Wednesday, July 14, 2010

"4 reasons why Texas beats California in a recession"

From Fortune:
Back in 1965, The Mamas & the Papas reached the top of the charts with "California Dreamin'," a song pining for a return to the warm safety of their home state. But these days they'd be better off dreaming about Texas.
The reason is that Texas powered through the global fiscal crisis, while The Golden State's economy is forecast to remain tarnished for some time.

The fact that California remains locked in such a pronounced slump compared to its economically and demographically similar cousin to the southeast has been pounced upon with biblical zeal by conservative commentators who claim the state's woes are a direct result of its liberalism and sloth. But in truth, California's industrial mix and its history of voter empowerment may have done more than glad-handing liberalism to bring low the nation's largest economy -- one that, in better times, brought the world the Popsicle, the Hula Hoop, the "slimsuit" swimsuit, and the fortune cookie.
1. Diversity of jobs - accountants over homebuilders.
The chief reason California remains mired in a recession that Texas almost skirted is fairly obvious. Its major industries were more directly tied to the causes of the recession, resulting in steeper job loss when the recession hit. "California experienced a more acute housing bubble than most states, including Texas," says Professor Jerry Nickelsburg, who runs the UCLA Anderson Forecast, noting that California lost more jobs than many other states because it was the center of the sub-prime mortgage finance industry, and housing was a major employer. He adds that California was also hit harder than most by the slowdown in Asia, which meant that fewer manufacturing goods were being moved to and from its important ports.

By comparison, housing was a relatively unimportant factor in job growth in Texas as the recession hit, with most new jobs being created in diverse professional fields such as accountancy, law, and security services. The more diverse Texas economy also benefited from its interaction with the oil and natural gas industry, which are an important part of the tax base, says Professor Steven Craig of the University of Houston Economics Department.

This left the two states with starkly different unemployment pictures. While Texas recently reported that more than 8% of its citizens were unemployed, California's unemployment rate remains greater than 12%.
A higher rate of unemployment is the deciding factor in determining the depth of any state's fiscal crisis. As Professor Robert Inman of the University of Pennsylvania's Wharton School found in his recent study of the issue, "the states' fiscal crises of 2009 do not appear to be linked to any obvious structural or institutional failures in state finances. It's the economy."
2. It pays to be friendly to business owners.
But low-tax, small-government advocates may have a point in terms of what could prevent a more robust recovery in California. Businesses perceived California's tax and regulatory structure as so unwelcoming that the state ranked last in Chief Executive magazine's 2010 survey of the best places to conduct business, calling it "the Venezuela of North America." Texas, by contrast, ranked first.

It is easy to see why. Professor Bill Watkins, who heads the Center for Economic Research and Forecasting at California Lutheran University notes that unlike California, Texas has no personal income tax, personal capital gains tax, or corporate income tax. "This is in huge contrast to California's tax structure," he says, adding that overall, Texans also just pay less in taxes of any stripe....MORE

HT: PE Hub