Eliminating Property Taxes in Texas Starts With Limiting Government Spending: Let People Prosper Episode 53
In this Let People Prosper episode, let's discuss one of the things that's on most Texans' mind: property taxes. I recently testified before the Texas Commission on Public School Finance's Revenue Workgroup on the problem and solutions to wretched property taxes in Texas. Here's my written testimony and you can watch my oral testimony at time 59:45 here.
Texas’ property tax system has turned property owners into renters, where government is their landlord and Texans who struggle to pay annual tax bills face confiscation of their properties. Additionally, the growth of government is harming taxpayers and the economy through higher taxes and more regulation.
The goal must be to eliminate all property taxes as they violate property rights, destroy economic growth, and disproportionately hurt the poor while being subjectively determined as they support excessive local government spending. A good place to start down that road is by ending nearly half of the property tax burden in Texas through the elimination of the school maintenance and operations (M&O) property tax, which is supported by the 18 groups in the Conservative Texas Budget Coalition. This is relatively easier than other local tax jurisdiction because the state already determines the school finance formulas and has a way to distribute funds to school districts.
First, we must identify the problem.
From 1996 to 2016, total property taxes across the state have increased by 233% while the school portion of the property tax increased by 201%. Personal income has increased by 199%; however, the best metric of the average Texan's ability to pay taxes is measured by the compounded growth of population plus inflation for that period, which was only 123%. This means that the total tax levy increased by 1.9 times more than pop+inf and the school district tax levy increased by 1.6 times more than the average Texan's ability to pay.
It's no wonder that many people are being forced out of their homes and businesses because of skyrocketing property taxes. This is a travesty what government is doing to people who are trying to leave a legacy for their kids and grandkids.
This points to the disease of the symptom of high taxes: excessive government spending. Taxes (and deficits) are always and everywhere a spending problem. To gain control of skyrocketing taxes, we must first get control of the driver of the problem in excessive government spending.
This brings us to a solution: By limiting state and local government spending, Texas can use taxpayer dollars collected at the state level to eliminate the school maintenance and operations (M&O) property tax, which is nearly half of the property tax burden, very soon. While other options have been tried in the past, like raising the homestead exemption and swapping the property tax with a reformed franchise tax ("margins tax"), those didn't permanently reduce property taxes--making those attempts a failure in the eyes of most taxpayers.
Fortunately, there are solutions.
One option is to permanently buy down the school M&O property tax with state surplus dollars until it is eliminated. Here's how:
Another option is to replace the school M&O property tax by broadening the sales tax base and limiting state and local government spending. Here's how that could work:
Clearly there is no silver bullet. This will be a difficult hill to climb whichever option is chosen.
Recently, two economists from Rice University estimated that if the buy down option or the swap option over time was chosen, the Texas economy could expand by about $12.5 billion above expected growth and private sector job creation could increase by 183,000 net jobs above expected growth soon after reform.
The Texas Model is strong, but there's more that must be done. These options would provide a clear path to more prosperity and less of a burden of holding property until you can finally own it when property taxes are eliminated entirely.
In this Let People Prosper episode, let's discuss Nobel prize-winning economist Paul Krugman's recent concern about the $779 billion budget deficit in FY 2018 under President Trump. Unfortunately, he wasn't worried about the 4 years of more than $1 trillion in deficits under President Obama and he in fact wanted even higher deficit spending. This episode provides a lesson in economics on the aggregate demand-aggregate supply model of how these policies should work in theory but how this mainstream view misses a lot that actually results in my preferred mainstream view of how the economy actually works and the burden higher government spending and resulting deficits put on economic activity and our prosperity.
Last Friday the Bureau of Economic Analysis reported that there was an increase of 3.5% in real GDP growth in the third quarter of 2018, indicated that 2018 may be above 3% growth for the first time in more than a decade. This issue along with the rising deficit gave rise to Krugman's tweet below.
Here's what Krugman tweeted: "Reaction to the GDP numbers: quarterly growth rates don't mean much. For one thing they fluctuate a lot -- e.g. rapid growth in 2014, signifying little. For another, you can always juice the numbers for a few quarters by running big deficits. What about the long term"?
Here was my tweeted response to his tweet that received a lot of attention: "Who is this @paulkrugman who wasn’t worried about budget deficits during #Obama’s 4 years of more than $1 TR deficit but is worried about #Trump’s $779 B? Recall #Krugman was in favor of LARGER deficit spending to “stimulate” the economy under #Obama. Principles matter."
I recommend going to my tweeted response and viewing the comments and discussion. It was a rather lively discussion with some good info in there along the way, but much of it was just noise.
This recent WSJ opinion piece by Nobel prize-winning economist Edmund Phelps explains the fantasy of fiscal stimulus quite well along with the nice figure below that shows stimulus doesn't correlate with faster economic growth.
What we really need for more prosperity is a government that simply sets the rules of the game such that the institutional framework allows for civil society to flourish along with the resulting prosperity for people. Government under presidents of each main party have fallen victim to the "stimulus" argument when in fact it should be about providing the most pro-growth economic environment while running balanced budgets. A good model would be to look at Texas.
OPINION: CALIFORNIA IS A FAILED MODEL NO MATTER HOW YOU LOOK AT IT
Vance Ginn and Elliott Raia | Director and Research Associate, Center for Economic Prosperity
When you have to begin an argument with “depending on how you look at it,” you’re not arguing from a strong position. Yet such has become the answer to the question of, “Is California a good role model?” posed recently in The New York Times.
Even its defenders say California’s prosperity is relative. The good news is that those seeking more concrete progress need only to look to the state that inspired the lone star in the upper-left corner of the Golden State’s flag: Texas.
While the Texas Model of limited government needs improving, it has already proven to be a more sustainable catalyst for job creation and economic prosperity than in California.
Although the idea of limited government may be foreign to many Californians, the Texas Model embraces the principle of reengaging institutions such as family, community, and free markets — institutions that are often undermined by an over-burdensome state.
This is not to say the government has no place in Texas; it does. Nor is this to say that those who have fallen through the cracks don’t deserve help in their times of need; they do.
Rather, the model revives the notion that government’s primary responsibility is to preserve the liberties of families and individuals, instead of attempting to supplant them. In the case of Texas, this also means allowing employers to operate with freedom and without onerous regulation.
The outcome of Texas’ limited government approach is empirically clear. In creating jobs, no one messes with Texas as one in four jobs added nationwide were created in the Lone Star State in the last decade since the Great Recession.
But it’s an even longer period of prosperity. Consider that the average unemployment (U3) rate since 2000 was 5.8 percent in Texas compared with 7.7 percent in California and 6.4 percent nationwide.
Perhaps more telling of the complete picture is the average underutilization(U6) rate, which includes the unemployed, underemployed, and discouraged workers. Given the data available since 2003, Texas averaged 10.5 percent while California averaged 14.3 percent and the United States averaged 11.6 percent.
And poverty is lower in Texas. The Census Bureau’s supplemental poverty index that adjusts for regional costs of living differences and government transfer payments places California’s 19 percent poverty rate the highest nationwide whereas Texas’ rate of 14.7 percent is near the U.S. average of 14.1 percent.
With a relatively light tax burden on employers in Texas compared with California, Texas’ employers have the freedom to innovate and grow. Although the current level of taxation is a stark departure from West Coast philosophy, Texans already see where improvement can be made as efforts to corral skyrocketing property taxes are underway to maintain their economic canter.
While taxes play a role in overall government intrusion, burdensome regulations do, too. The Texas Model, while still not free of all unnecessary regulation and corporate welfare, places more faith and decision-making in markets, where individuals — not politicians — decide the best way to satisfy their desires.
