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Texas vs. California: What’s the score?

🕐 13 min read

Dan Balz (c) 2013, The Washington Post

California and Texas are nation-states within the United States, a pair of behemoths in size, population, history and influence. In the debate over red-state versus blue-state governance, they stand at opposite poles.

The two states are led by veteran governors, politicians with personalities as different as their states. Texas Gov. Rick Perry, a Republican, is the longest-serving governor in his state’s history, having been in office consecutively since December 2000. California’s Edmund “Jerry” Brown, a Democrat, has served longer than any other chief executive in his state’s history and holds another distinction: In 2010, he was returned to the office 36 years after first being elected governor.

Perry ran for president in 2012 championing Texas as an economic model for the nation, pointing to the tax and regulatory structure of the Lone Star State as the engine that had helped produce more new jobs in post-recession America than any other state. His campaign faltered but that did little to dim the story of “Texas rising.”

“California declining” was the narrative Brown inherited when he returned to Sacramento in January 2011. The Golden State, once the envy of the nation, was beset with problems, from high unemployment and persistent budgetary imbalances to political dysfunction in the state capital. Today, with the state’s fiscal situation stabilized, Brown is being described as the Democrat who is providing the country a new model of progressive governance.

Perry continues to promote the contrasting narratives. “These are big, powerful economic states,” he said in a recent interview. “Twenty years ago, California was considered to be the absolute economic center of America. You pointed to California and said, ‘Gee, wouldn’t you like to be like them?’ And I would suggest that’s not the case and I will suggest to you that’s because of the burdensome tax environment, a regulatory climate that is very unpredictable and unstable and public schools that are continuing on a downward trajectory.

Brown and his advisers find the Texas versus California story tiresome and tiring. “Shakespeare said comparisons are odious,” Brown quipped in a recent telephone interview. “Another version was that they’re odorous.”

He was quick to counter Perry’s claim that Texas should be the nation’s model. Yes, he conceded, if you want to build something, you can do it faster in Texas than in California, where there are more regulations and governmental red tape. “That’s true,” he said, but added,”Would you rather live in Houston or Santa Barbara or maybe Santa Monica or San Francisco?”

His point was that California offers amenities that Texas does not — and that his state continues to attract talent and entrepreneurs in spite of its problems. Acknowledging that some critics have described California as “somewhere between ‘Bladerunner’ and a failed state,” he said, “On the other hand, when [Mark] Zuckerberg and his roommate worked on Facebook, they didn’t stay on the East Coast. They came to the West Coast.”

Among those who have promoted Texas as the nation’s model economic engine in America is Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas. His speeches carry catchy titles, like one delivered at Stanford University in November 2012 called, “The State of the West (With Reference to George Shultz, Eisenhower, Buzz Lightyear, George Strait, the San Francisco Fed and Adam and Eve).”

In that speech, he posed this question: “Why has the Golden State lost its luster and become a place where the economic burdens of its people have become hard to bear when it once was the very exemplar of happy, hearty dynamism that is the West? How could it be that the hardscrabble Lone Star State has come to replace California as the engine of the West’s economic growth?”

In a recent telephone interview, Fisher exclaimed, “We are a jobs machine,” meaning Texas, and noted that Texas has seen an influx of migration from other states — the biggest being from California. “People vote with their feet and right now they’re voting to come here — from New York and Michigan and California and so on,” he said. “Those are the facts and one can apply value judgments.”

Stephen Levy, director of the Center for the Continuing Study of the California Economy, offered this rejoinder. “Red and blue is not just about taxes and regulation,” he said. “It has other dimensions… It’s about those things that attract talented people to come and work in your area.”

Levy argues that one of California’s strengths is an openness to immigrants and to gays and lesbians. “If you look at the areas that are the most tolerant — the Bay Area and Hollywood — you find the highest clusters of creativity and innovation,” he said. “If you look at Silicon Valley — CEOs from Russia and Asia — [it shows] we are a welcoming state. I would argue that welcoming immigrants and gay persons is a blue policy and that has worked for us.”

Texas regularly outperforms California in rankings of states on the basis of which are friendlier for business. The Tax Foundation’s annual ranking of state tax business climates puts Texas at number 11, California at number 48.

