ECONOMY

ECONOMY

The Texas Way of Inclusive Capitalism

The state’s growth is being driven by people of color; here’s how economic freedom benefits us all.

story by W. MICHAEL COX AND RICHARD ALM

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the u.s. census released this summer put Texas’ population at 29.1 million—up 4 million since 2010, more than any other state. One part of the latest headcount stood out: People of color accounted for a staggering 95 percent of the state’s population growth over the past decade. The state’s fastest-growing ethnic group, Hispanics, made up 40.1 percent of the population in 2020, just slightly below the 40.6 percent for Whites. Blacks were at 12.1 percent and Asian-Americans (and others) at 7.2 percent (see chart).

As their numbers increase, racial and ethnic groups are becoming even more important to Texas’ economic fortunes. The state will need an ever-expanding labor supply if it wants to remain among the leaders in growth and job creation; non-Whites will be filling most of those jobs. Regular readers of this column will be familiar with the Texas model of economic freedom, the shorthand for a regime of low taxes and light regulation that for decades has empowered the private sector. The model served the state well over

the past two decades. Texas outpaced the nation by an average of 1.5 percentage points a year in GDP growth and increased employment more than twice as fast as the rest of the country.

By highlighting Texas’ shifting demographics, the 2020 census raised some interesting questions about the Texas model of economic freedom. Does it deliver better living standards for people of color? Would non-Whites fare better in places like California and New York, big states more disposed to tax, spend, regulate, and redistribute?

A DEEP DIVE INTO THE DATA

The questions triggered a research project that found real incomes for all major ethnic groups are higher in Texas and states with similar pro-market policies. Ethnic groups’ incomes are lowest in states with the least economic freedom. The study started with Census Bureau data on workers’ annual earnings by state and age from 2015 to 2019, which we adjusted for differences in states’ average cost of living and tax burdens. We then looked at four ethnic groups: non-Hispanic Whites, Hispanics, Blacks, and Asian-Americans, subdivided by five levels of educational attainment, 53 fields of study, and 70 occupations. We made separate calculations for men and women.

To determine states’ friendliness to free enterprise, we used the Economic Freedom of North America rankings, compiled by our Bridwell Institute colleague Dean Stansel. We divided the states into five groups. The study found a substantial economic freedom premium that persists across race and ethnicity in the freer states. Among men with high school diplomas, for example, the premium was $11,100 for Whites, $7,200 for Hispanics, $12,000 for Blacks, and $13,500 for Asian-Americans. Women with bachelor’s degrees exhibit a similar pattern—gaps of $13,500 for Whites, $12,750 for Hispanics, $10,000 for Blacks, and $10,500 for Asian-Americans.

The data confirm earnings rise with education—for all four ethnic groups. Among Hispanics with bachelor’s degrees and above, for example, men in the freest states earn an average of 40 percent more than those in the least-free states. For Hispanic women, the economic premium approaches 30 percent. We also looked at workers in the same jobs in states with different levels of economic freedom. For males, the freest states’ premiums over the least free were $19,900 for Whites, $21,600 for Hispanics, $13,500 for Blacks, and $19,400 for Asian-Americans. For women, the edges were $13,900 for Whites, $12,800 for Hispanics, $12,200 for Blacks, and $12,800 for Asian-Americans.

Our research doesn’t deny the minority groups’ past hardships or today’s structural racism. In fact, our data show large gaps in adjusted earnings between Whites and non-Whites. The disparities, however, are smaller in Texas and other states with greater economic freedom.

MIGRANTS WITH A MESSAGE

Research by SMU’s Mission Foods Texas-Mexico Center finds that once migrants get to Texas, they tend to stay put. They like it here. They find work that affords a better life here. They seem to grasp intuitively what our research finds empirically: economic freedom—i.e., the capitalist system of markets and free enterprise—is inclusive. It raises living standards for all people.

Our data has a message for Texas and the rest of America. It’s wrong to blame capitalism for racial and ethnic groups’ economic struggles. Strangling the private sector with taxes and red tape isn’t the way to improve living standards— for Whites or for people of color.

SALARY BREAKDOWN

The Texas Attraction: High Real Earnings

An analysis of 70 occupations to yield average earnings (adjusted for cost of living and state taxes) found that Texas Hispanics earned an average of $73,600 a year—the most by far among the 15 states with the largest labor markets. Georgia was next at $62,700, and economically unfree New York brought up the rear at $39,900. Blacks in the state earned an average of $62,900, ahead of Arizona and Ohio at $55,100. New York was last again, at $36,900. Average earnings for Asian-Americans in Texas was $67,000 a year, compared with $63,000 in Michigan and $38,100 in New York.

Texas’ Changing Demographics 1850-2020

100

90

80 HISPANIC (40.1%) ASIAN, OTHER (7.1%)

70

60

50

40

30

20

10 NON-HISPANIC BLACK (12.1%)

NON-HISPANIC WHITE (40.6%)

0 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020