A Blog by Jonathan Low


Mar 23, 2014

About That Texas Economic Miracle

Wherever they gather, around campfires literal and figurative, on continents developed or developing, economists and politicians wag their heads in wonder at tales of the Texas economic miracle. Job growth, in migration, corporate formation and all around success.

The answer, so we are told, is an ideologue's ideal blend of low taxes, non-existent regulation and free choice in just about everything.

And so governments with characteristics as different as tight reins or loose morals have embraced this formula under the general guise of austerity in hopes of replicating its ostensible benefits. That so few have been able to do so is usually attributed to a lack of effort, or a legacy of liberal inclinations.

The real reason may be, however, that the story is as highly embellished as some of the outfits worn by its most enthusiastic avatars.

The actual record is far more decidedly nuanced than the legend would suggest. As the following article explains, the metrics are deeply influenced by statistical sleights-of-hand that ignore declining household incomes which end up comparing Texas unfavorably with supposed also-rans like Vermont, whose primary assets do not command the advantages of an oil-and-gas sector, and whose 'extraction industries' run primarily to dairy products or maple syrup.

In fact, much of Texas' high population growth is due to migration from Mexico and to exceptionally high birth rates, and whose budgetary sustenance is funded by declining public service and educational offerings.

There is, indeed, no such thing as a free lunch. And those who believe that extraordinary results can be achieved by below average public or privaate investment are learning that lesson the hard way. JL

Phillip Longman reports in Washington Monthly:

