The 2021 TX Big Freeze: A Toxic Mix of Politics and Economics - Part 1

First, yes, I'm back again!!  I now have a 18 month old baby girl, so I'm a single dad so a little limited on time these days.  Nevertheless, having gone through 4 nights of freezing cold weather here in Corpus Christi, Texas, I feel the need to do some thinking about the power grid in Texas. 

Background

It is well documented that Texas has it's own power grid, and this power grid emanated out of a strong desire (similar to banking) to remain independent from Federal regulators.  The Texas grid is called the Texas Interconnection and it covers around 90% of the area of the State of Texas.  As you can see from the figure below (taken from the North American Reliability Corporation), there are only 2 energy grids on the continent that are smaller than the size of a State, notably Texas and Florida.  By being smaller than a State that means that as long as they don't trade energy across State borders they can escape being regulated by the Federal Energy Regulatory Commission, as only energy grids taking part in inter-state commerce are regulated at the Federal level.  The Texas Interconnection has gone to extraordinary lengths to ensure that even energy traded from the Western Interconnection to Mexico does not end up being traded to Texas (otherwise that would trigger Federal oversight).  A previous Governor of Texas, Rick Perry, even went as far as to say that Texas would rather be without power for more days than have Federal oversight of the Texas Interconnection (see here), but there are others who feel that this isolation (see here) may soon come to an end.  Indeed the Federal government does still have the jurisdiction to intervene if the State policies are a threat to the wellbeing of Texans.  

Now there are 2 other issues that in normal circumstances would have been mentioned as footnotes, if at all.  The first is the fact that the Texas Interconnection does have links to other States, but they are just not used. There was an incident in 1976 after a Texas utility, for reasons relating to its own regulatory needs, deliberately flipped a switch and sent power to Oklahoma for a few hours. This event, known as the "Midnight Connection," set off a major legal battle that could have brought Texas under the jurisdiction of federal regulators, but it was ultimately resolved in favor of continued Texan independence.  The fact is that Texas does already have 2 connections with the Eastern Interconnection, but apart from the "Midnight Connection" episode, these are not used (but are supposed to be available in case of an emergency).  The other issue is that there are 3 links to the Mexican energy grid, which are usually used for exporting energy rather than importing energy.  

ERCOT

The agency with responsibility for running the Texas Interconnection grid which is made up of private producers of energy of all different types, has been all over the news lately, and of course it is coming under great scrutiny ever since "The Big Freeze" occurred.  It's name, rather ironically, is the Energy Reliability Council of Texas (or ERCOT) and it is a non-profit based in Austin and in Taylor, Texas.  ERCOT is a non-profit with a Board of Directors of various stripes.  So let's go through their bona fides for this obviously important job:

• Bill Magness is the CEO and has a law background and lives in Texas;
• Sally Talberg (who lives in Michigan) is the Chair, who has a background in energy regulatory policy (and not in actually producing energy);
• Peter Cramton (who lives in Germany/Maryland) is the Vice Chairman, and is a Professor of Economics at the University of Maryland and University of Cologne - he is a specialist in auction markets;
• Vanessa Anesetti-Parra is a board member based with Just Energy which is based in Canada, but offers services in Texas;
• Terry Bulger is a banking expert who lives in Illinois;
• Mark Carpenter is an electric utility engineer based in Texas;
• Lori Cobos is the head of the Texas Office of Public Utility Counsel and lives in Texas;
• Raymond Hepper is a retired electric VP for the New England grid system, and it appears as though he lives in MA.  
• DeAnn T. Walker is the Chair of the Public Utility Commission (PUC) of Texas [in an ex-officio capacity]

and most of the other appointees not listed here are representative of the various market segments on either the consumer or producer side of the market in Texas.  Now I believe several of these Board members have resigned, but what I am trying to address here is not exactly who is on the Board, but the makeup of the Board.  

Now if we look at the description of ERCOT and how it is regulated, their website (see here) quite clearly states that "ERCOT is a membership-based 501(c)(4) nonprofit corporation, governed by a board of directors and subject to oversight by the Public Utility Commission of Texas and the Texas Legislature."  So that means that the PUC is regulating ERCOT but the Chair of the PUC has a seat at the table of the ERCOT Board.  

