Minding the gap

by E.G. | The Economist
AUSTIN
Jan 7th 2011

TEXAS is forecasted to have a hefty budget deficit over the 2012-2013 biennium—probably more than $20 billion, although the comptroller's latest forecast isn't due until next week. Paul Krugman, shocked by the numbers, sees it as a rebuke to Texas's model:

The point, however, is that just the other day Texas was being touted as a role model (and still is by commentators who haven’t been keeping up with the news). It was the state the recession supposedly passed by, thanks to its low taxes and business-friendly policies. Its governor boasted that its budget was in good shape thanks to his “tough conservative decisions.”

We've written quite a bit about the Texas budget, including here and here. As I said last summer, Rick Perry was being overly cavalier about the budget outlook, saying that he wasn't even sure it would be a problem, even while simultaneously ordering across-the-board spending cuts at all state agencies:

...an odd stance, but not inexplicable. The budget cuts will have to go through the state legislature, which does not meet again until January. The elections, of course, are in November.

Now, of course, it is January, and when the legislature reconvenes next week they are going to have a big challenge. There is still about $8 billion in the state's "rainy day" fund, although Republicans are historically reluctant to touch it. Given the deeply conservative tilt of the new legislature, cuts are far more likely than tax increases (although not impossible; even a few Republicans have endorsed the idea of raising the petrol tax to help pay for the roads).

It would, of course, be nearly impossible for any state to avoid a severe national recession entirely. However, I don't think it follows that Texas's approach over the last few years was the wrong one. Three years of economic indicators showing Texas out well ahead in lots of measures (unemployment, foreclosure rates, job creation) translates into a tremendous amount of foregone suffering and distress. That's one of the reasons Texas has seen significant population growth over those years—a kind of economic osmosis as people came here to work—and, in fact, the more recent rise in unemployment is partly because the rate of job creation hasn't quite kept up with population growth. At the moment, the state's economic performance is still better than that of the nation as a whole, although the gap has narrowed on measures such as unemployment. Going forward, the companies that relocated to Texas in the past few years aren't going to pull up stakes and vanish overnight, and in growing industries such as wind and solar energy, Texas has made inroads that position it well for decades to come.

As Mr Krugman points out, the most serious costs are Texas's relative underinvestment in education, health care, and social services. It's partly a philosophical question. Is it more important to focus on building a good safety net, or to try to create the conditions that would reduce the chances of people needing the net? Ideally you'd have both; in practice, sometimes, neither. Texas's approach has favoured the latter, with demonstrable results in the form of the economic osmosis I mentioned earlier. There appears to be a coalescing consensus in Texas that more attention needs to be paid to schools (although, Texas-ishly, the argument is being made on the grounds that a substandard educational pipeline will undermine global competitiveness). However, the political will is lagging. In my view, that's one adverse effect of Texas's comparative success during these past few years. The state hasn't experienced the kind of crises that occasionally stimulate productive risk or visionary change. However, it's a bargain that most Texans were happy to take.