Consider the energy industry in Texas.
While the state has yet to completely eliminate its wind subsidies, it has, in general, taken a more moderated position on industry regulation than the California model. Instead of coercing consumers towards a source of energy favored by bureaucrats and politicians, Texas strengthens its power generation, reliability and cost efficiency by allowing consumers to access a wide energy portfolio.
As a result, Texans pay half the price for their electricity than their Californian counterparts, while also not having to contend with potential rolling blackouts whenever the sun doesn’t shine and the wind doesn’t blow.
While energy is just one example, the California Model’s policies highlight why the state has nearly 20 percent of its population in poverty. No matter how well-intentioned, when government entangles itself in the lives of individuals and tries to supersede other institutions that may be more effective, tribulation soon follows.
Will the nation follow California down a road to serfdom, or, more recently, follow Texas down a road to liberty? That question remains undecided.
But if the mass migration of individuals and businesses out of California and into Texas is any indication, the trend is clear that institutions matter. When institutions in civil society are strengthened by limiting government, people prosper.
Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist. Elliott Raia is a research associate. Both work at the Texas Public Policy Foundation. Read the Foundation’s latest report for more.
In this episode, I explore the following questions: What are claimed market failures? Do they exist? Can government intervention correct them? Is there such thing as government failure? It's important to ask these questions to determine whether or not market failure or government failure are the bigger problem in society. Much of this has do with the differences between Mainline Economics (my preference) and Mainstream Economics.
This enters controversial territory in economics and politics by discussing the myths of "market failure." Supposed market failures usually include problems with markets because of asymmetric information (occupational licensing and healthcare), monopolies (utilities and EpiPen), and externalities (pollutants) that can theoretically be corrected by government intervention.
However, I make the case that these issues in markets are generated by government intervention, not unhampered markets, and the introduction of government intrusion to attempt to correct these potential issues only expand government and make the problem worse.
Moreover, there are no free-market government solutions, which is why toxic pollutants should be dealt with by letting markets sufficiently price them or alternatively, though not recommended, by regulation. Policy solutions such as a carbon tax indirectly price externalities and the price will always be wrong because of the "knowledge problem" taught by economist Friedrich Hayek and the poor modeling that's done by so-called experts (see William Easterly's book The Tyranny of Experts). In general, the institutional structure of an economy should be supported by the government through upholding contracts, protecting people, and providing very few public goods.
Instead of resorting to government intervention to solve supposed market failures, we should first understand that the government is likely the problem and Let People Prosper by promoting institutions with strong private property rights and fewer barriers to entry and exit markets.
In this let people prosper episode, I discuss two key reports released today. The first is that the Energy Information Administration reported that the U.S. oil production exceeded Russia and Saudi Arabia to become the top oil producer in the world in August 2018. The second is the Census Bureau released the latest income and poverty-related data that shows less poverty nationwide with little change in Texas' supplemental poverty measure (SPM) while California still has the highest SPM in the nation.
Regarding the EIA's data, the following figure shows this historic moment in U.S. history. Here's the EIA's projection through 2019: "Although EIA does not publish crude oil production forecasts for Russia and Saudi Arabia in STEO, EIA expects that U.S. crude oil production will continue to exceed Russian and Saudi Arabian crude oil production for the remaining months of 2018 and through 2019."
Much of this expansion in oil production has been in Texas. In fact, Texas is producing a record amount of oil at 4.4 million barrels per day as of June 2018 (latest data available), which is about 40% of total U.S. production that month.
The increase in oil production in the last couple of years has contributed to faster economic growth and job creation, thereby helping to reduce the poverty rate. Of course, this is a relatively small direct relationship, but the indirect relationship of more production capacity in the private sector is quite remarkable. Moreover, the regulatory cuts last year and the general increased economic activity and job creation in recent years has helped get people out of poverty.
This is noted by poverty measures improving some in the latest report for the average of the 2015-17 period (see page 26-27 of this report). The Official Poverty Measure (OPM) looks at one poverty level across the entire nation with the federal poverty level of $12,752 for an individual and a family of four (two adults and two kids) of $24,858. The OPM declined to 12.9%, or 41.2 million, nationally for the average of 2015-17.
However, the OPM is a poor measure of poverty because there are different housing costs in each state along with different levels of government benefits.
Several years ago the Census Bureau created the Supplemental Poverty Measure (SPM) that accounts for after-tax income, differences in regional costs of housing and other expenditures, and government transfers (see figure below). The SPM declined to 14.1 percent, or 45.3 million, nationally.
These measures for the 2015-17 period are also available by state. Let's consider the two largest states: California and Texas. California's OPM is 13.4%, which is near the national average, with 5.3 million people in poverty, and SPM is 19%, which is the highest nationally, with 7.5 million in poverty. Texas' OPM is 14%, more than a percentage point higher than the national average, with 3.9 million people in poverty, and SPM is 14.7%, which is near the U.S. average, with 4.1 million in poverty.
These data make sense because Texas is a relatively cheaper place to live that in California so Texans' dollars go a lot further than Californians' even as California has a more liberal welfare state and spends much more per capita.
In this Let People Prosper episode, I discuss the latest state-level jobs report for July 2018 issued by the U.S. Bureau of Labor Statistics while highlighting how economic freedom and the recent federal changes to the State and Local Tax Deduction (SALT) matter to our prosperity.
As noted in my previous blog post (see presentation), Texas continues to be America's jobs creation engine as the Lone Star State has created 23% of all new civilian jobs added nationwide and created the most nonfarm jobs of 377,100 in the last 12 months.
In general, states with more economic freedom and lower taxes have performed better in terms of economic growth and job creation over time than states with less economic freedom and higher taxes. Hundreds of papers have found this connection when considering the Economic Freedom of North America report by the Fraser Institute.
Watch the episode to find out more. Have a blessed day and let people prosper.
(Tip: Get checked by a dermatologist periodically, especially if you have fair skin like I do. That's the reason for the band-aid on my left cheek--praying for no issues!)
In this episode, I discuss today's decision by the San Antonio City Council with a 9-2 vote to pass a city ordinance mandating private businesses provide paid sick leave of 64 hours for those with more than 15 employees and of 48 hours for those with 15 or fewer employees.
As I noted in a previous blog post, this sort of forced activity by government is bad for employers (raises costs), bad for employees (reduces negotiating power), bad for consumers (increases prices), and bad for the Texas economy (less economic activity).
Instead, San Antonio and Austin, which passed this ordinance earlier this year, should find ways to provide a pro-growth economic framework to let people prosper instead of making people poor while likely violating state law (Texas Minimum Wage Act).
AUSTIN – Today, Texas Public Policy Foundation announces that Senior Economist Vance Ginn, Ph.D., has been named a Champion of Freedom by Grassroots America-We the People, one of the state’s leading conservative grassroots organizations.
“We are thrilled to announce Vance Ginn as a 2018 Grassroots America Champion of Freedom,” said JoAnn Fleming, executive director of GA-WTP. “To read, hear, and observe Vance assert the fundamentals of economic freedom one can never question that he believes these principles down to his very core. Vance’s gift is his ability to translate abstract economic principles into concrete, understandable applications for maximum liberty, while doing so with infectious enthusiasm and good cheer. Vance is a happy warrior, arming citizen activists with usable information as they battle government bureaucracy and prosperity-stealing over-regulation and taxation. Dr. Vance Ginn is a tremendous asset to the growing Texas conservative grassroots movement.”
