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The Economist: This is not the 1980s

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September 22, 2016 | 357 views | Post a comment

By M. Ray Perryman

The Texas economy has added 190,600 jobs over the past year, and employment has risen in 16 of the past 17 months. Last month, nine of the 11 industry groups tracked by the Texas Workforce Commission added jobs. All of this occurred despite the end (at least for now) of a major oil surge.

For those of us who have been around a while, the differences between what has happened this time when oil prices dropped precipitously and what went on in the 1980s is striking. I am regularly asked why that is and whether we just haven’t yet seen the really bad economic times but they could be coming. Here’s the short answer: This is not the 1980s.

In the 1980s, the Texas economy was not multifaceted as is today. We had oil, and that drove much of the business activity in the state. At the peak of that oil boom, the concentration of oil and gas employment in the state was more than 75% higher than it was at the more recent pinnacle.

The one-dimensional nature of the economic base wasn’t the only 1980s problem, however. When oil prices cooled somewhat in the early part of the decade, banks and savings and loans started scouting around for other opportunities and many landed on real estate. The tax laws at the time also encouraged savings and loans in particular to invest in real estate assets of various kinds, and some aspects of oversight were rather lax. The underlying economic and population growth did not support the level of construction, and a major bubble developed.

In 1986 when crude oil prices fell dramatically, a wave of failures of banks which were overly extended into energy loans was not far behind. Before much longer, another wave of failures followed as real estate loans also went bad (partially caused by yet another tax reform initiative that reduced returns on real estate). When all was said and done and the 1980s came to a close, 425 Texas commercial banks had failed, including nine of the 10 largest Texas bank holding companies.

Essentially, it was a one-two punch. The economy was dominated by oil and so were loan portfolios. Some leveling off of crude oil prices early in the decade led financial institutions to continue to pour money into real estate, despite the fact that vacancies were growing. (At one point in Houston, about one of every six houses was vacant.) First oil prices dropped dramatically and the economy stalled, then the effects of financial deregulation and some changes in the tax law kicked in and -- that was that!

Employment in the state was slow to recover and the real estate market took even longer. However, the experience has not been forgotten. When many other states were struggling with excess real estate in the aftermath of the recent Great Recession, Texas was only minimally affected. We missed the upswing (or bubble, more precisely) in part because Texas bankers had a been-there-done-that mentality about building more than the economy and population growth justified and were extra cautious.

We also learned that a one-dimensional economy was a very bad thing. Targeted economic development efforts have been ongoing for decades now. The state offers competitive incentives to locating firms and we‘ve done a decent job of ensuring the other requirements of businesses such as infrastructure, workforce, and competitive costs are met. (There are some challenges now, but that’s a topic for another day.) Many local areas across the state have passed sales tax measures for economic development and have been using those resources very well to encourage desirable corporate locations and expansions.

These efforts and investments have paid off. When the price of oil is less than half the level it was not so long ago and the state economy keeps adding jobs, clearly there are other industry groups which are flourishing. Technology and advanced industries, biosciences and research, and other emerging industries are part of the story. Stability and growth in cornerstone industries like higher education and health care is also a contributing factor.

When oil prices were in the $100 per barrel range, Texas was adding jobs at a 400,000 per year pace. Now, it’s less than 200,000 per year. The oil surge was definitely part of the reason for the strong economic performance of a few years ago, but the fact remains that the state is doing well even without that boost. There could be additional fallout from strained energy companies if prices stay low for an extended period of time, but I don’t think it will be a major problem across the economy.

In addition, there has been some good news on the energy front. Oil prices are staying generally high enough to make certain types of wells economically sound (particularly in the Permian Basin) and we’ve seen some increase in activity. The mining sector also recently added 100 jobs. One month is not a trend and a mere 100 is nothing to write home about compared to what the industry lost over the past couple of years, but it’s at least a positive signal.

The boom and bust of the 1980s is far more complex than can be adequately described in the space of a column. (In fact, I wrote an entire book about it.) The essential facts are that the 1980s Texas economy was anything but diversified, and changing laws in the financial sector made a bad situation far worse. This time around, we lost some momentum when crude oil prices tumbled, but expansion in many other industries has contributed to resilience and growth continues. This is not the 1980s!!

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group ( He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
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