Is Texas’ Economy Really Better Than California’s?

Gov. Rick Perry often touts Texas’ economic success, which he attributes to lower taxes and fewer regulations than cash-strapped California. But if Texas is so compelling, why did Perry go to California looking for new companies?
by | May 2013

Not long ago Gov. Rick Perry came poaching on my turf. Well, not mine, exactly, but close: He came to Oxnard, Calif., the town next door to the one I’ve lived in for 25 years, in hopes of luring one of our best local employers off to Texas.

I’m not sure how Perry targeted Haas Automation, one of the nation’s leading manufacturers of precision machining equipment. Admittedly, he wasn’t trying to lure the whole company; he just wanted to attract future expansion. Still, it was a rather brazen move. Although Haas and its Oxnard-based founder have had a lot of ups and downs over the years, the company remains large, successful and very civic-minded. Haas pays well and is one of the most philanthropic companies in Ventura County.

Read the May issue of Governing magazine.

Predictably, California Gov. Jerry Brown reacted with hostility. So did many local residents, who staged demonstrations in support of Haas outside the company’s main plant. It remains to be seen whether Perry will lure all or part of Haas to Texas. But the incident brought the contrast between two of our largest states by GDP into stark relief. Is there really a “Texas miracle” California can learn from? And if Texas is so compelling, why did Perry have to come to California with a fishing rod looking for new companies?

Over the past five or so years, as California’s struggled to remain solvent and create jobs, Texas has been justifiably proud of its job creation record. In a sluggish economy, Texas has created more jobs than anybody else, and Perry has been more than willing to take credit for it by citing Texas’ low taxes and light regulatory touch, especially in comparison to California. Meanwhile, I’ve attended innumerable meetings in Los Angeles where economic development types have wrung their hands over California’s troubles, wishing out loud that the state could return to a golden era when taxes were low, regulation was light, the government was small and jobs were plentiful.

Yet there’s also the question of what kind of economy you want to create. Texas’ job creation machine has performed amazingly well. But it’s been criticized for creating low-paying jobs. And Texas’ most successful job creation machine, Austin, is the most California-like city in the state, a place that embraces California creativity and weirdness so enthusiastically that the rest of the state routinely rejects it as being profoundly un-Texan.

California hasn’t been anybody’s model of economic development lately. Though the population is still growing, the state has been shedding middle-class jobs and middle-class families for two decades. Most of the jobs created in the state are also low paying; and, of course, California’s own state government wallowed in insolvency for a decade until voters approved Brown’s tax increase last fall, which has finally balanced the budget. Through it all, California has managed to maintain a big lead in certain high-growth, high-performing sectors, principally technology and entertainment.

In other words, Texas isn’t doing as well as you might think and California isn’t doing as badly as you might think. As our national politics devolve ever more deeply into a war between red and blue states, it’s important to understand the difference between red-blue political rhetoric and the on-the-ground reality of economic development.

Red-state politicians like Perry often claim that low taxes and light regulation are key to their economic success. In fact, however, their economic development experts know this isn’t the whole story. Red-state economic development has been successful in large part because leaders have figured out how to combine the low-tax/low-regulation environment with financial incentives, the power of research institutions and the construction of critical infrastructure. Even if Texas had no taxes or regulation, Austin wouldn’t be a high-tech powerhouse if it weren’t for significant state investments in the University of Texas.

Meanwhile, blue-state politicians often seem to believe that the tax and regulatory environment doesn’t matter at all, which isn’t exactly true, either. States like California can hang on to the desirable high-value-added parts of the economy -- e.g., Google and Facebook -- through a combination of quality of life and a dense concentration of entrepreneurship, venture capital and a highly skilled labor pool. But they can’t hang on to the middle class without sensible tax and regulatory policies. The current battle in California over the cost of public-sector pensions is a good example of how blue-state politics often divides working- and middle-class folks who have it good (public-sector employees in this case) and those who don’t (private-sector folks who are leaving the state).

There’s a certain short-term logic to Perry’s visit to Oxnard. California companies like Haas must expand, and that’s hard to do locally for various reasons. But just because California is down doesn’t mean it’s out. U.S. history is filled with examples of regional economies that looked dead when traditional industries left -- Boston, New York, Pittsburgh, Seattle -- but turned things around in a generation. California may have made the mistake of “sitting on a lead” economically for too long. But Texas shouldn’t make the same mistake, either. In economic development, smugness is your biggest enemy.

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