Those of you who read Texas Monthly's profile of Richard Fisher last year may remember that this is the only state that has almost an entire district of the Federal Reserve System to itself. The 11th District of the Federal Reserve includes a few counties in New Mexico and about twenty parishes in Louisiana, but more than ninety percent of the district's economic activity is in Texas. The result is that we have unusually good research about the state economy, at a moment when Texas's economic performance has significantly outperformed the nation's. Fisher, as president and CEO of the Dallas Fed, has spent years contrasting the two. On Wednesday he did so again, at a keynote speech at a Texas Public Policy Foundation conference on economic issues--and while he told the audience that Texas has plenty to brag about, he warned that this is no time to be complacent.
As background, Fisher pointed to some good news for the national economy: year-over-year real GDP growth has picked up a bit; the unemployment rate has come down; the inflation rate is hovering between one and one-and-a-half percent, which is a level that even he, a self-professed hawk on the subject, finds tolerable. (The slides he used are here, as a PDF, if anyone would like more information.) The Texas economy, Fisher said, continues to outperform national averages and national expectations. The state's unemployment rate has been lower than the national average continuously since 2007, even "as the denominator grows"--that is, even as hundreds of thousands of people have moved to Texas. Since the beginning of the year, Texas has added 54,000 jobs, and has seen employment growth in every sector other than manufacturing, which has lost some jobs--although, as Fisher added, the manufacturing sector's output has nonetheless increased.
More pointedly, Fisher observed some ways in which Texas contributes disproportionately to the national economy. This is the nation's biggest exporting state, for example, and Texas's exports have grown 24 percent since their pre-recession peak, in 2008. US exports have also grown--but if you look at the US exports without including Texas, the growth has been just two percent. And most important, Fisher said, is the fact that Texas is creating jobs in every income quartile: between 2000 and 2012, Texas has seen significant employment growth in every quartile, including roughly ten percent in the lower-middle quartile and 31 percent in the upper-middle. If you look at the United States without including Texas, the picture is comparatively grim and the implications for mobility are troubling: total employment in the lower-middle quartile declined by almost seven percent, and in the upper-middle quartile grew by only about one percent. "We are the job-creating center of America, and you should be proud," Fisher said.
The fact that Texas is creating middle-income jobs is certainly a point of pride for Fisher. They are also a key piece of evidence for an argument he has often advanced in his role as a central banker: that monetary policy is not the constraint in America's underwhelming economic recovery. For years, the Federal Reserve governors have tried to encourage private-sector spending by running a loose monetary policy, meaning that interest rates are low and money is accessible. As Fisher sees it, they have succeeded in the narrow goal--capital markets have an abundance of liquidity--but not in the broader one; the private sector is not showing the activity that advocates of a looser monetary policy may have anticipated. "You cannot count on the Federal Reserve alone," Fisher said, "and you wouldn't want to." That Texas is an exception proves that monetary policy is not the issue. All states are subject to the same monetary policy. Different results must be the result of things they do differently.
For all its success, though--as a result of its success, in a way--Texas nonetheless has some long-term challenges. Fisher ended his speech by encouraging more attention to what he described as the biggest of them: water. We don't have enough, and supply is decreasing. Growth in Texas, meanwhile, means that demand is increasing. This is a problem that needs to be addressed, Fisher said, and what's more, its solutions need to be financed. The Rainy Day Fund is not enough: "You have to decide if you're going to do it through taxes or if you're going to borrow." Fisher himself seemed ecumenical about which of those approaches the Texas Legislature might pursue. He observed that investors who took on very long-term debt during the recession had been shrewd to do so, given that interest rates were so low; they remain low, he added, and are likely to rise at some point in the next 100 years. On the other hand, it is possible that there will be political change in Texas during the same span, meaning that today's legislators might shy away from making decisions that their children will have to pay for, and that their opponents' children may have the authority to implement. The main thing, Fisher said, is that the legislature needs to decide how to handle this issue, and how to finance education, which he cited as Texas's other major long-term challenge.
If Fisher sounded sanguine, it might have been because he overlooked one of the short-term challenges in Texas: the mania for fiscal conservatism among politicians who don't understand the economy nearly as well as he does. A new report from the conservative American Legislative Exchange Council, for example, ranks Texas first for economic performance, but only thirteenth for economic outlook; the pessimism is because Texas ranks poorly on certain measures of fiscal discipline, and the report has, as a result, fueled conservative calls for the Lege to cut taxes, to reduce spending, and to stop borrowing so much. If you look at their ranking, though (PDF), the picture that emerges is not exactly one of unchecked profligacy. Texas's property taxes, for example, are among the highest in the country. That's because we don't have an income tax. Debt service as a share of tax revenue is another thing that ALEC points to as an ominous sign. Texas's debt service is a result of the tremendous growth of combined state and local debt in Texas, which is an issue that deserves more public attention--but the growth of state and local debt is a predictable consequence of the state's genuinely conservative approach to taxing and spending, and one logical way to tackle it is would be to raise more revenue for infrastructure, rather than kicking the can down the road by borrowing. The fiscal conservatives in the Lege shouldn't worry too much about fiscal liberalism during next year's session. What they should be worried about is fiscal literacy.Read More