Sunday, March 9, 2014

The Texas economic miracle?

I was inspired by this post by Scott Sumner to run the information transfer employment model for Texas using data from FRED (1997-2014); one thing I did was average the CPI less food and energy for the Dallas area and Houston area (the only ones available) to estimate a Texas-wide price level. Effectively the model is given by 1) P = (1/κU) (NGDP/U), which is an information transfer model from aggregate demand (NGDP) to the number of unemployed (U) that is detected by the price level (P:NGDP→U in the notation I've adopted) and 2) P = (1/κL) (NGDP/L), which is an information transfer model from aggregate demand to the number of employed (L) that is detected by the price level (P:NGDP→L).

This is the model result (blue) for the total number of unemployed (data in green estimated from the TX civilian labor force and the state unemployment rate):

If we use the price level to define a typical level of unemployment (as we do here), then we can graph the unemployment rate for Texas (green, data) relative to this mean level (model, blue):

We can compare this to US data (where I've done the fitting to 1997-2014 as well):

I would say the lower unemployment rate in Texas is likely due to the peak not being as high. Overall, any claims of more or less jobs in Texas seem mired in the noise. The late 90s national economic boom didn't reduce unemployment in Texas as much as it did in the US overall and the bust was worse. In general it looks like booms don't drive unemployment very far below the "typical" level of unemployment in Texas.

This doesn't like good evidence against or in favor of a Texas "miracle" in terms of employment. However if we look at the unemployment rate relative to the "typical" rate (based on NGDP and the price level), we can start to see an effect:

Texas seems to have had a higher unemployment rate than the US as a whole relative to its typical rate before the recession hit and lower afterwards. This means that the Texas "miracle" had an onset sometime after 2005. It is even more obvious if we look at the "double difference" =  (USA - typical) - (Texas - typical), i.e. the difference between the curves in the previous graph:

Here we have a constant level that takes off as the housing boom busts, reaches a peak in the financial crisis and then starts fading. The onset also coincides with the oil (and gas) boom that takes off in 2005. My guess is that the Texas "miracle" is one part oil (and gas) boom and one part not being as badly hit by the housing bust. Before the 2005s, under-performance was the norm. Sumner claims he knows the reasons for the low unemployment rate in Texas in his post I linked to above:
Sorry liberals, but there really is a Texas miracle, and it has nothing to do with “multipliers.”  It is explained by the fact that working class people like to move to states with low living costs (due to flexible zoning), and businesses and high skilled professionals like to move to states with low income taxes.  The working class cares more about the low living costs than the fact that Texas offers less expensive welfare programs than California.  They come to Texas to work, not to collect welfare.  The businesses bring them the capital they need to be productive workers.
This is incorrect. Texas had all of these things in place before 2005. Only the (lack of a) housing bust and the oil boom have serious enough macroeconomic implications to explain why Texas seems to be doing better in the current recession and why that started after 2005.

PS I grew up in Texas and my Dad worked for the oil and gas industry since he left college (until he retired last year). Anecdotes about Texas or the oil industry used in attempts to refute this analysis will be summarily ignored :)


  1. How do you explain the above than average rate of immigration to Texas (aka people voting with their feet) from the eighties and nineties?

    1. Unfortunately I don't have data that goes back that far ... state level GDP data only goes back to 1997. However any level of unemployment is consistent with any level of population. And the population growth in Texas is uncorrelated with unemployment rate:

      There was a large drop in the population growth rate in the mid-80s that was correlated with a big spike in unemployment (the 80s oil bust, which I remember well), but overall there has been a steady decline in the population growth rate from about 3% per annum to about 1.5% from 1976 to today.


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