Magazine July 20, 2009, Issue

Going Alamo

Why jobs and companies are flocking to a big small-government state

If you want to know where the future is headed, look where the people are going. And if you want to know where the people are going, check with U-Haul. Here’s an interesting indicator, first noted by the legendary economist Arthur Laffer: Renting a 26-foot U-Haul truck to go from Austin to San Francisco this July would cost you about $900. Renting the same truck to go from San Francisco to Austin? About $3,000. In the great balance of supply and demand, California has a large supply of people who are demanding to move to Texas. There’s a reason for this.

“Did the greater prosperity in low-tax states happen by chance?” asks Laffer, who studied the issue for a detailed economic report, Rich States, Poor States. “What seems obvious to us appears as right-wing science fiction to many California legislators and pundits. They claim that serious reform of the tax code is unrealistic, that a large state has many duties to fulfill, and that it is irresponsible to call for a return to a 19th century view of the role of government. . . . Not only does Texas lack a highly progressive income tax — it doesn’t have one at all! We hasten to add that the last time we checked, Texas still had literate kids, navigable roads and functioning hospitals, which one would think impossible given the hysterical rhetoric coming from defenders of California’s punitive tax system. In fact, the Texas success story illustrates everything we have been recommending for California all these years. How do they do that?”

How, indeed?

Texas was among the last states to enter the recession. California is expected to be the last state to leave it. Texas has lots of jobs and not much in the way of taxes. California, the other way around. California has Arnold Schwarzenegger, a Hollywood Republican who presided over enormous expansions of spending and debt. Texas has Rick Perry, a classic conservative hard case who just vetoed a pre-kindergarten spending bill, adding to the record number of vetoes he’s handed down as governor. And it’s not just Perry — the story of Texas politics is full of Democrats who would have been too right-wing to be elected as Republicans in Connecticut or Pennsylvania. Things are a little different down south of the Red River.

Governor Perry sums up the Texas model in five words: “Don’t spend all the money.” Here’s what a good long run of small-government, low-tax conservatism has achieved in Texas: Once a largely agricultural state, Texas today is home to 6 of the 25 largest cities in the country, more than any other state. Texas has a trillion-dollar economy that would make it the 15th-largest national economy in the world if it were, as some of its more spirited partisans sometimes idly suggest it should be, an independent country. By one estimate, 70 percent of the new jobs that were created in the United States in 2008 were created in Texas. Texas is home to America’s highest-volume port, the largest medical center in the world, and the headquarters of more Fortune 500 companies than any other state, having surpassed New York in 2008. While the Rust Belt mourns the loss of manufacturing jobs, Texans are building Bell helicopters and Lockheed Martin airplanes, Dell computers and TI semiconductors. Always keeping an eye on California, Texans have started bottling wine and making movies. And there’s still an automobile industry in America, but it’s not headquartered in Detroit: A couple thousand Texans are employed building Toyotas, and none of them is a UAW member. 

There are those who would look at this and say, “Not bad for a state with no income tax and a part-time legislature that meets only every two years.” And there are those who would say, “You could only accomplish this in a state with no income tax and a part-time legislature that meets only every two years.” Texas’s formula for success is classical conservatism: Low spending enables low taxes, while a liberal regulatory environment attracts the capital that makes capitalism work. Texas has a state government that is structurally incapable of taking on the grand political ambitions that characterize states such as California and New York, which leaves the private sector with a relatively open theater of operation. With conservatives at the national level looking to the states for models of what works, Texas can provide a blueprint for a prudent and bipartisan conservatism that is neither hostage to ideological excess nor relegated to merely trying to put Leviathan on a leash.

“Sure, there are structural things the rest of the country could do,” says Michael Williams, a charismatic conservative who sits on the state’s influential oil-and-gas commission and who is conservatives’ favorite in the race to replace Kay Bailey Hutchison in the U.S. Senate. “But the bottom line is, we’re Texans.”

There is much that is inexplicable and quirky about government in Texas — the petroleum regulator that Williams serves on is known as the Railroad Commission, not the Oil Commission — but the fact is that Texas’s state government works the way the U.S. federal government is supposed to work: It is a government of enumerated powers, and a government in which the separation of powers hinders the political class’s natural tendency toward self-aggrandizement. The powers that be in Austin simply are forbidden to do anything that they are not explicitly authorized to do by the constitution. Any meaningful expansion of Lone Star statism requires a constitutional amendment, which in turn requires the approval of the voters, who are not always eager to give their consent. The Texas constitution has been amended 456 times; about 200 other amendments were proposed by the legislature but rejected by voters. 