This model of economic development, which combines a highly regressive tax system with minimal levels of public investment, has not allowed Texas to keep up with America’s best-performing states in per capita income or rates of upward mobility. The real Texas miracle is that its leaders get away with bragging about it.
Is Texas our future? The question got kicked around during the last presidential campaign when Texas Governor Rick Perry was briefly riding high. Everywhere Perry went he appealed to Republican primary voters by describing what he called the “Texas Miracle.” As Perry told conservative talk show host Glenn Beck, “Since June 2009, about 48 percent of all the jobs created in America were in Texas. Come add to it.” In his stump speech Perry would click off what he said were the four major reasons his state had come to lead the nation in job creation—without ever forgetting a one of them. They were, he said, low taxes, low regulation, tort reform, and “don’t spend all the money.”
Perry’s prospects in that political season quickly faded, of course, after that moment—instantly viral—when he froze during a debate while trying to remember which three federal cabinet agencies he had vowed to eliminate. Neither his cringe-inducing exclamation of “oops” nor his subsequent explanations that he had experienced a “brain fart” while distracted by Mitt Romney’s smile were enough to save his candidacy.
But the debate over whether Texas has anything important to teach the rest of America has continued to build. One reason is that even though Perry didn’t get to replace Barack Obama in the White House, he has continued to boast about his Texas Miracle, including in radio ads that have caused an uproar everywhere they’ve aired across the country. “Building a business is tough, but I hear building a business in California is next to impossible,” Perry intones in one, before pitching California businesses to move to Texas. In another, he announces, “I have a word of advice for employers frustrated by Illinois’s shortsighted approach to business. You need to get out while there is still time. The escape route leads straight to Texas.”
When Perry launched a similar radio campaign attacking New York for excessive regulation and inviting its businesses to “Go Big in Texas,” he inspired the comedian Lewis Black to strike back with a “Don’t F*** with NY” video that aired on The Daily Show with Jon Stewart. “You say we got too much regulation,” Black countercharged. “We’ve got Wall Street. They break the law for a living and never get punished.”
Yet that observation wasn’t enough to prevent more and more rank-and-file conservatives, along with a growing number of nonpartisan observers, both in and out of Texas, from also taking up talk of the Texas Miracle. Among conservatives, a typical formulation contrasts Texas with the supposedly failed state of California. For example, Chuck DeVore, a Republican member of the California State Assembly before decamping in disgust for the Lone Star State, has a new book out entitled The Texas Model: Prosperity in the Lone Star State and Lessons for America. In it, DeVore explains that
Texas spends less, taxes less, sues less, and secures for their people the liberty to earn a living, keep more of what they earn, and live where they want. Is it any wonder that for more than ten years, Americans have been moving to Texas while Californians have been fleeing as fast as they can sell their home and pack? Texas and California represent two opposing versions of the American Dream, one based on liberty, the other, government.
The idea that vast numbers of Americans are “voting with their feet” for liberty and prosperity by abandoning blue states and moving to Texas has become conservative gospel.
Another typical formulation appeared recently in the American Spectator. After celebrating Texas’s lack of an income tax, John R. Coyne Jr. went on to exclaim that “with its coolness toward regulation, its suspicion of government stretching back to Reconstruction, and its respect for private enterprise, Texas provides a model for any part of the country willing to set aside the conventional collectivist economic pieties.” Few conservatives, especially Tea Party types, want to defend the economic record of the last Republican president. But that still leaves them with the Texas Miracle as putative proof of concept for the benefits that would accrue if, say, the country would just accept the economic prescriptions of Texas Senator Ted Cruz.
Some liberal voices have, of course, risen up to offer rebuttal. In 2012, New York Times columnist Gail Collins published a book entitled As Texas Goes … How the Lone Star State Hijacked the American Agenda. Within Texas, liberal legislators (and there are a few) have updated a publication every year since 2003 entitled “Texas on the Brink,” which provides rankings meant to point out the state’s worst deficiencies, such as being last in the percentage of the adult population who graduated from high school while being first among the states in carbon dioxide emissions and in the share of the population lacking health insurance.
