Why Has The Texas Economy Outperformed? A Surprising Answer From Paul Krugman

Source: Forbes

Years ago, when I was still at the Dallas Fed and long before Governor Perry had become the longest-serving Governor of Texas, he invited me to Austin for lunch. I expected it to be with his staff, but it was just him and his chief of staff. He asked me to update him on the state of the economy, and, during the course of the conversation, he asked if I had any advice for him as Governor. I wasn’t prepared for that question; so, I lamely said something like “Just keep doing what you are doing. Go easy on regulations and taxes, and, for goodness sake, don’t adopt a state income tax.”

He followed his instincts, and coincidentally my advice, and the rest is history. Texas has consistently outperformed the nation in growth and employment, and, especially, has done so since the financial crisis and great recession. So much so that it has come to the attention of Paul Krugman. In today’s Dallas Morning News, which is probably a reprint from the New York Times, Krugman’s article opens with ‘being nice to the rich not why Sunbelt is booming.’ Doesn’t it always come down to that old red herring, the rich?

Anyway, Krugman did not argue, as I expected, that it was ‘oil, oil, oil,’ although I’m sure he would agree that that’s a big part of Texas’s prosperity. Instead, he argued that Texas in particular and the Sunbelt in general, are experiencing greater prosperity because of greater net in migration to low-wage areas. The low-wage states, in turn, have lower costs of living, which is the real attraction for migrants. Lower housing costs are the main reason for the lower cost of living. But, although the low cost of living, especially in housing, is the real attraction, migration results in people leaving high wage areas (with high productivity) for low wage areas (with low productivity).

According to Krugman, ‘The average job in greater Houston pays 12 percent less than the average job in greater New York; the average job in greater Atlanta pays 22 percent less. So, why are people moving to these relatively low wage areas? Because living there is cheaper, basically because of housing. According to the Bureau of Economic Analysis, rents in metropolitan New York are about 60 percent higher than in Houston, 70 percent higher than in Atlanta.”

‘So, what the facts really suggest is that Americans are being pushed out of the Northeast (and more recently, California by high housing costs rather than pulled out by superior economic performance in the Sunbelt.’

At this point, I expected Krugman to argue that higher costs of living and especially higher housing costs in stagnant areas, are independent of economic policies, but he didn’t. In fact, he quotes Harvard’s Edward Glaeser and others as emphasizing that higher housing prices owe a lot to policies that sharply limit construction, although he didn’t mention the advantages of the union situation in right-to-work Sunbelt states, including Texas.

He shocked me further by saying that ‘conservative complaints about excess regulation and intrusive government aren’t entirely wrong, but the secret of Sunbelt growth isn’t being nice to corporations and the 1 percent; it’s not getting in the way of middle- and working-class housing supply.’ Well, I agree with the first half of that, but the second half is a canard and a red-herring. This one percent business is something the left holds over the right with absolutely no basis in fact.

Back to Texas. When I arrived in Texas in February 1991 as president of the Dallas Fed, I had a lot of catching up to do. I had a very favorable student-teacher ratio: one student, me, and about 15 or so teachers, Ph.D. economists from the best universities. One of the first things they pointed out to me was that wages tended to lag in Texas because any upward pressure on them attracts more migrants from north and south of the border and keeps them from rising very much. That same phenomenon had resulted in rather robust employment growth in Texas, combined with a somewhat higher unemployment rate.

Just as we take pride in the fact that the USA is the place the world comes to rather than tries to get out of, the same is true of Texas. As Davy Crockett is reported to have said to his constituents after losing his Congressional election in Tennessee: ‘You may go to hell; I’ll go to Texas.’ And he wasn’t just looking for cheap housing.