This is Texas, the second largest US state home to just over 30 million people and the
most fortune 500 companies in the country, now beating out even New York and California.
Texas on its own would be the 8th largest economy in the world,
ranking above Australia, Brazil, Russia, and even the entire country to their north,
Canada, with an annual economic output of nearly 2.5 trillion US dollars.
Texas is also doing something that most advanced economies fail to do,
maintain stable economic growth, outpacing most global economies of similar size,
certainly those that are equally as advanced.
And to understand why, we need to as always answer a few simple questions.
Will Texas be the next internal economic superpower like California?
What is it that makes the economy of Texas special on a state, national, and global level?
Has Texas just been lucky, or is there a strategic method behind the Texan economic plan?
And finally, will its long list of current challenges see it lose out to other rivals
within and outside of the USA?
Once we have done all of that, we can update Texas' spot on the Economics Explained National
Leaderboard.
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Before we get into it, a small disclaimer is that measuring the exact output of a state is
always up for a little bit of debate because the regular international organizations like
the International Monetary Fund or the World Bank that usually document national output figures
don't do it for Texas because, well, Texas is not a country.
But with that out of the way, in exploring the complexities behind a state's economic
prosperity, such as Texas, it's important to realize that the Lone Star State's economic
dominance is not guaranteed, and unlike sovereign national economies, Texas has certain advantages,
but key risks as well. And that has contributed to its history of big booms and big busts.
The state as we know it today really got started before it was officially a state when the land
was cheap. The promise of opportunity and the rich soil started to attract the new early
Texan settlers. The area once acquired by the United States was allowed to hold onto its public
lands, which was unusual at the time and was the reason for people to start making something of it.
In its most basic form, this is the concept of comparative advantage and economic output.
Where considering the factors of production, access to public lands created opportunities
for cattle and cotton to emerge as industries critical to the state's early growth.
Railroads expanded into the region, along with the invention of the cotton gin,
and it must be recognized the acquisition of labor from the practice of slavery,
all contributed to create the state's first economic boom.
Spinning the white gold into cash crowned Texas as the king of cotton,
creating profitability in the short run, but complicating the state's path to industrialization
in the long term. The comparative advantage of land, labor, and logistics made the natural
resources and infrastructure attractive to people to develop businesses around them.
This might explain how the Lone Star State was essentially a sovereign nation for the
nine years before joining the US. As the economy developed around cotton,
other agricultural sectors emerged such as ranching, timber, and corn.
Resource-rich economies eventually face major problems if they become overly dependent on one
industry. Whether that's pulling gold, oil, or cotton out of the ground, it all creates the
same problems. Today, cotton and cattle are important exports, but are no longer the main
growth drivers, so we know that Texas was able to transition its economy to other industry clusters
such as energy, advanced manufacturing, and technology.
A lot of countries, and even other regions in the US struggle to transition away from
resource economies, and this lesson of Texas can teach us a lot about how to successfully
make the switch. One thing to recognize though is that it had a few advantages that a lot of
resource-rich economies today don't have. One of the biggest things that Texas had going for
it was land. The disposition, use, and settlement of it transformed the resource into the state's
unofficial currency. The Lone Star State used land to reward soldiers, promote settlement,
and finance the operations of the government. Before transportation infrastructure was an
option for moving the state's exports, it depended on the wide-open frontier and access
in the cultivation of land which created trade opportunities with the rest of the country.
Global trade before the mid-1950s, and even trade between regions in the US,
was far less intense than it is today. As food production stabilized and local
industries sprung up to support the existing population, there was little pressure to be
globally competitive because it was easier to make the basic consumer goods of the day locally than
it was to transport them on small ships or early rail networks. Luckily the state was not complacent
because it would later find out that getting global trade right eventually rewarded Texas
with the number one land port and the number one destination for corporate headquarter relocations
The land grants that paved the way for development in the early statehood days
laid the groundwork for the state's business-friendly practices of today.
No corporate taxes and no personal state income taxes which create a competitive
advantage when companies consider places for corporate headquarters or relocations.
Attracting more people to Texas contributed to the record growth in population with domestic
migration leading the way in the last few years precisely because of its no personal
state income taxes. The number one state exporting people and companies to Texas
is California. Nearly 53,000 households with adjusted gross income of over 7.2 billion US
dollars made the move between 2020 and 2021 and over half of companies relocating their
headquarters are moving from the golden state to the lone star state.
If it continues this rate of growth Texas is tracking to surpass California in population
by 2040. The state's investment in higher education through the creation of two flagship systems
started in the first Texas constitution. At the time policy makers probably had no
idea just how much of an impact it would have on the state a century later.
The investment teed up the state's dominance in advanced manufacturing through public-private
partnerships with the state's education system leading to its position as a top tech exporting
state. So will Texas be the next California? No, but it could be bigger and that's because
of the influence of industry. Its diverse industry clusters make the
economy of Texas special on a state, national and global level. Energy's role in the Texas
economy is both an asset and a liability. One of the state's highest-grossed sectors
is as a top producer of wind power in the USA. The state has experienced both record-smashing
hot and cold weather which tested the limits of the state's grid system.