Yet within the last year or so, the Texas Miracle meme has nonetheless gained more promoters and attention in the wider culture. Time magazine, for example, recently ran the headline “Why Texas Is Our Future,” arguing in a cover story “that Americans are seeking a cheaper cost of living and a less regulated climate in which to do business; Texas has those in spades.” A new book written by a former correspondent for the Economist and respectfully reviewed by the New York Times is entitled Big, Hot, Cheap, and Right: What America Can Learn from the Strange Genius of Texas. Another new book, Texas Got It Right, contains a foreword by veteran mainstream media executive Walter Isaacson, currently CEO of the Aspen Institute, in which he proclaims that Texas’s “can-do spirit and love of independent thinkers, innovators, and entrepreneurs is something that could help kick up our whole economy.”
So rest assured that Texas boosterism will loom large again in the next presidential election, and not just because Rick Perry is showing clear signs of another run at the White House. Texas has indeed outperformed the nation as a whole in job creation during the Obama years. And it has done so with a state government under the total control of ever-more-conservative Republicans, who now hold up that fact as validation of their whole economic agenda. Progressives, and everyone earnestly interested in improving the nation’s economic performance, need to confront all this Texas bragging and find out what, if anything, it proves.
In recent remarks before the Dallas Breakfast Group, Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, exclaimed, “I am never shy on Texas brag.” This is saying the least. In countless speeches, Fisher has laid out out what is probably the most substantive case for a Texas Miracle, using mostly Dallas Fed data.
Fisher first emphasizes Texas’s comparatively rapid rate of job creation. Over the last twenty-three years, the number of jobs has increased twice as fast in Texas as it has in the rest of the country. Many people might imagine that most of those new jobs pay low wages, but that turns out not to be true. To be sure, Texas has more minimum-wage jobs than any other state, and only Mississippi exceeds it with the most minimum-wage workers per capita.
But Fisher is talking here about new jobs, and according to the Dallas Fed, only 28 percent of the jobs created in or relocated to Texas since 2001 pay in the lowest quarter of the nation’s wage distribution. By comparison, jobs paying in the top half account for about 45 percent of the new jobs in Texas.
This means that Texas has been creating or attracting middle- and high-wage jobs at a far faster pace than the rest of the country taken as whole. For example, between 2001 and 2012, the number of Texas jobs in the upper-middle quarter of the nation’s wage distribution increased by 25.6 percent. This compares with a 4.1 percent decline in the number of such jobs outside of Texas. Though coming off a comparatively small base, Texas has also outperformed the rest of the country in its growth of high-paying jobs.
That’s potentially a very big deal. During the eight years of George W. Bush’s presidency, the country as a whole experienced zero net job creation, and the continuing decline in middle-class jobs is arguably the largest single threat to the economy’s viability. If Texas has figured out a replicable and enduring fix for America’s broken jobs machine, then the rest of the country does indeed have something important to learn. But as we’ll see, there’s much less to the Texas Miracle than meets the eye, and its lessons hardly confirm conservative ideology.
The first and most obvious question to ask about the Texas boom in jobs is how much it simply reflects the boom in Texas oil and gas production. Texas boosters say the answer is very little, and play up how much the Texas economy has diversified since the 1970s. And indeed, Texas has more high-tech, knowledge-economy jobs than it did forty years ago. But so does the rest of America, and the stubborn truth is that, despite there being more computer programmers and medical specialists in Texas than a generation ago, oil and gas account for a rapidly rising, not declining, share of the Texas economy.
Unless you’ve been to Texas lately, you might have missed just how gigantic its latest oil and gas boom has become. Thanks to fracking and other new drilling techniques, plus historically high world oil prices, Texas oil production increased by 126 percent just between 2010 and 2013. Only a few years ago, Texas’s oil production had dwindled to just 15 percent of U.S. output; by May of last year it had jumped to 34.5 percent, as new drilling methods opened up vast new plays in once-forgotten corners of south and west Texas with names like Eagle Ford, Spraberry Trend, and Wolfcamp. Thanks to the bonanza of drilling, Texas already produces more oil than Venezuela, and is headed to become the ninth-largest producer of oil in the world, ahead of Kuwait, Mexico, and Iraq.

