A semi-permanent camp in Stockton, California.
The latest employment data from the Bureau of Labor Statistics for June 2024 paints a stark picture of the diverging economic conditions in Republican and Democratic states. The national unemployment rate remained steady at 4.1%, a modest increase of 0.5 percentage points from June 2023. But behind these headline numbers are stark differences, especially between economically vibrant Republican states and struggling Democratic states, with Texas and California being prime examples.
Texas: A Beacon of Prosperity
Texas continues to demonstrate the benefits of free market policies, as evidenced by our impressive job growth and relatively low unemployment rate. Over the past year, Texas added 267,400 nonfarm jobs in a pro-growth environment and favorable regulatory environment.
According to the Texas Workforce Commission, the state’s civilian workforce now exceeds 15.3 million, highlighting continued expansion of job opportunities. This growth is supported by a diversified economy that includes the technology, energy and healthcare industries. Texas’ unemployment rate was 4.1% in June, roughly in line with the national average and significantly lower than California’s 5.2%.
Texas’ economic model emphasizes fiscal responsibility, including the adoption of more sustainable budgeting practices. This has led the Lone Star State to rank 7th for fiscal freedom in the Cato Institute’s Freedom Index of the 50 states. It also ranks 20th for regulatory freedom and 17th overall for economic and personal freedom. For much of the past decade, Texas has kept its budget manageable by limiting the growth of government spending to less than the combined rate of population growth and inflation. This approach has kept taxes low and fostered long-term economic stability and growth. However, the current irresponsible budget, which has increased by more than 20 percent, calls into question the success of Texas’ past budgets and must be addressed in the next session in 2025.
California: Contrasting economic management
Contrast that with California, where, despite adding 223,600 jobs during the year, California’s unemployment rate rose to 5.2 percent, the second highest in the nation after the District of Columbia’s 5.4 percent. The increase highlights the challenges the state faces, including high taxes, stringent regulations and a high cost of living, that inhibit business growth and job creation.
According to the 50 States Freedom Report, California ranks 48th in fiscal freedom, 49th in regulatory freedom, and 48th in overall freedom. The Golden State ranks low when it comes to overall economic freedom compared to Texas and all states except New York and Hawaii. California’s economic woes are not a recent phenomenon. For years, state policies have created an environment that is less conducive to business investment and innovation. High-profile companies and individuals have left the state for more favorable conditions, such as Texas, further exacerbating economic disparities. The Wall Street Journal recently reported that the latest Internal Revenue Service migration data on adjusted gross income by state for 2022 showed that California had the largest net loss of $23.8 billion, while Texas had a net gain of $21 billion, second only to Florida with $36 billion. This is another example of how people and businesses are moving from high-tax states to low-tax states.
State unemployment trends
Broad employment trends in the June 2024 report revealed that eight states saw an increase in their unemployment rate and only one state saw a decrease in its unemployment rate. However, the majority of states saw no significant change in their unemployment rate. South Dakota had the lowest unemployment rate at 2.0%, followed by North Dakota and Vermont at 2.1%.
In contrast, states with more interventionist economic policies, such as California and Nevada, have higher unemployment rates, at 5.2 percent. This trend highlights a broader pattern of better employment outcomes in states with more market-oriented policies.
Employment growth and economic policies
According to BLS data, eight states saw increases in nonfarm payrolls in June 2024, with North Carolina, Massachusetts, and Virginia leading the way in job growth. 27 states saw employment gains over the course of the year, with Texas, California, and Florida posting the largest increases in absolute terms. While these larger job gains are often a reflection of the fact that these states have the largest populations, it’s notable that California’s growth rate for the year was just 1.3%, while Texas’ and Florida’s were more robust at 1.9% and 2.0%, respectively.
When we consider the economic policies and environments of these states, nuances become apparent. States such as Texas and Florida have prioritized low taxes and minimal regulation, creating an environment in which businesses can thrive, reflected in strong job growth and relatively low unemployment rates. In contrast, states with high taxes and heavy regulatory burdens, such as California, face more severe economic challenges despite adding jobs.
Flat Tax Revolution
A key aspect of the economic success seen in many Republican-leaning states, including Texas, is the state’s embrace of flat tax reform. This movement to simplify tax codes and lower tax rates has played a pivotal role in attracting businesses and encouraging investment. Moving to a flat tax system allows states to reduce the complexity and burden of taxation, making them more competitive and attractive to businesses and workers.
This revolution is part of a broader trend toward sustainable budgeting, in which states aim to avoid overburdening their residents with high taxes while maintaining fiscal discipline. The success of states such as Texas in implementing these policies suggests that other states may be able to achieve similar economic prosperity by adopting these principles.
Policy implications and recommendations
The stark differences in economic outcomes between Republican and Democratic states underscore the importance of policy choices. Republican states like Texas continue to demonstrate that free market principles lead to stronger economic growth and better employment outcomes. For policymakers, the lesson is clear.
Reduce the regulatory burden: Streamlining and eliminating regulations makes it easier for businesses to operate and expand, promoting job creation. Pass sustainable budgets and reduce taxes: Implementing sustainable budgeting practices and reducing the tax burden for businesses and individuals spurs economic activity and attracts investment. Promote economic freedom: Ensuring a business-friendly environment that supports entrepreneurship and innovation is key to sustainable growth.
As we look to the future, it is crucial that states learn from these examples. By adopting policies that prioritize economic freedom and reduce government intervention, states can create environments where businesses can thrive, jobs are abundant, and prosperity is widespread. The contrasting fates of Texas and California are a powerful reminder that policy decisions have real-world consequences.
By examining these trends and implementing effective policies, countries can pave the way to a prosperous future.
Vance Ginn
Dr. Vance Ginn is Founder and President of Ginn Economic Consulting, LLC and an Associate Fellow at AIER. He is Chief Economist at the Pelican Institute for Public Policy and a Senior Fellow at the American Tax Reform Institute. He previously served as Deputy Director for Economic Policy at the White House Office of Management and Budget from 2019-2020.
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