Wednesday, August 31, 2011

A Texas Lesson in Economic Growth

This lesson is drawn from a recent speech by Richard W. Fisher, president and CEO of the Dallas Fed. We begin with this chart of nonagricultural employment growth by Federal Reserve Districts over the past 21½ years, using the employment levels of 1990 as a base of 100 and tracing job creation through June 2011.

For clarity, we simplify the above chart to show an imperfect but reasonable proxy for the employment growth over the past two decades. Here we show the three Fed districts encompassing the three largest states in the country:

Texas produces 95% of the Eleventh District's economic output.
California, 62% of the Twelfth District's.
New York state, 72% of the Second District's.

Here are the compounded annual growth rates over 21½ years:
Texas 1.95 %
California at 0.57 %
New York’s at 0.19%.

Fisher notes, “There are several ways to calculate Texas’ contribution to national job creation from June 2009 through the end of June 2011. One is to look at the number of jobs created by all 50 states, including those that have lost jobs since the nation’s anemic recovery began. Using this metric, through June of this year Texas has accounted for 49.9 percent of net new jobs created in the United States.

“Another way to calculate Texas’ contribution to job creation is to lop off those states that have continued losing jobs and consider only those that have positive growth in employment these past two years. Using this metric, Texas has accounted for 29.2 percent of job creation since the recession ended.

“These are the facts. You may select whichever metric you wish. Regardless, it is reasonable to assume Texas has accounted for a significant amount of the nation’s employment growth both over the past 20 years and since the recession officially ended.”

Please refer to the first chart and note the job creation of the Texas district (Dallas) since the recession officially ended in 2009.  This district shows a sharp uptrend while the trend for all the other eleven districts has been essentially flat since 2009. 

Texas is known for its mining industry, which includes oil and gas, and has the highest weekly wages in the state. But surprisingly, this accounts for barely 2 percent (two-point-one percent, actually) of Texas' workers. The largest number of jobs has been created in the educational and health services sector, followed by the professional and business services sector.

Texas has a larger share of workers at or below the federal minimum wage than California or New York, but there are explanations for this. The agricultural sector has a relatively high share of minimum wage workers. Approximately 2% of Texas' workers are in this sector, compared to 1.1% in California and 0.5% in New York. Texas also has many migrant agricultural workers in the border area whose level of education is low. In addition, Texas has a younger workforce than the nation, further boosting the number of minimum wage earners in the state.

Here is Mr. Fisher conclusion:

“Despite the fact that Texas has severely limited social services and an education system that faces great challenges, people and businesses have been picking up stakes and moving to Texas in significant numbers over a prolonged period. It should be noted that in the last census, Texas gained population and congressional seats, while California’s population growth and congressional representation was static and New York’s was diminished. Jobs have been created for American workers in Texas in several different sectors, not just in the oil and gas and mining sectors. People have taken those jobs of their own free will, even though the jobs may not measure up to the compensation levels everyone would like. And yet Texas, like all states, is subject to the same monetary policy as all the rest: We have the same interest rates and access to capital as the residents of any of the other 49 states, for the Federal Reserve conducts monetary policy and regulates financial institutions under its purview for the nation at large. From this, I draw the conclusion that private sector capital and jobs will go to where taxes and spending and regulatory policy are most conducive to growth."

This lesson has wider application not only to other states and the U.S. as a whole, but internationally.  The U.S. has been losing industry and employment to foreign nations in large measure because U.S. tax and regulatory measures are less conducive to economic growth than those of many other countries.  This should be obvious, and yet the U.S. continues to follow the political ideology of a taxing, spending and regulatory regimen that makes no economic sense.