Tyler Cowen recently directed me to a post by Phillip Longman in the Washington Monthly, which attempts to debunk the “Texas miracle.” His main argument is that the boom in Texas is a product of the recent oil boom, not good economic policies. Even that is questionable, as lots of other places have large amounts of oil and gas but simply choose not to frack (Europe, New York, California, Mexico, etc.) But let’s accept the “Texas is lucky” argument for the moment; do the facts support this multiplier claim?
Unless you’ve been to Texas lately, you might have missed just how gigantic its latest oil and gas boom has become. Thanks to fracking and other new drilling techniques, plus historically high world oil prices, Texas oil production increased by 126 percent just between 2010 and 2013. . . .
To be sure, only about 8 percent of the new jobs in Texas are directly involved in oil and gas extraction, but the multiplier effects of the energy boom create a compounding supply of jobs for accountants, lawyers, doctors, home builders, gardeners, nannies, you name it. Saying that Texas doesn’t depend very much on oil and gas just because most Texans are not formally employed in drilling wells is like saying that the New York area doesn’t depend very much on Wall Street because only a handful of New Yorkers work on the floor of the stock exchange.
You’d think the editors of Washington Monthly would have at least checked the data, to see if his multiplier claim was accurate. It only takes 5 minutes. And as we’ll, see the data decisively rejects this argument. But first a bit of history about Texas oil production. Notice how it plunged in the decades after 1975:
Now look at the population growth by decade:
Texas’s population grew at roughly twice the national rate for decade after decade, even as oil output was declining sharply. Now look at the recent trends in oil output:
So the Texas oil boom was quite recent, beginning about 2010. Now let’s look at the population growth figures before and after the recent boom:
Where is all the population growth from fracking? Where is the multiplier, the spinoff jobs for other sectors? I suppose you could argue that while Texas hasn’t seen any more population growth, the unemployment rate has fallen more sharply than in other states. After all, only 6% of the Texas workforce is unemployed, as compared to 6.7% for the country as a whole. The problem here is that unemployment in Texas peaked at 8.3% in February 2010, versus a peak of 10% for the US. So the fall in the unemployment rate in Texas has actually been smaller than for the country as a whole (even slightly smaller in percentage terms). The fracking boom has not had a noticeable effect on either population growth or unemployment.
Sometimes I think that Keynesians are so convinced that there is a “multiplier effect” that they don’t even both to check the data. At least Paul Krugman has the good sense to make the argument in terms of GDP, not population:
But I wanted to follow up on one particular point: the role of oil and gas in recent years. Longman concedes that these industries directly account for a fairly small share of the economy even in Texas, but argues that their rapid growth, combined with multiplier effects, makes them a much bigger story when it comes to Texas growth. Indeed. Let me put some numbers to this, using the BEA data on real GDP by state.
What you learn from these data right away is that Texas is indeed king of the extractive expansion. Nationwide, mining output, measured in 2005 dollars, expanded $29 billion between 2007 and 2012; Texas accounted for $22.7 billion of that expansion. Nationally, the expansion of mining was 0.2 percent of 2007 GDP; in Texas, it was 10 times that, 2 percent.
Oil extraction is very capital intensive, so I don’t doubt the Texas GDP numbers would look better than their population or unemployment numbers. But that’s not the big story, and even Krugman admits that there’s much more to the Texas growth story than oil. The big story is that people have been moving to Texas in large numbers for many decades, even decades when oil production was falling fast.
Sorry liberals, but there really is a Texas miracle, and it has nothing to do with “multipliers.” It is explained by the fact that working class people like to move to states with low living costs (due to flexible zoning), and businesses and high skilled professionals like to move to states with low income taxes. The working class cares more about the low living costs than the fact that Texas offers less expensive welfare programs than California. They come to Texas to work, not to collect welfare. The businesses bring them the capital they need to be productive workers.
My only quibble with Krugman’s post is that he leaves out the lack of a state income tax, which helps explain why Texas grows far faster than other south central states with hot weather and cheap houses. The big story is that people have been moving to Texas in large numbers for many decades, even decades when oil production was falling fast.
PS. I was going to take Sunday off, but was inspired to write this post by Saturos, who is of course right about the decline in quality of my writing. That’s what happens to grouchy old reactionaries. But when Keynesians keep throwing softballs over the center of the plate, it’s hard to step away. I know Adam Gurri doesn’t read my blog, but perhaps someone can tell him that Knausgaard has inspired me to adopt a maximilist approach.
Update: Some commenters suggested that the Texas miracle is due to cheap real estate. This post demolishes that argument.