Weighing Texas economic resilience amid tariffs, workforce challenges

Q. How did you become an expert on the economics of Texas?

It was kind of a random thing. Like most things in my life, I've never been known for planning. I wrote my dissertation back in the day; it was actually an economic model. Back then, econometric models were still relatively rare.

We had a new dean at the business school at Baylor. I was a young faculty member. He said, “You know, all these states are doing models, and Texas doesn't have one.”

That was 47 years ago. I had no idea I'd still be doing it 47 years later. Because of the timing and the fact that we predicted a decline in oil when the oil bust began [in the mid-1980s], people started calling me and saying, “Can you help us with [this] economic development?”

It started to dawn on me. When you talk about an unemployment rate of 8 or 9 percent [through much of 1986–87 in Texas], if you then you go meet those people and shake hands with them or somebody that's lost their business, you begin to realize those numbers are more than numbers, they're a reflection of the lives of people.

When you say 500,000 people are unemployed, that means 500,000 families are not having the kind of life they need. Their kids may not be getting the opportunities they need. They may have food insecurity. There's a lot that goes into these numbers that you have to step back and think about.

Q. Is there one particular change here in Texas in the economy that really stands out?

When I was first building the model, literally, most folks within the leadership in the state didn't think they needed a model because you could plot the rig count against just about any economic variable. It was a very high correlation. Texas was very much an oil-and-gas economy.

Just as this was happening, our governor at the time, Mark White, and his chief of staff, Pike Powers, got together with a group of us to try to get MCC [the Microelectronics and Computer Technology Corp. research consortium] to Texas.

It was a big technology think tank to try to compete with the Japanese for the next generation of computing. There was a huge competition.

I mean, it was a huge deal, and Texas had never tried for anything like this before. We had relied on oil and gas, and Mark and Pike and a few other people, including Ross Perot, felt like we needed to go for this. That started a real technological revolution in Texas, and the whole economy started changing—from semiconductors to computers and gaming and film and bioscience and back to semiconductors again.

I really got to be there and see the beginnings of the transition from oil to technology and all the other things that we've been able to achieve since then.

Q. Looking out into the future, what do you think is Texas’ biggest challenge?

Honestly, I think the biggest challenge we have is educating the young people in our public schools today.

But if you look ahead, we're growing very rapidly in [semiconductor] chips, in artificial intelligence, data centers, crypto mining, all that. The common denominator of all those is they use a lot of electricity, and many of them use a lot of water as well. The oil and gas industry uses a lot of water. We have very real issues in terms of water for the future, power for the transmission lines to get the power where it needs to be for the future.

I mean, just the growing pains that come with adding over 1,000 people a day to your state, year after year after year, and then combining that with a lot of emerging industries that have specific needs.

But I think overriding all of that, the single most important thing is to educate our young people. The workforce is the currency of the future of economic development in any place. And here in Texas, we're blessed to have a nice population of young people. But we have to translate them into viable workers.

Q. How is Texas able to continue growing faster than other states over such an extended period?

I think it's a combination of things. On the whole, we've done relatively well in infrastructure over the years. We have a good climate. We have a regulatory climate that is reasonable, one that that tries to protect what needs to be protected but also tries to figure out ways to solve problems in general—not 100 percent of the time, but in general.

We have a young workforce. We have very good incentive programs. In a practical world today, with activist shareholders warning people to get the best value for their investments and that type of thing, that's a really important piece of the puzzle.

And we have some great natural endowments. Our state has evolved in such a way that we have major nodes of population that are just about the right distance apart for a lot of things to make a lot of sense.

Q. What impact do you think declining immigration could have on Texas growth?

I don't think you'll see it [immigration] come down as much as a lot of people think it will, because we don't have a choice. I mean, we literally don't have the bodies anywhere else [outside of immigrant labor].

Texas, in essence, wouldn't have a construction industry or an agriculture industry tomorrow if we didn't have access to the workers that we get primarily from Mexico. The immigration issue is complex.

You know, 25 percent of our doctors in Texas are immigrants. Scientists, engineers and health care professionals beyond the undocumented folks that seem to get the most attention—if we were to suddenly lose a big chunk of that workforce, we would have a very difficult time in Texas. And we could not sustain growth because, again, we couldn't grow anything. We couldn't build anything. And if you throw in the hospitality industry, we couldn't go anywhere. That would make for a not-very-pleasant state.

Q. How could tariff increases affect Texas?

We've looked at a number of things. One was, what if you truly put a 25 percent tariff on Canada and a 25 percent tariff on Mexico and kept them there. And we backed down to 10 percent on energy [imports], as the president has proposed.

If you did that and sustained it, we think the U.S. economy would lose $250 billion a year in GDP (gross domestic product). Texas would lose $45 billion a year in gross state product. And, you know, those kind of numbers are the kinds of things that are not sustainable.

I was involved both with NAFTA [the North American Free Trade Agreement of 1994] and the USMCA [the United States-Mexico-Canada Agreement of 2020], both of which are essentially free trade agreements. There's not that much difference in them. If you look at them, we've had 35 years to kind of stitch our economies together.

If you go back to the maquila [border manufacturing plant] program in Mexico, it goes all the way back to the 1960s. We are accustomed to being able to trade back and forth. And we developed supply chains like in automobiles, for example, where you make part of it in Mexico, bring it to the United States for another part, bring it back to Mexico for another part.

You might cross the border five or six times with electronics and automobiles during the production process. You start layering a 25 percent tariff on those every time they cross the border, and you get to something that's unsustainable very quickly.

I think we're going to move directionally that way, toward more tariffs, but I don't think it will be anywhere near the magnitude, certainly not on a sustained basis, of some of the things that have been proposed.

Q. What kind of problems are you solving for your clients? How do you navigate the fine line between providing credible information and meeting their business needs?

We basically do the numbers and report the results. We put out the numbers as we see them; it's the same thing with our clients. The vast majority of people approaching us are wanting to understand an issue. What does this market look like in the future? How does that change under different sets of assumptions?

Most of the questions we get are situational. It depends on what's going on. During the pandemic, we got questions about what we were going to look like afterward. Right now, we're getting questions about tariffs and immigration.

A lot of our work with companies is also helping them when they have a regulatory issue that they need to deal with that requires some economic analysis to provide perspective. But we really don't have the issue of having to navigate their [customers’] needs versus what we do, because what we try to provide is the information that will help them make the decisions they need to make. Over the years, I've turned down a lot of work where people wanted us to produce a specific conclusion. We just don't do that.

This is an edited and abridged version of a conversation available on the Southwest Economy Podcast.