Keys to Texas’ economic success

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I was recently asked by the House Select Committee on Economic Competitiveness to offer a perspective on some of the issues affecting Texas’ future performance.

The Committee’s purpose in the hearing was to address “principles that… should guide the state’s pursuit of long-term economic growth.” I am pleased that members of the legislature are thinking in these terms, as it is essential to long-term prosperity.

I focused primarily on three issues of concern which could, if not handled appropriately, result in notable and lasting damage. While one issue relates to ongoing changes in the Texas population and how we handle them, the other two are choices that, if made, would be self-inflicted wounds.

One of the reasons I chose these topics is because the ability to affect them in a meaningful way lies squarely with the legislature, unlike trade, immigration, and other concerns that, while vitally important, lie more in the hands of the folks in Washington.

My first area of concern is ongoing shifts in the Texas population and the resulting policy challenges. Despite Texas’ positive attributes and expectations, areas with better educated workers are achieving superior performance, and long-term success will require continuing improvement in labor characteristics.

As I have noted in past columns, Texas’ demographic patterns are favorable in that large numbers of young people will be entering the workforce in the coming decades at a time when the “baby boomers” are retiring in large numbers, and there are likely to be tight labor market conditions across of the country.

The demographic trends are challenging, however, in that much of the growth is concentrated in groups which have historically experienced relatively low levels of educational attainment. If these potential employees fail to receive proper training, this population increase could quickly transform from an asset to a liability.

In the absence of appropriate and aggressive efforts to enhance education, a vicious cycle will ensue. A less attractive and less employable work force will simultaneously diminish the ability of the state to attract and retain desirable industry and increase demands on the social service system.

As a result, fiscal revenues will be lower and needs higher. The future of the Texas economy is defined by the future of the Texas work force. Meeting this challenge is imperative.

A second concern is potential economic harms of discriminatory social legislation, such as the “bathroom bill” that was extensively considered in the recent Regular and Special Sessions.

Irrespective of their stated purpose, controversial laws that are perceived to be discriminatory can reduce travel and tourism. Any law with the potential to reduce attendees, for example, can cause professionals who organize conferences and events to avoid that location.

In addition, scheduling an event in a location with a law that is considered to be offensive by some groups can be interpreted as support for the policy, and some organizations will choose to avoid such locations.

If the Texas Legislature passes a law viewed as discriminatory against lesbian, gay, bisexual, or transgender persons, it is likely that some meetings and events would be canceled and that some leisure travelers will also avoid the state.

The resulting reduction in travel and tourism would involve substantial economic costs, which we recently estimated to include the loss of over 35,600 full-time equivalent jobs (based on 2016 levels of activity), which could be expected to rise to almost 59,600 jobs over time.

The state and local governments would also lose substantial revenue, with annual losses of $176.4 million in state revenue and $84.3 million in local fiscal resources (rising to $295.2 million and $141.1 million, respectively, over time).

I should note that these numbers exclude major sports events, concerts, and similar large attractions and don’t even begin to address the potential effects on corporate locations, retentions, and expansions.

Growing an economy and encouraging prosperity is difficult work, and the last thing Texas needs is to shoot itself in the foot over social policy. Any such legislation has the potential to be perceived in a negative light by the kinds of high-value businesses and individuals the state would like to attract from an economic perspective.

A third concern related to future success is maintaining economic development programs within the state. The most important key to success in economic development is to create an environment where companies want to locate.

This task is achieved through a favorable tax and regulatory climate, a fair and predictable judicial system, excellent education and training at all levels, infrastructure that can sustain a growing economy, and a desirable quality of life.

No incentive program will attract firms to an area that cannot meet their basic needs and provide a viable platform to thrive, but areas without competitive economic development programs are often shut out of the site selection process entirely (a fate which often befell Texas prior to the passage of new legislation in the early 2000s).

While in an ideal world such tools might not be needed, the fact of the matter is that other states and nations are offering them, and Texas must do so as well if we want to remain competitive.

Texas has a lot of things going for it – a large and growing workforce, abundant natural resources (particularly oil and natural gas), a central location, a competitive cost of living, and excellent incentive programs. We’re improving infrastructure, adding top-tier research facilities and medical schools, and emerging as a center for desirable corporate locations and expansions.

Having said that, the state economy is not invulnerable and optimal growth is not guaranteed. Texas faces intense competition from all sides.

The future performance of the Texas economy depends on getting the fundamentals right, prudently using incentives to stay competitive, and avoiding actions (such as discriminatory social policy) which can damage the business environment desired by high-growth companies.

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