“Vance’s important work continues to advance the goals of the Texas Public Policy Foundation – promoting liberty at every level, from local governance to state and federal issues,” said TPPF Executive Director Kevin Roberts, Ph.D. “This honor from Grassroots America-We The People is an unexpected but richly deserved award. We thank Grassroots America for its own work of holding government officials accountable and ensuring that government itself remain efficient, open and limited.”
Ginn will be honored with the award at GA-WTP’s annual Champions of Freedom Banquet, to be held on Sept. 8 in Tyler, Texas. Other honorees for 2018 include Teresa Beckmeyer of Lone Star Voice, Jim and Elizabeth Graham of Texas Right to Life, Aaron Harris of Direct Action Texas, Rachel Malone of Texas Firearms Freedom, Dr. Laura Pressley of True Texas Elections and Pastor Dave Welch of the Texas Pastors Council.
Previous honorees include Sen. Ted Cruz, Congressman Louie Gohmert, members of the Texas House Freedom Caucus and Pastor Rafael Cruz.
Grassroots America – We the People, Inc. is the largest constitutional conservative citizen organization in East Texas and one of the largest in Texas.
Limit Government to Support Prosperity Conversation with Chief Economist Jonathan Williams: LPP EP 27
In this episode, I talk with Jonathan Williams, Chief Economist of the American Legislative Exchange Council (see full bio here), about the positive economic effects of the recent Tax Cuts & Jobs Act along with how the Texas Model works well but should be improved.
Don't miss his latest Rich States, Poor States publication that gives an economic outlook for each state and then ranks them. Here is the recent commentary I co-authored with Jonathon on not believing the hype about a carbon tax.
Check out more of his work and more of the fantastic information at ALEC at the website www.alec.org.
State of the U.S. Economy Including Strong Growth & Rising Compensation and Costly Tariffs & Budget Deficits: LPP EP 24
In this episode, I discuss the state of the U.S. economy, including the markets, rising compensation for Americans, Federal Reserve leaves target federal funds rate unchanged in the range of 1.75-2%, and costly federal budget deficits of nearly $1 trillion that will be a drag on economic growth unless government spending is reined in along with the cost of tax hikes from tariffs.
There is a clear path to more economic growth, job creation, and resulting prosperity: capitalism without government barriers to opportunity.
In other words, the federal government should uphold contracts through a justice system, provide a national defense, and deal with international commerce, but really not much more than that.
Let people prosper by letting them satisfy their desires within institutions of civil society that are the backbone of America's strength. Unfortunately, too many of those institutions are hindered because of excessive government intervention at every level.
Let's learn more about what we can do together.
President Trump’s Council of Economic Advisors recently released a reportshowing that there is a large portion of non-disabled, working-age adults (16 to 64 years old) who are receiving government non-cash welfare payments funded by taxpayers but aren’t working. For example, of those on Medicaid, 53 percent of non-disabled, working-age adults don’t have a job.
These perverse incentives created by relaxed work requirements for able-bodied workers who receive welfare payments not only hurts their financial prospects today and over time, but is an extractive institution hurting civil society.
Institutions are the framework that makes up society. They are the rules of the game. Institutions can include formal laws and rules, but also more informal social norms, families, and churches. Institutions can be considered inclusive, like capitalism, or extractive, like socialism, as noted by Acemoglu and Robinson.
Economist Douglass North remarked in his 1993 Nobel Prize in Economics lecture that “if the institutional framework rewards productive activities then organizations—firms—will come into existence to engage in productive activities.” On the opposite side, if institutions reward unproductive behavior, the result will be more unproductive behavior and increased poverty.
Unfortunately, the institutional framework in the U.S. has many extractive programs in our welfare system that have incentivized unproductive behavior and made many people poor in the process.
As another example of a costly welfare program, the Supplemental Nutrition Assistance Program (SNAP) provides assistance to more than 10 million non-working, non-disabled working-age adults. Of all the childless adult recipients on SNAP, 63 percent do not work, which is higher than the rate of recipients with infants (57 percent)—often the most difficult age to raise a child.
Clearly, the incentives to work while getting welfare are little to none, even when you are able to work and don’t have a child. Welfare should be based on need, and with the unemployment rate at record lows and more job openings than people unemployed, there are few excuses to not work.
Work ethic, personal responsibility, and independence are all informal institutions. They are the rules of our game. These institutions are inclusive, because they allow individuals to be self-sufficient, and become productive members of civil society.
When these incentives and social norms are eroded, our institutions become extractive, redistributing resources from productive workers to welfare recipients. This process is done by government bureaucrats subjectively determining who gets what and when. Moreover, these institutions create a situation that crowds out inclusive social institutions, such as families and private charities and churches, which have been the backbone of civil society for centuries.
Our current welfare system, specifically the Temporary Assistance for Needy Families (TANF), has been reformed before, making it more inclusive. This includes putting the recipients on a path to individual responsibility and prosperity by increasing work requirements to receive welfare, thereby increasing recipients’ productivity that helps them actually get off government welfare.
Chicago economist Casey Mulligan has explained that the income cliff when someone earns more income and is dropped from government welfare programs acts like an implicit marginal income tax that reduces their incentive to work. It’s time to stop this sort of welfare for non-disabled working age adults. This would not only improve the relatively low but improving employment-to-population ratio for the prime age working group(25 to 54 years old) but also help to reduce welfare and the taxes paid by workers to fund these programs.
The Trump administration’s recent report highlighting these issues and calling for an increase in work requirements of welfare programs for able-bodied people is a step in the right direction to let people prosper.
In this episode of the Let People Prosper series, I discuss the economic freedom associated with the Texas Model, which is based on relatively less government spending and taxation along with sensible regulations.
I examine data for more than a decade along with the latest state-level jobs report to highlight how the Texas Model has supported abundant prosperity. Of course, Texas has room for improvement, such as limiting government spending and eliminating property taxes, but there's much Texas gets correct.
Please watch and share this episode.
Let People Prosper Episode 10: Stocks Up in Q2, Higher GDP Forecasts, Price Inflation at 6 Year High, & What Is Economics?
Please sign-up for my channel Vance Ginn Economics to watch this full episode and more.
In today's episode, I discuss how stocks look to end Q2 2018 up after a rocky quarter, projected economic growth rates continue to go up, price inflation reaches a 6-year high, and economics is the study of how people act and interact to satisfy their desires within institutions given scarce resources. Enjoy!
Texas ranks the 2nd most economically free state, tied with Florida, in the U.S. according to the Fraser Institute. This ranking is based on levels of taxes, government spending, and labor market freedom. Figure 1 shows states that rank in each quartile of economic freedom.
Research finds that higher economic freedom is overwhelmingly linked to a variety of economic benefits, which is why Texas cannot rest on its laurels but rather continue to free Texans from unnecessary economic barriers to competition.
Here are three of the many findings:
This commentary was originally featured in the Dallas Morning News on January 6, 2018.
Texas' economic policies keep it near the top in economic freedom, but government barriers hinder more human flourishing.
The Fraser Institute gleans these insights in its recently released annual Economic Freedom of North America report. Based on variables related to government spending, taxes and labor market freedom, Texas and Florida tied for second place, behind only New Hampshire, where fewer than 1.5 million people reside.
Texas, with a population of roughly 28 million, has ranked in the top five for 11 straight years, and has its highest overall score since the report began. On the other end of the spectrum, New York ranked 50th and California 49th, as they have for three of the last five years.
This matters because residents and businesses frequently vote with their feet in favor of economic freedom.
Since the last national recession ended in 2009, population in the 10 most-free states has grown two-and-a-half times faster than it has in the 10 least-free states, and nearly three-and-a-half times faster in just the past three years. Employment and income, two key measures of economic prosperity, have also increased faster in the freer states.