 But let's just step back a minute and look at the composition of the Board of ERCOT.  It consists of many of the representatives of the customers and suppliers of energy in Texas, as well as the head of the regulatory body.  I would suggest that this is not a good governance structure for ERCOT for the following reasons:

1. The PUC Chair is on the Board of the entity they are in charge of regulating;
2. The ERCOT Board consists of individuals who have no direct relationship with Texas, and therefore no "skin in the game" in terms of ensuring that this Body works for the good of all Texans;
3. The ERCOT Board consists of a large number of supplier and customer representatives, with differing incentives - the suppliers clearly want the highest prices for their output and the customers clearly want to pay the lowest amount for this output; and
4.  On the ERCOT Board, coalitions of voting members who are also market participants can easily vote down regulations they do not like. 

The last point is particularly relevant to "winterizing", expenditure on processes and equipment that will allow energy generation and distribution in severe winter conditions.  If policies are proposed to mandate winterizing for example, the suppliers may not want to do it as they are not sure how much of it they can pass on to their customers, and also the cost of winterizing may be different for different energy generation methods, which will lead to uncertainty as to competitive advantage vs other forms of energy generation.  Similariy, the ERCOT customers (commercial and retail energy companies) may not want to do it either, as it will lead to higher prices, which will lead to less energy purchased, and may increase the attractiveness of natural gas and solar power as alternatives for residential customers.

The PUC

But the rules of the game and the regulation of the Texas Interconnection really falls to the regulators.  As the ERCOT website makes clear, it is the PUC and the Texas legislature that is responsible for oversight of ERCOT, and therefore those are the responsible bodies for dictating the rules under which ERCOT generates and supplies energy to Texas businesses and residents.  

So let's do a deep dive on the PUC now to see what is going on there.  There are 3 PUC commissioners, all of whom are appointed by the Governor and "serve at the pleasure of the Governor".  At present, as the PUC webiste shows (see here), these are:

• DeAnn T. Walker who is the Chair, and has a background in accounting and law;
• Arthur DeAndrea was General Counsel to Governor Abbott and has a background in law; and
• Shelly Botkin who has an undergraduate degree in anthropology and used to work as the Director of Corporate Communications and Government Relations for ERCOT.

I do not know whether these 3 Commissioners are card-carrying Republicans, but I would suspect that if Governor Abbott appointed them (and at least one of them has worked in Governor Abbott's office) then there is a high probability that they are.  Moreover, one of the Commissioners was appointed from ERCOT which could give rise to "regulatory forebearance" ( - the notion that the regulator would go easy on the entities being regulated), and none of them have any direct expertise in the science and technology of power generation.  It also means that 2 out of the 3 Commissioners have a direct person to person relationship directly with ERCOT, and so it likely therefore means that ERCOT's views will be over-represented on the PUC.    

When you do a simple Google search on the Chair too, some worrying evidence comes to light - such as the article from July of 2020 in the Dallas Morning News (see here) regarding the disbanding of the PUC Enforcement Division.    

Now in terms of the grid standards that ERCOT has to comply with, these come from 3 bodies:

• FERC - the Federal Energy Regulatory Commission
• NERC - the North American Electric Reliability Commission
• Texas RE - the Texas Reliability Entity (see here)

The first 2 bodies determine standards and protocols in the US and North America respectively, but as Texas doesn't wants to be independent of the Federal government in terms of everyday activities and supervision, it has created it's own regulatory standards body, the Texas Reliability Entity or Texas RE.

Texas RE

Texas RE is once again a non-profit with a board of directors consisting of 8 individuals.  There is a mix of lawyers and energy executives or past executives, and from the Texas RE website.  This body was likely ultimately responsible for the regulation of ERCOT to certain specified standards that would have to be maintained by ERCOT, but in fact this body had already been fired by the PUC in September 2020, with no replacement made by the PUC.  This is documented here in a Houston Chronicle article.  Of course it is even worse than this, as the Texas RE may have been completely inadequate as supervisor and enforcer of standards for the grid, but I have not managed to find any documentation on this issue, and in any case, the Texas RE no longer has any function in relation to the Texas grid.

