Susan Combs is the comptroller of public accounts. She previously served two terms as agriculture commissioner and two terms in the Texas House.

Ernesto Cortés is the Southwest regional director of the Industrial Areas Foundation, the largest community- organizing group in the United States.

Rodney Ellis is a seven-term Democratic state senator from Houston. He is a partner at Rice Financial Products Company, a financial services firm.

James Huffines is the chairman of PlainsCapital Bank for the Central and South Texas region and the chairman of the University of Texas System Board of Regents.

Bernard Weinstein is the director of the Center for Economic Development and Research and a professor of applied economics at the University of North Texas.

Evan Smith, Texas Monthly president and editor in chief: Let’s begin with a satellite view of the Texas economy—from your particular perspective and that of the constituencies you serve. Comptroller, as the state’s chief financial officer, how do you think we’re doing?

Combs: The state has enjoyed tremendous growth—incredible sales tax growth of 12 percent three years ago, then 10-plus percent, then 6.6 percent. It has been rockin’ and rollin’. In 2008 the state brought in about 71 percent of all new jobs in the country. Certainly the wheels have come off some wagons, but you have foreclosure numbers that I think are still remarkably good for Texas. Our numbers for the last month are actually down about 90. We’re running about 1 foreclosure out of about 896 [mortgages] in Texas, versus 1 out of 70 in Nevada, 1 out of about 165 in California, 1 out of 186 in Florida, and 1 out of 147 in Arizona. We’re not sleeping in our cars. We’re still largely employed. We’re actually fairly lucky. We got hit late, but I expect us to see some light in October, November, December. I’m actually expecting to see our gross state product up 1.5, 1.7, 1.9 percent for 2009. So the state is so much better off than anyplace else. I really attribute that to how badly damaged we were in the mid-eighties. We lost 368 banks and 200,000 to 300,000 jobs, and we said, “Never again; let’s diversify.” Which we’ve done. Also, we put together the Rainy Day Fund, which will have $6.7 billion in it by the end of August. Only six times in its nineteen-year history has a dispersal been made from it exceeding $100 million.

Smith: Ernie, you speak for the interests of working people all over the state. Do they share the comptroller’s optimism?

Cortés: It varies. I mean, in the Valley you’re seeing almost double-digit unemployment. There had been an awful lot of job growth in places like McAllen and other areas tied to the Mexican economy—well, that’s getting a serious hit. I’m hearing lots of stories about people having very, very hard times in McAllen, Harlingen, Brownsville. San Antonio is really scared to death about the Toyota plant.

Huffines: Is the Valley declining because of the weakness of the peso?

Cortés: The weakness of the peso but also the continuing violence on the border and also a big drop in trade. The benefits that were supposed to have come from NAFTA have never come, because the shifting of manufacturing to China has clobbered the Mexicans.

Huffines: What happened with Holy Week? I was down in Brownsville, Harlingen, McAllen, and Victoria recently, and they were hoping for a Semana Santa.

Cortés: All I know is there were no Mexicans at the malls. I remember back when the peso had a big crisis in the early eighties. It was really, really awful. Some of the shopping centers were virtually ghost towns. It’s not quite that bad, but people are nervous.

Smith: What about other areas of the state?

Cortés: I’m worried about El Paso. And we met with the chairman of economic research for the Fed in Dallas, and he said that the economies of Dallas—Fort Worth and Austin are much more like the economies elsewhere in the country, but the rest of the state is going to get hit later.

Weinstein: The numbers show that right now Dallas—Fort Worth has the highest unemployment rate in the state among the large metros. The fact that the Dallas area has arguably the most diversified economy in Texas and yet has the highest unemployment indicates to me how widespread, how broad-based, this recession is. It’s affecting every individual and every sector.

Smith: James, how do the banks see things?

Huffines: I agree with what the comptroller said. There are six-hundred-plus banks in Texas, and with the exception of the large, multinational banks, the industry is fairly healthy—certainly by the standards of the other states.

Combs: Especially the community banks.

Huffines: That’s what Texas is. It’s a community-banking state. Most of those banks are well capitalized and still making loans. I also agree with the comptroller that one reason we haven’t experienced the downturn as severely is that there are still a lot of bankers who remember the eighties. On a lot of the underwriting for commercial loans and real estate loans, they got more equity down.

Combs: And we also didn’t overprice housing. You don’t have a thousand-square-foot house that’s 800,000 bucks.

