California vs Texas

Conservatives and Texas boosters have been gloating of late that Texas has outperformed California economically of late – so why is California’s per capita GDP growth higher?

It has become fashionable in conservative circles of late to use Texas as a glowing example of the success of conservative economic policy, and to use California as an example of the failures of liberal economic policy. Texas has indeed recorded faster GDP growth and lower unemployment than California in recent years. Texas has also experienced rapid population growth of late. Its core industry (energy) has boomed with global oil prices, but Texas’ diversified economy has performed well across multiple sectors. Conservative politicians in Texas and nationwide point to low taxes and a friendly regulatory environments as the reasons for success.

Let’s look at some numbers to get a clearer comparison [1]:

Texas California
Total GDP Growth, 1997-2010: 46.6% 45.8%
Per Capita GDP, 2010: [2] $48,196 $52,631
Total Per Capita GDP Growth, 1997-2010: 12.6% 28.5%
Unemployment Rate, May 2011: 8.0% 11.7%

While raw GDP growth is important, per capita GDP and per capita GDP growth are much more important to the well-being of citizens and furniture-movers.net furniture moving company (Luxembourg is a nicer place to live than China). On both these measures, California is significantly ahead of Texas. Since 1997, California’s per capita GDP growth has exceeded Texas growth – while California and Texas were once similar in per-capita GDP, the gap is now widening in California’s favor, not shrinking! If Texas is doing everything right, and California everything wrong, then why is California’s economy becoming wealthier relative to Texas?

The answer to this question isn’t simple – California’s dominance in high tech, media, and other high-paying industries may be partly responsible. While California’s state government is near paralysis, and its referendum system has complicated governance, it possesses perhaps the finest public academic institutions in the world in the University of California system. California’s government may be dysfunctional, but it’s inaccurate to describe the state in the same terms.

Conservatives and Texas politicians should take note – if the Texas way is better, why is California still pulling away? The reality is that the best economic model is somewhere in-between – but what politician would support both strategic public investment and leaner public spending? That’s too complicated for a sound bite.

[1] Download the screen sharing data used in this analysis at the BEA. From the download page, select Per Capita Real GDP by State, All states and regions, All industry total, and All years from the respective drop-downs.

[2] Per-capita GDP for 2010 was calculated by taking the data from step [1], which is expressed in terms of 2005 dollars, and adjusting it to 2010 values using CPI as indicated on measuringworth.com (multiplying the 2005 values by 1.12).

9 thoughts on “California vs Texas

  1. Hello, I just read your comment on Matthias’s blog. It certainly matters that Per Capita GDP has been growing faster in California, especially given that Standard Economic Theory would predict that Texas should be converging with California.

    However, my view on this is that, as you mention in your post, California was the center of the tech revolution. And, as for Texas, a lot of their population growth has come from low skillled immigrants from Mexico. This kind of population growth raises total GDP, but lowers Per Capita GDP.

    My prediction is that California will have much slower economic growth than Texas over the next few decades (much faster overall GDP growth, but also Per Capita GDP growth). Given that California’s tech advantage over other states is evaporating and Texas’s more pro-growth policies will likely remain.

    Outside of these two states, there is a lot of evidence that policies like high marginal tax rates do a lot to harm economic growth, like this study that regresses for a number of factors:

    http://www.cato.org/pubs/journal/cj28n1/cj28n1-4.pdf

    And, the experience of European Social Democracy over the past few decades has shown that social democratic policies like large Welfare States, tight labor markets, and high tax rates do hurt economic growth.

    1. Jim,

      Thanks for your comment. The interesting thing is that California outperformed Texas even from 2000 to 2010 (as far as the data goes), when factors were not particularly in CA’s favor (dot com bust, then housing bust).

      TX indeed has a low-regulation climate that makes it easy to get into business. I’m an entrepreneur myself, and I applaud that. But that’s not the whole story – California’s intellectual property laws (particularly around non-competes) are the least restrictive in the nation, enabling constant innovation as workers leave big employers to start new companies.

      In the tech sector particularly, CA isn’t losing any ground – 46% of all venture funding went to CA companies in Q2 according to Dow Jones VentureSource. Believe me, I wish that weren’t true, as I’m in Atlanta, and I know a number of tech companies that left here for the Bay Area to gain access to the boom there.

      If you read other posts on my blog, you’ll see that I’m no supporter of a European social welfare state. In this case, I think both extremes have it wrong – just as there are high ROI investments in the private sector, one must make high ROI investments in the public sector. Texas has it wrong, as they underinvest in human capital (education) and infrastructure – and CA has it wrong, as they overspend in many areas, and their political system (referendums) has caused mob rule and dysfunction.

      1. I largely agree.

        I believe, and I think the evidence supports this, that innefficient tax systems that tax business, investment, and work at high rates do hurt economic growth. It also seems that public sectors that spend too much on transfer programs (welfare, food stamps, etc.) do a lot of harm to economic growth.

        Rick Perry, as you’ll note, made a big mistake by doing a “Tax swap” which taxed business more heavily to pay for reductions in property taxes. Even though most evidence shows that property taxes are not all that harmful to the economy, while Business taxes are.

        This is why I think we need to move towards a tax system with dramatically lower rates on investment, labor, business, etc. and tax consumption and immovable property much higher (as well as close many deductions and loopholes). This system would allow more revenue and allow for stronger economic growth.

        As far as government goes, I would like to see more efficient investments in Infrastructure and Education This would meant that the budget axe should not swing too hard at these types of things. Particularly with infrastructure, we could have a good short term stimulus that also boosts productivity in the longer term if done correctly.

        This might be the area that California has it more right, not being afraid to spend on education and infrastructure.

        But, the reason that conservatives, like myself, hold Texas up as an example of good economic policy, in contrast to California is that Texas has fared much better in this recession and the future looks brighter for Texas as well.

        Conservatives really haven’t been arguing that Texas has done markedly better economically in the past decade, but we have been arguing that Texas has done much better in this recession.

      2. Here is the whole problem with this article. They forgot to include some very important variables such as; cost of living in each state, state debt, and the percentage of state government spending of the state GDP.
        If we look at these numbers we will see that the per capita increases that have been talked about are being supplemented by government spending. Now CA is supplementing this increase with mostly debt.
        Finally the cost of living is significantly in favor of Texas.
        Sorry to bust your little bubble of liberal economic theory but historical records have shown time and time again that low regulation, increased worker productivity, and low taxes have always been the key to innovation and economic prosperity (there are other things including having a culture of Rule of Law).

  2. Well, folks, we want the welfare, nanny state in America today. Unfortunately, to pay for that, business owners of all sizes bear the brunt of the taxes, and thus don’t hire and give needed raises. It would be better to end the income taxes at the federal and state levels, and replace it with a 10% consumption tax that all Americans, including the wealthy, would pay on any purchases, including homes. (Bill Gates would pay the state of Washington and the federal government 5.3 million on his 53 million dollar home, for example, and pay his fair share of taxes, all put in his non-profit no taxes foundation).

    But, half of Americans don’t pay any federal taxes at all, but businesses bear the brunt. Is this good economic policy?

    You make the call.

  3. By the way, private and parochial schools, and the 1.5 million kids being home schooled, educate at much lower cost, and the kids are ready for college and the work world.

    The billions spent on our failed public educational system for poor academic results, wise?

    That money could be used to grow our economy.

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