Toxic Politics and Economics

 

What is clear from my digging into the regulatory framework for the Texas Interconnection, is that Governor Abbott had failed to act when the PUC fired the Texas RE as monitor enforcers and supervisors of the power grid - they still exist, but their role as I understand it is now just as a supplier of information and a central despository for self-reported violations.  

The economic part of this is that any winterizing that needed to be done was likely not done by the grid participants as they knew that there would be no inspections or enforcement (with fines).  Worse than that, Governor Abbott must have known what was going on at the PUC, and yet he did not act, given that all the PUC commissioners serve "at the pleasure of the Governor".  

Summing Up So Far

In terms of the regulatory structure of the Texas Interconnection, there are 4 potential problems that I have identified:

1. The potential for "coalition building" on the Board of ERCOT to resist doing things that raise costs and therefore prices;
2. The Regulator having a seat on the Board of the representative body of the Regulated entities;
3. The Governor's appointment of Commissioners of the regulator (the PUC), which has led to less than ideally-qualified individuals regulating ERCOT; and 
4. The fact that 2 of the 3 PUC Commissioners have direct current or past dealings with ERCOT, likely leading to "regulatory forebearance.
5. The actual enforcements of standards was up until last year the responsibility of Texas RE, but they were fired by PUC, with no replacement being made - leaving the field completely open to forgo winterization this year.

  

  

The bell tolls on NAFTA - so what are the "known unknowns"?

Donald Rumsfeld

Donald Rumsfeld, the U.S. defense secretary in the George W. Bush administration, once stated (back in February 2002) that "there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know".  At present, the situation with whether NAFTA (North American Free Trade Agreement) exists this time next year is one of these "known unknowns".  In fact the date for deciding whether NAFTA will exist next year is about a month away, due to mid-term elections north of the border and the Presidential elections south of the border, which will hamper any further progress in the negotiations beyond May.  Not only that, but some decisions are to be taken also before May on the extent of the tariffs to be taken against China, in addition to the ones already announced.

Larry Kudlow - Speaking at CPAC 2015

With the new tariffs on steel and aluminium, plus the resignation of Gary Cohn as the head of the National Economic Council and President Trump's top economic adviser, there is little now to stop the advance of US economic nationalism in the US administration.  Even the new appointment of Larry Kudlow as Cohn's replacement is unlikely to change things on the trade front, as Kudlow clearly sees the bigger picture and wants to keep his new appointment and much greater political influence than he has pontificating on CNBC.  Plus in the grand scheme of things these tariffs are not that important compared to the regulatory rollback favored by Kudlow and his ilk.

In general though, the US media seems to be at a loss to understand why President Trump is pushing ahead with this agenda, and is predicting doom and gloom with the potential for trade wars to emerge, rolling back the advances made towards a fully globalized trading system.  But they do not seem to understand what is at stake here, and nor do they seem to understand the economics surrounding globalization and how financial markets are to a certain extent tied to the fate of globalization over the next month or so.  The way I tended to view the President's stance on tariffs was that it was mostly a case of "bluster" to prompt other countries to yield on their trade positions so as to obviate the need to implement tariffs. But recent events have proved that position to be wrong - President Trump is indeed willing to bypass the WTO, and implement tariffs, particularly on China (there is a good article on the growing irrelevance of the WTO from the FT here)

But the President's position on NAFTA is a little different.  President Trump was partially elected on his campaign promise to either repeal or renegotiate NAFTA, and so far the re-negotiation has been hung up on various of the US demands, most notably: i) rules of origin for autos - 85% NAFTA and 50% US for those autos sold in the US; ii) scrapping of the investor-state system, where investors from another NAFTA country can sue the government of that country if they are treated differently from how they would be treated in their own country; iii) scrapping of the trade dispute settlement mechanism whereby a panel of experts decides which country wins a particular trade dispute case; iv) an end to Canada's agricultural supply management system; v) the introduction of a sunset clause whereby all 3 countries have to renew NAFTA every 5 years.

