Ten gallon economy sizing up economic growth in texas

Ten-Gallon Economy



Ten-Gallon Economy
Sizing Up Economic Growth in Texas

Edited by
Pia M. Orrenius, Jesús Cañas, and
Michael Weiss


TEN-GALLON ECONOMY
Copyright © Federal Reserve Bank of Dallas, 2015.
Softcover reprint of the hardcover 1st edition 2015 978-137-53016-5

All rights reserved.
First published in 2015 by
PALGRAVE MACMILLAN®
in the United States—a division of St. Martin’s Press LLC,
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registered in England, company number 785998, of Houndmills,
Basingstoke, Hampshire RG21 6XS.
Palgrave Macmillan is the global academic imprint of the above companies
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the United Kingdom, Europe and other countries.
ISBN 978-1-349-57379-0

ISBN 978-1-137-53017-2 (eBook)
DOI 10.1057/9781137530172
Library of Congress Cataloging-in-Publication Data
Ten-gallon economy : sizing up economic growth in Texas / edited by
Pia M. Orrenius, Jesús Cañas, Michael Weiss.
pages cm
Includes bibliographical references and index.
1. Economic development—Texas. 2. Texas—Economic policy. 3. Banks and
banking—Texas. 4. Texas—Commerce. 5. Labor market—Texas. I. Orrenius,
Pia M., editor. II. Cañas, Jesus, editor. III. Weiss, Michael, 1954– editor.
HC107.T4T34 2015
330.9764—dc23
A catalogue record of the book is available from the British Library.
Design by Newgen Knowledge Works (P) Ltd., Chennai, India.
First edition: September 2015
10 9 8 7 6 5 4 3 2 1

2015010171


To the people of the Eleventh Federal Reserve District,
our hope is that analysis of conditions in our region,
as well as reflections on past experiences and
future challenges, will inform and
enlighten citizens and lawmakers.



Contents

List of Illustrations

ix

About the Title

xiii

Preface

xv

Acknowledgments

xvii

Part I

Introduction

1 Tipping Our Hats to the Ten-Gallon Economy
Pia M. Orrenius, Jesús Cañas, and Michael Weiss

3

Part II Public Policy and Business Climate
2 Increasing Jobs and Income from Work: The Role and
Limitations of Public Policy
David Neumark

15

3 Why Texas Grows Faster: The Role of Smaller Government
Jason Saving

33

4

47

The Shortcomings of the Texas Margin Tax
Alan D. Viard

Part III

Human Capital and Labor Markets

5 Texas’ Education Challenge: A Demographic Dividend or Bust?
Marta Tienda

61

6

Oil Boom Lowers Human Capital Investment in Texas
Anil Kumar

79

7

Employment Growth and Labor Market Polarization in
the United States and Texas
Melissa LoPalo and Pia M. Orrenius

91

Part IV Industry and Exports
8

Texas Real Estate: From the 1980s’ Oil Bust to the Shale Oil Boom
John V. Duca, Michael Weiss, and Elizabeth Organ

109


viii

CONTENTS

9 The Evolution of Texas Banking
Kory Killgo and Kenneth J. Robinson

119

10

The Impact of Changing Energy Prices on the Texas Economy
Mine K. Yücel, Michael Plante, Amy Jordan, and Nicole Lake

139

11

Texas Comparative Advantage and Manufacturing Exports
Jesús Cañas, Luis Bernardo Torres Ruiz, and Christina English

159

Part V Border and Economic Development
12

So Close to Mexico: Economic Spillovers along
the Texas–Mexico Border
Roberto Coronado, Marycruz De León, and Eduardo Saucedo

183

13 Border Economic Recovery Lags Rest of State
Keith R. Phillips and Christopher Slijk

199

14 Las Colonias along the Texas–Mexico Border
Jordana Barton, Emily Ryder Perlmeter, Elizabeth Sobel Blum, and
Raquel R. Márquez

