Friday, January 7, 2011

California vs. Texas

Paul Krugman is now claiming Texas doesn’t have a well managed economy or something. To be frank, I didn’t read his column, because I have grown tired of the man and his dogmatic and predictable views. He has been caught cheating so many times that I now trust Krugman's figures as much as I trust Glen Beck's.

But at least I have an excuse to write an easy post comparing California and Texas. A lot of people have done this, so here are my two cents.

I use budget data from the Census Annual Survey of State Government Finances and job and per capita income data from the Bureau of Economic Analysis.

Last year, high-tax California had a population about 50% larger than Texas, a deficit 220% higher, and a debt 380% higher. It's safe to say that low-tax Texas is in a better fiscal shape.

Since 1970, Texas has added 60 percentage points more jobs than California. A lot of this is due to faster population growth. But not entirely. In 1970, the employment to population ratio was 1% higher in California, while in 2009 it was 6% higher in Texas.

In 1950 the Golden State had 40% higher per capita income than Texas. In 1970, the advantage was still over 30%. By 2009, the difference had shrunk to only 10%, without taking into account the higher cost of living in California.

(this is how to read the graph: Texas is about twice of what Texas was in 1970, and California 60% higher than California in 1970. The graph shows that Texas has grown faster since 1970, not that it has surpassed California in terms of levels).

It appears that Texas is doing better than California not only fiscally, but also in terms of aggregate job and income growth.

One thing I would warn about is exaggerating California’s debt problem. It’s true that they have mismanaged their finances, and expanded government beyond what they can afford. However California is still extremely wealthy, with a total GDP of about 1900 billion dollars in 2009. This is about the size of the entire Italian economy, and still larger than Brazil, India, or Russia.

So while their tax base may appear narrow, their entire economic base is very wide. The debt to GDP ratio for California alone is still below 10% (or 80%, if you add the national debt).

Also, let's not make too strong policy-inference from the short-term mortgage-bubble that is currently distressing California. Policy should be based on evaluations of long term performance. I argue above that the long term trend also favors Texas.


  1. Another great post :)

    If you want an elite indicator, try the number of Fortune 500 companies headquartered in Texas. It overtook New York 2 years ago and now is overtaking California. Living in cities where your receptionists and office staff can afford to buy houses has some attraction.

  2. Tino,

    Great post.

    Swenglish alert.

    "whitout taking into account"

    "without taking into account"

  3. You should add the spatial cost of living adjustments. Ideally this should be done using a spatial data series that goes back decades. I don't know of one, unfortunately.

    My guess is that Texas was cheaper than California decades ago and that the gap has increased over time.

    I have seen claims that housing is cheaper in Texas now (in constant dollars) than in 1980. Note that 1980 in Texas was an oil fueled peak.

  4. Skeptical:

    Thanks for the correction!

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