More than 230 scholarly articles by independent researchers have used Economic Freedom of North America report data to examine economic freedom at the state level, while more than 400 articles have done the same at the national level (using its companion report that ranks countries).
Most of that literature finds that economically free areas tend to experience more broadly positive outcomes, including more economic prosperity. One reason is that high levels of spending, taxes and regulation make it harder for entrepreneurs to succeed. When businesses can't expand and hire new workers, everyone hurts.
States with the fastest economic growth, like Texas and Florida, tend to have a common focus in their economic policies: low taxes (including low or no income taxes), a fiscally conservative approach to spending, and a common-sense approach to regulation that makes it easier for entrepreneurs to succeed.
States that take the opposite approach, like New York and California, tend to experience much less economic prosperity and many more moving trucks leaving for greener pastures.
While Texas is ranked near the top again, it should be noted that the report grades on a curve, so there's plenty of room for improvement.
One step is to eliminate the burdensome gross receipts-style business margins tax. After multiple states eliminated such a tax because of the high compliance cost to businesses and its job-killing nature, only four other states (Delaware, Nevada, Ohio and Washington) still have it. This antiquated tax is a reason the Tax Foundation's State Business Tax Climate Indexranks Texas 49th on corporate taxes, better than only Delaware.
While Texas benefits from no personal income tax, another step is to reduce the burden of property and sales taxes; the Tax Foundation ranks both 37th. Reducing that burden would allow working Texans to keep more of their hard-earned money rather than leaving exorbitant amounts in politicians' hands.
In order to reduce the burden of taxation, of course, Texas must take the pivotal step in reining in excessive government spending. Allowing the budget to grow no faster than the population growth plus inflation, which has been done for a historic two straight legislative sessions, would make a big difference.
A good start would be to eliminate wasteful spending on corporate welfare programs, like the Texas Enterprise Fund, that put small businesses and businesses already in Texas at a disadvantage to businesses elsewhere. We should follow Florida's example, as the state zeroed out funding for economic incentives to individual companies in their similar fund two years in a row.
Taking the steps necessary to rank higher on the various measures of economic policies is a win-win for Texas (and all other states). Politicians can take the credit for improving the economy, and Texans can benefit from greater prosperity.
This commentary was originally featured in the Fort Worth Star-Telegram on September 6, 2017.
The 85th Texas Legislature’s special session ended Aug. 16. While there were several topics in Gov. Greg Abbott’s call that improved economic freedom and opportunity, which are the basis of greater prosperity for Texans, there was much left desired to strengthen the Texas model.
Texans already enjoy more freedom than most other states. For example, Texas ranks third-highest in the 2016 Economic Freedom of North America (EFNA) report, which ranks states on their relative levels of economic freedom. There have been more than 150 independent studies of the relationship between economic freedom at the state level and a variety of economic outcomes. The overwhelming majority of those have found that states with higher economic freedom have better results, including faster economic growth and higher incomes.
While Texas is ranked high for economic freedom, there are several notable areas of deficiency that need improvement. While some of these were on the call, they weren’t addressed and should be studied during the interim for swift implementation next time in 2019.
1) Eliminate the business franchise tax, not included in the call.
The Tax Foundation ranks Texas 49th for its corporate tax burden, worse than every state except Delaware. A big reason is that Texas is one of few states to even levy this particularly burdensome tax, which is a tax on a firm’s gross receipts. Eliminating this tax would make it easier for Texas businesses to expand and hire new workers.
2) Reform property taxes, included in the call but not passed.
The property tax burden in Texas ranks sixth-worst nationwide. Residents across the state have seen huge increases in recent years. Either SB 1 or HB 4 would have provided much-needed structural property tax reform by triggering an election for local voters to approve increases in property tax revenue by local jurisdictions of more than a certain threshold. Neither made it to the governor’s desk.
3) Restrain budget growth to cut taxes, not included in the call.
One option is to cut the sales tax rate. Most Texans pay a combined state and local sales tax rate of 8.25 percent. Only nine states have a higher rate. By restraining government spending, excess money could be put toward reducing the state’s sales tax rate or other taxes, providing much-needed relief.
4) Enact a stringent spending limit, included in the call but not passed.
To not excessively burden taxpayers with funding government services, population growth and inflation are key metrics that reflect that burden. One represents the increase in number of residents while the other tracks closely with wage growth over time, collectively providing an increase in funding to government that probably doesn’t overly distort each individual’s ability to satisfy his or her desires. Either SB 9 or HB 208 would have been terrific steps to enacting an effective cap on government spending that limits increases to no more than the rate of population growth and inflation, but neither made its way to the governor.
5) Increase state budget transparency, not included in the call.
Many government programs continue to get funding years after they are no longer needed. Requiring agencies to explicitly justify the need for their programs on a biennial basis through the practice of zero-based budgeting would make it easier to eliminate those that are unnecessary while making it easier to provide tax relief.
6) Reduce government regulations, not included in the call.
The Legislature recently took a step to address the growth of the regulatory burden by passing a law that requires the state to remove one regulation for every new regulation created. Requiring that all regulations “sunset” after a certain period would go further by actually reducing the number of regulations on the books.
Residents and businesses vote with their feet in response to policy differences. Texas is widely regarded as a top business-friendly state; the flood of new businesses into the state in recent years is testament to that reputation. However, like any sort of reputation, maintaining good standing requires constant vigilance.
These six reforms to tax, budget, and regulatory policy would help increase economic freedom and individual liberty in Texas. While none of these were addressed in the special session, they should remain high priorities by the 86th Legislature to provide relief to taxpayers and put Texas at the top when it comes to economic freedom and associated prosperity.
The Fraser Institute’s recently released annual report on economic freedom in North America shows that Texas continues as one of the most free jurisdictions in the nation and continent in 2014. Specifically, Texas retained its third place status in the U.S. for the sixth straight year while improving to fourth place when including jurisdictions in Mexico and Canada.
Because of its positive relationship with measures of standards of living, this economic freedom measure serves as a valuable guide for states to use when designing policy.
Individuals are said to have economic freedom when:
(a) Property they acquire without the use of force, fraud, or theft is protected from physical invasions by others; and
(b) They are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others.
This essentially calls for less government manipulation of markets to allow voluntary exchange between buyers and sellers to satisfy their desires. Data indicate that high levels of economic freedom result in economic success among businesses and families, including those in poverty.
When compared with state economies of similar stature, the Texas model of low taxes, no personal income tax, relatively restrained government spending, and stable regulation leads the way. California, the only state with an economy larger than Texas, ranks an abysmal 49thin economic freedom, outranking only New York—the country’s third largest economy.
New York and California have placed burdens on their citizens with high personal income and business taxes as well as forcing many workers in unions instead of encouraging individual choice. California and New York’s low rankings in these categories and their overall tepid scoring in government spending and market regulation question the hands-on governing approach.
Meanwhile, Texas continues to enjoy superior rankings across most metrics thanks, in part, to the passage of a conservative budget that limits increases in government spending to no more increases in population growth plus inflation. However, Texas still has room for improvement to surpass New Hampshire and Florida.
Texas’ most critical rating is that of “sales tax revenue as a percentage of income,” which includes both sales and gross receipt taxes. Contributing to the state’s poor scoring is the onerous gross receipts-style business franchise tax. Putting this tax on a path to elimination in the upcoming legislative session would likely result in a major improvement in economic freedom and help generate more economic prosperity.
