March 13, 2014
If it’s not immediately apparent how the rate of job creation on Bill Gates’ estate is relevant to the pace of job growth in California and Texas then you have to think about the issues more carefully. In recent weeks, many proponents of low taxes have been touting the faster pace of job growth in low tax Texas compared with high tax California as proof of the economic superiority of the low tax model.
There is little doubt that Texas has seen faster job growth in recent decades. Since the business cycle peak in 1981 employment has grown by 56.0 percent in California, compared to 77.9 percent in Texas. If our only measure of economic success is job creation, there is no doubt that Texas wins the prize, but it is a bit more complicated.
First there is the issue of oil, which is important but by no means the only factor explaining differences in growth. By using 1981 as a base year, we are comparing a near peak oil price with another period of high prices. But Texas’ growth pattern does look a bit like an OPEC country. If we take the low oil price year of 2000 as the end point, California wins the job growth prize 48.6 percent to 47.1 percent. So clearly the price of oil (and gas) plays a big part in the economic performance of Texas.
However there is another very important factor in the story, building restrictions. In general, California imposes relatively tight restrictions on building, whereas regulations in Texas are considerably more lax. The result is that, relative to the size of its population, much more housing has been built in Texas over the last three decades than in California. And this has meant that housing is considerably cheaper in Texas than in California.
Just to take a couple of examples, according to the Department of Housing and Urban Development, the fair market rent for a two-bedroom apartment in Los Angeles County is $1,398 a month. In Harris County, which includes Houston, it’s just $926 a month. The fair market rent for a two-bedroom apartment in Santa Clara County, which includes San Jose, is $1,649 a month. It was just $894 in Dallas County in 2010, the most recent year available.
These are the most heavily populated counties in the two states, but the same patterns would be found elsewhere. Rent is much higher in California than Texas. To put this in perspective, consider that a person working 160 hours a month at the median wage (@ $17 an hour) would earn $2,720 a month, before taxes. A worker earning $10 an hour would gross just $1,600 a month, too little to pay the rent on a two-bedroom in Los Angeles County and way too little to cover the rent on a two-bedroom in Santa Clara County.
Paying a lot in rent is bad news, but there are two points to consider. First, there is an advantage to restrictive zoning. It makes areas less dense and therefore more pleasant for the people who live in them. That is why politicians get elected who support building restrictions. So people may pay a lot more for whatever housing they rent in California than in Texas, but the people are likely to find the area to be more attractive as a result of it being less crowded.
And if you were able to buy a home in California, you made a lot of money as building restrictions drove up prices. According to the Case-Shiller price indices (which control for the quality of the house), house prices rose 260 percent in Los Angeles between 1987 and 2013, a period in which overall inflation was just 105.1 percent. This means that if you paid $150,000 for a house in Los Angeles in 1987, you would be able to sell it for $540,000 today. After adjusting for inflation, you would still have a gain of $232,500. There would be comparable stories in many others areas of California. By contrast, in most areas of Texas house prices have not increased much beyond the rate of inflation. (The only Texas data available in this series show house prices in Dallas have increased by 34.4 percent since 2000, compared to an inflation rate of 32.0 percent.)
This is not to argue the growth path resulting from California’s housing restrictions is the better way to go. It simply means that this difference must be taken into account when comparing the job growth in the two states. The people of California obviously value their quality of life, even if it means making some sacrifice in the form of economic growth. (And for the people who own homes and have jobs, this is not much of a sacrifice.) They are not setting rules exclusively to maximize job growth in the state, just as Bill Gates is not trying to maximize the job growth on his estate.
