Wednesday, August 17, 2011

Texas Migration Bubble

The Sun Belt got fat off of decades of inmigration. The simple act of national demographic reshuffling fueled spectacular economic growth in states such as Texas. I call this boom a "migration economy" and the current financial crisis killed it.

The house of cards is easy to see in Florida. The story is much more complicated in Texas, which is good news for Rick Parry. Ryan Avent (Free Exchange) is keeping the spotlight on Parry running on his jobs record:

There are a lot of ways of looking at the Texas miracle, and I don't think one can or should write off structural factors entirely, whether tax policy, regulatory burden, housing costs, or oil and gas. But the dynamic above is an example of a virtuous cycle of self-fulfilling expectations. People come because Texas is where the jobs are, and because people come Texas is where the jobs are. Firms anticipate that growth will continue, and they hire accordingly, which ensures that growth continues. And migration ensures steady, stabilising growth in labour-intensive government, education, and health jobs.

I emphasized the positive feedback loop that applies equally well to any Sun Belt boom state. More people justify more government. More government means more jobs. As long as the demographics hold up, the pyramid scheme works great. Should migration suffer and birth rates plummet, legacy costs are a bitch. That's the other shoe in the process of dropping in Florida.

I've written about the troubling numbers cursing the future of certain Texas cities such as Houston. Dallas is looking to Pittsburgh for a way forward. The urban leadership doesn't like where the Parry wagon is heading. Texas is a good example of the way the economy use to work. How would Parry manage an aging and shrinking workforce? Open the border wide to immigrants?

There is a remarkable correlation between asset market bubbles that cause macroeconomic crisis and demographical changes. In Figures 1.1 and 1.2, I show Japan, the United States, Spain and Ireland as examples of countries affected by the financial crisis. In these countries, the formation of bubbles in asset markets seems to coincide with a growing inverse dependency ratio, which is the ratio of the working population to the non-working (dependent) population. Meanwhile, busts in asset markets seem to happen when the inverse dependency ratio declines noticeably.

As I posted yesterday, a large part of Texas is in demographic crisis. Those dying counties are the real test of Parry's policies. Fail.

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