213

Contributor Biographies

231

Index

237


Illustrations

Figures
2.1
2.2

Effects of State Hiring Credits on Employment Growth, 2007–2011
Range of Estimated Employment Effects of
Enterprise Zone Programs
2.3 Averages of Estimated Effects on Growth Rates of Changes from
Fortieth to Tenth Position in Rankings of Components of
Tax- and Cost-Related Business Climate Indexes, and
Comparisons to Nonpolicy Factors
2.4 Contributions of Business Climate Index and Control Variables
to Employment Growth (QCEW), 1992–2008
2.5a Relationships Between Economic Growth, Change in
Inequality and Rankings on EFI Business Climate Index,
1992–2008: State GDP Growth Versus Change in the 50–10 Gap
2.5b Relationships Between Economic Growth, Change in
Inequality and Rankings on EFI Business Climate Index,
1992–2008: State GDP Growth Versus Change in the 90–10 Gap

2.6 Earned Income Tax Credit by Income and Number of Children, 2014
2.7
Estimated Effects of State Earned Income Tax Credit on
Probability that Family Earnings are Above Poverty Line or
One-Half of Poverty Line
3.1
Texas Consistently Grows Faster than the United States
3.2
Texas Population Growing at Twice National Rate
3.3
Texas Leads Nation in Exports Since 2002
3.4
Texas’ State and Local Per Capita Tax Burden Lower than
National Average
3.5
Texas’ State and Local Per Capita Outlays Also Below
National Average
3.6
No Clear Relationship between Tax Burden and
Per Capita Output Growth
3.7
No Clear Relationship between Government Expenditures and
Per Capita Output Growth, Either
4.1
Texas State Margin Tax Revenue
4.2 Disparity in Effective Tax Rates in a Simplified Economy
5.1a US Age–Educational Attainment Pyramid, 1970
5.1b US Age–Educational Attainment Pyramid, 2010

16

18

21
22

23

23
24

25
34
35
36
38
39
40
40
48
52
63
63


x

ILLUSTRATIONS

5.2

5.3
5.4
5.5
6.1
6.2
6.3
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
8.1
8.2
8.3
8.4
8.5
8.6
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8
9.9
9.10

9.11
10.1
10.2

Percentages of Full-Time, First-Time Freshmen Receiving
a Bachelor’s Degree Within Six Years of Enrollment at
a Texas Public University
Population Ages 25–34 and 55–64 with a Bachelor’s Degree or
Higher: Selected OECD Nations and Texas, 2010
Texas and US Age–Education Profi les, 2010
Texas Age–Education Profi les: Anglos and Hispanics, 2010
Oil Price Boom and Bust from 1970 to 2010
Change in Mean Real Hourly Wages (Texas Versus Rest of
United States)
Difference in Share with College Education in 2010
(Boom Cohort minus Pre-Boom Cohort)
Change in Employment by Wage Quartile, 1979–2012
Change in Employment Shares by Wage Quartile, 1979–2012
Job Growth by Wage Quartile and Decade in Texas
Job Growth by Wage Quartile for Large States, 1999–2012
Change in Employment Shares for Full-Year, Full-Time Workers
Change in Employment Shares by Wage Quartile, 1979–2006
Texas Job and Wage Growth by Industry, 1979–2012
United States Minus Texas Job and Wage Growth by Industry,
1979–2012
Job Growth in Texas Usually Outpaces the United States,
Especially During Energy Booms
Texas Employment Trends Up Strongly After 1980s’ Oil Bust
Unemployment Rate in Texas Usually Below National Rate
During Energy Booms

Texas Residential Construction Outpaces the United States,
Particularly During Energy Booms
Banking Institution Failures Concentrated in Texas During
Savings and Loan Crisis, not in Recent Crisis
Low Inventories Consistent with Rising Inflation-Adjusted
House Prices in Texas
National Banks in Texas, 1865–1905
Private Banks in Texas, 1877–1905
Assets in Texas National and State Banks, 1905–1929
Liquidation Rate at Texas State Banks, 1907–1929
Special Assessment on Texas State Banks, 1910–1927
Disposition of Insured Deposits at
Failed Texas State Banks, 1910–1927
Annual Return on Average Assets
Nonperforming Loans as a Percentage of Total Loans
Bank Failures as a Share of All Banks
Relative Growth in Banks and Branches at Year-End
Percentage of Banks with a Texas Ratio Greater than 100 Percent
Texas Crude Oil and Natural Gas Production
Texas Employment Follows Changes in Oil Prices