So what is likely to happen here and what are the potential "known unknowns" here?  First, how far is President Trump likely to want to compromise to save NAFTA. Well so far the negotiations have been making slow progress, but as one might imagine, some of the US demands are proving difficult for the other NAFTA countries to accept and/or compromise around.  The investor-state system has been updated, and as the US wants it scrapped, Canada and Mexico have decided to just make it apply to them, effectively giving the US an opt out from the system.  Recent news from the talks in Mexico City appear to show that the US has now dropped all it's demands on auto content (see here), which was also a major sticking point.  While that seems like a reasonable compromise, there are still other issues like the trade dispute mechanism and the sunset clause, where it is hard to see how the different parties can come together in a deal, despite what is at stake.

The Mexican border at Yuma, AZ

As the President stated in a Reuters interview last year: "A lot of people are going to be unhappy if I terminate NAFTA. A lot of people don't realize how good it would be to terminate NAFTA because the way you're going to make the best deal is to terminate NAFTA. But people would like to see me not do that". The big problem for President Trump is not Canada, although the Canadians have taken issue with the US position here (see this recent article in their national newspaper, The Globe and Mail here), but  on the other hand Mexico is seemingly the biggest problem as far as President Trump is concerned, and largely because of the trade deficit that the U.S. runs with Mexico . Even just this morning on his way to Church, the President stopped by reporters to announce that as well as there being no DACA deal that he was still considering pulling out of NAFTA (see here) if border security did not improve. So this is clearly a huge "known unknown", and if President Trump appears not to be able to get his cherished wall on the Mexican border by a deal with the Democrats on DACA, then this appears to be the President's next best hope - allowing Mexico to remain in NAFTA, only if it pays (in part or wholly) for the new border wall.  It also perhaps is a signal that the President was not happy with the concession that his negotiators made in regard to the trade in autos.

U.S. Trade Representative Lighthizer's comments at the conclusion to the 7th round of talks in Mexico City were also revealing. He stated "As President Trump has said, we hope for a successful completion of these talks, and we would prefer a three-way, tripartite agreement. If that proves impossible, we are prepared to move on a bilateral basis, if agreement can be made."

Texas is very much involved now in trying to save NAFTA - as Canada's Financial Post pointed out in an article this week (see here), but clearly the President is not keen to compromise on NAFTA without there being some quid pro quo in the case of Mexico.

But what is at stake is probably bigger than any talk of tariffs with China, as although China is a large trading partner, the embedded nature of the trading relationships with both Mexico are far reaching. The actual size of the trading relationship with both Canada and Mexico can be seen in the figure above, which shows the flows of trade in and out of the country for 2016,  Now of course the trade relationship with Canada is unlikely to be threatened, as President Trump will likely revert to what was known previously as CUFTA (the Canada-US Free Trade Agreement), but for US States along the border with Mexico the implications are much more serious if Mexico is prohibited from continuing in NAFTA.  The figure below shows the exports by State to Mexico and it is clear that although all the border States would be hit by any new trade restrictions introduced between the US and Mexico, it is Texas that would suffer by far the most of any State.

Now it is likely that the US has a surplus on services which should likely redress some of the imbalance on the trade in goods (i.e. a trade deficit).  The latest figures we have for the U.S. Services exports were $33.3 billion; services imports of $26.3 billion, giving a U.S. services trade surplus with Mexico of $7.0 billion in 2017.  This figure also seems small to me, considering how many Mexicans come on vacation to the U.S. and also considering the dominance of the internet by U.S. multinationals, but in any case, those benefits would likely mostly flow to one U.S. State: California.

