Scott Sumner  

Thanks Texas

PRINT
Superforecasting on Epi... Deaton on Medicare and Life Ex...

I just spent some time in California, and noticed that there are a lot of really rich people out there. My hotel was in Santa Monica, a pleasant beach town where the average house costs $2.7 million. One property was available for under a million, a 450 square foot condo. And while Santa Monica is exceptional, much of coastal California is quite rich. In fairness, they produce a lot of neat stuff in California. Internet companies like Google and Facebook, IT companies like Oracle, biotech companies like Amgen, and of course Hollywood.

California's politicians have done a great job in making sure that their producers can extract as much rent as possible from the rest of America, and indeed with the TPP, from the rest of the world. Most coastal California products have very low marginal costs of production, so the barriers to entry created by IP rules create enormous rents, in many cases far beyond what economic theory can justify. (I'm looking at you, Hollywood). And many of their companies are pleasant places to work:

Screen Shot 2015-10-15 at 8.44.03 PM.png
In contrast, Texas is famous as the home of the American oil industry, and indeed Houston is the most technologically sophisticated oil town in the world. The Texas oil industry did something incredibly important, which has significantly impacted the rest of America, indeed the rest of the world. And as we'll see, the rewards could not have been more different from the case of California.

The technological innovations that came out of Texas led to an explosion in US oil output. Much of this increase came in south and west Texas, but there were other important fields in God-forsaken places like western North Dakota.

Unlike in coastal California, the work was very hard:

Screen Shot 2015-10-15 at 8.49.26 PM.png
And in the end what did the Texas oil industry get out of all this extra production? All this capital investment and hard work under intense heat and bitter cold? Approximately nothing.

Unlike California's IP-oriented industries, the oil industry is highly competitive. One company's oil is pretty much like another, at least of a given grade. Firms are price takers. And in recent months the prices they've had to take are pretty low.

The problem is as follows. Oil production has soared in the US from about 5 million barrels a day, to well over 9 million barrels per day.

Screen Shot 2015-10-15 at 8.55.22 PM.png
The 4.5 million barrel increase was equivalent to almost 5% of global output when the fracking boom began.

And of course oil prices have recently fallen in half, from about $100/barrel to less than $50.

Screen Shot 2015-10-15 at 8.57.42 PM.png
Yes, I know that there are other things that have impacted oil prices. But those "other things" cut both ways. Studies suggest that oil demand is extremely inelastic in the short and even medium run, so it's not that far-fetched to believe that the US production surge was a key factor in all this. Take 4.5 million barrels off the market and you'll see $100 oil in the blink of an eye.

The net result is that the US oil industry is not making any more money selling 9.5 million barrels a day today then they got selling barely half that amount back in 2007-08. All that hard work for naught.

Every time I drive in to a gas station and fill up at $2.19 a gallon, I think about the selfless sacrifice of the Texas oil industry (including one of my cousins, who lives near Houston.) I'm sure the comment section will include at least one spoilsport, who mentions Adam Smith and butchers and benevolence. But I prefer to think that the oil industry knew this was going to happen. They purposely refrained from lobbying Washington for laws that banned fracking, because they were motivated by the American Spirit of Enterprise. It was a generous act of self-sacrifice by the Texas oil industry, totally unlike those California politicians who pressured Obama to pressure foreign governments to make sure as many dollars as possible can be transferred from the pockets of low income East Asian consumers to the billionaires of coastal California.

PS. California and Texas. Which state's economy massively increases global inequality? And which state's economy massively reduces global inequality? And which model do the Dems like best? And which model does the GOP like best?

PPS. On the other hand, on the immigration question you might give a very different answer.




COMMENTS (21 to date)
Mr. Econotarian writes:

There is plenty of tech in Texas as well. Not quite like California though.

AT&T and Texas Instruments have HQs in Dallas, Dell in Austin.

Austin's "Silicon Hills" hosts employees from 3M, Apple Inc., Hewlett-Packard, Google, Facebook, AMD, Applied Materials, ARM, Cirrus Logic, Cisco Systems, eBay/PayPal, Bioware, Blizzard Entertainment, Hoover’s, Intel Corporation, National Instruments, Samsung Group, Silicon Laboratories, Oracle Corporation, Hostgator, and United Devices.

