I’d like to expand on something I wrote near the end of my last post on the current boom in Texas. As I said, buying into or shorting secular trends is a key investment strategy for me, and Texas’ explosive growth is a major opportunity. But I don’t think most people understand why the state is doing so well. It’s not just because of its low taxes and hands-off regulatory regime. If that were the case, low-tax backwaters like Alabama and Mississippi would be thriving, too. What sets Texas apart is education, especially the public UT system, which possesses the third largest endowment in the country behind only Harvard and Yale.
Dynamic, innovative economic regions–with the highest per capita incomes–always benefit from quality educational systems. Silicon Valley and the Northeast are the most obvious examples. But other places like North Carolina’s research triangle have also been fueled by great schools. The reason for this isn’t rocket science. You simply can’t have sustained economic growth without a steady supply of smart, highly educated people.
The problem is that schools cost a lot of money. And most states these days–especially the state where I live, California–spend far more on prisoners, public employees, and old people than education. It’s a disturbing secular trend, so disturbing that if California were a stock, I’d short it.
California used to be at or near the top in education spending. Then it passed the infamous Proposition 13 and everything changed. Older Californians, many of whom benefited from the state’s great schools and almost free public universities, shafted their children and grandchildren so that they could pay lower property taxes. Now the state is Mississippi-west when it comes to education spending and the UC system, once the greatest public university system in the world, is a shadow of its former self.
I’d like to see Prop 13 repealed in its entirety. That’s probably never going to happen, but we should at least reform the extremely unfair commercial real estate sections of the law. Giving individual homeowners a break on their taxes is one thing, but there’s no reason why wealthy commercial landlords like Shorenstein Properties should pay 1978-level taxes on lucrative holdings like high-rises and business parks. I can assure you, they’re not charging their tenants 1978-level lease rates. Their properties should be reassessed every year based on the real revenues they are able to reap from them, and the funds collected should be dedicated solely to education.
Earlier this year, a bill that would have done almost this exact thing was proposed–and promptly quashed–in Sacramento. Opponents of the bill called it a “job killer.” The unintended irony of that phrase would be laughable if the stakes weren’t so high. Shortsighted policies like Prop 13 have been killing off California’s economic prosperity for a generation now.