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California v. Texas closer than perceived, forecast says

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California’s economic climate compares favorably to Texas’, despite a slough of media reports to the contrary, according to a recent forecast from Beacon Economics.

In its second quarter forecast, the Los Angeles-based company said sound bites from policymakers and headlines alike have ignored some comparative advantages California has over Texas, and the fact that economic growth in the Golden State has tracked closely with Texas in real terms.

The only area in which Texas holds a clear advantage over California is in real estate, according to the report. The most expensive metro area in Texas, Austin-Round Rock, has a median price among existing single-family homes of $194,000, more than three times less than the $600,000 price tag in San Jose, the most expensive metro area in California.

The resulting gap in affordability explains much of Texas’ advantage in job growth and California’s increased cost of government, the report says.

“While it is true that Texas has outgrown California in nominal terms since 1994, much of this can be explained by a stronger bout of inflation over this time period rather than rapidly expanding production and output,” the Beaconomics forecast reads. “In real terms California has tracked economic growth in Texas quite closely, despite contentions to the contrary.”

According to the U.S. Bureau of Economic Analysis Real GDP Index, California and Texas have tracked closely since 1994, though California did fall more steeply during the recession. Both have far outperformed the balance of the country.

As of 2010, Texas’ Real GDP Index was just under 180, while California’s was just under 170. The balance of the country, meanwhile, had an index number south of 150.

However, the percent change in Real GDP from 2009 to 2010 in Texas was 2.8, above the national level of 2.6, while California’s was just 1.8. Texas was in the fourth quintile of performance of all states, while California landed in the second quintile. “Different studies can yield different sets of numbers or conclusions, but perceptions in many cases is reality,” said Lynn Reaser, chief economist at the Fermanian Business and Economic Institute at Point Loma Nazarene University. “The business climate in Texas is viewed as much more positive in terms of unionization and the burden of regulation.”

The Beaconomics report minimizes the effect of the perceived business-unfriendly climate in California. Recent reports by the Public Policy Institute of California (PPIC) and UCLA support the group’s conclusion, finding that much-discussed “hunting trips” by Texas Governor Rick Perry to lure businesses out of California have had minimal impact on either state’s labor situation.

PPIC said California lost 0.6 percent of its employment to the discrepancy between the relocation of jobs out of the state and those into the state.

The true difference in employment growth between the two states, according to Beaconomics, is simply the outsized effect the recession had on California compared to Texas, rather than any other external explanatory factors.

Over time, job growth relies on new businesses and expansion of existing businesses, rather than relocation from one state to another, according to Reaser. The climate for startup and expansion in Texas gives it an advantage over California, she said.

Alan Gin, professor of economics at the University of San Diego, said the higher regulatory burden of California is a calculated decision based on quality of life.

“Do we want to allow drilling off the coast of California? Are we concerned about air quality? It’s basically a quality of life issue,” he said.

Beacon emphasizes California’s manufacturing advantage over Texas. While the U.S. manufacturing sector has collapsed, manufacturing output increased more than 3-fold between 1994 and 2008, while Texas increased 250 percent. In 2009, Texas manufacturing declined, while California’s continued to grow.

Social and demographic differences in the states also make for very different types of economies. Texas has a higher share of adults with no high school diploma or only a high school diploma at 45.5 percent, compared to 40.3 percent in California and 43.2 percent in the rest of the country.

A larger share of adults have a graduate or professional degree in California, at 10.7 percent compared to 8.5 percent in Texas and 10.3 percent in the rest of the country. Likewise, 19.1 percent of California adults have a bachelor’s degree, compared to 17 percent in Texas and 17.6 percent in the country as a whole.

As a result, California has a greater share of its private-output in high skilled jobs like professional, scientific and technical services, information and management, while Texas has a larger share of mining and extraction industries, wholesale trade, transportation and manufacturing.

“This is relevant because the jobs of the future are in these high tech, high knowledge high skill areas, so you’ll need an educated workforce,” Gin said.

The difference in prominent industries isn’t statewide, according to Reaser. Austin, home of the University of Texas, is a “pocket of exception,” she said, with resources that lend themselves to the technology field.

California maintains a larger government than Texas, leading many media reports and policymakers to focus on the effects of large government. State and local government expenditures as a percent of state GDP have fluctuated between 8 and 9 percent in California, and between 7 and 8 percent in Texas.

In terms of employment, however, Texas actually has a larger government than California. State and local employment is 15 percent of total payrolls in California, compared to 16 percent in Texas.

The reason California spends more on government while employing a smaller share of the working population than Texas, points to what Beacon says is Texas’ one clear advantage over California: cost of living.

Assuming an $80,000 annual income, a San Jose resident will pay 48.2 percent of her monthly income on home ownership, compared to just 18.5 percent in Austin. This stark contrast filters into wage negotiation between workers and businesses, ultimately allowing state and local governments as well as businesses to spend significantly less on labor.

“Thus, in addition to higher property prices increasing the costs of plant and property in California, they also lead to higher costs of living, which increase the cost of doing business in California through the wage mechanism,” Beaconomics reads.

Gin said a large amount of Texas’ job growth was lower paying than what exists in California, owing itself largely to the housing market.

“The cost of living is so much lower in Texas particularly in terms of housing, that that is attractive in terms of attracting employers because they don’t have to pay higher wages,” he said. “But that’s the price you pay for living in California, and coastal California is more desirable, and that’s why housing costs are so different.”

Reaser agreed that California’s coastal environment makes it more expensive, but also more attractive.

“That’s a significant advantage (for Texas) in terms of the access to more highly trained individuals, particularly if it’s more of a recruitment cost in attracting individuals into higher priced areas,” she said.

As a result, Beacon says the longing from media and policymakers for a rebound to pre-recession home prices is misguided.

“Affordable home prices are likely just what the doctor ordered to help California’s firms grow and attract the best and brightest from around the nation and the world,” the report reads.

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