Besides tech, Austin is also HQ of SP:500 component Whole Foods Market.

Jim Dow writes:

Arguably the causation is reversed. Entertainment and technology tend towards winner-take-all markets in a way that extractive industries do not. Locations that happen to be where entertainment is located will end up with a wider income distribution. For the most part industries choose the state rather than the other way around. Extractive industries are located where the stuff to extract is. Entertainment industries (or maybe industries that generate rents and a wide income distribution) tend to locate where the living is nice. And Santa Monica is very nice.

Given the industries that have tended to locate there, California is more redistributive than Texas, and so it’s logical that the Democrats see it as having the best policies.

foosion writes:

I just spent some time in California, and noticed that there are a lot of really rich people out there.

California has some beautiful areas. Rich people tend to like being in beautiful areas.

the barriers to entry created by IP rules create enormous rents

All right thinking people oppose the extent of IP protection - copyright, patent, film, drug, whatever.

They purposely refrained from lobbying Washington for laws that banned fracking

There's overlap between the oil industry and the fracking industry.


I think about the selfless sacrifice of the Texas oil industry

You might google: oil industry subsidies.

ThomasH writes:

Pretty much everyone (except politicians) knows that IP protection is too strong, zoning too restrictive of building denser, more walkabel cities, and that the oil export ban makes no sense. I'm not clear that there is a difference in party take on these issues.

ChargerCarl writes:

Scott, I just returned from Tokyo where you can easily find an 800sqft apartments in the city center for about $400,000.

Needless to say us Californians have a lot to learn from Japan.

Hyena writes:

This does not seem an accurate characterization. For one, both Texas and California had an importantly formative 1900-1960 oil boom. They have similar Gini coefficients. Texas is an anecdotally popular destination for Californians fed up with housing prices or who want a single-family home, suggesting similar enough industry, energy aside. They also publicly, sometimes acrimoniously, compete over the same industries, meaning that companies are roughly equally willing to locate to either.

Honestly, I think your post doesn't work because the states aren't very different economically aside from current energy production and land prices. Neither of those are political or ur-economic: they have different endowments of fossil fuel reserves and different geographies. The obvious political influence is the housing unit price, which sits very close to the land value for complex but very obnoxious reasons.

Hyena writes:

Come to think of it, even their politics are very similar: California is just Texas with a larger share of urban residents. Head out into suburban areas or the hinterlands and you'll see the same sentiments as in Texas. Head into Texan cities and they have similar sentiments to those in California, especially among long-time urban dwellers.

The major difference is the relative size of these populations.

Scott Sumner writes:

Everyone, I'd encourage people to reread the post. Most people seemed to miss the point, and responded to things that were not there.

Mr. Econotarian, Yes, I know.

Jim, You said:

"Arguably the causation is reversed."

What causation? How does that differ from what I said?

Foosion, You said:

"There's overlap between the oil industry and the fracking industry."

That's exactly my point.

Thomas, I agree.

Hyena, You said:

"This does not seem an accurate characterization. For one, both Texas and California had an importantly formative 1900-1960 oil boom. They have similar Gini coefficients."

Sorry, but how does this conflict with what I said?

You said:

"Texas is an anecdotally popular destination for Californians fed up with housing prices or who want a single-family home, suggesting similar enough industry, energy aside. They also publicly, sometimes acrimoniously, compete over the same industries, meaning that companies are roughly equally willing to locate to either.""

I don't understand the conclusions you are drawing there. People moving to new places shows those new places must be like the old places? Is that also true of Mexicans moving to the US?

Trevor H writes:

I enjoyed this post very much.

It may look roughly zero sum for the industry as a whole, though it will take another year or two of current prices to wipe off all the gains of the previous 5 years.

I know you're being cheeky, but altruism did not produce today's lower prices - there have definitely been lots of winners and losers within the industry. The biggest winners have been those that gambled on unproven methodologies yet were conservative with capital and relied on equity financing. Disciplined agility - it's a really hard thing to execute.