So what are the possible outcomes here?
i) First the worst scenario, with a complete withdrawal from NAFTA. No special trade relations with either Mexico or Canada.  This is now extremely unlikely, but the effects on the North American markets would definitely be highly negative if it were to occur.
ii) Second, a more likely scenario would be a withdrawal from NAFTA while at the same time an invitation to Canada to continue negotiating on a CUFTA deal.  This I think is highly likely if no concessions are made by Mexico regarding border security, and in particular, some funding for the wall. Clearly Mexican markets would take a big hit if this were to occur, and the Texan economy in particular could potentially be badly hit. In the U.S., the auto sector and the energy sector would be particularly vulnerable.
iii) Third, another possible scenario which has just appeared due to the President's retreat from doing a DACA deal with Democrats, that of the NAFTA being successfully concluded due to a side deal that the President does with the Mexicans such that they partially agree to some unspecified payments so that the President gets a partial victory.  Although unlikely, due to Mexican opposition to any acquiescence on the wall, it is possible and would likely have no effect on the U.S. markets but would see a relief rally in Canadian and Mexican stockmarkets.
iv) Fourth, a successful conclusion to NAFTA without any side agreement, but with some of President Trump's signature demands embedded into the agreement, notably reformed dispute settlement mechanism and a sunset clause on the agreement, subject to a review and further revisions at some point in the future.  A relief rally in all 3 participant countries would likely occur on such news.

If I were forced to choose, I would say that outcome ii) and iv) are most likely, but in fact I think for electoral reasons I think President Trump's instincts will be to withdraw from NAFTA, unless certain key concessions are won.  . 

Norway, Texas, and Guns

OK, I have a confession to make up front - this blog posting is really not too much about economics, but having just been on a short visit to Finland I was shocked about what has gone on in Norway in the last 4 days. The Nordic countries are close neighbors ( - as anyone will know who watches the Eurovision Song Contest!) and a tragedy in one Nordic country is keenly felt in others. And I confess that although I have met some Norwegians on my travels around the Nordic countries, I haven't been there since a trip I made to Oslo many years ago. The big shock for most people from Northern Europe is where it happened - Norway is a conservative social democracy, and like most other Nordic countries has a very generous welfare system, and of course is the most oil-rich country in Europe.

What is perhaps not so shocking is that this crime took place, given the rhetoric of the right and the "bubble" a lot of the right-wing pundits appear to live in. I think it is noteworthy that most successful politically-motivated violent attacks come from right-wing or anarchist groups and they are nearly always aimed at government or prominent left-wing figures. You very rarely hear of a left-wing attack on a right-wing politician (ok I guess Reagan and Pim Fortuyn of the Netherlands are the most obvious exceptions), and I think there is good reason for this. The main reason is that the left wing are by definition a more community-oriented social party, whereas the right wing tends to believe in more individual autonomy and freedom. Most-definitely-right-of-centre Mrs. Thatcher once famously said "And, you know, there is no such thing as society. There are individual men and women, and there are families." which I think encapsulates the way in which many on the right think. So when society doesn't go their way, they sometimes seek to change it by attacking the guts of how societies operate - that is the system of government and the politics that comprise it. History is littered with examples of anarchists and righ-wingers who have done this - from Timothy McVeigh to the Unibomber, to now the Norwegian Anders Behring Breivik.

What I find stunning in all this is the reaction of some on the right - I read in the Christian Post that the attacks have exposed "European Immigration Issues", in a way trying to find a silver lining in the fact that a man killed nearly over 70 people. Surely the issue is that one man killed 76 people in a clear attempt to strike out at government and eliminate the next generation of leftist politicians who he thought of as the Labor party youth wing who had convened for a summer camp west of Oslo.

As most people who read this blog know, I live in Texas.  Texas is a state where gun ownership is very much embedded into state law and the culture of the place, and many people own guns and have concealed weapon permits so that they can carry guns pretty much anywhere if desired. The State nearly passed a law which would permit students and professors to carry guns on campus, and so I have decided that in my own interest, I should at least know how to use a gun and now have a concealed weapon license. Explaining this to Europeans is not easy - the reaction is usually extremely negative, as most Europeans are emphatically anti-gun, even though ownership of guns is quite usual in the rural areas of Europe and particularly in the Nordic countries. The justification for introducing the carrying of guns into Universities in Texas was the argument that if students or professors had been allowed to carry firearms at Virginia Tech and on other campuses where shootings have occurred, many lives could have been saved. But although this argument is in principle correct, it ignores the "unintended consequences" that may occur as perhaps student suicide rates would rise and it might lead to much higher fatalities than if guns were not allowed on campus. Gun advocates have noted that since 2007  guns are allowed on campuses in Utah, and there doesn't seem to have been any uptick in incidents. But that might have to do with the fact that many students in Utah go to Utah universities as often there is a religious affiliation, and therefore many of the students might have grown up with guns already. Also as an economist, I would argue that perhaps not enough time has passed to really evaluate the Utah campus gun laws.