Huffines: I think we probably have the most restrictive homestead laws in this country. At the end of the day, that’s benefited our economy and the people of Texas.

Ellis: We also got home equity after the rest of the country, with more restrictions than anybody else.

Cortés: Some of those restrictions have been lifesavers. People can’t borrow 105 or 110 percent of the value of the homes like they did in California.

Ellis: The flip side of that in Texas is that it’s so difficult to get a loan that if somebody wanted to start a small business, they had to have a home to get access to capital. A lot of people who could have started businesses couldn’t start them.

Weinstein: One thing that does concern me is the housing market. I don’t think it’s all that great—certainly not in the Dallas—Fort Worth area. If you look at the subprime lending in DFW, it’s the highest in the state.

Ellis: Houston can’t be far behind.

Weinstein: It’s considerably below DFW. DFW had more subprime lending, both in absolute dollars and as a percentage of loan origination, in ’05, ’06, and the first half of ’07 than any part of Texas. We’re seeing record foreclosures—50,000 last year—and the pace of foreclosures in the first quarter this year was greater than the first quarter last year. Foreclosure doesn’t always mean the bank is going to take the house back, but however you define it, the numbers in DFW are going like that, and it’s going to get worse before it gets better.

Cortés: I can see that, because I’m being told by some of our organizers in the Dallas—Fort Worth area about the collapse of housing values.

Weinstein: It’s mainly in low- and moderate-income neighborhoods, like South Dallas. That’s where all that subprime lending took place.

Cortés: Right. But having said that, compared to Las Vegas or western Maricopa County [in Arizona] or Southern California, it looks like nirvana to me.

Weinstein: It does. The problem in Nevada and Florida wasn’t related so much to subprime. It was crazy lending and speculation.

Huffines: It was a bubble.

Cortés: But also it was financial entrapment, because people were lured into borrowing money with zero equity.

Smith: I want to bring Senator Ellis into this discussion, because I’m mindful of what we heard earlier about the Rainy Day Fund, how Texas has only had to draw more than $100 million out of it six times in nineteen years. The Senate just passed a budget that used federal stimulus funds to fill in holes that would have otherwise required us to drain the Rainy Day Fund or else cut state services significantly. So with all due respect to the comptroller, is there really something to brag about here?

Ellis: Here’s my take on it. When the comptroller says we are doing all right, well, we are—the seven of us at this table. We don’t quite reflect the experience of the average Texan. The numbers don’t lie when you look at how we compare to just about every other state in the country in terms of the safety net. We think everybody’s gonna start running out of California because of its deficit, but what is California gonna cut? They’re gonna cut the stuff we never provided. They’re gonna cut the stuff that was giving a lot of people a leg up to get the great American dream, to get to the middle class. We never did that. So one reason why we have rarely touched our Rainy Day Fund has been because of an inability to recognize that it was raining. And we brag about it as though that’s something to be proud of. We used to say, “Thank God for Louisiana and Mississippi.” Now their legislators say, “Thank God for Texas.” We rank virtually at the bottom in every category of that safety net. The largest percentage of uninsured people—not just children, people. The highest [homeowner] insurance rates in the country for those of us who do have it. The real challenge for the future of Texas, in my judgment, is the gap between those who have and those who don’t. It puts us on par with our neighbors to the south or in any developing country.

Cortés: One of the reasons, I think, that you’re going to see businesses leave California is there’s no way they’re going to get the trained workforce they want.

Huffines: I was talking with [an Austin Chamber of Commerce] executive who’s in charge of recruitment, and last month they had 24 inquiries from out-of-state companies that were looking at relocating. Seventy percent were from California.

Ellis: What will they offer? Abatements?

Huffines: More important than abatements is a skilled workforce. I think everybody saw the [] article: Five of the top big and midsize cities in the country to find a job in are all in Texas. There’s something going on, guys. In today’s economy and tomorrow’s economy, jobs will follow brainpower.

Combs: And flexibility—wherever you have the flexibility to train somebody.

Cortés: It’s also about new people. We’ve got to get over our mania about immigration, because if we don’t do that, we’re going to stagnate. The one good thing about George Bush was that when he was governor of Texas, he had a good attitude on immigration, and it served us very, very well. We were not Arizona or California. We didn’t have crazy people bashing immigrants. And so there was a lot of receptivity to people who would come here and start businesses and work hard. A big source of our economic growth has been migration from south of the border.

