THE BLOG
03/05/2013 03:07 pm ET Updated May 05, 2013

Don't Mess With Texas

If you come across the op-ed headline 'America's Red State Growth Corridors' in the Wall Street Journal do you need to read the article to know what it's about? Like, say, the movie Snakes on a Plane, or unlike Happiness, the title pretty much says it all. With the Journal piece my guess was it's going to be someone from the Hoover Institute patiently explaining that lower taxes and non-stop drilling is the way to prosperity -- just look at Texas! Well, turns out I didn't know everything from the title since the author, Joel Kotkin, is not a Hoover member (his inclusion on the op-ed page might be the Journal's version of affirmative action) and he mentions other oil-producing regions in addition to Texas. But Kotkin and his cohorts ignore a handful of inconvenient truths in espousing the virtues of the 'Texas model' of more drilling and lower taxes.

First, it makes no sense to compare economic policies for those states with mineral resources to those without. Texas has oil and gas. North Dakota has oil and gas. So does Norway, which has the second highest GDP per capita in the world among industrialized nations (barely behind Japan). But whereas Japan makes cars and semiconductors and steel and power generators
that the rest of the world wants
, Norway's biggest non-oil export is fish.

Sitting on hydrocarbons is what makes Norway as rich as Japan, keeps Qatar from being Ethiopia and allows pundits to cheekily point to Texas as an example of the benefits of low taxes. Without oil, would Texas be Mississippi? We don't know, but since less than a quarter of US states are sitting on meaningful reserves of easily accessible oil and gas it's senseless to advocate the Texas model for wide adoption.

Second, the advocates of lower state taxes fail to mention the elephant in the room--if all states cut taxes to the bone the strategy wouldn't work. Texas can get away with lowering taxes precisely because most other states don't follow suit. If other states did then Texas would not be as large a net recipient of inter-state migration and they wouldn't make up their lower revenue per capita by housing more people.

Still, some will say that if all states lowered rates, though they wouldn't benefit as they would if they were the only state, it's still good for the country. But there is no evidence that lower taxes means better economic outcomes, even on a state by state level where lower tax states can 'steal' population at the expense of higher tax states. Massachussetts, which Kotkin uses as one of the poster states for backward policies, has a higher tax rate than Texas but also has a higher GDP per capita even as it produces no oil. Maybe that's because Massachusetts uses that tax revenue to rank twelve places above Texas in quality of education. It's not just Massachusetts that scrapes by despite higher taxes. In fact, a scatter plot of GDP per capita v effective tax rates in all fifty states shows, if anything, higher per capita production in higher taxed states. View image

If some states are to drill with abandon, why don't they at least accompany it with a sensible tax regime? Norway, as mentioned above, home to the second highest GDP per capita, has an even higher tax regime than Massachussetts. It also has a pension fund created by surplus oil wealth that has $129,000 for every citizen.

The other pillar of the Norway model is don't drill all at once, conserve. Why don't we call for similar restraint? What is wrong with saving some for a rainy day? Instead of the cost of filling the strategic petroleum reserve, which can only hold approximately forty days usage and is largely symbolic, we can leave a lot more of the stuff in place at no cost. And philosophically, don't conservatives espouse, you know, conservation? We have seen the Texas model at work in Mexico and Venezuela, Russia and Nigeria, Iran and Iraq. All of which have have suffered from the Resource Curse, where mineral riches create a tiny cadre of super rich while the country as a whole stagnates. None of those countries tried the Norway model, which is the rest of the world's (i.e. non Hoover) example for how to best benefit from found mineral riches. Why are some states here so anxious to forsake it as well?