And you're welcome. Now go buy yourself a big gas guzzling SUV with your fuel cost savings and my compliments. And get all your friends to do the same (please).

Jim Dow writes:

Scott,

Maybe I misinterpreted this statement:

"California and Texas. Which state's economy massively increases global inequality? And which state's economy massively reduces global inequality? And which model do the Dems like best? And which model does the GOP like best?"

I took this to mean that the Dems like the California model and the California model increases global inequality (and so implicitly, Dems are hypocrites). For me, the California model means high taxes and high government spending (more or less) not support of what industry happens to be there. Sure, the politicians support what the local industry in California wants, as do the politicians in Texas.

The industry in California happens to be one where it is feasible to restrict supply (although less so as we go) so the politicians support restricting supply. With the industry in Texas it's less political feasible to meaningfully restrict supply, which is why the companies themselves focus on increasing production.

Causation goes from nature of industry to business decisions to political decisions. But *given* that politicians must do what the local business wants, the Dems are more focused on reducing inequality.

Maximum Liberty writes:

Hyena laughs:

Come to think of it, even their politics are very similar: California is just Texas with a larger share of urban residents. Head out into suburban areas or the hinterlands and you'll see the same sentiments as in Texas. Head into Texan cities and they have similar sentiments to those in California, especially among long-time urban dwellers.

I don't think so. The median voting suburbanite in California votes democratic. The median voting suburbanite in Texas votes republican. I say this based on personal experience living in both places, not real data.

Max L.

ThomasH writes:

@Heyna

Well you also have laws making it harder for low income people to vote in Texas, a feature, bug a bug from he standpoint of the Texas Legislature.

Floccina writes:

ThomasH gets it almost right. Let me fix it:
Pretty much everyone (except politicians) knows that IP protection is too strong expept the IP they and thier employer own. Zoning is too restrictive of building denser, more walkabel cities except in their area. That the oil export ban makes no sense only to those in the oil industry.

Thomas writes:

LA just hides its extractive industry: http://www.theatlantic.com/photo/2014/08/the-urban-oil-fields-of-los-angeles/100799/

Chuck writes:

Knowledge workers are smart and know how to protect their turf.

It's the logical thing to do.

Hyena writes:

Scott,

Sorry, but how does this conflict with what I said?

You characterize California and Texas as being very dissimilar, both presently and historically, while also implying that one is substantially more generative of inequality. To a certain extent, you do this by dropping the direct comparison implicit in the first paragraph for, instead, comparing their most famous industries. I'm pointing out that the economies seem to be very similar and, if they're generating vastly different levels of inequality, that's not apparent locally, at least. I don't address the famous industries because it seems much less important.

If you'd like, however: the tech industry has some famous names because they're consumer brands, most of the tech industry is sharply competitive business-to-business products and services. Those include bespoke and made-to-measure software, communications infrastructure, IT contracting, specialized hardware, scientific instruments, and on and on.

Our currently most famous companies -- Google, Facebook, and Apple -- face immense competitive pressures. Google's position comes from its massive investments in physical infrastructure, not from some valuable patent in the vault. Facebook is perennially just one new entrant from becoming MySpace. Apple, at this point, is a supply chain management company which also makes phones; its profits come from brutal production efficiency, not magical IP.

Lastly, California's politicians may vote for various IP protections, but we are famously also a center of anti-protectionism and completely free stuff. Well, ad-supported free stuff, much of the time. Consider, for a moment, that Android is free, open source, and a life-changing technology throughout the world. That and other endeavors like it probably stack up well against the Texas oil industry in downward-distributed utility terms.

I don't understand the conclusions you are drawing there. People moving to new places shows those new places must be like the old places? Is that also true of Mexicans moving to the US?

I would expect that someone, in choosing a substitute good, will choose the most similar substitute they can given relative price. I would not, then, expect that someone choosing a cheaper house would also choose a substantially different labor market. I would expect someone choosing a higher-paying job to choose a substantially different labor market while attempting to mitigate other differences. In fact, if I'm not mistaken, that's precisely the logic under which ethnic enclaves develop.