Smith: I want to ask the comptroller to address Senator Ellis’s point. Is he right that our salvation has been our unwillingness to provide a safety net to the neediest Texans?

Combs: I think there’s a middle point. You could say that California is about to founder because they ate a very rich diet and they have a $50 billion problem. I think we can and should always do more—I’m extremely interested in the rights and welfare of children—but at least we’re not facing a large tax hike when things go south.

Cortés: I think that notwithstanding our commitment to individual responsibility, we’ve basically fostered a culture of irresponsibility. We’re living off our seed corn. California made significant public investments when Earl Warren was governor, and we had politicians of both political parties willing to invest in a first-class educational system and a first-class transportation system.

Ellis: Reagan did a lot.

Cortés: I’d put Reagan in there as well. Remember when he said in a press conference, as he signed the biggest tax increase in the history of California, “The sound you hear is the cement cracking around my feet”? We in Texas live off the work of people like Sam Rayburn, Lyndon Johnson, and others who created all of our infrastructure. Today, we think can get away with not making huge investments in our infrastructure, in our culture, in our institutions. We think we can get away without sacrifice.

Weinstein: There are two ways to look at the Texas economy: How’s Texas doing, and how are we gonna do long-term? Our unemployment rate’s almost two percentage points below the U.S. rate right now, and we lost only a hundred and some thousand jobs in the past year. In percentage terms, that’s not bad. If you look at the period from ’04 to ’07, we added more jobs in those three years than at any time in our history. More than half a million jobs in three years in Texas! Every region of the state added jobs. DFW added about 250,000 jobs, and Houston added a few thousand less. It was absolutely incredible. Now we’re in a severe national recession. It came late to Texas. I hope we come out of it with the rest of the country.

Ellis: Don’t we normally come out of it six months after the rest of the country?

Weinstein: These aren’t normal times. There’s no precedent here, because it’s not your plain vanilla recession. We’re dealing with a recession that’s overlaid with frozen credit markets and huge losses in the stock market and pension funds and all this other stuff.

Cortés: It has been called the “Great Recession.”

Weinstein: It is a great recession. It’s also a great deflation, and we don’t know what that’s going to mean. Is it just a short-term phenomenon? If we’re entering a deflationary era like we had in the thirties, then all bets are off. I remain reasonably optimistic that the U.S. economy will recover, but it will be slow, and we probably won’t see any meaningful improvements until early 2010.

Huffines: But how do you define coming out of it? That’s going to mean different things to different people and different states.

Cortés: The Fed people told me we’re going to see growth without much employment.

Weinstein: The economy improves before we see job opportunities. You take your existing workforce and work them harder. You do overtime.

Cortés: The implication was that we’re going to see a much longer lag in unemployment changes. We’re going to see a very sluggish and flat recovery.

Weinstein: Could be. On the other hand, we could be surprised.

Combs: I think there’s pent-up demand.

Huffines: There’s a lot of money on the sidelines.

Combs: A lot of mattress guys have money.

Ellis: I believe that.

Combs: Even if you’re not affluent, you’re so tired of hearing the negative news. All over East Texas, folks would like to spend money.

Cortés: No question, but here’s the problem. We’ve had times in which pent-up demand has saved us, but that was before everybody had a retirement account. Now there’s this negative wealth effect. If you feel like you’re poor because your assets are going down, you don’t spend money. I was talking to a woman on the way over here who wants to spend money, but every quarter she looks at her 401(k) and says, “Man, I’ve got to put it off. I’ve got to put it off.”

Combs: I think that’s valid, but let’s suppose that I’ve been told by my employer that I am not going to lose my job. If I think my job is secure, will I go out and spend some more money? That’s really the question.

Ellis: Let me ask you this, Professor. How sustainable is it to have an economy based on people spending money to buy stuff they don’t need that’s made somewhere else, as opposed to changing the dynamic so that we train people for jobs of the future?

Weinstein: We may be looking at a fundamental change in the way we spend money in this country.

Huffines: I agree.

Weinstein: Let’s say right now that it’s about 70 percent private consumption and 30 percent public goods—the stuff the government provides to us. I think we’re looking at a shift in that proportion. Ten years from now, it may be more like 65—35 or even 60—40. But it’s going to require some change in our political will.