Texas may also be associated with crude industries but the first electronic integrated circuit was
built in Dallas in the 1950s and Texas has continued to pioneer critical tech conventions
leading to increased investment from the state's legislator into initiatives that position the
state as the dominant player in both the national and global race for semiconductor production.
Ironically the state's first constitution prohibited banking and made the formation
of private corporations difficult, completely the opposite of the free market practices
that attract companies to move there and entrepreneurs to start new businesses today.
Today more fortune 500 companies have headquarters in Texas than anywhere else in the US,
55 to be exact. The state's central time zone, access to transportation infrastructure and
tax-friendly business climate are a big deal when it comes to attracting companies that
create more jobs for Texans. The state's central placement in North
America has long strengthened Texas's economy when agriculture, oil and trade were its primary
industries. Now companies in industries such as advanced manufacturing not only move to the state
but increase their investment spending which spurs more innovation. The result is that Texas
exported more semiconductors and electronic components than California, Arizona and New
York combined in 2022. Increases in investment spending from companies is matched by a fiscal
policy response from the Texas government's 1.4 billion dollar boost to the advanced manufacturing
sector through the CHIPS Act. The move meets the moment as geopolitical tensions escalate
between the US and China over Taiwan, the leading global semiconductor manufacturer of advanced
chips in the world. Driving global recognition is important for an economy like Texas,
particularly as it relates to moving goods. As global trade intensifies, Texas is well
positioned in advanced technology and manufacturing to boost the state's exports. As the top exporting
state in the US for the last 21 years in a row, Texas's total trade value rose to 285.6 billion
US dollars in 2022. The Lone Star state has the most ports of entry in the US, linking its companies
with the nation and the rest of the world. The top trade port in the United States is the port
of Laredo in South Texas. As American companies reduce their reliance on factories in Asia and
shift their manufacturing to Mexico, Texas is positioned to continue growing as a dominant
player in international trade. The state's proximity to Mexico is a challenge and an
advantage because Mexico is both the state's top export and import destination. But ongoing
tensions at the US-Mexico border complicates supply chains and creates bottlenecks straining
the very trade flows that contribute to the state's record economic growth.
Economic and political tensions at the border have accelerated the crisis,
and with no federal action in sight to relieve the pressure, it remains one of the state's biggest
challenges. International trade is key to the economy with over one million jobs supported
by Texas's exports and another half a million jobs in foreign-owned Texas firms.
Firms face another crisis on the domestic front, a tight labor market. More than half of Texas's
business executives reported in a Dallas Fed survey that the skills gap in the state's workforce is
an impediment to hiring. Despite all of that, employment on average grows twice as fast in
Texas compared to the rest of the nation, which is due to consistent and sustained net in-migration
from other states and abroad. Texas's rapid population and scaling economic growth are
advantages that also pose challenges in terms of access to natural resources. Demand for the
state's water is forecasted to outpace the supply by 2070, which could result in over a quarter of
the state's population facing a municipal water shortage if nothing is done. Texas has room to
grow unlike the golden state with the largest state GDP, however it must manage and protect
the very natural resources critical to sustaining and supporting that growth.
Water throughout Texas's history has always been a cherished, highly regulated commodity
with specific legal structures in place before and after statehood. Investment in water infrastructure
repair is critical after learning that the state lost 30 billion gallons of water in 2021 due to
broken pipes. Nobody can predict the future, least of all economists, but Texas is today more than
ever facing international and domestic challenges to support the very population growth that is in
turn supporting its economy.
Ok, so now it's time to put Texas on the economics explained leaderboard,
which we have done before, but that was 3 years ago and a lot has changed since then.
Starting as always with size, Texas has an estimated GDP of 2.3 to 2.4 trillion US dollars,
making it comparable to the 8th largest national economy in the world,
if it was to be counted as its own country. Of course it's not, and these figures are less
accurate than world bank figures because imports and exports which are a major component of economic
output are harder to measure over state borders where unlike international borders,
almost no records are kept of what is coming in or going out.
Even still, the state gets an 8 out of 10.
Taking those GDP estimates and spreading it out over Texas's population of 30.3 million people
means the state has a GDP per capita of around $79,207 which puts it in line with countries
like Denmark, so it gets an 8 out of 10, falling only behind the true outliers with 6-figure GDPs
per capita.
Stability and confidence is both helped and hurt by being part of the largest and most
influential economy in the world. Helped because it uses the global reserve currency,
it has a huge domestic market for its products, and it has the backing of the US federal government
if it finds trouble. But it's also hurt because it competes for talent and investment spending
with the other states including California, which is still the go-to destination for a
lot of the same industries. Even still, the state gets a 9 out of 10.
Growth has been strong and consistent, only shrinking during the 2008 global recession
and the global lockdowns of 2020. It's also maintained a growth rate above the US,
outpacing most advanced economies. Texas gets a 7 out of 10.
Finally, industry. Texas is unmatched, as more fortune 500 companies choose to relocate their
corporate headquarters there, particularly advanced manufacturing, which relies less
on extracting value from limited natural resources. Texas rides in at an easy 10 out of 10 here.
Altogether that gives Texas an average score of 8.4 out of 10.
If you liked this video, you'll also like the one that we recently did on California,
and you should be able to click to that on your screen now.
Thanks for watching, partner. Bye.