68
70
71
72
80
84
87
95
96

97
98
99
100
102
102
110
111
112
113
114
115
120
121
122
126
126
127
130
130
131
133
134
140
140


ILLUSTRATIONS

10.3

10.4
10.5
11.1
11.2
11.3a
11.3b
11.3c
11.3d
11.4
11.5a
11.5b
11.5c
11.5d
13.1
13.2
13.3
13.4
13.5
13.6
13.7
13.8
13.9
14.1
14.2
14.3
14.4
14.5
14.6

Location of Major Shale Formations by

Railroad Commission District
Oil Production Picks Up, Reversing Decades-Long Trend
New Technology Changes Distribution of Texas Natural Gas
Texas Exports Growing Faster than the Nation
Texas’ Main Country Competitors in World Markets
Petroleum and Coal Products
Computer Equipment
Motor Vehicle Parts
Fabricated Metal Products
Share of World Manufacturing Exports, Selected US States
Petroleum and Coal Products Manufacturing
Computer and Electronics Product Manufacturing
Transportation Equipment Manufacturing
Fabricated Metal Product Manufacturing
Border Metros Except El Paso See Faster Job Growth than Texas
Business-Cycle Indexes Show Varying Degrees of Volatility
Across Border Metros
Weak Employment Growth in Chihuahua Accounts for
Some Slower Growth in El Paso
Real Government GDP Growth Higher on Border than in State
Federal Government Job Growth Much Faster on Border than
in Rest of Texas
Home Health Care Employment Share Higher in
Rio Grande Valley, Border than in State
Border Employment Growth Usually at or Above Texas Rate
until 2011
South Texas Border Metros See Weak Housing Recovery
After Bust
Medicaid Enrollments Picking Up Sharply in Border Counties
Infrastructure Improving in Border Colonias

Poverty and Near-Poverty Rates, Colonia
Versus County Populations
Public Assistance Recipiency: Colonias and Counties
Median Household Income by Area, 2011
Educational Attainment by Area, Persons 25 Years and Older
Earnings Gap Remains with Increased Education for
Hispanics Along Border

xi

142
143
144
160
164
165
166
166
167
168
170
170
171
171
200
203
203
205
205
207

208
210
211
216
219
219
220
222
223

Tables
5.1
5.2
5.3

Selected Educational Indicators: Texas and United States, 2011–2012 65
Texas Racial and Ethnic Disparities in College Readiness, 2010
66
Percentages of 25- to 34-Year-Olds with a BA or Higher:
Texas and United States, 1980–2010
69


xii

ILLUSTRATIONS

6.1
6.2
6.3

6.4
6.5
7.1
9.1
9.2
10.1
10.2
10.3
10.4
10.5
10.6
11.1
11.2
11.3a
11.3b
11.3c
11.4a
11.4b
11.4c
12.1
12.2
12.3
12.4
12.5
12.6
12.7
12.8
13.1
13.2
14.1

Worker Percent Share by Educational Attainment: Oil and
Gas Versus other Industries in the United States
Worker Percent Share by Educational Attainment: Texas Versus
United States
Real Hourly Wage in Texas Versus United States
Real Hourly Wage of Workers with High School Versus
College Degrees in Texas Versus United States
Percent of Population in 2010 with College Degree or Any College
Wage Quartiles in the 1980 Census
Capital Requirements on Texas State-Chartered Banks
Ten Largest Banking Organizations in Texas
Long-Run Variance Decomposition of Texas Nonfarm
Employment in the Oil Model
Long-Run Variance Decomposition of Texas Nonfarm
Employment in the Natural Gas Model
Employment Responses to a 10 Percent Increase in Oil Prices
Employment Responses to a 10 Percent Increase in Gas Prices
Employment Responses to a 10 Percent Increase in Oil Production
State GDP Responses to a 10 Percent Increase in Energy Prices
Texas Shares of World Exports
Texas’ Revealed Comparative Advantage
Ratio of Texas’ Revealed Comparative Advantage with
Respect to Illinois
Ratio of Texas’ Revealed Comparative Advantage with
Respect to California
Ratio of Texas’ Revealed Comparative Advantage with
Respect to Ohio
Texas Market Gain Versus Illinois
Texas Market Gain Versus California

