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 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 Tesax is fiscally stronger.

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%, whithout 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.

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About Tino Sanandaji 39 Articles

Tino Sanandaji is a 29 year old PhD student in Public Policy at the University of Chicago, and the Chief Economist of the free-market think tank Captus.

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