Additionally, Texas must not fall prey to the temptations of raising the minimum wage, which is a labor market regulation. The authors of the report note that their minimum wage “component measures the annual income earned by someone working full time at the minimum wage as a percentage of per-capita income.” Given that Texas has a low cost of living, a higher minimum wage hurts low-skilled workers and those near the minimum wage much more than in more expensive states.
While Texas’ high level of economic freedom should be celebrated, the Fraser Institute’s report provides a valuable guide for simple steps to take this session to further improve Texans’ well-being.
This commentay originally appeared on the Austin American-Statesmen on September 1, 2016
Football season is almost here. No matter which team is your favorite, there are certain players that you root for because they are an influential part of the team’s success. If those players are injured or not playing at their full capacity, that team is unlikely to perform well. It’s one thing for a team to play well for a year or two, but it’s another thing entirely to sustain that over many years, which is often called a dynasty.
Recently, Julián Castro, the U.S. secretary of Housing and Urban Development and former mayor of San Antonio, compared two economic heavyweights: California and Texas. Specifically, he said, “California is kicking our butt, creating more jobs and more economic growth than Texas.” He claimed this means that progressive, big-government policies in California produce better results than Texas’ conservative, limited-government policies.
PolitiFact released an article in the Statesman that rated this claim as “true.” However, as in sports, one or two years of winning seasons by California doesn’t come close to the extraordinary success in Texas during the last decade of what could be considered an economic opportunity dynasty.
One of every five people live in these two states. One of every four dollars of production nationwide are produced there. Ranking each state against countries, California would rank sixth and Texas would rank 10th. The list could go on.
Given their size and importance, Americans really need both states to prosper.
After descending into a deep valley during the recession, California’s economy has recently grown at a faster rate than in Texas, where the drop in oil prices and higher value of the dollar have negatively affected the mining and manufacturing sectors. However, during the last decade, the productive, real private sector growth has increased by 13.6 percent in California compared with a robust 29.1 percent in Texas.
This growth translates into output per person in Texas increasing almost four times more than in California in that period, meaning economic output has far outpaced population growth.
Although contemporary economic growth in California has led to a higher annual job creation rate than in Texas since April 2015, this only tells part of the story.
Since December 2007 when the last national recession started, total civilian employment increased in California by 1.2 million while it increased by 1.7 million in Texas, with a labor force two-thirds the size of California’s. This increase in employment in Texas constitutes about one-third of all jobs created nationwide — truly remarkable given recent headwinds!
This phenomenal job creation contributed to Texas’ unemployment rate (4.6 percent) being at or below California’s rate (5.5 percent) for 121 straight months, or since July 2006. But the official unemployment rate only accounts for those actually looking for work, a better gauge of labor force health would be the share of the population employed, which has been higher in Texas than in California since at least 2000.
More economic output and job creation over time in Texas has contributed to less poverty. The Bureau of Labor Statistics’ supplemental poverty measure, which accounts for the local cost of living, shows that Texas’ rate matches the national average while California has the nation’s highest poverty rate
Income inequality has also been higher in California than in Texas for years. For example, the average of total income held by the top 10 percent of income earners from 2000 to 2012 was 49.9 percent in California compared with 48.8 percent in Texas.
The results are pretty clear that California’s progressive policies of having the highest marginal personal income tax rate, cumbersome regulations, huge unfunded pension obligations, an out of control lawsuit environment, and other policies reduce economic opportunity.
We need both of the key players in the U.S. to perform at their full potential, as we do the best players on our favorite football team. California and Texas need to not only win but also be dynasties with pro-growth policies that support a strong foundation for continued economic growth.
The Texas model of low taxes, no personal income tax and stable regulation would help Californians and all Americans prosper if the last decade is any indication of future activity.
On Tuesday, the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) released the real gross domestic product (GDP) growth numbers for all 50 states in the fourth quarter of 2015. Along with revised figures for the previous three quarters, the BEA also released updated GDP growth for all of 2015.
One conclusion is remarkably evident from these data: the Texas miracle is still alive and well.
Despite the massive drop in oil prices (the average price of oil dropped from $105.78 in June 2014 to $37.34 in December 2015), the Texas economy has continued to grow rapidly, outpacing the national trend and most of its economic contemporaries. In the face of lower commodity prices, diversified industries, a fiscally responsible government, and a lessened dependence on production in the oil and gas sector have enabled the state to prosper.
Table 1 illustrates that the nationwide economic trend was generally positive, with some negative outliers. United States GDP grew 2.4 percent in 2015, a slight uptick from 2.2 percent in 2014.
Regionally, the Far West states grew the most (3.8 percent) and the Plains and New England economies barely advanced (1.3 percent). California, Oregon, and Texas had the greatest growth while Alaska, North Dakota, and West Virginia had the least.
At first glance, Texas growth in the most recent quarter looks unimpressive; the state GDP only grew 1.4 percent in the fourth quarter of 2015, which ranked as only the 29th highest of 50 states. However, robust growth of 7 percent in the first quarter compensated for weak performances of -2.3 percent and 1.3 percent in the 2nd and 3rd quarters, respectively.
Accordingly, the growth rate for the entire year of 2015 was much better; Texas GDP grew a strong 3.8 percent, which ranked 3rd in the nation, only behind Oregon and California. This growth is remarkable considering that the state also grew 3.8 percent in 2014, when oil prices began to collapse.
Texas also outperformed many of its economic competitors in 2015. Among states that have a significant amount of oil and gas production, Texas grew the fastest (3.8 percent), outperforming Oklahoma (1.3 percent), Alaska (-0.5 percent), and North Dakota (-2.2 percent). Among states with largest four economies, Texas surpassed both New York (1.4 percent) and Florida (3.1 percent) and was only slightly below California (4.1 percent).
Texas has grown more than any other state since 2013, except Colorado (the two states are virtually tied at increases around 7.7 percent). The tales of the state’s demise are greatly exaggerated; Texas is not a petrostate solely dependent on the sale of fossil fuels. Rather, economic diversification and limited government have empowered the Texas economy to continue prospering, irrespective of oil prices.
by Vance Ginn and Talmadge Heflin
Texas faces multiple economic challenges. These headwinds have slowed economic growth of what would be the world’s 12th-largest economy, potentially leading to the state’s first major recession in 30 years. This has contributed to another possible challenge — a tight state budget in the 2017 legislative session.
Fortunately, Texas’ high level of economic freedom, diversified economy and pro-growth policies help weather these challenges and provide an environment conducive for Texans to prosper.
During the Great Recession and since, Texas has been America’s jobs engine, creating 34 percent of all U.S. civilian jobs during the last eight years in a state with less than 10 percent of the nation’s population. Texas has employed more net nonfarm jobs in 64 of the last 66 months, and created 152,300 private sector jobs during the 12 months ending in March.
Texas certainly faces challenges. There was a combined 95,500 job losses in Texas’ mining industry, primarily oil and gas activity, and manufacturing industry during those 12 months. More job losses and fewer openings were expected as the latest annualized increase in real gross domestic product was only 0.5 percent in the second quarter and 0.1 percent in the third quarter of 2015 — barely avoiding a technical recession.
These challenges would likely have caused a prolonged, severe recession in Texas if the economy looked like it did during the 1980s.
The mining industry is directly related to about 15 percent of the real private economy and less than 3 percent of the labor force today. This is substantially lower than in the 1980s, when it was about 21 percent of the real private economy and 5 percent of the labor force.
The combination of more economic diversification and pro-growth policies have supported a more resilient economy.
Consequently, the sustained steep drop in oil prices hasn’t taken nearly as much of a toll on the Texas economy as it did in 1986 when Texas had its last major recession that lasted two years.
