The Global Guru: The United States’ Future: California or Texas?

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

The rivalry between Texas and California reflects the two competing visions for the United States that were put to the test in the U.S. presidential elections. On the one hand, the United States’ two most populous states have a lot in common: a long ocean coast, a terrific climate, and a diverse and growing minority population. On the other, they represent two contrasting beliefs in the role of government. California was solidly in Barack Obama’s camp, while Texas’ commitment to the Republican vision was never in doubt.

For much of the last 100 years, California, the home of Silicon Valley and Hollywood, has been the much cooler and more influential place. Texas was a cliché conservative in cowboy boots, as embodied by George W. Bush. U.S. voters’ decision to support ‘Californication” of the U.S. economy by re-electing President Barack Obama will result in a very different America over the coming decades.

The World According to Texas

Texas offers an economic and social model based on small government. It has no state capital-gains or income tax, and a business-friendly and immigrant-tolerant attitude. Texas imposes far fewer regulations and taxes on business, and consistently comes in the top five in rankings of business friendliness. No wonder Texas is home to more Fortune 500 companies than any other state — 64 compared with California’s 51 and New York’s 56.

In recent years, Texas has reveled in its much faster-growing economy; its better record of job creation; and its responsible approach to government spending. Texas has also welcomed with open arms high-profile California expatriates like former Congressman Chuck DeVore, who then promotes it with the zeal of a convert, gushing statistic after statistic that proves Texas’ economic superiority over its West Coast rival.

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California: “Obama Nation”

California has always been at the cutting edge in the United States. Whether emission controls, non-smoking policies or the Mac computers that appeared at the Stanford University campus when I was a student there in 1984, California was always ahead of the curve. More recently, California has come to represent Barack Obama’s progressive vision of America: cap and trade, massive taxes on the rich, high-speed rail, powerful unions — and unsustainable deficits.

When Texas and California compete on the economic playing field, the statistics don’t look good for California. In terms of gross domestic product (GDP), California’s growth rate was just 2% in 2011 and 1.7% in 2010. Texas’ growth rate was double that level, hitting 3.3% in 2011 and 5.2% in 2010. Since the recession ended in June 2009, Texas has created more than twice as many new jobs as California. California’s unemployment rate is stuck at 10.2%, while the jobless rate in Texas is 6.8%.

Silicon Valley billionaires notwithstanding, California has the highest poverty rate in the nation at 23.5%, according to a new Census Bureau measure of poverty. The same number in Texas is 16.5%. And in what is sure to irk well-educated Californians, Texas students easily outperform those in California schools, despite similar demographics, lower GDP/capita, and lower per pupil spending.

No state income tax, far lower housing costs and better prospects for real estate appreciation make Texas more attractive for prospective employees. California lost an average of 100,000 people a year over the past decade. University of Michigan economist Mark Perry’s “U-Haul Index” shows that renting a 20-foot truck one-way from San Francisco to San Antonio, will cost $1,693. But the U-Haul tab to go in the opposite direction is just $983. Even before California’s new millionaire tax of 13.3%, a law school classmate and a partner at a Los Angeles law firm told me that he was considering picking up sticks from Malibu and decamping to Texas.

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California: Tomorrow’s Europe?

Defenders of California marshal plenty of statistics to defend the Golden State. Californians still make more money on average. Texas generates only low paying jobs. Texas also lacks California’s world class universities and offers little in terms of culture. Texas is “lucky” and only has natural resources to thank for its prosperity. And once it recovers from the housing bust, California’s world class industries will trounce the upstart yahoos (pun intended) from Texas.

But there is an elephant in the room.

Much of California’s attitude of superiority is less about tax policy or culture than it is about a visceral dislike of Texas and its small government philosophy. A Californian will admit, yes, we have high taxes, high prices and suffer in cramped housing. But what “civilized” person would actually want to “live” in an uncultured backwater like Texas. Besides, all Texans are fat and unhealthy, and Houston’s weather is “vile beyond belief.” Even Mitt Romney is moving to La Jolla, Calif., and not to Fort Worth.

The irony is that how Californians feel about Texas is identical to how Europeans feel about the United States. Replace “California” with “Europe” and “Texas” with the “United States” (and “Mitt Romney” with “Johnny Depp”) in the paragraph above, and you get an idea of what it’s like to be an American living in France.

But this cultural “one-upsmanship” misses the point. A little over a century ago, my London neighborhood of South Kensington — Royal Albert Hall, Imperial College, the Victoria & Albert Museum — gave homage to the achievements of Victorian England, back when “the sun never set on the British Empire.” Meanwhile, California’s Silicon Valley was an orange grove and the site of my alma mater, which collected its 28th and 29th Nobel Prizes this fall, was a horse farm of a retired California governor, Leland Stanford. Today, my London neighborhood is barely an answer to a “Trivial Pursuit” question. But the right mix of entrepreneurial spirit turned that California horse farm into Stanford University and those orange groves into Silicon Valley, the epicenter of the global high tech revolution, all in the blink of an historical eye.

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The lesson?

Cultural snobbery, whether by a European or Californian, only gets you so far. Smugness about past success does not guarantee a prosperous future. It is economic opportunity offered by the likes of Texas, or the countries of Asia, that carry the day.

I hope I am wrong. But unless California changes course, it is already past its glory days. Like the British a century ago, it’s just too darn smug to recognize it.

To read my e-letter from last week, please click here.

Sincerely,

Nicholas A. Vardy
Editor, The Global Guru

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