The Texas legislature itself is something of an anachronism, convening the second Tuesday in January — but only in odd-numbered years. It is constitutionally forbidden to meet for more than 140 days. “There’s a lot of us who think it would be better if it met two days every 140 years,” says Will Newton, executive director of the Texas chapter of the National Federation of Independent Business. “They still manage to get a lot done in those 140 days. Last session, they introduced something like 7,600 bills.” Newton wants the legislature to enact a filing fee for bills — $1,000 from each legislator’s operating budget for every bill filed. He suggests this with a chuckle, but he isn’t really joking. It’s a safe bet that the pols wouldn’t pay the fees out of their salaries: Texas legislators are paid only $7,200 a year. The going rate used to be eight bucks a day, and there are some crotchety conservatives who think that’s still about right. 

Weak as it is, the Texas legislature is the dominant force in state politics. Texas has one of the institutionally weakest governorships in the nation, and Governor Perry has nothing like the lordly powers of his counterparts in Albany or Trenton. The executive is divided: Because the separately elected lieutenant governor presides over the state senate, the man in the No. 2 job sometimes proves as powerful as the governor, and sometimes overshadows him. George W. Bush won much praise for his cordial bipartisan relations with the Democratic lieutenant governor Bob Bullock, but the truth is that he didn’t have much choice — Bullock could have strangled Bush’s legislative agenda with one hand.

A divided executive, a relatively weak legislature, severe constitutional limits: not a recipe for over-ambitious government. The result is: low taxes, low spending, light regulation — and a resilient, productive, growing economy. The Texas legislature, like any other, can be a little bit of a freak show from time to time, but it may very well be the nation’s least destructive one. Despite decades of giving it their level best, Austin’s big-government camarilla hasn’t even managed to enact a state income tax. Bullock was the last big-time player in Texas to show much public enthusiasm for taxing income, and that’s one of the reasons he never became governor.

Bullock died in 1999, but what might be called Bullockism really lived until 2003. The desire, acute among professional-class Democrats, to transform Texas’s government into something more like California’s or New Jersey’s — a big, blunt instrument for social engineering — has long been an undercurrent in Texas politics. The Democrats insist that Texas underfunds everything from schools to roads, and they have spent years maneuvering to enact a state income tax to give them the revenue they want to work with. But they didn’t want their fingerprints on a tax bill. In a perverse way, the 2002 elections, which for the first time found Republicans winning majorities in both houses of the legislature, along with every statewide office, gave the Democrats their chance. Before the new Republican majority was sworn in, Texas Democrats spent down the state’s entire cash reserve. And then, through an act of accounting chicanery, they arranged things so that the payments for a number of big-ticket items — millons in education spending, for instance — were scheduled for the next fiscal year. They basically emptied the checking account and left some bills unpaid. That meant that the new Republican majority was sworn into office facing a politically manufactured hole in the budget, a crater $10 billion deep. The obvious solution, Democrats argued, was to raise taxes — for Republicans to raise taxes. Dozens of revenue-raising bills were introduced into the legislature, and there was a resurrection of income-tax talk. 

Republicans did not take the bait. Governor Perry told the legislature to not even bother sending him a bill with a tax increase, because he would not sign it. Instead, he submitted a budget in which every spending line was a zero — an act of political theater, to be sure, but an effective one. Republicans ran a classic good-cop/bad-cop routine on the bureaucracy, with Perry taking a hard line against tax increases and Rep. Talmadge Heflin, at that time the new Republican chairman of the Appropriations Committee, meeting with the heads of the state’s 35 largest agencies and asking them to start from zero. The agency chiefs were told that they had to keep spending at less than 87.5 percent of the previous year’s level, draconian cuts by the standards of most state governments, but they were given maximum flexibility in achieving those goals. 

Heflin, a temperate man with a courtly demeanor, says that the agencies had often been treated shabbily by imperious, long-tenured legislators. “They were treated like anything but professionals,” he explains, called before various legislative committees for public dressings-down. “But we were able to work with them.” The end result was a balanced budget that combined deep cuts in some areas with increased funding for public schools, and did so without general tax increases, much less the enactment of a new state income tax. There were some revenue measures — hunting licenses got more expensive — but it was the sort of resolution that conservatives outside of Texas must regard with a good deal of envy. Texas is facing another tough budgetary year, but this time they’ll do so with $9 billion in the kitty to help smooth things over.

“There are certain truths that have to be agreed to,” Perry says. “One is that economies grow when they are free from over-taxation, over-regulation, over-litigation, and they have a skilled work force. Government isn’t difficult in theory — don’t spend all the money, keep taxes low, have a fair and predictable regulatory climate, keep frivolous lawsuits to a minimum, and fund an accountable education system so that you have a skilled work force available. Then get the hell out of the way and let the private sector do what the private sector does best. It’s simple in theory, but it’s difficult to accomplish. In Texas, we’ve implemented that theory, and it’s produced an economy that has no match in America.” 

