Monday, August 15, 2011

Krugman on Texas

As if doing the White House's bidding, Paul Krugman's article today is devoted to deconstructing the "Texas Miracle", which Gov. Rick Perry is sure to run on in the presidential election if he wins the Republican primary. Texas, after all has grown 2.4 times as fast as the rest of the economy since the "end" of the recession.

Krugman makes some good points:
It's true that Texas entered recession a bit later than the rest of America, mainly because the state's still energy-heavy economy was buoyed by high oil prices through the first half of 2008. Also, Texas was spared the worst of the housing crisis, partly because it turns out to have surprisingly strict regulation of mortgage lending...

[Texas] has, for many decades, had much faster population growth than the rest of America... [people] are attracted to Texas by its warm weather and low cost of living, low housing costs in particular. And just to be clear, there’s nothing wrong with a low cost of living. In particular, there’s a good case to be made that zoning policies in many states unnecessarily restrict the supply of housing, and that this is one area where Texas does in fact do something right.
After these, he wanders off into a mire of toggling back and forth between real and nominal numbers, and alternately allowing or ignoring dynamic effects, depending on how they help his case. But let's return to the cogent parts above. So Texas' oil industry had positive overflow to the rest of the state? So what does Krugman think we should do with oil? That's what I thought.

And Texas has surprisingly strict regulation of mortgage lending, despite two decades of Republican dominance. Because it was Republicans who were always pushing for easier and easier mortgages, right? No? That's what I thought.

And people are moving to Texas for cheap houses, so the state must have a higher-than-average unemployment rate, right? After all, if housing is really cheap, and you don't need to heat your home much, it's a good place to live if you're unemployed. The Texas rate, which Krugman calls "high" was 8.2% in June. Is that higher or lower than the national unemployment rate? That's what I thought..

Krugman tries to argue that immigration causes lower unemployment; but that doesn't make a lot of sense to me, particularly since Americans willing to move states are rarely doing so while remaining in their jobs. If people were only moving for cheap houses and warm weather, we would see unemployment increase. Thus, if Texas had hypothetically closed its borders to the rest of America, it would have had an even lower unemployment rate!

Krugman brings his line of reasoning to a tormented conclusion:
[A]rguing from this experience... involves a fallacy of composition: every state can't lure jobs away from every other state...

So when Mr. Perry presents himself as the candidate who knows how to create jobs, don't believe him.
The fallacy of composition only exists because Krugman assumed that inflowing population led (somehow) to lower unemployment. Once we switch the causality to the more likely direction (low unemployment attracts immigrants), we should conclude that other states should indeed imitate Texas, since it is not only doing better than the rest of the country, but it is helping the other states out by employing many of their unemployed!

It still could be the case that Texas' success is not duplicable: if all its growth came from the oil sector, for instance; however, with oil prices in normal territory for most of the last 2 years, that's unlikely. So when Mr. Krugman presents himself as the economist who knows how to create jobs, don't believe him.


Anonymous said...

I had an epiphany reading this. I just realized that the best way to control skyrocketing house price is...

Restrict the availability of mortgages! If buyers can't get mortgage for price x, but can get it for 0.7x, then the house price will have to be 0.7x, and the price increase is thereby stopped before it even gets out the gate.

Stalker said...

Courtesy of Emily Grace, here's another blog that went to the data on its own, and agrees with my assessment (not Krugman's):