Texas had a few nice years there. Economic growth was soaring and employment booming, and fortunes were multiplying and tax receipts cruising. On that last item, tax receipts, really cruising. For the fiscal year ending in March, the Texas government reeled in 6.7% more in total tax collections than in 2013, which itself was 8.4% more than in 2012, which was 13.4% more than in 2011. That’s a 30% nominal increase in three years.
Then the Federal Reserve switched up. The über-confidant academic-turned-central-banker Ben Bernanke retired as chair. His replacement, Janet Yellen, though a career Keynesian, showed more modesty than her predecessor. She asked questions, courted conservatives, and talked of raising rates. By late last year, the dollar had powered through major thresholds against the euro, yen, and Canadian dollar. Surely the U.S. dollar rose because it was becoming a distinct possibility that the Fed, under its new leadership, had moved on from the all-blowout, all-the-time posture of the Bernanke era.
The obverse of the dollar rally was the big drop in the price of oil, from $112 to $44. Dollar up, oil down, just like in the 1980s and 1990s. Dollar down, oil up, just like in the 1970s and 2000s.
The relationship is direct. Oil is among the classic hedges against dollar mismanagement. The main determinant to its price above the natural level (which could be as low as $10-$20 per barrel, given marginal-cost realities), is whether the world is confident that the United States is being responsible in its issuing of currency.
Fracking and all the rest, while supremely interesting and invigorating as an intellectual experiment and engineering marvel, was a development that blossomed only because the oil price went up inordinately on account of the Bernanke Fed and Treasury acquiescence. Capital poured into Texas (and North Dakota, north-central Pennsylvania, and other shale-heavy regions) as Washington mismanaged the dollar.
But then D.C. cooled a little on the dollar-mismanagement. Capital dislodged from the shale places to a more general displacement across the country. Given that oil above $20 is a hedge, this capital movement should prefigure greater economic growth, and health, in the economy at large.
So what about this “Texas Miracle?” Has Texas’s success been a pseudo-success, the reflection of D.C. bumbling—or is it of the real variety?
This is a question that the Texas legislature, now in rare biennial session ending at the close of this month, gets to face squarely. The chance that this state will do well outside the context of soaring oil prices is negligible, should it fail to do two imperative things. Texas must make sure that it does not spend all the new money that has rolled into government accounts the last few years. And it must cut taxes.
