The Peter Zeihan Podcast Series - What Makes Texas So Successful || Peter Zeihan

Episode Date: August 23, 2023

Texas is known for many things - cowboys, bbq, oil, and who could forget the Alamo - but none of those are why Texas has been (and will continue to be) the fastest-growing state in the US. Full Newsletter: https://mailchi.mp/zeihan/what-makes-texas-so-successful

Hey, everybody, Peter Zion here, coming to you from one of my favorite places in central Colorado. Elkhorn Pass just above the Missouri Basin. It has, let's see, there's Mount Missouri there, Emerald is a pointy one, and all important is that long sloping one, which is IOPP. And as long as I was here surrounded by Midwestern names, I thought today would be a great time to talk about Texas. Now, Texas has been economically and from a demographic point of view the fastest growing state in the United States now for roughly 30 years. And I don't think that that trend is going to break anytime soon, but things are going to look a little bit different. First, I guess we should evaluate what has allowed Texas to be successful to this point.

And really, there's four things. First up is demographic growth. You've had a relatively high birth rate in Texas because costs of living is relatively, low for property, for housing, for electricity, for food. That definitely helps with family formation and helps young families have more children. Second and just as important, if not more important, is proximity to Mexico. About half of the trade that the United States participates with, with Mexico is actually Texas Mexican trade, and nearly half of what's left passes through Mexico on the way to the rest of the country. So one of the things that that, that's the United States,

the United States really is bad at is manufacturing because we don't have different wage levels and skill levels. We're pretty homogenous across the country. Even if you compare the richest state, Connecticut to the poorest one, Mississippi, you're only talking about a two to one ratio difference. And that means it's difficult to get synergies and economies of scale and manufacturing where it's really best if you have one person doing the software and one person doing the metal casting and one person doing the wiring and so on. Mexico plus Texas, has that to a degree. And so Texas is far and away the number one manufacturing state as a result.

Probably couldn't have achieved nearly, probably not a third as much success if it wasn't for partnership with Mexico. But once you get into the last two factors, things get a little bit weird and a little bit political. Texas is a red state, obviously, which means relatively low taxes and relatively low regulation. Companies love that. but people don't. Citizens, especially as they live in cities, still want services. So Texas is kind of the model for a red state where the state has very, very low interfered to the economy. But blue cities, where the cities provide a number of economic and services advantages that you would see in more traditional urban centers across the country.

And for companies that are looking to move somewhere, this is kind of the magic mix. Because at the state level, tax levels are low. And even in high tax cities like Austin, they're not nearly as high as they would be in a place like, say, Los Angeles, Chicago, or New York. So you get the best of both worlds. You get a low tax and regulatory regime. At the same time, your workers actually get the services that they want if they're going to live in a city. Which brings us to the fourth reason why Texas has been so successful. They've got a state development policy that's kind of, well, it's kind of, well, it's kind of.

dickish. Whenever they see another state facing fiscal problems, the governor gets together a bunch of representatives from local communities as well as local business leaders and takes them on a tour of that state so that

he can make the case, or she can make the case, that Texas has a better business environment and we have a balanced budget. It's constitutionally mandated. And you could move your business to Texas and we'd even give you a tax holiday on the sort of taxes that you're used to pay.

It's been really successful. So what we're seeing now, though, is it's unclear whether this strategy is going to continue to work as well. It's still going to work. Number one, birth rates in Texas have fallen. One of the many downsides of having a strong red state environment is that you kind of skimp on infrastructure. And that means we're seeing inflation rise up and it's been to become more difficult for Texans to live the way that they have at the low cost of living that they've been experiencing. Also, places like Austin, which were like, you know, the seventh pit of hell 25 years ago,

have now become tech hubs and have gone from being relatively inexpensive to win the upper third of living costs across the United States. Second, migration. Mexico's tapped out, especially if this Texas-Mexico axis continues to develop, more Mexicans are going to be staying in Mexico. which is going to make it difficult for Texas to replace its own lost birth rate with birth from somewhere else. What we've seen since the early days of COVID is this weird little shift where Texas has actually been birth rate negative, but it's still been drawing people from, not Mexico, from the rest of the country.

And if we're now in a situation where the birth rate in California has been negative for so long, and inward migration to California has been negative for so long, then Texas is looking at potentially losing its two biggest sources of in-migration at the same time. California is number one, Mexico's number two. As for the business model, you know, red state, blue state works to a point. The five major cities in Texas have expanded massively over the last 30 years, and they are not done. But the easy pickings is gone. If Texas really wants to continue this pace, it's going to have to do something at this

state level to continue to encourage people and businesses to move in, and that's something has to be something more substantial than nothing. It's not that it's relatively hands-off libertarian policy needs to go away, but the idea of all the decisions being made at the local and county level probably is pretty close to running its course. Now, that doesn't mean that Texas is looking down the maw of an economic collapse or anything like this. I'm just saying that the growth that we have seen in the last 35 years probably can't be replicated at the same pace on a state-wide basis. But because we've got blue cities in a red state, you can have a number of urban centers that are still going to do incredibly well moving forward. I would expect at the top of

the list to be Houston because it's got a foot in manufacturing and a foot in finance and a foot in energy and a foot in Mexico. I think El Paso will probably be second because when it comes to manufacturing and having those different great weight structures, El Paso shares its urban zone with Juarez, Mexico. It's a perfect setup. And then third, we'll probably be Austin. The more problems that Silicon Valley has, and you know, you might want to take a look at that California video we did, the more that tech is going to disperse out of the brain work into the application work, and that's where Austin shines. All right, that's it. See you guys later.