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Tuesday, April 26, 2016

The American Dream Is Now the Texas Dream

Why the Texas Miracle Survived the Oil Bust

Back when I was young, America was an optimistic country that grew rapidly. Before NIMBYism got out of control, builders could build vast new housing developments, and the government would supply brand new expressways. Housing was cheap, and the workforce grew fairly briskly.

That America is mostly gone, except in Texas. Many liberals thought Texas would have a recession when oil prices collapsed last year. After all, back around 1986 Texas had a fairly steep recession, after a similar collapse in oil prices.

But not this time; indeed unemployment just fell to 4.4% in February, which is only slightly above the all time low of 4.0%, which occurred during the boom year of 2000. Nor can this be attributed to people leaving the state; Texas continues to lead the US in population growth (total), and indeed growth actually picked up in the most recent 12 month period.

Of course Texas economic growth has slowed sharply due to the dramatic downturn in the fracking industry, but just look at how different the unemployment picture is compared to 1986:

I’d love to hear some thoughts as to why. I can think of three possible reasons:

1.  In 1986 Texas was also suffering from the hangover effects of the S&L fiasco, but this time its banking system is in better shape.

2.  Oil is now a smaller share of the Texas economy (but that can’t explain the entire difference).

3.  The explanation I like most is that in 1986 the rest of the country was still doing sort of OK, so the attraction of moving to Texas was less obvious than today. Now the rest of the US is stuck in The Great Stagnation, which makes Texas look good by comparison:

Liberal Governors, tired of looking bad next to Texas, may have hoped to catch a break as the full impact of cheap oil hit the Lone Star State in 2015. And Texas is creating jobs more slowly this year””1.1% growth through May versus 3.6% in the same period last year. Lower-paying positions in hospitality have substituted for higher-paying energy jobs.

But the overall economic resilience is a far cry from the Texas recessions that followed previous oil busts. Unemployment in the state, 4.3% in May [2015], was still well below the national average of 5.5% that month.

Some credit goes to the foresight of energy companies that made themselves less vulnerable with better balance sheets. In a report specifically focused on the energy capital of Houston, the Dallas Fed notes recent improvement in job growth and says that “refining, petrochemicals and service industries are managing to offset oil-producer woes.” Statewide, education and health services employment has also been strong.

Meanwhile in Austin, which has little exposure to the energy industry, business other than government is booming. May job growth surged at an annual rate of 6.6%, including “a significant increase in high-paying scientific and technical services jobs.” Texas is now America’s top technology exporter, surpassing long-time leader California.

Notice that the boom in Austin is helping to offset a slowdown in places like Houston, so that overall job growth continues to be positive. Back in 1986, Austin was not yet an important tech center.

Here, as in so many other recent cases, the pragmatic progressivism of Matt Yglesias (a Texas bull) has proved far more accurate than the ideological progressivism of Paul Krugman (a Texas bear). Progressives might not like the small government model of Texas, but wishful thinking won’t make the Texas miracle go away.

Cross-posted from the Money Illusion.

  • Scott B. Sumner is the director of the Program on Monetary Policy at the Mercatus Center and a professor at Bentley University. He blogs at the Money Illusion and Econlog.