Business is booming sign in Austin, Texas market
It is no secret that U.S. economic growth was weak for most of the past two decades. Recovery from the dot-com bubble and the financial crisis was slow, and it was not until just before the pandemic that wage growth accelerated. Now, just when things are starting to open up, federal policy is on the verge of taking the wind out of the economy’s sails. Big states like Texas and Florida are still moving in the right economic direction, but it will take more than a couple states to reignite economic growth.
Prior to the pandemic, economic growth was picking up. Wages were increasing, especially for lower income workers, and the unemployment rate in every state was at or near a historic low. But since 2000, such strong economic gains have been rare.
As the figure below shows, from 1961 to 1999, U.S. GDP per capita grew by 2.4% per year on average. At that rate, GDP per capita doubles about every 29 years, or nearly each generation. So, with 2.4% growth, the average child will have twice as many goods and services available to them as their parents did at a similar age.
Real U.S. annual per capita GDP growth, 1961 to 2019.
Starting around 2000, growth slowed down. On average, GDP per capita only grew by 1.3% annually from 2000 to 2019. At that rate it takes 54 years for GDP per capita to double. So instead of children having access to twice as much stuff as their parents, people will have to wait until their grandchildren’s generation before living standards double.
This is a sad situation, but slow growth is not inevitable. For most of the last 100 years America had the most innovative and dynamic economy in the world. And though it has gotten sluggish recently, it can be fixed, and states must lead the way.
Consider Texas. Texas promotes growth by allowing housing to be built more easily than many other states. Affordable housing in places close to jobs and other amenities is vital for a dynamic and resilient economy. America is at its best when people can move freely from place to place as opportunities arise. Past waves of migration—first from east to west, then from south to north—moved people from lower productivity places to higher productivity ones, boosting the economic fortunes of individuals and the country alike.
Texas’s cities are substantially more affordable than California’s. The median home price in Los Angeles is $710,000. In Dallas it is $225,550. In Riverside-San Bernardino the median home price is $393,000. In Houston it is $192,500. Texas allows people to access opportunity while California walls it off, and people are responding by moving to Texas. According to an analysis from the Kinder Institute for Urban Research at Rice University, net migration from California to Texas was over 40,000 people in both 2018 and 2019.
Perhaps the best sign of the diverging fortunes of Texas and California comes from the 2020 Census. Starting in 2022, California will lose a congressional seat for the first time in its history while Texas will gain two. Florida, another fast-growing state with more reasonable housing prices, lower taxes, and sunny weather, will also gain one seat.
Just as Texas and California are often compared to each other, Florida is frequently compared to New York. Like Californians fleeing to Texas, New Yorkers are fleeing their high-cost, high-tax state for Florida. According to one article, 19,000 Manhattanites moved to Florida during the pandemic. Though it is still unclear how many will stay in Florida long term, it is telling that we do not hear stories of thousands of Floridians moving to New York. The pandemic-induced migration of New Yorkers also fits with the broader trend of people moving from high-tax to low-tax states, taking their businesses and income with them.
Florida and Texas are two of America’s rising stars, but they are not the only ones. Utah was recently ranked number one in the American Legislative Exchange Council’s (ALEC) Rich States, Poor States report. According to ALEC’s analysis, Utah had the 3rd most GDP growth in the country over the last decade, as well as the 13th most domestic in-migration and the most non-farm employment growth.
Utah also recently expanded its regulatory sandboxes, which are less-regulated environments that allow companies to experiment with new products, services, and business models on a temporary basis. More experimentation should lead to more innovation and new businesses down the road.
If U.S. economic growth and dynamism pick up, states like Texas, Florida, and Utah will have to led the way. But it will be hard for states—even highly populated ones like Texas and Florida—to do it on their own. Federalism has eroded over the years and the federal government’s influence has grown to the point where federal policy affects every aspect of the economy. So when federal economic policy is anti-growth, it is hard to get much growth.
Many of the economic policies coming out of the Biden administration are anti-growth—higher taxes on investing and saving; large subsidies for “infrastructure” projects like high-speed rail that will not increase the productive capacity of the country; and more federal regulation in child care, schools, and health care. These proposals do not encourage risk-taking or promote experimentation. Instead, there is nothing but top-down federal control as far as the eye can see.
Biden also seems uninterested in tackling the federal debt. The federal deficit is projected to be over $3 trillion this year and the federal debt is projected to total 113% of GDP by 2031. If interest rates increase, interest payments on the debt will crowd out other government activities and may make us more beholden to our creditors, including China. Neither of these things is good for economic growth.
Worse, other things that matter for economic growth, such as freer trade and more immigration, are completely controlled by the federal government. Biden has been a bit better than Trump on immigration, but it is still too hard for talented, hardworking people to come to America to work or start businesses.
When it comes to trade, Trump and Biden are more alike. Like Trump, Biden is infatuated with “buy American” rules that force government agencies and firms that contract with the government to buy higher-priced or inferior products from U.S. producers. Such rules are an imprudent use of taxpayer dollars and reduce growth by making inputs such as iron and steel more expensive. They also increase regulatory and compliance costs.
States like Texas, Florida, and Utah show us what a strong economy looks like. With the right federal policies, the whole country would be growing rapidly again. This is important because faster growth increases living standards for everyone. As economist John Cochrane recently wrote, “In the long run, nothing else matters. GDP buys you health, advancement of the disadvantaged, social programs, international security, and climate if you are so inclined. Without GDP, you get less of all.” Federal policymakers should keep this in mind.