Meanwhile, Texas accounts for 27 percent of U.S. natural gas production, which is more than the production of any nation except Russia. NASA satellites now record an arc of white light at night stretching from San Antonio to the Mexican border produced by gas flares. As a recent issue of Texas Monthly notes, in once-sleeping towns like Cotulla, where a young Lyndon Johnson taught migrant Mexican children in the 1920s, the population has more than tripled in the past two years, and no fewer than thirteen new hotels have opened, along with numerous “man camps,” to accommodate the influx of oil rig workers.
Though Texas boosters point to the growth of the high-tech industry in Austin, the so-called “telecom corridor” in Dallas, and the growth of health care jobs in Houston, this can’t hide the fact that oil and gas are by far the fastest-growing sources of the state’s economic growth. Between 1998 and 2011, for example, the percent of Texas GDP produced directly by oil and gas extraction more than doubled, according to the U.S. Commerce Department’s Bureau of Economic Analysis. This doesn’t even count the growth of related industries, like oil refining and a petrochemical sector now thriving on the state’s abundant supplies of natural gas. Meanwhile, the share of the Texas economy produced by the information, communications, and technology sectors is 27 percent smaller than it was in 1998.
To be sure, only about 8 percent of the new jobs in Texas are directly involved in oil and gas extraction, but the multiplier effects of the energy boom create a compounding supply of jobs for accountants, lawyers, doctors, home builders, gardeners, nannies, you name it. Saying that Texas doesn’t depend very much on oil and gas just because most Texans are not formally employed in drilling wells is like saying that the New York area doesn’t depend very much on Wall Street because only a handful of New Yorkers work on the floor of the stock exchange.
The next big question is how much Texas’s growth in jobs just reflects its growth in population. For many decades, Texas has grown much faster in population than the U.S. as a whole, indeed about twice as fast since the 1990s. On its face, there is nothing particularly impressive about a rate of job formation that is just keeping pace with increases in population.
But in the conservative narrative, this population growth is largely driven by individual Americans and businesses fleeing the high taxes and excessive regulation of less-free states. In other words, Texas’s rate of job creation is supposedly more a cause than a consequence of its population growth. If that were true, the Texas boosters would be right to brag. But among the many problems with this story is the reality that, even with an oil boom on, nearly as many native-born Americans are moving out of Texas as are moving in.
For example, according to Census Bureau data, 441,682 native-born Americans moved to Texas from other states between 2010 and 2011. Sounds like a lot. But moving (fleeing?) in the opposite direction were 358,048 other native-born Americans leaving Texas behind. That means that the net domestic migration of native-born Americans to Texas came to just 83,634, which in a nation of 315 million isn’t even background noise. It’s the demographic equivalent of, say, the town of Lawrence, Kansas, or Germantown, Maryland, “voting with its feet” and moving to Texas while the rest of America stays put.
And despite all the gloating by Texas boosters about how the state attracts huge numbers of Americans fleeing California socialism, the numbers don’t bear out this narrative either. In 2012, 62,702 people moved from California to Texas, but 43,005 moved from Texas to California, for a net migration of just 19,697. That’s a population flow amounting to the movement of one village in a continental nation. Far from proving the merits of the so-called Texas model, it shows just how few Californians have seen fit to set out for the Lone Star State, despite California’s high cost of housing and other very real problems. The same is true for all but a handful of Americans living in other states. Net domestic migration to Texas peaked after Hurricane Katrina devastated Louisiana and Mississippi, and has been falling off ever since.
This comparatively low level of net domestic migration to Texas is consistent with another little-appreciated fact that runs counter to the conservative narrative about the Texas Miracle. It is that, for most Americans, as well as for most businesses, moving to Texas would not mean paying less in taxes, and for many it would mean paying more.
Oh yes, I know what you’ve heard. And it’s true, as the state’s boosters like to brag, that Texas does not have an income tax. But Texas has sales and property taxes that make its overall burden of taxation on low-wage families much heavier than the national average, while the state also taxes the middle class at rates as high or higher than in California. For instance, non-elderly Californians with family income in the middle 20 percent of the income distribution pay combined state and local taxes amounting to 8.2 percent of their income, according to the Institute on Taxation and Economic Policy; by contrast, their counterparts in Texas pay 8.6 percent.
And unlike in California, middle-class families in Texas don’t get the advantage of having rich people share equally in the cost of providing government services. The top 1 percent in Texas have an effective tax rate of just 3.2 percent. That’s roughly two-fifths the rate that’s borne by the middle class, and just a quarter the rate paid by all those low-wage “takers” at the bottom 20 percent of the family income distribution. This Robin-Hood-in-reverse system gives Texas the fifth-most-regressive tax structure in the nation.
Middle- and lower-income Texans in effect make up for the taxes the rich don’t pay in Texas by making do with fewer government services, such as by accepting a K-12 public school system that ranks behind forty-one other states, including Alabama, in spending per student.
Moving a business to Texas also turns out to have tax consequences that are inconsistent with the conservative narrative of the Texas Miracle. Yes, some businesses manage to strike lucrative tax breaks in Texas. As part of an industrial policy that dares not speak its name, the state government, for example, maintains the Texas Enterprise Fund (known to some as a slush fund and to others as a “deal-closing” fund), which the governor uses to lure favored businesses with special subsidies and incentives.
