Texas’ economic model grapples with new challenges

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Texas entered the COVID-19 crisis as a leader among states in economic growth and job creation. The latest data indicates that the state is emerging from the pandemic the same way. Over the past 12 months, for example, it has ranked second to California in job creation and second to Nevada in percentage job gain.

Nothing abnormal there. Texas’ economy has been booming for decades, ever since rebounding from the oil price shock of the mid-1980s. The state’s political and business elites and many analysts (including us) attribute the prosperity state support for the Texas model of lower taxes, smaller government and economic freedom. The approach works because it gives markets and the private sector more leeway. Texas offers fertile ground for entrepreneurs to start businesses and sometimes fail. It’s a place where companies are freer to innovate and pivot, and sometimes fail. Texas gives workers a chance to find jobs and sometimes lose them.

Critics always criticize the Texas model, but it delivers results and draws crowds. Thousands of out-of-state businesses have chosen the state as a place to grow their business. Millions also came, drawn by Texas’ low cost of living and job opportunities. The state’s economy is looking rosy right now, with job growth despite the pandemic and the worst inflation in 40 years. The threats to the Texas model are longer term and to some extent speculative. They focus on three main areas: cost of living, labor supply and the external environment.

Comparative cost of living

The nation has gone through two housing bubbles this century. In the mid-2000s, house prices rose more slowly in Dallas-Fort Worth and Houston than in most other major metropolitan areas, by a wide margin (see box). Another house price spike came in 2022. According to the Freddie Mac House Price Index, homes in North Texas now cost 51% more than just 30 months ago. Housing prices in Houston are up 36%.

Homes in Texas are still much cheaper than in many other states, but house price increases are now on par with those in the other 10 metropolises. DFW placed fourth behind Phoenix, Miami and Atlanta and ahead of Los Angeles. Houston was second only to Los Angeles in terms of appreciation.

Texans are spending more on apartment rents, and winter storms and summer heat have sent electric bills shockingly high.

House, apartment and electricity prices reflect local supply and demand. At some point, these expenses could begin to erode the cost-of-living advantage that provided a strong incentive for businesses and workers to move to Texas.

Policy and job offer

From 2012 to 2019, Texas’ labor force grew by more than 175,000 people per year. In the economic tumult of the past two and a half years, the annual pace was even higher at 232,000, helping to fuel demand that has driven up house prices. Some new entrants were ethnic Texans, of course, but it’s worth noting that California’s labor force has shrunk at an annual rate of more than 72,500 since January 2020 and New York’s by 170,000.

So why worry? We have already indicated one reason: a potential increase in the cost of living. A second concern relates to politics. Often, winning elections and setting legislative priorities are not decided on economic issues but on social concerns. Hot issues of the day include transgender and abortion rights, gun and religious rights, and immigration. Many Texans favor one side; many Texans favor the other.

Most companies want to avoid being drawn into the culture wars that divide America. They can’t win. They fear the repercussions. Of particular concern is whether the political climate will embitter Texas workers, especially the highly skilled and highly mobile tech contingent in demand across the country. Maintaining past growth rates could require Texas to increase its workforce by 175,000 to 225,000 workers each year. If the cost of living continues to rise and political repugnance sets in, this could be a tall order.

External environment

A lot has happened in Texas over the past three decades. Trade flourished and Texans became America’s leading exporters. Mexico opened up its economy and we led the charge south. Immigrants arrived and the state had jobs for them. The energy exploded and the Texans reached a spurt.

In the future, this is unlikely to be the world we will live in. Higher shipping costs, supply chain bugaboos and trade barriers are barriers to imports and exports. Mexico has withdrawn into itself under the presidency of Andres Manuel Lopez Obrador. Immigrants face hostility in Texas and elsewhere. Today’s booming oil and gas industry faces global challenges related to climate change policies.

For the remainder of the decade and beyond, the state may find that growth will not come as easily as before unless private companies once again reinvent the state’s economy to s to adapt to new realities and seize new profit opportunities. This is what the Texas model does best.


W. Michael Cox is Professor of Economics at the Bridwell Institute for Economic Freedom in the Cox School of Business at Southern Methodist University. Richard Alm is writer-in-residence at the Bridwell Institute.

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