Texas and the Sunbelt economic model

By Reihan Salam

The latest issue of The Economist has a data-rich dispatch (subscription-only, I believe) on the state of Texas's economy. Political progressives have long lamented the Sunbelt model of government, which marries low taxes with stingy public services. Without wading too deeply into the political thicket, it does seem, however, that the Sunbelt model might prove more resilient in an economic downturn. I should stress that resilience isn't the highest virtue. But let's think through this. 

Texas has been a magnet for technology firms and industrial development for some time now, in no small part because the state has no income tax and has otherwise maintained a famously "pro-business" climate, often through active collusion -- some call it industrial policy -- between the state government and powerful business interests. Texas is not Adam Smith's utopia by any means. At the same time, there are persistent anxieties over whether Texas is doing an adequate job of educating its population. High school dropout rates are high, particularly so among the Latinos and African Americans who represent a very large slice of the state's younger cohorts. And though Texas has a number of celebrated research universities, it is widely believed that the state is punching below its weight in this regard. The University of Texas has served as an incubator for innovative business enterprise, yet it is unique in the state.

In another sense, however, this leanness of the public sector has arguably facilitated job growth. The Houston metropolitan area absorbed the crushing blow of Hurriance Rita and a large number of severely disadvantaged Katrina evacuees. The unemployment rate remains low relative to the national average -- it just hit 6.4. percent in January. And in a striking contrast with the vast majority of other states, Texas is in excellent fiscal shape.

Ray Perryman, an economist who focuses on Texas, mentions another point of solace: state finances are in reasonably good shape. The comptroller, in her biennial revenue estimate, predicted that Texas would have about $77 billion to spend in 2010-11: down 10.5% from the previous round, because of declining sales and property taxes. Fortunately the state has several billion dollars in its Economic Stabilisation Fund, set aside against the possibility of a downturn. With Texas's share of the federal stimulus set at $17 billion, the state may not even need to tap this "rainy day" fund. But even if it comes through the downturn in relatively good shape, there is the future to worry about. Many now fear that Texas's low-tax, low-spend model will need revision.

Note that Texas relies very heavily on regressive sales tax revenue. This would be acceptable if the state used a more efficient VAT and if the revenue were spent in a highly progressive fashion, but that's not exactly the case -- this does, however, point towards a modest revision of the low-tax, low-spend model that could be in keeping with the state's economic resilience.

In light of Texas's public-sector failures, one wonders why the voluntary sector hasn't stepped in more aggressively to address them. A few hypotheses immediately leap to mind: affluent incorporated communities have relatively good services, thus dampening the sense of urgency that some of the most capable citizens have about these failures. And, as Edward Glaeser and Alberto Alesina suggest in their brilliant book on Fighting Poverty in the US and Europe, race probably plays a role: according to the authors, racial homogeneity corresponds to a strong taste for redistribution whereas racial heterogeneity corresponds to a strong distaste for it. The diversity of Texas, and the fact that affluent Texans tend to be non-Hispanic whites while less-affluent Texans tend to be black or of Mexican origin, suggests that -- depressingly -- racism might play a role in the state's less-than-generous public culture.       

This article available online at:

http://www.theatlantic.com/business/archive/2009/03/texas-and-the-sunbelt-economic-model/1698/