But most Texas businesses, especially small ones, don’t get such treatment. Instead, they face total effective tax rates that are, by bottom-line measures, greater than those in even the People’s Republic of California. For example, according to a joint study by the accounting firm Ernst & Young and the Council on State Taxation, in fiscal year 2012 state and local business taxes in California came to 4.5 percent of private-sector gross state product. This compares with a 4.8 percent average for all fifty states—and a rate of 5.2 percent in Texas. With the exception of New York, every major state in the country, including New Jersey, Massachusetts, Pennsylvania, Ohio, Michigan, Indiana, Illinois, Wisconsin, and Minnesota, has a lower total effective business tax rate than Texas. If you think that means Texas might not offer as much “liberty” as advertised, well, you’re right.
The same study compares how much businesses in different states pay in taxes for every dollar they get back in government-provided benefits. Using methodology developed by the Federal Reserve Bank of Chicago, the study first allocates public spending between households and businesses. Certain expenditures, such as for health care and welfare, are treated as benefiting only households; others, such as for police, fire, and highway transportation, are treated as benefiting businesses as well. The big question mark here is how to treat education spending, since businesses differ in how much education they require from their workers. But regardless of how that allocation is made, California businesses as a whole still get a far better deal on their taxes than those in Texas.
For example, under the assumption that spending on education benefits only households and not businesses, California businesses pay $2.30 in taxes for every dollar they get in benefits, while Texas businesses pay $5. By this measure, Texas is the ninth-worst state in the country in the cost/benefit ratio it offers businesses on their taxes. Assuming that 50 percent of education spending benefits business, California businesses pay $1 in taxes for every dollar they get in benefits, while Texas business pay $1.50. Either way, it’s no wonder that Texas’s economic development efforts rely so heavily on (largely false) advertising.
The business case for Texas does not speak for itself. It may be a great place to be a big oil or petrochemical company, or a politically favored large corporation able to wring out tax concessions. Its state laws are also hostile to unions, and its wage levels are generally lower than in much of the rest of the country. But for the vast majority of businesses, which are small and not politically connected, Texas doesn’t offer any tax advantages and is in many ways a harder place to do business. This is consistent with Census Bureau data showing that a smaller share of people in Texas own their own business than in all but four other states.
Before the 1980s, Texas followed a long, populist tradition that tried to protect family farmers and other small-scale businesses and consumers. Under its 1876 constitution, for example, Texas enacted consumer protections against predatory mortgage lending, with provisions that ironically helped to hold down foreclosures in Texas during the Great Recession. In 1889, Texas became the second state in the country to enact an antitrust law. Two years later, it further pioneered government regulation of big business by establishing the Texas Railroad Commission, which went on to protect wildcatters and other small-scale oil producers by regulating the oil industry in ways that kept outside Goliaths like Standard Oil at bay. But since the 1980s, “pro business” in Texas has more and more come to mean just pro Big Business.
The comparatively low levels of entrepreneurship in Texas in turn help to explain its comparatively low rates of upward mobility over the last generation. Here the evidence comes from a recent study, led by Raj Chetty and colleagues at Harvard University and the University of California, Berkeley, which tracked children born into families of modest means in different parts of the country and determined how many of them managed to move up the economic ladder when they became adults. The findings are illuminating.
In the San Francisco Bay Area, for example, children who grew up in families in the bottom fifth of the income distribution had only a 12.2 percent chance of rising to the top fifth as adults. Those who grew up in or near San Diego or Los Angeles had even lesser odds—only 10.4 and 9.6 percent, respectively. It’s depressing that for so many Californian children, the chances of realizing the American Dream are so slim. But California looks like the land of opportunity compared to Texas.
In the greater Austin area, children who grew up in families of modest means had only a 6.9 percent chance of joining the top fifth of earners when they became adults; in Dallas, only 7.1 percent; in San Antonio, just 6.4 percent. Yes, Texas offers more chances for upward mobility than places like Detroit and some Deep South cities like Atlanta. Yet the claim that Texas triumphs over the rest of America as the land of opportunity is all hat and no cattle. Children raised in the postindustrial wasteland of Newark, New Jersey, during the 1980s, it turns out, had a better chance of going from rags to riches than did children born in Houston, which was the best city in Texas for upward mobility during that time.
No wonder then, that the flow of Americans moving to Texas is so modest. The state may offer low housing prices compared to California and an unemployment rate below the national average, but it also has low rates of economic mobility, minimal public services, and, unless you are rich, taxes that are as high or higher than most anywhere else in America. And worse, despite all the oil money sloshing around, Texas is no longer gaining on the richest states in its per capita income, but rather getting comparatively poorer and poorer.
It’s hard to think of any two states more different than Texas and Vermont. For one, Texas has gushers of oil and gas, while Vermont has, well, maple syrup. As early as the 1940s, Texas surpassed Vermont in per capita income. Vermont had virtually nothing going for it—no energy resources except firewood, no industry except some struggling paper mills and failing dairies. By 1981, per capita income in Vermont had fallen to 17 percent below that of Texas. That year, the state’s largest city elected a self-described “democratic socialist,” Bernie Sanders, to be its mayor. Vermont, it might seem, was on the road to serfdom and inevitable failure.
But then a great reversal in the relative prosperity of the two states happened, as little Vermont started getting richer faster than big Texas. By 2001, Texas lost its lead over Vermont in per capita income. By 2012, despite its oil and gas boom and impressive job creation numbers, Texas was 4.3 percent poorer than Vermont in per capita income.

