The California versus Texas Model, and Public Choice

William Voegeli, a contributing editor at The Claremont Review of Books, has an excellent essay in Manhattan Journal comparing the economic performance of California and Texas.  (I believe a short opinion page version appeared recently in the LAT.)  Among other things, the article provides a good example for how a public choice analysis can be applied to show, in this case, capture of public revenues and the process of increasing public revenues by public employees in California.

The most interesting feature of the article, however, is that it does not start out from a position of hostility toward California and its high tax model.  On the contrary, it says that there is a tradeoff that different people will make differently with respect to high tax/ high public services jurisdictions and low tax/ low public services jurisdictions.  There is a perfectly good argument for the former as well as for the latter.

It’s true that many people are less sensitive to taxes and more concerned about public goods, and these consumer-voters will congregate in places with extensive services. But it’s also true, all things being equal, that everyone would rather pay lower than higher taxes. The high-benefit, high-tax model can work, but only if the high taxes actually purchase high benefits—that is, public goods that far surpass the quality of those available to people who pay low taxes.

I grew up in California and despite my Upper Upper NW DC address, will always count myself a Californian, product of its public schools and a proud graduate of UCLA.  I was a beneficiary of the high tax/ high benefits model, and gravitate toward it.  The problem, as Voegeli documents, is two fold.  First, California is today a high tax/ low benefits model, while Texas, even with relatively low taxes, has managed remarkably to catch up and even pass California in ways I would not have believed possible.  But Voegeli’s data, as I have discussed it with other Californians and Texans, seems to me pretty robust.  His conclusion?

“Twenty years ago, you could go to Texas, where they had very low taxes, and you would see the difference between there and California,” Joel Kotkin, executive editor of NewGeography.com and a presidential fellow at Chapman University in Southern California, told the Los Angeles Timesthis past March. “Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California’s government and the middle class is constantly being renegotiated to the disadvantage of the middle class.”

Similarly, the CEO of a manufacturing company in suburban Los Angeles told a Times reporter that his business suffered less from California’s high taxes than from its ineffectual services. As a result, the company pays “a fortune” to educate its employees, many of whom graduated from California public schools, “on basic things like writing and math skills.” According to a report issued earlier this year by McKinsey & Company, Texas students “are, on average, one to two years of learning ahead of California students of the same age,” though expenditures per public school student are 12 percent higher in California.

State and local government expenditures as a whole were 46.8 percent higher in California than in Texas in 2005–06—$10,070 per person compared with $6,858. And Texas not only spends its citizens’ dollars more effectively; it emphasizes priorities that are more broadly beneficial. In 2005–06, per-capita spending on transportation was 5.9 percent lower in California than in Texas, and highway expenditures in particular were 9.5 percent lower, a discovery both plausible and infuriating to any Los Angeles commuter losing the will to live while sitting in yet another freeway traffic jam.

What happened?  According to Voegeli, two things.  One is that scarce tax dollars in Texas are spent on priorities that have broad appeal, while California spends far more of its tax dollars on transfer payments to particular groups with political clout.  Second (and a subset of the first, really) is that the tax dollars in California go to public employees, public employee pensions, public sector unions – nominally to the service providers of the “high benefits” received in exchange for high taxes.  Voegeli reports that they soak up the additional revenue but provide increasingly poor services at an ever increasing cost.

In California, by contrast, more and more spending consists of either transfer payments to government dependents (as in welfare, health, housing, and community development programs) or generous payments to government employees and contractors (reflected in administrative costs, pensions, and general expenditures). Both kinds of spending weaken California’s appeal to consumer-voters, the first because redistributive transfer payments are the least publicly beneficial type of public good, and the second because the dues paid to Club California purchase benefits that, increasingly, are enjoyed by the staff instead of the members.

Californians have the best possible reason to believe that the state’s public sector is not holding up its end of the bargain: clear evidence that it used to do a better job. Bill Watkins, executive director of the Economic Forecast Project at the University of California at Santa Barbara, has calculated that once you adjust for population growth and inflation, the state government spent 26 percent more in 2007–08 than in 1997–98. Back then, “California had teachers. Prisoners were in jail. Health care was provided for those with the least resources.” Today, Watkins asks, “Are the roads 26 percent better? Are schools 26 percent better? What is 26 percent better?”

Watkins is not referring to the mythical golden past in which I grew up outside of LA; this is a mere decade ago.  But Voegeli observes that the task for California is inherently harder for it than for Texas; there is an asymmetry baked in:

If California doesn’t want to be Texas, it must find a way to be a better California. The easy thing about being Texas is that the government has a great deal of control over the part of its package deal that attracts consumer-voters—it must merely keep taxes low. California, on the other hand, must deliver on the high benefits promised in its sales pitch. It won’t be enough for its state and local governments to spend a lot of money; they have to spend it efficiently and effectively.

Agency capture of public institutions, their tax mechanisms and their benefits, is far from an unknown phenomenon.  But I have to say that the idea that California could ever be surpassed on any of the metrics above – education, liveability, transportation, quality of life, etc, – by Texas is … shocking.

(Note – and before everyone gets all p-o’d in the comments.  I do freely admit and guilty as charged that I feel pretty much about my home state as every Texan I’ve ever known feels about Texas, so no need to abuse me in the comments.  And I will also say that if I were able to move back to California today, and not have to worry about gainful employment as a law professor, I would move to … Carson City, Nevada, just below the Nevada side of Tahoe, on Highway 395 in the Eastern Sierra Nevada corridor, and have two-thirds the benefits of California (the mountains and the desert, minus the Pacific and the California coastal foothills) without the taxes.  I’m headed out to give a talk at Stanford Law School next week, and while terrifically excited to go talk about robots and war and grateful for the invite, I have serious regrets about not being able stay just long enough to drive over the Sierras.)