Scott Sumner writes:

Thanks Trevor.

Jim, I wasn't trying to show that Democrats are hypocrites. (All politicians are hypocrites). I just thought it was ironic.

You said:

"For me, the California model means high taxes and high government spending (more or less) not support of what industry happens to be there."

I think it involves both.

You said:

"But *given* that politicians must do what the local business wants, the Dems are more focused on reducing inequality."

Would allowing more oil drilling in California lead to less inequality?

Floccina, Good point.

Hyena, You said:

"I'm pointing out that the economies seem to be very similar and, if they're generating vastly different levels of inequality, that's not apparent locally, at least."

Where did I say it was apparent locally? And I don't agree that their economies are very similar.

And you didn't answer my question---do Mexican's move to the US because they think it will be like Mexico? My hunch is that they move because they want a change.

Nathan W writes:

On the inequality effects. This may appear so in looking strictly at income figures, but consider what is produced by these two different economies. Also, consider intergenerational inequality.

Silicon valley produces a lot of products that are available to the world's poor at a price of $0. An awful lot of code produced in Silicon Valley ends up permanently in the public domain for free - while final software is IP, thousands and thousands of the world's best software engineers are using open source code, and many of their miniscule improvements are ploughed back into further open source code, with the result of significant additional technological power available to the entire world's developers at $0. And while Hollywood enjoys a lot of IP protection, for the poor who simply cannot rationalize $20/DVD or $15 or theater visit (and for the generally unscrupulous), there's always file sharing where they can obtain these goods for $0.

Find me a way to download a barrel of oil for $0, and I'll buy your logic fullstop.

Also - the production of Silicon Valley et al are IP which are forever available for the enjoyment and/or productivity of all future generations, whereas oil is finite. Add intergenerational inequality into the equation, one can easily argue that California will pay heavy social dividends well into the future, while Texan technologies are simply making it easier to "steal" resources from the future while deterring current investment in renewable technologies.

ChrisA writes:

Your thoughts are similar to the ones I had on the claims that the recent "middle eastern wars" were really about securing access for US oil companies to the oil in the middle east. I always wondered what the logic would be for oil companies to bring more oil on the market. Surely they would prefer the oil supply from these regions to be restricted to reduce supply?

Also rent seeking trough intellectual property protection is a tough business nowadays given the ubiquity of torrents and suchlike. Most of the big computer firms, like google, are more about network effects than IP protection. And the reason that Apple does so well it not really about their technology (arguably not as good as most of their competition) but about marketing and branding. In the supposedly poor country that I currently live in at the moment, which is undergoing a significant recession, I-Phone 6's and Apple Watches are selling like hot cakes, and I get a lot of pitying comments about my cheap no-name phone.

I think causation is probably the other way, Companies like Google stay in California because the nice environment allows them to attract creative, clever types who have lots of options. Because of snobbery about Texas, the people who head to Texas have a different demographic and approach.

Chris writes:

Scott, can I interest you in the purchase of a Tower Records?

Seems like the wholesale destruction of the record industry was perpetrated by other California companies. I will grant you that most other industries destroyed by Silicon Valley companies are more dispersed (travel agents, newspapers, magazines, encyclopedia salesmen, etc) and not just California industries.

But yeah, overall I see your point.

John Hayes writes:

Scott,

A more interesting comparison is between the hard working oil producers and intel (where some people also work hard). Intel, even lacking credible competition, has reduce the cost of computing by half every year and half for the last 40 years. If people consumed compute power the same way they consumed energy, Intel would have made their last CPU 20 years ago because all of the computing would have been done. Instead compute consumption has also steadily increased over time.

Why hasn't oil consumptions increased when it's price is cut in half? It's not just that it's inelastic, but most people believe the price decrease is temporary. There's a perfect analog to monetary theory, temporary injections do not change the consumption level while permanent injections do.

Intel has been successfully doing level targeting for long enough that the increase in compute resource is anticipated and consumed in equilibrium keeping their chip unit prices stable.

Comments for this entry have been closed
Return to top