Economist Arthur Laffer, the godfather of supply-side economics, prepared a series of charts for Americans for Economic Freedom that collectively make the argument that red-state governance is better economically than blue-state governance. In his analysis, Texas far outpaces California in job creation and in growth of domestic state product

Defenders of California point to Texas and argue that while its economy has been vibrant in terms of jobs produced, the quality of life, especially for those on the lower rungs of the economic ladder, trails many other states, including California.

The Bureau of Labor Statistics reported last March that 7.5 percent of workers paid by the hour in Texas receive the minimum wage or less. The national average is 4.7 percent and in California, those at or below the minimum wage accounted for just 1.4 percent of workers paid hourly.

Critics of Texas say it has created more low-wage jobs than any other state in the country. Fisher, in a speech delivered earlier this month, countered that the state also has produced more middle-income and high-wage jobs than any other.

But Texans are also more likely to lack health insurance than residents of other states. The Texas Medical Association has called Texas “the uninsured capital of the United States.” The Henry Kaiser Family Foundation estimates that 27 percent of Texas below the age of 65 lack insurance, compared to 21 percent of Californians and 18 percent nationally.

California has moved swiftly to implement President Barack Obama’s new health care law and to expand Medicaid under its provisions. Texas has declined to enter into the expanded Medicaid program and refused to set up a state exchange for residents seeking to buy insurance under the Affordable Care Act.

Perry says that, if people want to live in a state with a substantial social safety net, they would move. “Texans have made that decision themselves,” he said.” If they wanted to go live in a state that had guaranteed health insurance and the cost associated with that, they would by and large go to those states. Perry added that he measures success “by how many people in your state have a job versus how many people are on government assistance. And most Texans agree with that.”

Texas’ detractors say the reason for the Lone Star State’s economic success is an oil and gas industry that boomed through the recession. There’s no question that it has benefited from the energy boom, but the Texas economy today is far more diversified today than it was a few decades ago.

California suffered badly during the recession in part because it was one of the epicenters of housing foreclosures. Booming Texas escaped the housing bust. One reason is because the state had instituted tougher mortgage lending rules after the savings and loan crisis of the late 1980s, which hit the state hard. This was one case where more stringent regulation in Texas served the state economically.

George Mason University economist Tyler Cowen touched off another round in the California versus Texas debate this fall with an October cover story in TIME Magazine sub-titled, “Why the Lone Star State Is America’s Future.”

Cowen argued that at a time of hollowing out of the middle class in America, low-tax, low-services Texas, with cheap land and housing, makes for an especially attractive destination. He pointed to the steady influx of migrants from other states, including California, as evidence that the combination of job opportunities, tax and regulatory structure and services showed that Texas was well suited to the new economy.

That prompted Ben Olinsky, an economist at the progressive Center for American Progress to offer a rejoinder entitled “Why Texas Shouldn’t Be in Our Future.” “Texas might have more jobs,” he wrote, “but it represents a devil’s bargain with high levels of child poverty, limited ability to afford health, less economic mobility, smaller homes, fewer kids and extreme inequality.”

Olinsky also questions the assertion by Cowen and many others that Texas’ lower cost of living helps to offset the lack of services and lower wages paid to many workers. He said that California has a higher percentage of families with incomes of $35,000 or above and, by his own calculations based on government data, that working-class Texans are likely to pay a higher share of their incomes for food and shelter than their counterparts such Democratic-led states as Maryland and Minnesota.

Perry has touted his state’s success in luring California companies to move or expand to Texas. Jed Kolko, chief economist at the real estate site Trulia, studied job movements in California between 1992 and 2006 while working at the Public Policy Institute of California (PPIC). He said the losses were “very much at the margins” of the overall state economy. “The net loss was about 9,000 jobs a year, which is about five-one hundredths of a percent of the California economy.”

Moreover, he said, factors such weather, cheap housing, the mix of industry in a state and what economic sectors are rising and falling play the most important role in the decision-making of companies about plant location. “The most important reasons don’t have anything to do with policy,” he said.

Still, that doesn’t mean a state like California can pretend to be as business friendly as Texas. One analysis Koklo helped produce urged California to re-examine its welfare and transfer payments policies, along with its corporate tax structure to make it more competitive.

