A TALE OF TWO (OTHER) STATES

In an earlier post I compared the economic performance of two adjacent states, Minnesota and Wisconsin. I concluded that Minnesota's employment has risen faster than Wisconsin's because of its heavier reliance on services employment, while Wisconsin's major area of employment is the manufacturing sector (http://econlives.blogspot.com/2015/03/a-tale-of-two-states.html). Employment in manufacturing, as is well known, has had a secular decline in nationally as a result of two strong forces- internally, the substitution of capital for labor that has been going on for many years and, internationally, foreign competition producing goods at lower costs. On this post I focus on the two most populous states in the nation: California and Texas. The chart above displays some basic statistics for each state. Two statistics stand out, median income where California exceeds Texas, although income is growing much faster in the latter, and the homeownership rate where Texas does better than California.
Also, we find a striking difference between both states in two key areas, employment and output- this is discussed in detail below.

Texas- More Free Market Oriented

For many years, the state of Texas has had the reputation of following economic policies that are more or less free market oriented, even though it still has some heavy regulations on specific trades. In contrast, as is well known, California has the reputation of being a heavily regulated state. In fact, if those of us who don't live in California do not like a specific regulation or restriction imposed by either a state or Federal government, we only have to thank California, it's highly likely that that regulation originated first in California. 

The tax burden of both states also differs markedly. While Texas has no income or corporate tax, California imposes a 8.84% tax on corporations, and its income tax is very "progressive" so that a family with $50,000 income pays a 9.3% rate. 

The reputation of both states is evidenced by economic data.

Texas GDP Growth Surpasses California's
While the total output of both California and Texas grew at similar rates between 1997 and 2005, we begin to see a divergence after that year, a divergence that became wider very rapidly. By 2005, the output in both states had increased similarly, California's was 62% higher than in 1997, and Texas' was 63% higher- a negligible difference in growth rates among both states. But from that year on, it appears that the states are on totally different paths. For instance, California grew by twenty percentage points between 2005 and 2008, but Texas grew by double that amount- forty points. Furthermore, even though Texas GDP fell more sharply during the 2008 recession, its recovery was both more rapid and more robust.
At their current growth rates, Texas GDP will be greater than California's in about 15 years.

Slow Employment Growth in California, Robust in Texas

Thus, total employment in Texas has exceeded that of California at least for the last 25 years. Since 1990 employment in Texas has grown by 68%, compared to California's more modest growth of 28%. Incidentally, as the chart shows, employment in California closely matches that of the U.S., even though it actually lags the national growth rate. Texas has led both California and the U.S. no matter what period we look at, as can be seen on the table below. For instance, while California took 79 months, that is 6 years and 7 months, to reach its pre-recession employment peak, it was only 39 months for Texas to do that. By the way, the U.S. took 6 years and 3 months to reach the pre-recession employment level, a modest improvement over California. 

Texas Leads in Virtually All Sectors

The jobs growth in Texas is a phenomenon that is driven by the majority of its economic sectors- that is, it's a widespread phenomenon and not one that is due to a single industry or sector.

For instance in Professional & Business Services, an important one because it includes many jobs that command above average wages, Texas has seen the number of jobs increase by an astounding 162%, while in California the growth is far lower although still a respectable 69%. The graph also shows that California lags the U.S. in this sector's jobs for the last 25 years. 

The manufacturing sector, a very important one because of the value of output it generates, is another case where Texas leads California. Data reveals that manufacturing employment has declined in both states but California's drop is much more severe than Texas. In fact, as can be seen in the chart, today's manufacturing employment in Texas is only 6% below the level of 1990, whereas for California we see that it's a substantial drop of more than a third (36%.)Moreover, manufacturing employment in the U.S., as I showed in a previous post (http://econlives.blogspot.com/2015/03/on-manufacturing-reshoring.html) has followed a generally downward trend for quite some time, its decline is similar to California's although slightly better.

Comparison Across Major Sectors

The chart below compares the growth rates since 1990 for all major sectors. Only in two areas does California exceed Texas- Information  and Arts & Entertainment; Texas does better in all other sectors, some of the by a substantial difference such as in Construction (97% growth for Texas versus only 10% for California); or Professional & Business Services where Texas growth is more than twice that of California's. 

What Are the Implications?

These two states are a textbook example for other states. If you want your state to grow sluggishly or not at all, simply follow on California's footsteps by imposing greater regulations and maintain a heavy tax burden on business and consumers. On the other hand, if you want to have robust growth then follow the example of Texas, by reducing unnecessary regulations and keep a minimal tax burden.