However, increased diversification contributed to Texas being more dependent on the rest of the U.S. economy. Without growth in exports and the oil and gas sector, which fueled much of the U.S. economic expansion since 2009, the national economy stands on a shaky foundation.
With the Federal Reserve having held interest rates too low for too long and (rightly) beginning to tighten credit in December, slower economic growth and lower oil prices are likely, as highly distorted markets correct. In addition to overbearing regulations, including those of Dodd-Frank and others promulgated by the Obama administration, the American Dream is further out of reach for too many Americans.
Of course, Texas’ economic future is unknown, but so far the sky is not falling. Texas has been blessed with a long expansion contributing to great prosperity, but it will one day have another recession.
Texas legislators increased the total state budget by far more than population growth plus inflation in both 2001 and 2009, the previous two recessions.
Excessive spending in 2001 was followed by a $10 billion revenue shortfall in 2003 that was resolved with steep spending cuts without raising taxes. The 2009 Legislature balanced its books by accepting a large short-term “stimulus” payment from the federal government. Two years later, it covered a larger revenue shortfall with accounting gimmicks that were reversed in 2013.
Previous spending excesses that expanded the government’s footprint hurt Texans by forcing them to pay higher taxes and lose government benefits. This cyclical nature of excessive spending has been going on too long in Austin.
The 2015 legislative session started with the state’s coffers overflowing with cash from a robust economy. Instead of discussing how much to spend, state officials discussed how much to cut taxes.
Before the session started that January, Comptroller Glenn Hegar gave his biennial revenue estimate, or BRE, to provide a guidepost of what was available to appropriate given the state’s requirement of a balanced budget. He then released the certification revenue estimate, or CRE, in October after the session ended. The CRE expected slower economic growth and lower oil prices that led to less general revenue-related funds for the 2016-17 budget cycle.
The revenue estimate shows a higher beginning balance, lower tax collections, less funds available for transfers, and a decline in the potential surplus.
Today, the taxable oil price in the CRE looks overestimated, as recent forecasts of the average oil price is about $15 lower in 2016 and 2017. This could lead to slower economic growth that would put pressure on fully funding the current budget and leave a tight budget next session.
Through the first seven months of fiscal year 2016, September through March, sales tax collections were down 2.6 percent.
Hegar recently said, “The modest growth in sales tax collections for March was in line with expectations and comes after five consecutive months of declining sales tax revenues.”
In addition, he highlighted the state’s diversity by “stronger growth in receipts” in other sectors that helped offset lower tax collections from oil and gas-related sectors.
Total tax collections are below the revenue estimate by $3.2 billion during those seven months, but a major portion of that is the franchise tax discrepancy.
Franchise tax collections are $2 billion below the CRE, but historically this tax is primarily collected monthly starting in March through the rest of the fiscal year. For example, there was $249 million net tax collected in March after six months of refunds to businesses that overpaid.
If you exclude this, total tax collections would be about $1.2 billion below the revenue estimate for fiscal year 2016.
With oil prices potentially averaging another $15 lower this year and with about a $1.2 billion decrease in revenue projected in fiscal year 2016, that could translate to $2.1 billion less for the full year. If this pace of total tax collections continues, there’s likely to be dollars available to fund the current budget but little to no potential surplus for the 2017 legislative session.
Advancing the Texas model
The 84th Texas Legislature made great strides last session to weather an economic downturn by passing a conservative budget, and $4 billion in tax and fee relief, leaving billions of dollars unspent, including about $10 billion in the state’s rainy day fund.
Texas faces real, and potentially major, economic and fiscal challenges. However, the proven recipe of a diversified economy and limited government philosophy must be enhanced to continue meeting these challenges and propel Texas toward greater economic prosperity.
The 85th Texas Legislature should provide the best economic environment for Texans to succeed and further cushion the effects of business cycles. This could be done by measures supported by the 13 influential organizations of theConservative Texas Budget Coalition. These include passing another conservative budget, eliminating the business franchise tax, reforming the state’s weak spending limit, adopting a mechanism to reduce the budget, stopping excessive growth in property taxes, and increasing budget transparency.
By advancing economic freedom and individual liberty, Texas will better deal with potentially deep downturns and other economic circumstances. This provides Texas with the best opportunity to remain a place where Americans can achieve their hopes and dreams.
Federal regulations are often a complex cobweb of repetitive, useless rules determined by federal bureaucrats rather than elected officers. These regulations may have good intentions of providing clean water, increasing public safety, and other benefits, but it’s important to consider the costs of those measures. Far too often, government avoids considering these costs that are detrimental to everyone’s well-being.
It’s no secret that big government restricts the economy, but by how much?
According to a new study by the Mercatus Center, federal regulations that have accumulated from 1980 to 2012 cost Americans approximately $4 trillion!
Figure 1 shows that this huge cost translates into about 25 percent of the U.S economy, $13,000 per American, or the fourth largest economy in the world. Clearly, Americans are being stifled by too much red tape.
Figure 1: Federal regulations have hindered economic progress to the tune of $4 trillion since 1980.
The study’s findings show that federal regulations have reduced average U.S. economic growth by about 0.8 percentage points per year since 1980. While this doesn’t seem like a big deal, it’s important to note that economic growth compounds over time. Therefore, the negative gap between economic growth without regulations compared with actual growth grows larger as it builds on itself each period.
Mercatus has the federal regulation and state enterprise (FRASE) index that ranks the economic impact of federal regulation on states. Texas ranks as having the 6th highest, or the state’s industries are negatively influenced 29 percent more than the national average.
This is a huge cost to Texans as noted in Figure 2 with the tremendous number of federal regulations on businesses.
The cost of federal regulation on Texas is not only burdensome at the federal level. States also plague their businesses with burdensome regulation. Texas' successful economic model is one that other states and federal lawmakers would be wise to follow, but even Texas could do far better when it comes to regulation.
In the Mercatus Center’s Freedom in the 50 States report, Texas ranks only 24th for regulatory freedom. One reason is stringent occupational-licensing requirements; the Institute of Justice ranks Texas as having the 17th most burdensome set of them. These regulations protect existing businesses from new competition and make it harder for low-skilled workers to find employment, making everyone losers in the process.
To have the best economic environment for opportunities to prosper and higher standards of living, regulation at the federal and state levels should be dramatically scaled back. The cost of every regulation must be considered, and those that have a higher cost than benefit should be scrutinized and ultimately not imposed. This is how we can begin to reclaim the American Dream for far too many who feel as though it is out of reach.
Economic Prosperity through Free Market Energy Abundance
Presentation by Dr. Vance Ginn at the Philadelphia Society meeting in Charlotte, NC
April 2, 2016
As the U.S. presidential election draws closer, politicians and voters are considering different ways to reignite a depressed economy and labor market during a historically weak economic recovery. At the heart of this is a debate between extractive, or progressive, institutions that forcefully redistribute resources and inclusive, or free market, institutions that allow individuals to satisfy their own desires through voluntary transactions.
The U.S. was once the envy of the world as it held the bronze prize in economic freedom in 2000, according to the Economic Freedom of the World Index published by the Fraser Institute. After years of government intervention in the economy and our daily lives, this ranking has fallen to 16th behind Taiwan, resulting in lackluster economic growth and job creation.
This decline precipitated from policies attempting to stabilize the economy through unprecedented fiscal and monetary actions. In fact, the current recovery looks to be one of the weakest on record with average annual growth of only 2.1 percent with no relief in sight. The direction of public policy must radically change.