Cortés: Right now the attitude is that we’re consumers, and we define ourselves by our consumption habits. Part of the opportunity that we have in this difficulty is that we can begin to change some of those habits—to help people see that we have to make significant public investments in child care, in health care, in education, in infrastructure, in green technology so that we don’t waste so much. We can do an enormous amount of public good, for example, in the Rio Grande Valley, where you’ve got lots of homes that are abominably wasteful and lots of poor people. Put them to work weatherizing those homes. We could do significant things on unemployment, on energy efficiency.

Weinstein: The corollary to this shift, of course, is higher taxes. If we’re going to have more public goods, we need more public revenue, right?

Cortés: There used to be something called deferring one’s consumption.

Weinstein: That’s part of the problem getting out of this recession. All of a sudden Americans have become thrifty. We had a one percent personal savings rate for twenty years, and now it’s 4.5 percent or 5 percent.

Cortés: I know, and that’s wonderful if we can translate those savings into some kind of public investment.

Combs: Well, wait. Myrtle is now saving 4.5 percent. Myrtle wants it for Myrtle and her kids and grandkids. Myrtle does not want somebody else taking it. Myrtle is worried. She’s got it in her mattress, and she thinks that maybe in seven months or seven years she’ll spend it. Myrtle is not going to be excited about giving it to somebody else. She’s worried about her household.

Cortés: So why don’t we give Myrtle an equivalent of a savings bond?

Combs: Love the thought, but Myrtle still wants it to be her money.

Huffines: More than ever, she wants to have control.

Smith: James, you’re close to the governor and other top Republicans. Is Ernie right that there’s a failure of will among the state’s leaders to invest in the future?

Huffines: I take issue with that, because I think, to some degree, results speak for themselves. Texas is doing better [than the rest of the country]. There is always going to be a difference of opinion on where our priorities are. Senator Ellis and I both agree that we need more money for higher education, for grants and scholarships and financial aid, but I’m sure if you go back twenty or thirty years , when the Democrats held all the leadership positions, there were disagreements over how they wanted to allocate resources. Everything goes through cycles. And if you look around at other states where the leadership is controlled by the other party, they’re facing the same things we are.

Cortés: Let me be clear: I want to critique Republican and Democratic leadership. Ann Richards, who I loved and was a good friend, was way too timid, way too cautious, and unwilling to provide the kind of leadership we needed.

Huffines: The leadership in our state, whether Democrat or Republican, generally reflects the will of the majority. We have elections every two years for all House members and some senators, so ultimately the people of Texas have an opportunity to speak out on the direction they want our state to go.

Ellis: Professor, where do you see the Texas economy in twelve to eighteen months?

Weinstein: If I had to pick one place to ride out the great recession of 2008 to 2010, it would be here.

Ellis: I agree. We all agree.

Weinstein: Okay. Why? Because we’re coming off of this dynamic era of huge population and job growth that is helping to insulate us somewhat from the vicissitudes of the global economic downturn. That’s why we came into the recession eight months after the rest of the U.S. We had speed built up, and we had high energy prices. But let me give you a statistic. Right now our per capita income is about 6 percent below the national average. In our entire history our per capita income has only been above the U.S. average once, in 1982, when we were one percent above—but by ’86 and ’87 we were 11 percent below. In the last 25 years we’ve bounced between 10 percent below and 4 percent below. What does that tell us? It’s just one statistic, but maybe what it’s telling us is that the two thirds of our state that’s low income is growing faster than the third that’s high income. Maybe what it’s telling us is that, by this particular measure, we’re a below-average state.

Huffines: It could have something to do with the age of our population. We’ve got a younger state.

Weinstein: That’s true. We also know this is going to become a majority-minority state. That’s not going to change. We also know that a lot fewer Yankees are going to be moving here. Yeah, maybe we’ll get some companies from California, but if you just look at the population distribution, we’re not going to have as many folks moving to Texas. So you get back to “Okay, now that we know what the demographics in the state are going to look like, are we going to have a productive workforce? Are we going to have a productive workforce when we’re forty-first in the country in spending on public education?”

Cortés: Here’s the question I want to ask you: Given the fact that we have some difficult decisions ahead, is the state’s leadership thinking hard about the strategic decisions we’ve got to make now to deal with those realities?

Weinstein: My personal opinion is no.

Ellis: The leadership is thinking about how to stay in the lead.

Huffines: Hasn’t it always been that way, Senator?

Cortés: No. The guy who came up with the Marshall Plan was Will Clayton, who spent his last years in Texas. He was a cotton merchant, as I understand it, and he was no flaming liberal. But he figured out it was in our economic and political interest to make a huge investment.

