California v Texas

America's future

An intriguing, much more equal rivalry out West. But both California and Texas can learn from each other

AMERICA’S recent history has been a relentless tilt to the West—of people, ideas, commerce and even political power. California and Texas, the nation’s two biggest states, are the twin poles of the West, but very different ones. For most of the 20th century the home of Silicon Valley and Hollywood has been the brainier, sexier, trendier of the two: its suburbs and freeways, its fads and foibles, its marvellous miscegenation have spread around the world. Texas, once a part of the Confederacy, has trailed behind: its cliché has been a conservative Christian in cowboy boots, much like a certain recent president. But twins can change places. Is that happening now?

It is easy to find evidence that California is in a funk (see article). At the start of this month the once golden state started paying creditors, including those owed tax refunds, business suppliers and students expecting grants, in IOUs. California’s governor, Arnold Schwarzenegger, also said that the gap between projected outgoings and income for the current fiscal year has leapt to a horrible $26 billion. With no sign of a new budget to close this chasm, one credit agency has already downgraded California’s debt. As budgets are cut, universities will let in fewer students, prisoners will be released early and schemes to protect the vulnerable will be rolled back.

They paved paradise and put up the parking taxes

Plenty of American states have budget crises; but California’s illustrate two more structural worries about the state. Back in its golden age in the 1950s and 1960s, it offered middle-class people, not just techy high-fliers, a shot at the American dream—complete with superb schools and universities, and an enviable physical infrastructure. These days California’s unemployment rate is running at 11.5%, two points ahead of the national average. In such Californian cities as Fresno, Merced and El Centro, jobless rates are higher than in Detroit. Its roads and schools are crumbling. Every year, over 100,000 more Americans leave the state than enter it.

The second worry has to do with dysfunctional government. No state has quite so many overlapping systems of accountability or such a gerrymandered legislature. Ballot initiatives, the crack cocaine of democracy, have left only around a quarter of its budget within the power of its representative politicians. (One reason budget cuts are inevitable is that voters rejected tax increases in a package of ballot measures in May.) Not that Californian government comes cheap: it has the second-highest top level of state income tax in America (after Hawaii, of all places). Indeed, high taxes, coupled with intrusive regulation of business and greenery taken to silly extremes, have gradually strangled what was once America’s most dynamic state economy. Chief Executive magazine, to take just one example, has ranked California the very worst state to do business in for each of the past four years.

By contrast, Texas was the best state in that poll. It has coped well with the recession, with an unemployment rate two points below the national average and one of the lowest rates of housing repossession. In part this is because Texan banks, hard hit in the last property bust, did not overexpand this time. But as our special report this week explains, Texas also clearly offers a different model, based on small government. It has no state capital-gains or income tax, and a business-friendly and immigrant-tolerant attitude. It is home to more Fortune 500 companies than any other state—64 compared with California’s 51 and New York’s 56. And as happens to fashionable places, some erstwhile weaknesses now seem strengths (flat, ugly countryside makes it easier for Dallas-Fort Worth to expand than mountain-and-sea-locked LA), while old conservative stereotypes are being questioned: two leading contenders to be Houston’s next mayor are a black man and a white lesbian. Texas also gets on better with Mexico than California does.

American conservatives have seized on this reversal of fortune: Arthur Laffer, a Reaganite economist, hails the Texan model over the Gipper’s now hopelessly leftish home. Despite all this, it still seems too early to cede America’s future to the Lone Star state. To begin with, that lean Texan model has its own problems. It has not invested enough in education, and many experts rightly worry about a “lost generation” of mostly Hispanic Texans with insufficient skills for the demands of the knowledge economy. Now immigration is likely to reconvert Texas from Republican red to Democratic blue; Latinos may justly demand a bigger, more “Californian” state to educate them and provide them with decent health care. But Texas could then end up with the same over-empowered public-sector unions who have helped wreck government in California.

Second, it has never paid to bet against a state with as many inventive people as California. Even if Hollywood is in the dumps (see article), it still boasts an unequalled array of sunrise industries and the most agile venture-capital industry on the planet; there is no prospect of the likes of Google decamping from Mountain View for Austin, though many start-ups have. The state also has an awesome ability to reinvent itself—as it did when its defence industry collapsed at the end of the cold war. Perhaps the rejection of tax increases will “starve the beast” and promote structural reform. A referendum on a new primaries system could end its polarised politics. Mr Schwarzenegger’s lazy governorship could come to be seen not as the great missed opportunity, but as the spur for reform.

Fifty laboratories, one magic formula

The truth is that both states could learn from each other. Texas still lacks California’s great universities and lags in terms of culture. California could adopt not just Texas’s leaner state, but also its more bipartisan approach to politics and its more welcoming attitude towards Mexico. There is no perfect model of government: it is America’s genius to have 50 public-policy laboratories competing to find out what works best—just as it is the relentless competition of clever new firms from Portland to Pittsburgh that will pull the country out of its current gloom. But, to give Texas some credit and serve as a warning to Mr Schwarzenegger’s heir, at this moment America’s two most futuristic states look a lot more like equals than ever before.