Federal spending has increased by 27 percent since the fourth quarter of 2008, when the financial crisis took its greatest toll. This spending included bailing out banks and an almost trillion-dollar stimulus package contributed to an almost 80 percent increase in the national debt to $19 trillion. This debt now exceeds all of the country’s economic output. Though the sequester recently restrained spending, it has expired and didn’t correct the massive increase beforehand.
In December 2008, the Federal Reserve took historic action by lowering the federal funds rate to the range of zero to 0.25 percent and multiple rounds of bond-buying programs called quantitative easing. These actions were primarily intended to keep interest rates low to stimulate the economy.
A common benchmark for the direction of the federal funds rate is the Taylor rule, named after the Stanford economist John Taylor, that calculates the rate based on economic measures. The rule indicates that the Fed left the rate too low for too long during the mid-2000s, contributing to the housing market boom and bust, and has now left it lower than it should have been since 2010—with the current calculated rate of around two percent. After the previous lessons of failed policies, the Fed would be wise to return to a more rules-based approach that misallocates fewer resources.
Supporters of these policies cheer the drop in the unemployment rate from 10 percent in October 2009 to 5 percent in March 2016. But this measure misses the large number of people who have dropped out of the labor force and those working part time but would like a full-time job, which when added to the total unemployed brings the current underutilization rate to near 10 percent.
Collectively, these policies have misdiagnosed the U.S. economy. There is less economic activity with fewer dollars in the private sector due to higher taxes, more government debt, and more dollars flowing to unsustainable projects from excessive monetary easing. It’s no wonder that the U.S. has dropped so far in its ranking of economic freedom and Americans have been left to suffer.
Fortunately, the system of federalism provides an opportunity for a laboratory of state competition within an umbrella of federal policies. In search of a more free market model that would reward risk-taking and entrepreneurial activity, I recently published the paper “A Labor Market Comparison” at the Foundation’s website www.texaspolicy.com comparing economic freedom and labor market measures among the largest states—California, Texas, Florida, and New York—and U.S. averages during the last 15 years.
Ranking third in economic freedom and having the best labor market results compared with these largest states, Texas acts as a model. This high ranking isn’t an accident as Texas has kept taxes low, never enacted a personal income tax, and passed sensible regulations. These factors combined define the Texas model.
This model helped support the creation of 73 percent of all new nonfarm jobs in the U.S. from January 2000 to December 2014. Although critics often shrug these off as low-paying jobs, the inflation-adjusted private sector pay has been 67 percent higher than the U.S. average during that period with many more jobs added in high wage jobs than low wage jobs in the state and compared with the rest of the U.S.
The progressive policy prescriptions in D.C. and California continue to fail, especially regarding energy policy, which is what I’ve been asked to discuss today. These failures include the overbearing EPA, the lack of approval regarding the Keystone XL Pipeline, funding of uneconomical forms of energy, and the overall war by progressives on fossil fuels. Continuing down this path is one that will make Americans poorer, less productive, and more dependent on the government, which could be part of the progressive plan.
To renew the American dream, presidential candidates should consider similar free market measures taken by some states, particularly those in Texas. By providing inclusive institutions that allow free markets to work and support prosperity rather than extractive ones that redistribute resources and hinder progress, the American Dream that’s alive and well in Texas can be available for Americans nationwide.
Free Market Energy Policy
The world’s energy landscape has radically changed within the last decade because of surging production of oil and natural gas in the U.S. Unimaginable not too long ago, the U.S. is now the world’s largest producer of petroleum and related liquid fuels. More than three-fourths of the increased global oil production in the last decade is from domestic oil fields, contributing to a drop in our oil imports by roughly 60 percent since 2007.
This sea change is the achievement of a mix of innovative technologies, known collectively as hydraulic fracturing, applied by small and independent oil companies in multiple states. The shale revolution has been so successful that it has produced a large surplus of crude oil. The Energy Information Administration forecasts that there could be as much as 3.2 billion barrels of global oil inventory by the end of 2016. There’s been so much oil produced in the U.S. that there are barrels of oil parked in tankers in the Gulf of Mexico and in train cars until it’s more profitable to sell.
For our country to benefit from the colossal energy wealth now at our fingertips, the end of the antiquated 40-year old oil export ban starting this year is a step in the right direction. Tankers have now exported oil to other countries at an initially slow pace, but this is likely to pick-up as oil contracts run out for other countries and those countries find it in their best interest to purchase crude at a discount based on the West Texas Intermediate crude oil price.
Although this step provides a positive path in the energy arena regarding a source of energy that is portable, dependable, and affordable, there’s much more to do. Unfortunately, the Obama administration and many states have taken it upon themselves to make it more difficult to produce fossil fuels as renewables are propped up as a savior. This approach, if taken to its logical conclusion, will fail, as has been the case in Europe. We must rethink how we produce energy including how we can better allow free markets to allocate resources most efficiently rather than the current path of government manipulation without complete knowledge. This path towards greater dependence on free markets is one that will provide a brighter and more prosperous future.
Energy Revolution from Entrepreneurial Activity
The abundance of energy, especially fossil fuels, has transformed the world, particularly since the Industrial Revolution, helping bring more people out of poverty faster than in any other time in recorded history.
Economics is the study of human action and interaction whereby scarce resources are used to satisfy individual desires. Entrepreneurs are a vital part of this process in satisfying our desires as their ingenuity transforms markets into something very few thought possible. The shale boom is a terrific story of economic success.
Entrepreneurs helped create an environment conducive for the shale boom to bless us with abundant, affordable, and portable fossil fuels that provide efficient energy to satisfy our desires on a daily basis. Even still, with many of the cutting-edge fracking processes coming to fruition in the early 1980s, the price of oil plummeted during that decade making it not profitable to use these, at the time, expensive drilling techniques.
Things began to change during the 2000s. Not only did the techniques become economical, as entrepreneurs continued to work to bring down the cost of fracking, but also the price of oil and natural gas were such that it was profitable to frack.
The steady climb of oil prices during the 2000s, particularly in late 2007 and 2008 when the price of WTI hovered around $140 per barrel, there was plenty of profit motive using these more expensive fracking methods. Natural gas production that includes gross withdrawals and production took off around that time with production increasing by 31 percent from January 2008 to August 2015. Natural gas production was really the first round of the shale boom.
That didn’t quite transfer to an increase in oil production as the price of oil plummeted during the Great Recession to a low of about $35 per barrel in early 2009. It wasn’t until around the Arab Spring in early 2011 when oil prices recovered and were topping $90 per barrel and then reaching above $100 per barrel in March 2011.
Since then until the latest EIA data in December 2015, oil production per day is up 65 percent to 9.3 million barrels, which remains near the record high in late 1970 of 10 million barrels per day and the latest high of 9.6 million barrels per day in April 2015. This is in spite of the substantial drop in oil prices, showing the high level of efficiency of those wells online.
Texas has been a major contributor to this shale boom. Oil production per day in Texas is up 150 percent to 3.3 million barrels since March 2011 to December 2015, contributing to 55 percent of the increase in U.S. oil production during this period. Again, despite the drop in oil prices, oil production so far has not fallen off a cliff as those efficient drilling rigs remain in operation with a drop of 304,000 barrels per day since the record high in March 2015 of 3.6 million barrels.
It’s important to note that this drilling activity has been a bright spot in an otherwise dismal economic recovery. The U.S. labor force participation rate remains near lows not seen since the 1970s, but let’s somehow cheer the 5 percent unemployment rate—even though the more realistic underutilization rate sits at near 10 percent. The push to end the production of fossil fuels by the Obama administration is a push to end much of the prosperity that’s been created during the last decade.
