New strategies key for Texas’ prosperity
Dallas Fed leader talks of diversifying industry, climate change, education
Texans, get ready for the next evolution of the local economy.
To continue the prosperity that the state has enjoyed — outperforming the national economy when it comes to unemployment rates and job creation — Texas won’t be able to rely on the same formula that has worked over the years, said Robert Kaplan, president of the Federal Reserve Bank of Dallas.
In an interview with the Houston Chronicle’s editorial board, Kaplan said local economies across the state will need to diversify its industry makeups, confront climate change and fix early childhood and K-12 education if the state’s productivity is to continue to increase.
With an increasingly tight labor market — the state unemployment rate was 3.5 percent in December, near its historic low — a key challenge for Texas’ economy will be finding workers to fill openings for employers. At the same time, the energy sector will need to diversify its products and businesses to prepare, like other industries, for the effects of climate change, he said.
As baby boomers retire in droves, smaller generations will be unable to fill all the open and abandoned posts, which, in turn, will slow productivity across the economy. A key ingredient to economic growth is a large, young workforce — something the U.S. and other developed nations don’t have anymore.
The aging population has already resulted in major economic challenges across the country, leaving some regions, particularly in the Midwest, without large enough pools of workers to attract and retain employers.
For the time being, Texas is bucking that trend because it continues to benefit from migration from other parts of the country and
world, Kaplan said. “We take it a little bit for granted down here,” he said.
In the coming years, Texas won’t be so lucky. The population, though relatively younger than the rest of the U.S., is still aging, and now, domestic migration is slowing — meaning fewer people are moving here from other states than in the past — and international migration is declining as the Trump administration’s crackdown on both undocumented and documented immigration takes effect.
At the same time, Texas may find itself at a competitive disadvantage in the coming years if what economists call the “native” workforce, or, young people who grew up in Texas, don’t get the education and training they need to succeed in the 21st-century labor force.
Right now, Kaplan said, the state’s labor force is propped up by newcomers who bring a job and education with them.
Meanwhile, black and Hispanic children are falling behind in Texas’ public schools, ranked among the worst performing in the nation. That is not just a social problem, Kaplan said, but also an economic one — and a major vulnerability for Texas.
The state will need to spend more on education, at every age, and at every skills level, if Texas wants to grow a competitive workforce, he said.
“Start early. Make sure pre-K is focused on at-risk populations,” Kaplan said. “By the time you get to high school, there needs to be a much more viable skills training option. We want more students who have advanced degrees, too.
“Texas has the money to address these issues. There are no magic bullets.”
Energy, not just oil
Another challenge to Texas, and particularly Houston, is the slowing oil and gas sector, which is struggling with tightening investment from Wall Street and slumping oil prices.
“It’s going to be a challenging year for the energy business, and that will affect Texas,” Kaplan said. “It’s already affecting Houston. You’ll see some job reductions and you’ll see lower capital spending.”
Mining and logging employment, which in Texas is dominated by the oil and gas industry, fell by 9,800 jobs, or about 4 percent, in 2019, according to state employment data.
Slowing global growth is hurting demand for crude oil and refined products, which in turn pushes oil prices lower and hurts related industries, such as manufacturing. At the same time, public pressure is mounting to transition to cleaner energy sources, which is also likely to reduce demand for fossil fuels.
Kaplan said Texas is wellpositioned to lead on the energy transition, so long as the energy industry continues to diversify with renewables and other technologies, such as carbon capture, that cut greenhouse gas emissions.
“It’s unusual to find a company that is not thinking about (the energy transition),” Kaplan said. “It’s happening faster than people think.”
Still, he said, Texas will have to confront climate change on many fronts. The Port of Houston will need to be wider, deeper and better reinforced, building standards will need to change, and petrochemical and refining facilities will need better protection against the increasing frequency and severity of hurricanes.
“If you believe the National Climate Assessment,” he said, “you’d want to spend more to protect those (facilities).”
Show me the money
Another structural risk for Texas, Kaplan said, is new technology. Online commerce keeps prices low for consumers but means that local businesses continually face slimmer and slimmer profit margins. That constricts businesses’ ability to raise wages and expand, he said.
Businesses are “investing even more in technology to replace people,” Kaplan said.
Trade tensions appear to be easing, with a phase one trade agreement between the U.S. and China and a new North American trade pact in place, but the uncertainty over trade policy hurt business investment last year, Kaplan said. If business investment doesn’t begin to pick up in 2020, that may restrict growth not just in Texas, but nationwide.
Texas, of course, is not alone in contending with an aging workforce, underperforming public schools and the effects of climate change. But the state starts with many strengths — including a business climate that attracts both companies and workers — and just needs to adapt to changing conditions and economic trends.
“If you had to pick a state in the country whose hand you were going to play, Texas would be right at the top of the list,” Kaplan said. “I’m confident we will address these issues, because these are good business decisions.”