Well, for starters, there's the traffic.

Photographer: Joe Raedle/Newsmakers

What California and Texas Have in Common

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Contrasting the economic approaches of California and Texas has become something of a national pastime for wonks, especially those with ideological axes to grind. For years, one has been able to read opinion piece after opinion piece (the bulk of them in the Wall Street Journal) describing how Texas's low-tax, light-regulation approach was helping it run rings around those West Coast liberals. Lately California's economy has been stronger, and there's been a bit of a backlash

I'm not going to deny that the two states do things differently. Texas has the fifth-lowest state and local tax burden (7.6 percent of state income) among the 50 states, according to the Tax Foundation. California has the sixth highest (11 percent). And while it's harder to measure, I do think it's fair to say that California has a much less business-friendly regulatory climate than Texas.

The biggest difference between the two states, I think, has to do with housing. Texas builds it, California doesn't. In 2015, according to the Census Bureau, the Lone Star State permitted 79 percent more new housing units than California despite having 30 percent fewer people. This is partly because Texas's regulatory climate is friendlier to builders, partly because California's biggest cities are hemmed in by coastlines and mountains, and partly just because attitudes are different: Texans embrace growth. Californians have, at least since the 1970s, tended to be wary of it.

Still, over the course of the current recovery, both states have seen economic growth that most of the rest of the country would envy. California has led the U.S. in job creation, adding 2.3 million nonfarm jobs since January 2010. Texas is in second place, with 1.8 million jobs. Between them they're responsible for 28 percent of national employment growth. That's partly just because they're the two most populous states, but they're also among the top states in percentage employment growth.

The Country's Job Engines
Increase in nonfarm payroll employment since January 2010
 
Source: Bureau of Labor Statistics

What is the California-Texas secret? Well, most obviously, it's that, as economic activity in the U.S. has become increasingly concentrated in a few big, vibrant metropolitan areas, they are both states with big, vibrant metropolitan areas. Of the 10 biggest urban agglomerations in the U.S., two (Los Angeles and San Jose-San Francisco) are in California and two (Dallas-Fort Worth and Houston) are in Texas. Each state also has two others in the top 35.

Big metropolitan areas are doing so well in large part because cramming lots of people together increases the interactions that fuel innovation and growth. The impact is especially big if these people bumping into one another are highly skilled. Educational attainment is a useful if imperfect proxy for skill, and among the nation's metropolitan areas with 1 million people or more, San Jose and San Francisco score No. 2 and No. 3 for the percentage of the adult population with at least a four-year college degree, while Austin, Texas, is in sixth place. Houston, Dallas and Los Angeles are in the middle of the pack, but they're all so big as to allow for major concentrations of talent in certain industries (energy in Houston, entertainment in Los Angeles) that in turn attract more talent.

Why did these cities develop in California and Texas, and why do they exercise such attractive force? A lot of it is surely dumb luck, but I think there is an important common thread (and this is where I'm going to haul out my particular ideological ax). In past decades, private- and public-sector leaders in both California and Texas made big investments in their states' futures that have paid off richly. As a result of investments in higher education, for example, California and Texas lead the nation in the number of institutions on the brand-new ShanghaiRanking 2016 list of the world's top research universities:

Again, California and Texas are the two most populous states. They should be at the top of that list. But consider Florida, the third most populous state, which has 74 percent as many people as Texas but fewer than half as many top research universities. That's partly because Florida is loaded with retirees -- but that's sort of the point. Investing in the future hasn't been as big a priority in Florida as in California or Texas.

Another form of investment is venture capital: California leads the country in dollars invested, and its lead keeps growing. Texas was No. 2 for most of the 1990s and 2000s, but has actually lost ground lately. To some extent what seems be happening is that money is being invested in startups based in Silicon Valley, but as soon as they start getting big they expand into Texas and other states (and countries) with lower operating and housing costs. It's also an indication, though, that both states are currently benefiting from investments made a while ago -- investments that aren't necessarily continuing.

For example, both states' investments in primary and secondary education have sputtered in recent years:

Falling Behind in School Spending
Spending per public-school pupil,* in 2014-15 dollars
 
Source: National Center for Education Statistics
*Measured by average daily attendance

California used to spend more on its schools than the national average. Proposition 13 put an end to that in 1978 by restricting property taxes, the main source of school funding in the state. Texas passed California in the 1990s and was nearing the national average, but has fallen back since. I realize that more spending doesn't always mean higher quality schools, but this does seem like a good proxy for both states' willingness to invest in the future -- and it shows that this willingness may be on the wane.

The trends in state support for higher ed are similar; both Texas and California spent well-above-the-national-average amounts on it in the past, but have been less impressively generous in recent years. Texas does have an added advantage here, though: long-ago land grants to the Texas and Texas A&M university systems that, thanks to the subsequent discovery of oil under those lands, have given them among the biggest university endowments in the nation. “A cultivated mind is the guardian genius of democracy,” the then-president of the Republic of Texas, Mirabeau B. Lamar, said upon making the original land grant in 1839. Turns out he was investing in future economic growth, too.

In recent years, both California and Texas seem to have pulled back on that investment, at least on the public level. In California this is mainly because the state has loaded itself up with too many obligations to the past (pensions) and present (health care). In Texas the issue appears to be more ideological -- the state's Republican majority really, really wants to keep taxes and spending low. As somebody who grew up in California and has a big soft spot for Texas, I'm hoping both states find ways around these obstacles. Investing in the future is what made them great. They need to keep doing it.

  1. Yes, I know there are getting to be exceptions, especially in the Austin area. Probably California transplants, come to think of it.

  2. I'm going by Wikipedia's list of primary statistical areas, which mashes together the Office of Management and Budget's combined statistical areas with metropolitan areas that are "not a component of a more extensive defined metropolitan area." If you just go by metro areas, the San Jose area is kept separate from the San Francisco area, which seems silly given how seamlessly interconnected the two are.

  3. "Universities are ranked by several indicators of academic or research performance, including alumni and staff winning Nobel Prizes and Fields Medals, highly cited researchers, papers published in Nature and Science, papers indexed in major citation indices, and the per capita academic performance of an institution."

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Stacey Shick at sshick@bloomberg.net