This is not an isolated example. Since the early 1980s, Texas has also been falling behind many other states in its income per person. In 1981, per capita income in Texas came to within 92 percent of that of Maryland; now Texans earn only 79 percent as much as Marylanders. In 1981, per capita income in Texas almost equaled that of Massachusetts; now Texans on average earn only about three-quarters of what residents of Massachusetts do. Relative to Connecticut, Texans have seen their per capita income slip from 82 percent to 71 percent.
Now let’s compare Texas with a big, demographically and economically diverse state like New York. Same pattern. As with Vermont, Texas started out poorer than New York. Into the 1930s, per capita personal income in Texas was less than half that of the Empire State. But gradually, Texans began to catch up. By the mid-1950s, Texans on average earned a full three-quarters as much as New Yorkers, thanks to a combination of New Deal-era investments in rural electrification, paved roads and other infrastructure, huge increases in federal military spending during and after World War II, and, of course, the oil boom.
In this era the state was under the firm control of Democrats like Sam Rayburn and Lyndon Johnson, who passionately believed in big federal spending projects, especially if, as with the early space program, a significant share of the spending flowed to Texas. By the beginning of the 1980s, per capita personal income for Texas reached 92 percent of that of New York.
Yet since then, per capita income in Texas has fallen to as low as 72 percent that of New York, and still remains at just 80 percent. This is true even though most of New York’s major cities, including Buffalo, Rochester, Syracuse, and pretty much the whole northern tier, have been in deep recession since the 1980s, and even though it’s only within the last few years that upstate New York has derived any income from shale oil. Meanwhile, per capita income in metro Houston has fallen from 4 percent above that of metro New York City in 1981 to 13 percent below in 2012.
A big part of the reason that Texas has not been able to keep up with New York in per capita income is, of course, the fantastical, world-historical fortunes that have been racked up on Wall Street since the 1980s, which inflate the per capita income numbers for not just New York City but the state as a whole. And Texans would be right in saying that their tax dollars, along with everyone else’s, went to bail out those big New York investment banks back in 2009. But that does not explain why Texas, even as it has led the nation in job formation, has fallen further behind states like Vermont, Maryland, and Massachusetts in per capita income.
So what is the explanation for that riddle? Here’s a stab. As we’ve seen, the flow of native-born Americans moving to Texas has been quite modest over the last generation, and for good reason. Few native-born Americans could lower their taxes, or raise their standard of living, by moving there. But Texas population has nonetheless boomed due to two main factors: immigration from abroad, mostly Mexico, and a birthrate that is the second highest in the nation after Utah.
Both come with challenges. Texas leads the nation, for example, in the percentage of teenagers with multiple children. And one factor driving down Texas’s per capita income is simply a compositional effect of having a high and rising percent of its population comprised of young, low-skilled, recent immigrants.
But regardless of its sources, population growth fuels economic growth. It swells the supply and lowers the cost of labor, while at the same time adding to the demand for new products and services. As the population of Texas swelled by more than 24 percent from 2000 to 2013, so did the demand for just about everything, from houses to highways to strip malls. And this, combined with huge new flows of oil and gas dollars, plus increased trade with Mexico, favored Texas with strong job creation numbers.
But this model of economic development, which also combines a highly regressive tax system with minimal levels of public investment, has not allowed Texas to keep up with America’s best-performing states in per capita income or rates of upward mobility. And that’s what most people, including in Texas, most want the economy to deliver. The real Texas miracle is that its current leaders get away with bragging about it.


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