Texas Market Gain Versus Ohio
List of US–Mexico Border City Pairs
Employment Growth in US Border Cities by Sector, 2007–2012
Average Annual Growth in Maquiladora Wages and
Employment in Mexican Border Cities, 2007–2012
Employment Estimation Results for US Border Cities, 2007–2012
Employment Estimation Results for Texas Border Cities, 2007–2012
Employment Regressions for US Border Cities with
Industry-Varying Coefficients, 2007–2012
Employment Regressions for Texas Border Cities with
Industry-Varying Coefficients, 2007–2012
Employment Regressions for US and Texas Border Cities
Under Different Specifications, 2007–2012
Location Quotients: Employment
Government Transfer Payments as a Share of Personal Income
Texas Colonias Classification System

82
83
84
85
86
94
124
129
147
147
148
149
154

154
161
163
173
173
174
175
175
176
186
187
188
190
191
192
193
194
201
206
216


About the Title

I

n Texas, a ten-gallon hat refers to a large cowboy hat with a tall crown. Linguists
believe that the term, rather than referring to ten gallons of liquid, may have
originated from the Spanish phrase “tan galán,” meaning “very gallant” or “really
handsome.” Thus, the hat conveyed those characteristics on its wearer.

Preface

T

he body of research making up this edited volume was assembled in celebration and recognition of the Federal Reserve Bank of Dallas’ centennial
year. The papers that form the basis of this book’s chapters were first presented
at the Dallas Fed’s regional centennial conference on November 7, 2014, almost
100 years to the day since the creation of the Bank.
Forged out of the Federal Reserve Act in 1913 and established the following
year, the Dallas Fed and the other 11 Reserve Banks share responsibility for monetary policy with the Federal Reserve Board of Governors in Washington, DC.
This unique central bank structure reflects the federalist values that underlie
many American institutions and grounds US monetary policy in the experiences
of regional economies around the nation. This volume offers an in-depth examination of the largest part of one of these regions, Texas.
The volume’s contributors include the Dallas Fed’s own economists, many of
them renowned in their fields of expertise. They are joined by some of the nation’s
foremost minds in regional economics and public policy (David Neumark), tax
policy (Alan Viard), and education (Marta Tienda).
No single industry or public policy explains Texas’ successes, and no one
future challenge looms transcendently large. While the state’s triumphs may
reflect a combination of adept decisions and good fortune, the key throughout
its recent economic history has been Texas’ ability and willingness to change.
Market forces thrive in the state, guiding investment and fueling growth. But
where the market’s reach ends, nimble policymaking must often intervene to
help leverage past achievement into an equally remarkable future.
Texas has set a high bar by which success is measured. If the past provides any
guidance about the future, the state and its burgeoning population are up to the
challenge.

Acknowledgments

W

e thank all the authors who contributed their time and expertise to the
production of the research highlighted in this volume. We thank Mine
Yücel, in particular, who is both a contributor and the Federal Reserve Bank of
Dallas Director of Research; this project would not have been possible without
her support. We also thank Richard Fisher, our former Bank President, for his
encouragement and support of our regional economics team during his time
leading the Dallas Fed. We also owe a debt of gratitude to First Vice President
Helen Holcomb, whose backing for the centennial conference and the compilation of this volume ensured we had the resources and collaboration of Bank staff
to successfully carry out this project.
The logistics of the compilation of this volume required the assistance of copy
editors, research assistants, and administrative assistants. We thank Jennifer
Afflerbach, Kathy Thacker, and Carol Dirks for their thorough editing of all the
manuscripts. We thank Sarah Greer, Emily Gutierrez, and Kristin Davis for compiling tables and figures. We thank Michele Brown for helping assemble all the
pieces of this volume for submission to the publisher.
Pia Orrenius expresses her deep appreciation to her coeditors, Jesús Cañas
and Michael Weiss, who worked tirelessly to ensure the quality and readability of
every manuscript. She also thanks Leila Campoli at PalgraveMacmillan, whose
enthusiasm and sense of urgency sped this process along, ensuring a timely
publication.
Pia Orrenius, Jesús Cañas, and
Michael Weiss