The state’s last great economic crisis, the simultaneous meltdowns in the oil and real-estate markets in the Eighties, caught Texas with its Levi’s down. The state’s economy was so dominated by the energy industry that the collapse in oil prices created a whole ravenous Charybdis of economic angst that sucked down commercial real estate and housing with it. State-government revenues cratered at the precise moment that enormous new demands were being put on appropriations. It was a catastrophe, and the only Texan who was making any money in those days was J. R. Ewing.

That’s all changed. While Texas is home to a pretty good roster of corporate giants — ExxonMobil, AT&T, Clear Channel, Continental Airlines — much of its growth in the past 20 years has been in small- to medium-sized businesses. (And some of those newer Fortune 500 behemoths started off pretty small, too: Dell was launched in a University of Texas dorm room.) “We’ve really managed to diversify our economy,” says Newton, whose organization works for small-business interests. “In the Eighties, with the oil and real-estate busts, revenue shrunk, and we just couldn’t recover. It’s different now. We’re in a recession, and we’re feeling it, though not as bad as Michigan or Florida. But we’ll come out of it carried on the back of small business.” 

The diversity of business means lots of jobs of different kinds. In a 2008 article for the Manhattan Institute (“Houston, New York Has a Problem”), Prof. Edward L. Glaeser of Harvard compared the polarized economy of New York City with that of the middle-class city of Houston: “Both greater Houston and Manhattan have about 2 million employees. In Manhattan, almost 600,000 of them work in the idea-intensive sectors of finance, insurance, and professional services; only 2 percent are in manufacturing, and fewer than that in construction. Finance increasingly drives New York City’s economy as a whole. By contrast, Houston is a manufacturing powerhouse that makes machinery, food products, and electronics, with a retail sector twice the size of Manhattan’s and lots of middle-class jobs.” Manufacturing bricks and cowboy boots (Fort Worth’s Justin Industries does both, oddly enough) may not be as sexy as trading derivatives on Wall Street, but in 2009 some of those non-sexy industrial jobs would be welcome on either coast. 

Texas is hardly a citadel of libertarian purism — they love their farm subsidies and wind-power incentives — but there’s a deep appreciation for Governor Perry’s “get the hell out of the way” conservatism. Republicans are wary of being branded the Party of No, but the Texas experience suggests that the more government you say no to, the more investment you say yes to. “You want to talk about giant sucking sounds? That’s the sound of government sucking money out of the economy,” Newton says, in a reference to Ross Perot’s famous denunciation of free trade. “If you want the capital, you have to get off the backs of business owners, period. We elect candidates who say they want to protect the taxpayer from the government, but then, after they’ve been in there for a few terms, they start looking to protect the government from the taxpayer.” 

Saying no at just the right time sometimes means turning down “free” money from Washington. Texas left $556 million on the table when the federal government offered it to help modernize Texas’s unemployment trust fund, because the deal would have forced state taxpayers to pour additional revenue into the system after Uncle Sam’s bequest was tapped out. “Thanks, but no thanks,” Newton says. “We know who is going to have to replenish those funds. That was an attempt to bribe us — to bribe us with our own money.” 

Under wall-to-wall Republican management, Texas has managed to keep the growth of the state budget to about 1 percent, and some conservatives are pressing for a hard cap on state spending, indexed to population growth and inflation. They’ll face reenergized opposition from Texas Democrats, who have grown aggressively liberal during Republican rule. The Democrats’ move left is a perverse outcome of the Republican party’s growing dominance in Texas, which is not historically a heavily Republican state: As the GOP advanced, it mostly knocked off conservative rural Democrats while the more left-leaning urban and suburban Democrats survived. They are embracing a more conventional big-government agenda and, like Democrats across the country, have found some traction on health care and other issues that speak to middle-class insecurities. There’s a lot of churn in a dynamic economy like Texas’s, and the state’s high levels of legal and illegal immigration impose real social costs, too. Even in the west, it’s not always easy selling “get the hell out of the way.”

Already on course to be the state’s longest-serving governor, Perry’s got his eyes on a third four-year term — he’d be the first Texas governor to win one — and, despite a probable primary challenge from Senator Hutchison, he’s well positioned to add a terms-won record to his bills-vetoed record. He believes that the Texas model can be replicated in Washington, and thinks that the fiscal incontinence of the Obama administration, coupled with overreach on issues like cap-and-trade, may offer an opportunity.

“This is a popular president, and that’s not lost on me. But his policies are scaring Americans to death. You can’t spend like this and have a future that is anything other than tenuous in its prosperity. We’re about to see hyperinflation, and the cost of doing business and living in this country is going to go through the roof.” If that happens, it will be a moment for national conservative reform: We can’t all move to Texas.


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