Consider total civilian employment since the Great Recession started in December 2007. Texas has added 1.6 million new jobs while the rest of the U.S. has added 3.2 million. In other words, Texas has created 37 percent of all new civilian jobs in the last eight-plus years. The rest of the U.S. didn’t turn positive from massive job losses until January 2015 and didn’t surpass Texas until November of last year. Of course, these have not all been oil and gas jobs as Texas is a highly diversified economy with less than 3 percent of the labor force employed directly related to the oil and gas sector and less than 15 percent of the entire real economy. It was 5 percent and 21 percent, respectively, in the 1980s.
Texas has certainly felt a pinch from the lower oil prices as real GDP increased by less than half of one percent in the second and third quarters of 2015, contributing to slower annual job creation of just 1.4 percent. There have been almost 100,000 combined job losses in the manufacturing and mining sectors during the last twelve months through February. However, Texas has added nonfarm jobs in 64 of the last 65 months and the 4.4 percent unemployment has been at or below the U.S. average for 110 consecutive months.
By keeping a high level of economic freedom, which Texas ranks third in the recent Economic Freedom of North America report by the Fraser Institute, Texas will continue to be able to weather this challenge and others in the future. This is something that those in other states and D.C. should try to emulate. By remaining fiscally sound, Texas families and small businesses will continue to prosper.
What’s Holding the U.S. Back from Reaching Its Full Energy Potential?
The solution for a more prosperous nation is to facilitate the ingenuity of entrepreneurs and let states have more discretion over what may work best there instead of a one-size-fits-all approach that fits none. Entrepreneurial activity and free markets, after all, is what led to the shale boom, and other forms of advancement throughout human history. So what are the steps that are necessary to create this prosperous and energy rich future for America?
The first was taken at the end of 2015, which was to allow exports of crude oil. As noted previously, this may take some time to reap major benefits, but the marginal benefits of this are likely substantial. There are already huge construction projects taking place at the port in Corpus Christi, Texas, where the first tankers shipped, to export more oil and liquefied natural gas.
Policies made on faulty science and the lack of looking at the true costs of EPA regulations are widely viewed as preventing the economic recovery that Americans want. A better solution could certainly be private regulation, end of the EPA, and a greater focus on regulation at the state level, but this will not happen overnight.
With that in mind, we should consider the following in the meantime: allowing drilling on
federal lands; building more refineries; ending all subsidies for energy sources; approving construction of pipelines to build a robust national network of pipelines; reducing the EPA’s overreach by letting states do what works best for them, building more nuclear power plants, and ending state and federal renewable energy standards.
The best path forward for economic growth and prosperity is for the government to get out of the way, especially when it’s costly for Americans, as in the energy sector.
It’s truly remarkable that the Malthusian argument that society will one day return to a level of subsistence as the population grows hasn’t held true through the power of entrepreneurs to innovate. Indeed, ‘peak oil’ and ‘peak gas’ concerns have been waylaid by reality. Therefore, if we do not produce it here, production will happen elsewhere, many times in places that have worse production techniques to provide a safe, pollution-free environment and in places that aren’t friendly with us—leading to less peace and prosperity.
By following these solutions and others that allow free markets to lead the way instead of governments, the American Dream can once again seem not so far out of reach for Americans. This will also help to improve the federal government’s fiscal problem as we spend less on wasteful projects and regulations.
Finally, I’d like to call your attention to a new book being released on May 23rd called Fueling Freedom: Exposing the Mad War on Energy co-authored by Steve Moore at the Heritage Foundation and my colleague Kathleen White at the Texas Public Policy Foundation. It includes the history of how fossil fuels have been a key contributor to economic prosperity and provides more information about these policy proposals and more. I hope you will take time to read it.
Thank you for the opportunity to speak here today. I look forward to answering any questions you may have.
This presentation highlights Texas’ economic and fiscal challenges and how legislators can help the state weather these headwinds by limiting the size and scope of government.
Presentation: Can Texas Weather Economic and Fiscal Challenges?.
This commentary, written by Dr. Vance Ginn and Daniel Garza, originally appeared in Townhall on February 8, 2016.
In the last seven years, the United States has tumbled from 6th place to 11th place in The Heritage Foundation’s annual Index of Economic Freedom. This scale is a loose measure of the federal government’s burden on us in the form of taxes, debt, and opaque regulations that dictate how we must spend “our” money.
Under the current administration, government spending has increased to nearly $30,000 per household, and our national debt now exceeds $19 trillion, or about $125,000 per tax-filing household. We’ve seen bank bailouts, taxes that depress hiring, and mandates that force working Americans to cough up their hard-earned money to buy products of questionable value.
Simultaneously, the burden of regulation is exploding, as Washington imposes new rules on companies that force us to spend more on energy, health care, food, and education.
Bottom line: The American people are paying more and more of their hard-earned dollars to satisfy government at all levels, and they’re not getting value in return.
That’s not what backers of big government promise, of course. They claim that other people will pay these costs, not the working families who are struggling to achieve their hopes and dreams. However, middle-income Americans are always the ones who foot the government’s bill.
Although government officials often vow to enact a raft of new government programs, they conveniently don’t talk about the massive tax increases associated with such a plan that would substantially lower incomes. And when the current administration finally won the massive tax increase on “the wealthy” that the president promised for years, it ended up hitting 77 percent of American households instead.
Still, our youth clamor for increased government intervention because, they’ll tell you, they are tired of the greed, the cronyism, and the increasing income inequality. They see government as a benevolent force untainted by a profit motive.
However, they ignore that inequality has been aggravated precisely because of excessive government spending, quantitative easing measures by the Federal Reserve that centralize capital in Wall Street, and government cronyism that only favors the few well-connected. They overlook the need to focus on alleviating poverty as a priority over inequality, which is a natural outcome of economic growth supported by free markets that rewards talent, hard work, and comparative advantage.
The youth ignore that economic freedom makes funding social programs possible, and is now sustaining the highest quality of life in human history.
Some see “economic freedom” as a complex idea, or one that doesn’t affect them. But, at the most basic level, it means protecting our rights as workers and entrepreneurs to earn, spend, and save without unnecessary interference from the government.
It means that if you’re a young Latina trying to pay for college, you shouldn’t be hurt by poorly-managed government programs that increase the cost of tuition. If you’re a worker trying to save for a home, the government shouldn’t tax you for programs that will go bankrupt before you can benefit from them. It means that if you’re a senior on a fixed income, the cost of basic necessities shouldn’t rise just because decision makers in Washington want to protect their political supporters.
The plain truth is that the vast majority of Americans do a better job caring for themselves than government officials in Washington ever could. If taxes and regulations didn’t inflate the cost of health care or stifle job growth, millions would be better off than they are now. Daniel’s family immigrated to the United States not because of government programs aimed at helping them. That was the false promise they rejected at home, in favor of the chance to build a life for themselves in the most dynamic economy in the world. To fulfill that destiny, Vance took it upon himself to earn a doctorate in economics as a first generation college student from a low-income household instead of following the potential path of being supported by taxpayer dollars.
Millions of immigrants and disadvantaged people have proved throughout our nation’s history that success comes not from government taxes and mandates smoothing the bumps along the road. Quite the opposite. We have done well because government was limited, leaving room for people to create, build, and prosper.
Government has a role—a critical role—in protecting our security and ensuring the care of those who truly cannot help themselves. But when it tries to do too much, as is the case today, it winds up doing more harm than good. When government protects economic freedom and individual liberty with policies that limit taxes, spending, and regulation, it helps everyone succeed.
Vance Ginn, Ph.D.