Part I

Introduction


1

Tipping Our Hats to the
Ten-Gallon Economy
Pia M. Orrenius, Jesús Cañas, and Michael Weiss

Abstract: Texas has grown twice as fast as the nation for over 25 years. This fantastic growth has lifted many boats. Living standards have increased along with
employment opportunities, attracting record migration to the state. Per capita
income was just a percentage point shy of the nation’s in 2014, a level previously
achieved only at the height of the 1980s oil boom. Meanwhile, Texas’ unemployment rate has fallen below the nation’s and remained there for over a decade. Home
affordability has remained high—the American dream come true for many. There
are several reasons for this superior growth record, including low taxes, a businessfriendly climate, and booming energy sector. This chapter introduces the articles in
this volume, which applaud these accomplishments and explore their root causes,
all the while raising concerns about the tradeoffs inherent in the Texas model and
their implications for the state’s future.

Introduction
The Texas economy is the envy of the nation, expanding consistently at twice
the national rate. Since 1990, job growth has averaged 2 percent per year, compared with a national pace of 0.9 percent. For every 100 jobs that existed in Texas
in 1990, 63 have been added. This compares with 10 for New York and 23 for
California. Notwithstanding the recent slowdown, no other state boasts of such
dynamic expansion over such an extended period and on such a large scale.
Texas is an economic powerhouse—with an annual output of nearly $1.6 trillion,
the Texas economy is the largest in the United States behind California. Texas
produces more goods and services in a year than do most countries; the state’s

economy is equivalent to that of Canada, the world’s fifteenth-largest economy.1
Texas’ output grows so fast—4.3 percent annually on average since the Great
Recession—that it has added the output equivalent to Portugal’s economy during
the period 2009–2014.
The expansion has lifted many boats—and added to the flotilla. Living
standards have risen along with employment opportunities, attracting record


4

PIA M. ORRENIUS, JESÚS CAÑAS, AND MICHAEL WEISS

migration to the state. Per capita income was just a percentage point shy of the
nation’s in 2014, a level previously achieved only at the height of the 1980s oil
boom.2 Meanwhile, Texas’ unemployment rate—historically above the national
rate—has fallen, dipping below the national rate in 2003 and staying there since
then. Home affordability has remained high, even after a burst of postrecession
house price appreciation. Fifty-six percent of families can now afford their own
home in Dallas and Houston, compared with 16 percent in Los Angeles and
25 percent in New York.3
While this volume showcases Texas’ standout growth, it seeks to put it into context. Many observers first want to know why Texas grows so fast. There are a number of factors, including the state’s small government. Texas has no state income
tax, and businesses can operate in a comparatively lightly regulated environment.
The state has a robust energy sector, producing over 38 percent of the nation’s crude
oil and 28 percent of its natural gas. Another strength is exports. Texas has been the
nation’s top-ranked exporting state since 2002; it sent $280 billion in goods abroad
in 2014. Texas’ biggest trading partner is Mexico, with whom it shares a dynamic,
industrialized binational border economy and large immigration flows.
A second question many ask is whether this growth comes at some cost to be
paid in the future. With relatively low taxes and low spending, is Texas enjoying
growth now at the expense of future prosperity? Is the state’s investment sufficient in physical and human infrastructure—not only its bridges, roads, and

