Much of California and Texas are in a state of baseball euphoria. Either the San Francisco Giants or the Texas Rangers will win their first World Series title this week. (The Giants won it in 1954 but were a New York team then.)
Unfortunately for Californians, the shared state of elation ends with baseball. On the economic playing field, Texas is winning in a rout.
Over the most recent 10 years (1998-2008) for which we have data, Texas enjoyed almost 30 percent greater economic growth than California. The Texas economy expanded by 104.1 percent compared with California’s 81.2 percent. Not surprisingly, people have voted with their feet.
The population of Texas has grown by almost double the rate of California over the last decade: 16 percent versus 9 percent. Tellingly, the absolute increase in the number of people residing in Texas (3.9 million) exceeded California (3.1 million).
The best statistic illustrating the divergence of the two economies is unemployment. California’s unemployment rate of 12.4 percent is more than 50 percent higher than Texas’ 8.1 percent.
If marginal workers and those working part time when full time is preferred are added to the unemployment rate, then unemployment and underemployment reaches 21.9 percent in California, more than 1 in 5 workers in the state and highest in the nation. The equivalent number for Texas is 14.6 percent, one-third less than California.
The flip side of unemployment is job creation, particularly in the private sector. Since peaking in December 2007, California’s private job market has lost 1.4 million jobs or 10.8 percent. Texas, on the other hand, since peaking in November 2007, has lost 2.7 percent of its private sector jobs.
There are several explanations for this divergence. Focusing on differences in public policies makes sense because politicians and bureaucrats can actually do something about these barriers to prosperity immediately.
State and local government in Texas represents 15.4 percent of the economy compared with 22.3 percent in California. California’s state and local governments consume 45 percent more of the state economy than their Texas equivalents. This means that Texas, to a far greater degree than California, relies on individuals and businesses rather than governments to make economic decisions.
The burden of government translates into stark differences in taxes. California’s top personal income tax rate of 10.55 percent is third-highest in the country. The second top rate, 9.55 percent, is also high and kicks in at $47,055. Only three states have higher rates of personal income tax than California’s second-highest rate. Texas has no personal income taxes.
California’s corporate income tax, 8.84 percent, is the eighth-highest in the country. Texas has no corporate income taxes. This is important because research has consistently shown that corporate income taxes are a serious barrier to investment and business development, the foundation of job creation. California also has the highest state sales tax rate in the country at 8.25 percent, more than 30 percent higher than Texas’ 6.25 percent.
Advocates for even larger government contend that California enjoys a high level and quality of public services. A recent study compared California’s program and service performance against 23 industrialized countries. California ranked a dismal 21st out of the 24 jurisdictions.
Some contend that Texas is resource-rich at a time when commodity prices and demand are fairly strong. This is true but ignores a key reality. California’s rigid regulations have effectively shut down much of its resource industry, particularly minerals. It is entirely possible that California could be enjoying a resource-led recovery had it not chosen to shut down these industries in the good times.
Whatever the outcome of the World Series, California and Texas remain major-league examples of how public policy influences economic performance. The lesson should be clear. A lineup of smaller government, lower taxes and regulatory relief will help restore the economic health of California and the nation.