The 'U-Haul Indicator' Obscures Much More Than It Reveals
When Rob Lowe moved to California with his mother and siblings in the 1970s, they settled in Malibu. Money was scarce. Divorce can be economically crippling for obvious reasons, and Lowe’s parents had divorced. Hard as it is to imagine, Malibu was somewhat “working class” then, which helps explain the why behind where they moved to in California. A call to his father in Ohio was a rare luxury.
Nowadays one would be hard pressed to find hard-up families who would move to Malibu. Where would they live? Everything is so expensive. California housing isn't expensive solely because of stringent development rules. A lot of it's just a function of rising wealth in an economically dynamic state (if a country, California would have the world's fifth largest economy) chasing what's finite. Evidence supporting the previous point is downtown Los Angeles. Real estate there was not-too-long-ago cheap. So was living cheap. Now it’s a popular place to live, and as a consequence of DTLA’s popularity it’s increasingly expensive to take up residence.
Things change. Particularly in consideration of how dynamic is the U.S. economy, the present rarely defines the future. In the ‘70s Seattle was like Detroit is today, while Detroit was in many ways like Seattle is now. While the seriously talented or degreed wouldn’t generally look Detroit’s way in the present, they did in the ‘70s. Just the same, Austin, Nashville and Portland were kind of run down cities in the 1990s, but they’re booming today. All three are talent destinations. In Austin alone the number of Stanford grads (and dropouts) can be measured in the thousands.
All of this came to mind while reading recent posts by conservative economists Mark Perry and Dan Mitchell. Among conservatives it’s increasingly sport to belittle California, New York, and other high tax states. Up front, there's no disagreement with them about taxes. They're a penalty placed on work. The goal should be to always and everywhere bring them down, or eliminate them. Always. But they don’t explain everything. Clearly.
No doubt Nashville booms in zero income tax Tennessee, but Memphis is an economic basket case in the same state. Readers can probably count on one hand (with a few fingers to spare) how many people they’ve met over the years who were moving to Memphis.
With California’s high taxes very much in mind, Perry and Mitchell noted that the availability of U-Haul trucks in the Golden State is low; their point being that demand for moving trucks in California is very high. People want to get out. On the other hand, the supply of U-Haul trucks in Texas (where there’s no state income tax) is relatively high. People don’t want to leave Texas. It’s about three times more expensive to do what so many seemingly want to do (U-Haul their belongings from California to Texas) than it is to move one’s belongings to California. Get it? Heavily-taxed California is losing population to low tax Texas which, if it were a country, would be the world's 10th largest economy.
The problem is that such an argument obscures a great deal more than it reveals. One can see this by simply considering Texas itself. Amarillo is in the northern part of Texas, and it can claim the same zero tax rate as Austin does, but does anyone think Amarillo is heavily populated with Stanford grads? UT grads? While it’s likely true that there are more UT alums living in low-tax Amarillo than there are Longhorns in high-tax New York City, does anyone want to bet this writer that the Amarillo grads out-earn their fellow alums in Manhattan?
Comparing Texas to California from a pure talent perspective, that each state can claim numerous billionaires exists as a signal that there’s enormous economic talent in both states. Still, would anyone bet this commentator that there are more 2019 Harvard, Stanford and Wharton MBAs heading to Dallas and Houston over Los Angeles and San Francisco? And for those who say those three schools are populated by lefty left coast types, will anyone take a bet that more University of Chicago 2019 MBAs are heading to Texas over California and New York? To sweeten it, will anyone bet this commentator that Texas would beat either state as a lure for 2019 Chicago MBAs?
No doubt the U-Haul stats are signaling something, but it’s arguably not what so many conservatives think. Goodness, average and working class earners have been exiting Malibu for decades. Same with Manhattan. Both are very expensive places not because economic growth has been suffocated by taxes in California and New York, but precisely because offensive as each state’s tax rates are, they haven’t snuffed out the dynamism that makes each locale a major magnet for the commercially bright. It's worth reiterarting that to blame nosebleed housing prices in the coastal states solely on limits to development is more than a bit simplistic.
Furthermore, it’s probably not unreasonable to assume that not too many Harvard, Stanford, Wharton and UT MBAs are using U-Hauls to haul their things around as is. So yes, California has surely lost lots of residents turned off by the high prices, regulations and taxes, but an economy is a collection of individuals. And it’s individuals, or the “vital few” as Canadian economist Reuven Brenner describes them, who drive economic growth. This matters because it seems the “vital few” still view the Golden and Empire states as the places to prosper, despite the taxes.
Sure enough, the vast majority of venture capital money still flows to California, Massachusetts and New York. California on its own can claim businesses that attract over half of the world’s total VC money. It can also claim three of the world’s five most valuable companies, not to mention the vast majority of “unicorn” style businesses that investors (many of them based in New York) think will eventually replace today’s technology giants.
To be clear, none of what’s been written should be construed as an apology for high taxation. It’s a shame that New York and California don’t mimic Texas’s far more enlightened approach whereby they don’t tax production (work), but do tax consumption through higher taxes on property.
But at the same time, it is to say that measures like the “U-Haul” index have a facile quality to them that obscure a great deal, and that might give the impression that Los Angeles, New York and San Francisco are soon to be depopulated to the benefit of Dallas, Orlando and Phoenix. That’s unlikely.
To see why, it’s probably wise to track who’s entering California and New York each year, along with who’s leaving. Needless to say, the arrivals probably aren’t coming in U-Haul trucks.