water resources, but also its children’s education? Alarm bells have sounded for
some time along these dimensions. Texas has the nation’s largest uninsured population, an above-average poverty rate, and educational attainment below the
US average.4 Texas is also home to 500,000 people in colonias—unincorporated
developments often lacking basic infrastructure—that are found along the border.
Signs of lagging progress are evident despite the state economy’s prowess.
Public Policy, Business Climate, and Taxes
Casual observation may suggest that the low-tax, low-spending Texas model
yields faster growth, but what does the evidence say? University of California
professor David Neumark reviews the evidence on the ability of public policy to
spur local growth in chapter 2, “Increasing Jobs and Income from Work: The Role
and Limitations of Public Policy.” Policies that target job creation and income
growth have a mixed record. Some policies help, others have no effect, and still
others can make things worse. In his overview, Neumark demonstrates that a
business-friendly tax and regulatory policy typically spurs job growth but may
also increase income inequality. This would seem consistent with Texas’ experience, although income inequality has been increasing nationally as well, a topic
addressed in chapter 7.
Neumark also points out that higher minimum wages are not helpful because
they curb job growth for the vulnerable groups they are trying to help; they also
do a bad job of targeting the poor. Texas has a relatively low minimum wage—
equal to the federal rate. A more effective policy to boost income of the working


TIPPING OUR HATS

5

poor, Neumark says, is a state-run earned income tax credit (EITC) that operates
in concert with its federal counterpart. More than a dozen states have adopted
such a state tax credit, including most of Texas’ neighbors.5 The EITC is, however, an expensive job-creation program. The costs of creating jobs via hiring
credits targeting the unemployed, a viable alternative, are much lower than creating jobs with the state EITC.

Jason Saving, a Dallas Fed senior research economist, applies Neumark’s
foundation to the case of Texas in chapter 3, “Why Texas Grows Faster: The
Role of Smaller Government.” After making a case that Texas is indeed a smallgovernment state—it has the eighth-lowest per capita tax burden in the country—
Saving also points out that the tax burden is not well distributed. By relying
heavily on a state sales tax, Texas disproportionately levies low-income residents.
Moreover, the low overall state tax rate also masks weightier local taxes; in Texas,
local governments (not the state) largely fund public schools and hospitals, and
property taxes are relatively high in many parts of the state.
Next, Saving argues that a small government by itself is only one side of the
coin. Taking less away from Texans leaves them with more to spend and invest,
which boosts growth. However, it also matters how the state spends the money it
collects. Near-term economic growth is more highly correlated with infrastructure and public-safety spending than with education and welfare expenditures.
That said, education spending is particularly important when seeking to raise
incomes in the long run. While Texas lags the national average in spending on
K–12 education, Saving demonstrates that the state so far has gotten good bang
for its buck with above-average student outcomes. However, Saving writes that
the Texas model may be due for a correction. Rapid economic and population
growth has increased the urgency of finding new revenue sources to address
looming infrastructure, education, and health care needs. Even so, state legislators prefer to cut taxes rather than raise them.
One new revenue source has been the Texas corporate franchise tax, put in
place in its current form in 2006. So far, the tax has generated less revenue than
estimated and has provoked criticism among business leaders. In chapter 4, “The
Shortcomings of the Texas Margin Tax,” Alan Viard of the American Enterprise
Institute describes how this levy taxes firms on their gross receipts without allowing a full deduction for business expenses. The so-called margin tax is therefore similar to a turnover tax, long condemned as inefficient because it imposes
uneven tax burdens on labor used at different stages of production and creates
artificial incentives for firms to merge. Texas lawmakers have revised the tax
in every biennial session since its original enactment but, as Viard points out,
the changes may have made the tax even more distortionary. It is instructive to
realize that only a handful of US states still have gross-receipts taxes. In the 2014
election, Nevada voters overwhelmingly rejected implementing a tax closely patterned after the Texas margin tax. In Europe, these types of taxes were replaced

by value-added taxes decades ago.
Viard acknowledges that it is always difficult to forge a fair and efficient tax
system. Income taxes punish the rewards from labor, a disincentive to work
harder and earn more. Moreover, the Texas Constitution prohibits imposing


