Texas: the 2020 Fiscal Crisis

Contrary to what may be suggested, it is very difficult to assess public performance in an unprecedented situation. However, the natural law is constant in any equation. It is natural for humans to thrive in freedom. The right to enterprise, work and trade freely has been the most important variable when measuring the increase in real income in recent decades. I call it variable because historically it is something new and in recent weeks, like never since the Second World War, we have seen how most of us have surrendered these individual freedoms for the purpose of dealing with a common adversity.

The "Great Lockdown" – the period, in which we live under the containment measures enacted in response to the pandemic – has been the trend of public policy world-wide. Governments acted with fear of the growing trend of COVID-19 cases. These actions were taken in an effort to protect some over others; they protect the most vulnerable to the new virus over those who live from their daily work; protect some today and everyone pays tomorrow.

There is already evidence in favor of the "Great Lockdown". Kinsa, a provider in the healthcare industry, using smart thermometers, supplemented with smart-phone apps data, tracked and mapped the incidence of flu-like illnesses in the US. The data clearly indicate an abnormal increasing number of cases in March; there were more cases reported than expected. Then, in the last week of the same month, a significant decrease is depicted, even below the forecast. The database includes the incidence of diseases other than COVID-19, implying that the lockdown has reduced the incidence of many other flu-like contagious diseases.

What’s the cost?

In the past six weeks, more people have applied for unemployment insurance in the United States than during the first eighteen months of the last recession. According to data from the US Department of Labor, more than 30 million people, 20% ​​of nonfarm workers nationwide, have lost their jobs and their incomes.

The situation in the Texas labor market is not much different. In a matter of six weeks, 1.6 million people have been reported unemployed, 12% of workers in the state. More than a third of these workers are people involved in retail trade, accommodation and food services.
Texas, relative to other states in the U.S., has typically demonstrated greater resilience in cases of economic crisis. Even with a hindered job market, Texas has historically shown better growth and opportunity after a recession when compared to other states. The extra problem Texas is encountering today is the historic decline in the price of oil. The lower oil price and the negative economic effects of the "lockdown" will seriously affect the income of workers and firms in all industries, and the revenues of the state government.

Historically, the price of oil has fluctuated for political and economic reasons. Its price had been kept stable thanks to strategies coordinated by the global oil oligopoly, specifically the Organization of Petroleum Exporting Countries led by Saudi Arabia. Initially accentuated by a commercial quarrel, the decline in the price of oil has been the effect of reduced economic activity in the last few months. Using the words of Dr. Raymond Robertson: "Although it seems the end of the world, it is really a fairly simple problem, there is too much oil and there is nowhere to put it."
 
In the short term, oil importing countries will benefit. Without state intervention, producers will either be efficient or exit the market. In Texas this is the question; the Railroad Commission will not decide whether to dictate production cuts until the first weeks of May.

In the past 10 years, the mining and extraction sector in Texas has averaged 10% of the state's gross domestic product, more than $140 billion in nominal dollars per year. In 2019, according to data from the Texas Comptroller of Public Accounts, taxes on oil production and regulation generated $3.9 billion, representing 7.7% of state tax revenue. So far in 2020, this income represented 8.2% of the total taxes received by the state. If the barrel of oil is devalued by 50%, the state’s tax revenue will decrease approximately 4%; if the price falls by 90%, it would represent a loss to the state’s budget of 7.4%.

This is serious. Texas, unlike other states in the U.S., boasts of not collecting an individual income tax. With a 6% sales tax rate, two out of every three dollars the state collects in taxes come from the sales tax. This revenue is already being affected today, with more than 10% of workers out of the labor market, and even more affected by the temporary business closures due to the "lockdown". In certain sectors, there is no production, there is no income, there is no consumption, and there are no sales. This does not even take account of the spillover effect that is already occurring in other industries; as there is no trade and services, tax collection will decrease significantly. According to calculations by the Private Enterprise Research Center, the state budget could decrease from 10% to 15%, relative to the previous year, due to the oil market and the effect on consumption due to the COVID-19 pandemic. Neither the financial aid of 1,200 dollars granted by the federal congress, nor the state and federal unemployment insurance payments, will be enough to cover the loss that both the individual and the state will suffer. There will be no recovery on income if there is no production and no freedom to consume.

What’s next? As an entity, the state will seek to stabilize its budget. On the energy side, it will have to lower oil production.  There are two possible scenarios, one where the Texas Railroad Commission dictates a cut in production for this summer, or one where the low price in a virtually free market makes less efficient producers, that is, those that produce oil at a higher cost, fail and exit the market. For Texas, the ideal would be for other countries to cut their production, causing the price to stabilize before the commission participates.  This is unlikely. The United States produces 15% of global crude oil; 41% of national production comes from Texas. As an economic entity, Texas ranks 4th in crude oil production after the US, Russia, and Saudi Arabia. If the price is to stabilize, it would require action from the U.S. and Texas. As the economy is “reopened” we will begin to use oil reserves. Still, with the projection of a global recession worse than any since the Great Depression, this oversupply will take months, if not years, to stabilize.

Regarding work and commerce, Texas will resume normal activities, gradually, in May. There are constituents who agree with the government's obligation to inform and take preventive measures, but, Texas being Texas, entrepreneurs expect that they have the right to work and operate safely without having to ask for permission. There is also the possibility, as in Oregon, according to Kurt Huffman, owner of ChefStable, in his column published in the Wall Street Journal, if workers are already receiving economic stimuli, such as unemployment insurance and the $1,200, they will see no incentive to return to work until these expire in July or August.
Rob Kaplan, President of the Federal Reserve Bank of Dallas, mentioned in an interview that the two most important factors driving growth in Texas are its workforce and productivity. Even with this already diverse state industry, President Trump's suspension of immigration will only slow, rather than help, the state's economic recovery. Immigration has been the most important factor since NAFTA in strengthening the state's labor market. With no entry of people into its workforce, the workforce (and human capital) becomes more expensive and hinders the creation of private enterprise jobs. Texas is a clear example that the immigrant does not "steal" jobs; they create jobs. Capital has no need to migrate when the willing worker shows up at its door.

If the price of the barrel of oil remains at these low levels as never before seen in its history, the Texas government will be faced with the political need to provide economic stimulus during an impending recession without one of its most stable sources of income. Without jobs, without immigration, and without oil revenues, Texas will face a crisis like never before.
Despite this, the synergy between worker and capital in Texas is an example of the positive effects of a state with relatively more free-market policies. According to the Bureau of Economic Analysis, Texas was the state with the highest growth in 2019 (4.4%), thanks to the freedom to work, to do business, and to migrate. Once these liberties are restored, and the tax revenue is recovered, we could see a recovered Texas less dependent on the oil sector.

Posted: May 08, 2020 by Carlos I. Navarro