Thatcher. The UK in the 70s was in terrible shape - quite similar, in fact, to the end result to which the Democrats seem to want to get.
And Ms. Thatcher not only stopped a further slide. She reversed it. Things got better. It can happen here as well.
jdm–I am also an optimist,however I can relate to catofan’s gloom. We have squandered the inheritance that previous generations worked so hard to produce.
Mr. Brouwer, I completely understand. In “weaker” moments, I too feel that gloom.
I just thought I’d mention that most people, and especially those younger than those in the mid-50s have no idea how bad things were in the 70s here in the US, but especially in the UK.
If I may be so bold with a quote: “Scepticism about our economic prosperity is deep rooted particularly among those endured the trials and tribulations of the 1970s. This miserable decade included a three-day week, power cuts, a near 70% fall in share prices in the 1973- 75 bear market, inflation at 26%, an IMF loan and the winter of discontent.”
Or read.
My point was simply that it is not “game over”. It never is. The current state of affairs and the current policies can be reversed.
Sigh. Sorry about messing up those two links. Normally I’m pretty good.
jdm–not a problem. Many people today do not know about what Margaret Thatcher did or even much about Ronald Reagan. That’s a good point because it’s easy to assume that people understand those events of yesteryear.
That’s one reason why I have posted comparisons to this economic downturn and earlier ones such as 1980-1982. As another great British PM said, “America always does the right thing, after trying every other option.”
Kurt,
Thanks for highlighting the Economist article. I perused it online before you featured it in your blog. I really liked the Economist’s and your conclusion about learning what works and what does not.
Fortunately, governors do talk with one one another, and there are several associations which bring state and local government officials together to discuss their mutual concerns. They are part of the larger fabric of our civil society, which is why and how we will be able to eventually figure out solutions to our problems.
Having lived in both states, I can attest to the gist of the article (as well as get a chuckle from the accompanying cartoon). In the ’50s and ’60s, California was the model of effective government harnessing the gifts of its people, as well as those found in the myriad agricultural and industrial bases. Now, it only serves as a bad example.
California’s citizens can always vote for change, either through the ballot box or moving van. The wealthy and entrepreneurial classes no longer feel welcome and are beginning to leave for more salubrious environs. The brighter souls within the middle and working classes are following, as well.
California reminds me of those Rust Belt cities that failed to see change coming until their downtowns were rotting and the factories shut down.
If Texans ever fund state education to a level similar to California, they will become even more insufferable than they already are and cities like Houston and Dallas could become this century’s LA and Silicon Valley.
But the food and wine will always be better in California. The blessings and curses of Geography can never be replicated; try, though, as they may in the Lone Star State.
Thanks, again, for the continuing education. I enjoy your point of view and your posts help me to become a more savvy consumer, citizen, and investor.