6

PIA M. ORRENIUS, JESÚS CAÑAS, AND MICHAEL WEISS

a state income tax. Meanwhile, Texas sales and property taxes are already relatively high. Oil and gas severance tax revenues are a welcome boost to state coffers but are not dependable because of oil price volatility.
Human Capital and Labor Markets
The bulk of state tax revenue is earmarked for two purposes: education and
health care. In chapter 5, “Texas’ Education Challenge: A Demographic Dividend
or Bust?” Professor Marta Tienda of Princeton University forcefully argues that
by making the right choices now, Texas can harness a demographic dividend—
a productivity boost fueled by human capital investment in its large minority
youth cohorts. This will require closing achievement gaps along racial and ethnic
lines and raising college completion rates. Tienda shows that Texas is falling
behind in college completion even as the share of graduates continues rising.
Racial and ethnic differentials are troubling because the largest gaps correspond
to the already large and still fast-growing Hispanic population. Hispanics make
up 39 percent of the state’s population and 47 percent of people under 30. By
2030, a majority of Texans will be Hispanic.
Another interesting though less well-known force mitigating market incentives for greater educational attainment is higher oil prices. Research on other
oil-producing economies has suggested a link between higher oil prices and
lower educational attainment among cohorts of young people. Dallas Fed senior
research economist Anil Kumar tests this hypothesis in chapter 6, “Oil Boom
Lowers Human Capital Investment in Texas,” using Texas’ experience during the
1970s oil boom. Relative wages in Texas rose during the oil boom, increasing the

opportunity cost of staying in school. Comparing Texas-born cohorts who graduated from high school during the oil boom with those in the pre-boom period
suggests that the expansion negatively affected college enrollment and reduced
the share of individuals with college experience by 3 percentage points.
Texas’ recent shale oil boom may very well have had similar adverse effects
on college degree attainment; after all, wages in the oil and gas sector far exceed
average compensation, and many high-paying, energy-related jobs do not require
college degrees. But today’s energy industry is not the energy industry of 40 years
ago. Drilling and production have become highly sophisticated and mechanized,
and workers have to be trained in the use of computers, digital instruments, and
other advanced technical equipment. While bachelor’s degrees may not be required,
vocational training and certificate programs are widespread.
One positive consequence of the state’s large oil and gas sector has been
its contribution to the creation of well-paying, middle-class jobs. Past Dallas
Fed research has documented Texas’ prowess in job creation across the wage
distribution.6 Using Current Population Survey data on individuals’ employment and wages, and measuring changes in employment over time, LoPalo and
Orrenius (2014) show that between 2000 and 2013, middle-class jobs in Texas
grew 42 percent. By comparison, the United States sans Texas created no net
new middle-class jobs over that period.


TIPPING OUR HATS

7

In chapter 7, “Employment Growth and Labor Market Polarization in the
United States and Texas,” Melissa LoPalo and Pia Orrenius build on their earlier
work in two ways. They use census data to study the nature of job growth by
decade as far back as the 1980s. Then they measure the relative change in the distribution of employment; that is whether middle-class jobs are shrinking in Texas
relative to high- and low-wage jobs. The results clearly show that despite its massive
advantage in job creation, Texas has not been immune to the trend of labor market

polarization that has characterized US labor markets over the past three decades.
Low-paid positions and, to a much smaller extent, high-paid positions, make up a
larger share of Texas employment than they did three decades ago.
These trends have resulted in a large and growing stock of relatively low-paid,
low-skilled workers in Texas. The state’s metropolitan areas boast costs of living
below the national average, easing the burden of low pay in Texas. However, Texas
also has a limited social safety net compared with other large states. Continued
outsized growth in the low-paid workforce suggests that the state may need to
consider greater investments in public goods such as education and infrastructure to help level the playing field for future generations.
Real Estate, Banking, Energy, and Exports
In chapter 8, “Texas Real Estate: From the 1980s’ Oil Bust to the Shale Oil Boom,”
John Duca and Michael Weiss of the Dallas Fed and coauthor Elizabeth Organ
look back to see whether Texas learns from past mistakes. The 1980s Texas
oil boom and subsequent investment excesses led to the collapse of the state’s
banks under the weight of a residential and commercial real estate overhang.
The chances for a repeat of that calamity in an era of shale energy are small,
the authors write, citing the economic diversification and regulatory reform that
ensued after the 1980s energy bust. Financial institutions are no longer as geographically constrained as they were in the 1980s, and nonbank investors play a
larger role in the real estate market.
The impact of lessons learned appeared in the years of the Great Recession,
when the United States struggled with a wave of mortgage defaults that rippled
through the banking system. Texas largely avoided the chaos seen elsewhere in the
country. Amid a changed national regulatory environment, Texas also acted to
improve lender resiliency. While a 1997 state constitutional amendment allowed
homeowners to borrow more against the value of their homes, such lending was
limited to 80 percent of the value of a home (including the first mortgage).
Even before the 1980s bust, Texas banking boasted a colorful legacy that says
much about the independent nature of the state’s financial leaders and their philosophy, Kory Killgo and Kenneth J. Robinson write in chapter 9, “The Evolution
of Texas Banking.” After joining the United States in 1845, Texas constitutionally prohibited state-chartered banks, but nationally chartered institutions and
private banks could operate unregulated and unsupervised. Those private banks

