Throughout much of our nation’s history, US federalism has moved toward centralizing power within the federal government. Since the post-bailout hysteria and most recent public sector expansion, the issue of states’ rights has had a renaissance. Some Americans long for a system where states have more control to govern. You know, the system our Founders seemed to envision, where each state is an experiment adopting best practices from one another.

With 50 experiments going on at once, the federal government should have an excellent source of case data to see what works and what doesn’t. Why, then, does the federal government much more closely resemble the California model then the Texas model?

We know there are distinct differences between the federal and state governments. The feds are to secure the borders and oversee national defense. The feds haven’t secured the borders. Just ask Arizona, which is home to the city with the second highest volume of kidnappings in the world: Phoenix. How does that happen in America? Arizona had to pass state legislation to enforce federal immigration laws already on the book, which apparently is highly controversial. The feds are working to appeal the law before it’s scheduled to take effect July 29th. Said Justice Department lawyers:

In our constitutional system, the power to regulate immigration is exclusively vested in the federal government. The immigration framework set forth by Congress and administered by federal agencies reflects a careful and considered balance of national law enforcement, foreign relations, and humanitarian concerns — concerns that belong to the nation as a whole, not a single state.

Except that they haven’t enforced the national laws and Arizona is paying for it. At this point, I’m just bracing for Washington to declare open commerce of drug wars across the border as an “economic stimulus” for the southwest. When it comes to drug wars and kidnappings, this aggression will not stand, dude.

Other differences between the federal and state governments is that the feds have taken it upon themselves to institute and run national social insurance programs like Medicare, Social Security, and FDIC. They control the US dollar, monetary policy, and thus interest rates (the Federal Reserve isn’t technically a government entity, but for all intents and purposes, it is…other then having elected officials and that whole transparency thing). But in essence, the feds are still a government instituting laws on a sovereign land. For some head-scratching reason they aspire toward the California model which is festering in bankruptcy, rooted in high taxes, regulation, and entitlements.

All I’m saying is why not be more like the Lone Star State? So far, Texas has managed to skirt through the financial collapse and recession rather swimmingly. The Texas unemployment rate has been at or below the national rate for 42 consecutive months. In June, unemployment clocked in at 8.2%, compared to California’s rate of 12.3%, and a national rate of 9.5%.

Chief Executive magazine’s 2010 survey of the best places to conduct business called California “the Venezuela of North America”, ranking it last. Guess who came in at number one? Texas.

I think we can all agree that Texas’ performance relative to demographically similar California probably has something to do with friendly tax policy. Texas has no personal state income tax, no personal capital gains tax, and no corporate income tax. California on the other hand, is, well, Venezuela. For the last twenty years, California’s oppressive tax burdens have consistently ranked among the top 10 highest in the country.

Source: newgeography.com

Texas’ housing market has been unbelievably steady through the financial crisis and housing bubble. This is mainly because Texas did not particularly expose itself to sub-prime mortgage products. To quantify this, in May 2010, the Texas foreclosure rate was one in every 862 mortgages. Compare that to California, Arizona, Florida, and Nevada, states who doled out the most sub-prime loans: Nevada one in 79, Arizona one in 169, Florida one in 174, and California one in 186. Consumer protection laws in Texas prohibit the total amount of debt on a home from exceeding an 80% loan-to-value. Laws also don’t allow Texans to take proceeds from a refinance to pay off other debts.

Texans are smart. They understand that inflation parties eventually end and instituted sound lending practices. They didn’t trust Fannie, Freddie, and the Federal Reserve to set long-run interest rates and assume everything would be peachy. Texas proved to have an understanding of bubbles, over-heated markets, risk, herd behavior, contagion, moral hazard, the global financial system, sustainability, fundamentals, and common sense.

Now let’s take a look at unions. In my opinion, unions are generally a negative because they inflate labor costs and make the United States far less competitive. It’s one thing to institute a minimum wage and child labor laws (which in a modern, free, and democratic society like ours, doesn’t make sense in many ways), but it’s entirely another thing to impose the benefit packages, above-market salaries, and legacy costs on companies that unions so often do. The percent of Texas’ labor force represented by unions is only 6.2%. Contrast that to California which has 18.3%.

When it comes to government revenue (receipts and fees), the practice of taxing income can create great fluctuations. In California’s case, they experienced a 20% upswing in annual revenues through fiscal 2000, which quickly turned into a 17% drop in 2002. This volatility makes it much more difficult to balance a budget. This time frame was during the slight contraction of the economy following the dot.com bust and post-9/11. Now that we’re in the worst economic period since the Great Depression, what type of revenue swings will be in store for The Golden State? Texas, on the other hand, get’s the lion’s share of its revenues through taxing sales. This inevitably distorts the economy less and allows for more flexibility. As far as a model for the federal government, this would support a Fair Tax-type movement on a national scale. Other benefits to scrapping the 67,000 page tax code would be getting rid of the many special favors and handouts it creates. This breeds the lobbyist and toxic culture in DC. If we moved to a Fair Tax, not only would each and everyone of us get back hours and days of our lives doing taxes every year (or the accountant’s lives), there would be no more lobbying community in Washington. Thinking about the creative energy lost every year in this country due to becoming compliant with our tax code is astonishing.

Lastly, the Texas economy is very diverse. The government plays a role in this diversity. For one, the University of Texas at Austin is the fifth largest college in the country with enrollment of 51,032. This is a public institution which generates plenty of jobs. Texas benefits from flourishing professional fields such as accountancy, law, security services, and the oil and natural gas industry. The latter has to do with natural resources, but the presence of just about any other industry you can point to has to largely be contributed to Texas’ business-friendly practices. Businesses go to less taxed, less regulated places. The flocking of such businesses creates diversity, which in a recession, cannot be under-appreciated.

The government of Texas has striven to be a responsible steward of the economy. But they let the people manage it. As a result, Texans have a great economy and a balanced budget. They did not sink themselves through pensions and entitlements to the tune of California.

There’s really no question that in a state death match, California does not want to mess with Texas. The federal government should be implementing similar policies as the Texas experiment. That was one of the major advantages to federalism as our Founders saw it.

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