Huffines: Well, I just have to argue with you a little bit. If you go back fifteen years, the state of Texas wasn’t even one of the top five states in terms of the numbers of headquarters of Fortune 500 companies. It’s not all about headquarters, but Texas leads the country today. Businesses want to come here, and businesses create jobs. I think it’s important that we have a business-friendly state. That doesn’t mean we have to compromise the safety net or anything else, but one solution to helping all aspects of the population is having an available, plentiful supply of jobs. And education will help, whether it’s pre-K or elementary or secondary or community college or higher ed. If we do the right thing on education, we’re going to have plenty of jobs.

Cortés: My understanding is businesses locate because of their supply networks, their communities they want to spend time with, the markets they can access.

Weinstein: There’s no question that we have great location—just look at a map. But we do a lot of silly things. The New York Times loves to make fun of Texas. The New York Times hates Texas, and anytime they can pick on us, they do. If it’s Governor Perry talking about seceding, it makes the New York Times. If it’s the battle over creationism in the science curriculum, it makes the New York Times. If it’s the Legislature saying, “We don’t want to spend any money on embryonic stem cell research,” it gets picked up in the New York Times.

Smith: I want the comptroller to respond to that.

Combs: I lived in New York for about ten years, and I remember an incredible insularity and provincialism there—somebody was really angry that I did not know where Abercrombie & Fitch was. There is a vast [misconception] that everybody in Texas has a room-temperature IQ.

Weinstein: That’s not the point I was trying to make, Susan. When the New York Times writes an article about creationism or intelligent design, it projects an image of Texas as a backwater. The same with the stem cell thing. I talked to the bioscientists, and they told me, “Researchers don’t want to come here because they’re afraid of what the Legislature might do to them.” Why would you want to come to a state that was not perceived to be a safe haven?

Ellis: It’s a real challenge for us when a fringe element, whether on the left or the right, holds good people hostage. Our future in Texas is going to be tied to being a part of the rest of this country.

Huffines: If you read The Big Rich, you see that they picked on Texas in the thirties, forties, fifties, sixties, and seventies. Unfortunately it’s something our state has had to live with. I don’t think it’s new.

Combs: Every state has an image that’s fostered someplace else, so there are people who do not ever want to go to California. There are people who do not want to go to Mississippi. There are people who do not want to come to Texas. I would say, however, that Texas is remarkably diverse in opinion—and it’s actually pretty doggone healthy to have that kind of debate. I believe we’re waking up to the fact that it’s absolutely imperative we nurture, protect, educate, and train our children. What I would call marginal issues do not obviate the fact that this is a very dynamic state with interesting opportunities and enormous value.

Cortés: My concern is that we think we debate a lot of ideas, but we dismiss so many things out of hand as not worth considering. Everybody knows we need a strong and healthy and innovative and creative business climate—that battle is won. We know we need leaders who don’t operate like bureaucrats. But that doesn’t mean we can’t begin to think hard about how we create the kind of infrastructure, both civic and governmental, necessary to sustain the kinds of markets we want. Markets don’t come from the sky. They’re not created by God. They’re human institutions. They require certain infrastructure—I learned that in Economics 101. You don’t create markets without confidence and trust. You don’t have confidence and trust without rule of law or respect for private property. And you don’t have private property without a public sector to protect it.

Combs: Ernie makes really good points, but it all comes down to one thing: The legislative process is fatally flawed in that everything has a two-year horizon. We have so few opportunities to take the long view. We come in for 140 days and try to carve our way through the morass of problems we’ve all described—I think it’s insane. Folks like Ernie and Bernard are trained to look back twenty years, while most of us have a two-to-four-year [window].

Ellis: The only way to change it, obviously, would be to amend the constitution. Voters would have to do it, and that’s unlikely to happen. In the system that we have, it’s very much leadership driven. So it matters who the House picks to be their Speaker. It matters who the voters pick to be the lieutenant governor. It matters who the lieutenant governor and the Speaker put on the Legislative Budget Board, because they’re moving the money around when we’re gone. Elections matter.

Huffines: That’s what I said earlier. Elections do matter.

Ellis: So you say, “How has Texas made it?” As opposed to the kind of beat-my-chest, Texas-proud answer, we’ve been pretty damn lucky. And I hope that lucky charm keeps rolling along.

Combs: I’ve got the other answer, Rodney. We have the best-shaped state in the country!