along with nationally chartered institutions predominated at the beginning of
the twentieth century. A constitutional amendment in late 1904 repealing the


8

PIA M. ORRENIUS, JESÚS CAÑAS, AND MICHAEL WEISS

prohibition of state-chartered banking set off a boom in state charters—600 state
banks by 1910. One reason was that state banks provided more lending flexibility
than national banks. At the same time, the law limited bank operations generally
to the area in which banks were chartered. That framework largely endured until
the 1980s collapse, an event that precipitated wide-ranging changes to the state’s
financial landscape, including the fire sale of insolvent Texas institutions to outof-state banks that were later allowed to operate across state lines.
Killgo and Robinson state that the changed Texas banking landscape and regulatory safeguards helped the state avoid the brunt of the subsequent financial
collapse. From 2008 to 2013, 428 banks failed nationwide. They represented almost
6 percent of the commercial banks operating at the end of 2007. By comparison,
only nine Texas banks failed in the same period, or about 1.5 percent of the 2007
count. Killgo and Robinson credit a state economy that did not face the same
challenges experienced elsewhere, in part due to the absence of a Texas residential real estate bubble that prudent policies may have helped avoid.
The Texas economy’s resilience in the wake of the Great Recession has been
tied to development of new shale oil and gas fields across the state, explain
Mine Yücel, Michael Plante, and Amy Jordan of the Dallas Fed and coauthor
Nicole Lake in chapter 10, “The Impact of Changing Energy Prices on the Texas
Economy.” Shale oil and gas have helped increase state crude oil production from
1.2 million barrels per day in 2010 to more than 3 million barrels per day by late
2014. It is the latest development in a tale that began with the discovery of oil at
Spindletop, the gusher that in 1901 propelled Texas into the petroleum age. The
authors demonstrate that energy has since played an important role in the Texas
economy, although its influence has varied over the years.

Texas’ dependence on the energy sector in the 1970s and early 1980s—oil
was 19 percent of output and 4.7 percent of total employment near the boom’s
peak in 1981—began to diminish by the 1990s. By 2013, however, the sector
had rebounded, accounting for 13.2 percent of Texas output and 2.5 percent
of employment. The catalyst for change a decade ago was the shale revolution.
Horizontal drilling and hydraulic fracturing led to an energy resurgence in areas
stretching from the Barnett Shale in North Central Texas to the Eagle Ford Shale
in South Texas. Even old oil fields in the Permian Basin got new life.
The authors note that the impact of oil price shocks on the state’s economy,
especially employment, after 1987 reflects the new technology as well as economic diversification away from the energy sector. Looking at the 1974 to 2014
period, which includes boom and bust cycles for both the Texas economy and
the oil industry, the authors use a vector autoregressive model and find that a
10 percent increase in oil prices leads to a 1.3 percent increase in total Texas
employment. The effects are strongest from 1974 to 1987 and weaker thereafter.
The authors also show detailed effects by state geographic region.
Another booming sector in recent years has been Texas exports. In chapter 11,
“Texas Comparative Advantage and Manufacturing Exports,” Dallas Fed business economist Jesús Cañas and coauthors Luis Torres and Christina English note
that, while Texas has gained global market share in some industries, it has lost
ground in others. Using detailed trade data, the authors identify the comparative