On the Economy, Texas Leads the Way

States across the country are struggling to make ends meet in the aftermath of the economic crisis, yet one state has surprisingly continued to flourish throughout the nation’s economic slump: Texas.

It is my view that the nation could learn a thing or two from Texas’ limited, efficient state government philosophy. Examples of these policies include no state income tax, limited regulation, and conservative mortgage lending practices that were accepted by banks after the state’s savings and loans crisis of the 1980s. These tighter lending practices prevented Texas’ housing market from falling victim to the housing bubble that negatively impacted many other areas of the nation. 

According to the S&P Case-Shiller Home Price Index of 20 cities in the country, national housing prices over a seven year period increased by 155% to peak in July 2006 and since then have declined by 32%. A decline of this magnitude led consumers to tighten their budgets as their wealth decreased along with the value of their home and residential investment plummeted, which both were primary contributors to a decline of 4.1% of real gross domestic product during the Great Recession.

The housing market in Texas did not rise nearly as fast, and therefore has not seen anything close to the national rate of decline. The Federal Reserve Bank of Dallas noted in its March report that housing prices have fallen by 1.6% over the last year in the state; whereas, the Case-Shiller index is down 3.1% during the same time period for the nation. 

While the housing market is not the main focus here, it is important to understand a few of the differences that led to the only minimal recession in Texas and the more extreme recession for the rest of the nation’s economies. One could argue that Texas was just lucky, but I argue that there are specific policies that help to explain Texas’ prosperity.

It does not appear to be luck that the economic indicators in the state have been considerably better than many other areas of the country. Even after last week’s Jobs Report for March showed that the nation's unemployment rate is 8.8%, the Texas rate still remains lower at 8.2%. In addition, the Texas’ Comptroller Susan Combs recently wrote, “The Texas unemployment rate has been at or below the national rate for 49 consecutive months.”

Even with all of this good news, the Texas government still finds itself with a projected deficit over the next two years of anywhere between $15 and $27 billion. These projected deficits are a clear indication that government spending is excessive during a period of declining tax revenue from the economic slowdown and property tax cuts over the last couple of years. Republicans, who make up the majority in both chambers and the governor’s office, signal that they will work to close this gap, as mandated by the state’s balanced budget amendment, by cutting spending and incentivizing economic growth. Additionally, both Republicans and Democrats have taken raising taxes on the “wealthy” off the table.

Some will be upset about the spending cuts proposed by the Texas House, but I think that many of these cuts are necessary for taxes to remain low and for the economic engine of the private sector to flourish. In addition, the balanced budget amendment requires action; therefore, the best path to bringing down the deficit and continue the limited government philosophy in Texas is to lower government spending by reducing inefficiencies and cutting programs.

The deficit in Texas is still high, a fact that could certainly raise questions over whether the state’s philosophies should be used as a guide for other states across the nation. But, a report by the Center on Budget and Policy Priorities projects that 44 states face deficits in FY 2012 for a combined total of $112 billion, where Texas’ is projected to be $13.4 billion next fiscal year. I sympathize with those that look at the current numbers for the deficit and determine that Texas has its own problems, but up to this point the state has not had a deficit problem relative to many other states and more workers have been hired in Texas, as expressed in a recent speech by Dallas Federal Reserve President Richard Fisher, relative to any other state over the last few years.

In his article, "Texas’ Fiscal Future," Dr. Arthur Laffer (who is the founder and chairman of Laffer Associates and senior fellow at the Texas Public Policy Foundation) sums up nicely his views that are similar to my own and that other states can learn a few lessons from the state of Texas:

“In my opinion raising taxes to maintain spending levels would do immense harm to the Texas economy and would not provide the tax revenues government forecasters would predict. Raising tax rates never raises tax revenue by the same proportion and can at times actually yield less revenue … Texas should not succumb to the illusion that something for nothing is available. For whenever governments believe they can get something for nothing, they invariably end up with nothing for something.”

Photo Credit: Wikimedia Commons

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Vance Ginn

Vance Ginn, Ph.D., is an Economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin, Texas. He can be reached at vginn@texaspolicy.com. Vance has been a PolicyMic contributor since 2011 and has university teaching and public policy experience. Fun fact: Vance is a drummer and once played in a top-rated rock band in Houston, TX.

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