Did Texas Really Experience an Economic Miracle?

Thursday, 13 March 2014 09:34 By Paul Krugman, Krugman & Co. | Op-Ed
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A worker reconfiguring a heater unit that helps to process crude oil at the Valero Refinery in Three Rivers, Texas, last year. (Photo: Michael Stravato for The New York Times) A worker reconfiguring a heater unit that helps to process crude oil at the Valero Refinery in Three Rivers, Texas, last year. (Photo: Michael Stravato for The New York Times)

Philip Longman, a senior editor at Washington Monthly magazine, wrote a very good article in the latest edition that debunks the hype about the Texas economy. Things I didn't know included the fact that net inward migration by native-born Americans is actually quite small.

But I wanted to follow up on one particular point: the role of oil and gas in recent years. In his article, Mr. Longman concedes that these industries directly account for a fairly small share of the economy even in Texas, but argues that their rapid growth, combined with multiplier effects, makes them a much bigger story when it comes to Texas growth.

Indeed. Let me put some numbers on this, using the data from the Bureau of Economic Analysis on real gross domestic product by state. What you learn from this data right away is that Texas led the extractive expansion. Nationwide, mining output, measured in 2005 dollars, expanded by $29 billion between 2007 and 2012; Texas accounted for $22.7 billion of that expansion. Nationally, the expansion of mining was 0.2 percent of G.D.P. in 2007; in Texas, it was 10 times that, 2 percent.

This mining expansion must also have had a multiplier effect as mining operations and workers spent money in the local economy, leading to higher incomes and further increases in demand. State-of-the-art estimates of regional multipliers from the economists Emi Nakamura and Jon Steinsson (who use fluctuations in defense spending as natural experiments) conclude that the multiplier is around 1.5. So that extractive-boom 2 percent of G.D.P. in Texas should have raised the state's G.D.P. by 3 percent, or 2.7 percent relative to the nation as a whole.

Meanwhile, overall G.D.P. in Texas rose 13 percent from 2007 to 2012, while national G.D.P. rose only 2.5 percent.

What this calculation suggests is that the oil and gas boom accounts for more than a quarter of that growth difference.

That's a lot, although it's not the whole story.

What about the rest? Partly we're seeing the continuation of the long-term movement of people and jobs to the Sunbelt in the United States; the economist Ed Glaeser likes to point out that the single best predictor of state growth is the number of winter degree days. On top of that, Texas does do one very important thing right: it has relaxed zoning, which keeps housing abundant and cheap.

And what about the more general miracle of free-market capitalism? It exists only in the eyes of the beholder.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008. Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2014 The New York Times.

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