In his TIME cover story, Cowen cited Silicon Valley as one of California’s most notable attributes. But the rise of the tech industry has come with its own set of problems, particularly the cost of housing. “The middle class is being driven out of Silicon Valley,” he said. “They will pay huge sums to live in Menlo Park or commute very long distances_or move to Texas.

Nearly a quarter of the new, domestic immigrants to Texas between 2006 and 2012 came from California, which was by far the largest contributor of any state in the nation. Last year, according to the Census Bureau, 63,000 people moved from California to Texas while 43,000 in Texas moved to California.

Some conservatives have argued that high taxes, especially on the wealthiest, are driving some people to leave California. A 2012 study by Stanford University scholars Charles Varner and Cristobal Young debunked that claim, and Trulia’s Kolko argues it is less-wealthy people leaving California, largely because of high housing prices.

Red-state advocates say California’s big-government model, built over many decades, has become an expensive burden that will continue to slow the state’s growth in the future. Dowell Myers, a demographer and professor of public policy at the University of Southern California, said California’s big-government model helped build a world-class education system and an intricate transportation network. And Fisher, of the Dallas Fed, acknowledges that California, with six tier-one institutions in its state university system (not including private institutions like Stanford), has twice as many as in Texas.

“We’re still feasting off those investments of prior decades,” Myers said. “Conservatives can say that big government was a waste but they’re free riding on that investment.”

However, he agreed that California’s efforts to protect its environment and regulate industry have created burdens that can constrain growth. “Some people would say this has gone too far,” he said. “That it’s too heavy handed, too rigid and it might be stifling growth and it’s making it more difficult for people to start-up businesses. I think there’s broad agreement about that, and how to reform it is unclear.”

The Texas economy weathered the recession nicely, though Perry had a $27 billion budget shortfall in 2011 that he closed with spending cuts, including major cuts to education, and no tax increases. Perry, who is considering a second campaign for president in 2016, will not seek re-election next year.

Brown, who has not said whether he will seek another term next year, has brought stability to the state’s finances. “The state’s budgetary condition,” according to the Office of the Legislative Analyst in California last month, “is stronger than at any point in the past decade.”

Brown did this within a progressive framework, through a combination of spending cuts and tax increases. Facing a $27 billion budget shortfall, Brown first pushed through the spending cuts. Then he campaigned for and won approval for a ballot initiative (Proposition 30) that increased marginal income tax rates for wealthy Californians and boosted the sales tax by a quarter cent. The state expects to gain an addition $6.1 billion this year from the new rates, which will end after tax year 2018. The money will fund education.

“By putting Proposition 30 on the ballot and getting it passed, Governor Jerry Brown has allowed California to pay its bills, and, indeed, to develop a surplus,” Kevin Starr, author of a multi-volume history of California and professor at the University of Southern California, said in an email. “He has not, however, in any significant way addressed the labyrinth of restrictions and entitlements that make California non-competitive with, say, Texas in terms of business investment.”

Brown’s future agenda includes more steps to combat climate change, which began in earnest during the administration of his Republican predecessor, former governor Arnold Schwarzenegger, raising the minimum wage, channeling more money to disadvantage school districts and keeping the budget in check.

He must also reckon with substantial liabilities in the teachers’ pension fund and a teachers union that is one of the most powerful political groups in the state. Acknowledging that the union has considerable clout and a key Democratic constituency, Brown said, “The teachers do have a pension problem of $3 to $4 billion a year. We will get at it. We will have the funding.”

California has been able to make progress after many years of stalemate in Sacramento because Democrats have the power to act, Brown said. But he also pointed to a downside of unified Democratic power_an almost limitless appetite by legislators to keep spending. “If I took my foot off the brake, we’d be back in the red within six months.”

Texas has enjoyed a period of strong growth and continues to attract people and businesses. Californians argue they are rising once again. More than any other pair of states, they stand as proxies for the national debate about the size and shape of government and which direction a divided America should go in the future.

Robert Francis
Robert is a Fort Worth native and longtime editor of the Fort Worth Business Press. He is a former president of the local Society of Professional Journalists and was a freelancer for a variety of newspapers, weeklies and magazines, including American Way, BrandWeek and InformatonWeek. A graduate of TCU, Robert has held a variety of writing and editing positions at publications such as the Grand Prairie Daily News and InfoWorld. He is also a musician and playwright.

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