Its never good news to hear a state has a budget deficit. But this recent article in The Economist made me a little happy for a couple of reasons. One, I was really tired of hearing conservatives (like Meg Whitman in 2010) praise Texas as a model for California. So hopefully that won’t happen again. Two, its a vindication that California is not broken just because were lazy or some other variety of insults hurled our way from the other 49.  It shows that regardless of the economic system, the bipartisan consensus was over-reliance on a massive bubble.  

Many, if not all, will argue my view that the left’s model of government-as-charity is unsustainable.  But the the progressive case against the conservative model of government-as-corporation has been proven with the demise of Texas’s “economic miracle.”  So there are a few lessons here, and most demonstrate why Texas and California can’t be compared now or in the future.

1) The Dutch Disease.  California is the third largest oil producer but due to our economy and size we are not an energy exporter. An oil tax exactly modelled on the one in Texas would generate revenue but cannot be a large enough cash stream to support our state.  Texas is still over-reliant on its energy sector. It will receive a windfall with the current mideast crisis of the day. Don’t be surprised if this contributes to a recovery and is used as proof that the Texas Model “works.”  California conversely will suffer economically due to high gas prices. People should be aware that the ups and downs of the energy market don’t demonstrate which system is better only that both systems are not properly buffered for it.

2) Environment. An issue conservatives cringe at in California and abhor in Texas. But the thing is, our mild climate and natural beauty can’t be found or replicated in Texas. As oil is to that state, the environment is a resource to us. Its a strong enough resource in fact that the wealthy will continue to live here regardless of the tax situation (much like they live in France).  

3) Taxes. Our environment opens the door to higher taxes on the wealthy as long as its packaged as the price to live here. But it doesn’t open the door to high taxes on ALL corporations. Companies that are high tech and want to attract people that want to live the California lifestyle can afford those taxes. Companies that require low-cost labor and are face stronger market competition (the non-Apples) cannot.   Texas does grow more low-cost labor jobs and manufacturing. Granted there is not a high margin on that production but high-end producers that California is known for cannot employ all of us. Both no-taxes Texas and higher taxes California are too broad brush. A more nuanced corporate tax code may be needed.

4) Education.  As the article points out, Texas aims to entice intellectual talent with no income taxes and more jobs instead of growing it natively with its education system. Its definetely a cheaper way to go, but is it sustainable? California’s education system currently relies on its upper institutions to draw talent and hopes that its lifestyle and environment will keep them after graduation. I think California is the model to bet on, not (just) because of state pride, but Texas opens itself up to a race to the bottom situation.

5) Jobs.  The Texas Model trumpets no income taxes and uses this to draw talent from across the nation. California, often called (incorrectly) the highest taxed state, uses taxes to provide services that higher educated/higher income people come to expect – well maintained roads, good schools, beautiful parks etc.  The Texas job numbers were high last year but it appears that those were primarily lower-income jobs (some numbers said 2/3rds of all jobs created). Of course those are important jobs but not revenue generators or economic growth contributors like high tech. Bottomline, Texas plans to attract the lowest bidder (those that don’t want to pay taxes). Like Wal-mart shoppers they don’t expect frills or high quality products and services. California is like  (insert expensive store of your choice, I won’t play favorites) it gives you high end stuff and you expect to enjoy the experience not get the deal and rush out.  But unquestionably its expensive, Californians need to decide which “store” do we want to be?

I have some thoughts on the issue but open it to all, what is California to do next?