We all want to be proactive to prevent the kinds of massacres that have been witnessed in Norway. But i) there are unintended consequences of allowing all students and professors to hold guns on campuses or elsewhere for that matter; ii) once a law is passed allowing people to do something it is very difficult to remove that "right", so this basically becomes a one-way street. The real question is, is  there another (better) way to allow better regulation of guns so that more of these isolated incidents can be prevented, while at the same time mitigating the unintended consequences of more widespread carrying of guns? I am not sure I know the answer to this question, but of course I have some ideas!

I would suspect that in a country like Norway, and likely now other Nordic countries, more gun controls will be put in place as despite the isolated nature of this incident, the authorities will take steps to ensure that this never happens again.  And I would also suspect that in Texas someone will have another go at introducing legislation to allow concealed weapons on campuses - this time it failed, but it only needs to pass once and then it will be the norm and we'll be experiencing any "unintended consequences"!

Texas Trouble

Paul Krugman recently wrote about a “Texas Tragedy” in relation to the budget cuts that are going to have to be made in the upcoming legislative session in Austin. Certainly this last election in Texas was a farce as the true extent of the budget problems were kept from the voters (in my cynical mind) to ensure a Republican victory and of course the re-election of Governor Rick Perry. And now the alarm bells are certainly ringing loud and clear in all state-funded institutions (including my own), with virtually all planning on hold now until the extent of the cuts is made a little clearer.

But for those like Krugman who live outside of the State, I should start off by saying that there is really one group that is going to be drastically effected in Texas – the poor. For those who “have” and who are educated, the Texas budget crisis is not as bad as might be expected. Certainly at the University level, with several Universities now running early retirement programs, with some programs being abandoned and plans to combine existing programs between Universities in the same geographical proximity, this should yield some savings and so ease the pain. In general educated workers tend to be more mobile as well, so they are likely to head for other states if they are laid off in the private sector. Plus the housing market downtown hasn’t nearly been as bad in Texas as say Florida or Arizona, so there is still considerable mobility.

No, the tragedy of the cuts lies with the poorer segments of the population and the economically dislocated. But more about that in a moment. I first want to explain the way in which budgets are formulated in Texas, which is unusual, to say the least.

In Texas the legislature meets every 2 years for a short period of time in the spring and hammers out the budget as well as any new legislation. This saves money on one front, as paying annual salaries for legislators is not required as it is in most states or Canadian provinces with standing legislatives. But it leads to all sorts of problems on other fronts. First, a budget is not enacted and revised every year ( - the legislature in Texas is in essence currently making 2 budgets – one for 2011 and one for 2012). So when there is an economic downturn, the budget isn’t adjusted gradually, but on a two year basis – hence much larger cuts are likely this year in the state budget given the deficit last year, and this won’t be revised for another 2 years even though the economy could rebound In the second half of 2011, giving the State a surplus in 2012. Second, it also leads to suboptimal lawmaking as well, as laws are made during the legislative session, and then cannot be revised until 2 years later. While I support the idea of a part-time legislature as a cost-saving measure, I do think the legislature should meet at least once a year, perhaps for a short session just to revise budgets and amend existing laws, if needed.

The other thing that I think is a little crazy in Texas is that the State only has a sales tax for general tax collection purposes. Particularly during recessions like the most recent downturn, US consumers retrenched, leading to an increase in the US savings rate, which I (like most other economists) think was a good thing, as the US savings rate has been chronically low for some years and was a source of international economic imbalances. But of course, a higher savings rate really clobbers state revenues, and causes a disproportionate decline in revenues. To make things worse, the state even has a “tax free” weekend in September at the beginning of school year which caused an absolute shopping blitz in 2010 as cash-strapped parents, among others, avoided paying taxes on all clothes and school items.

Texas, like most states, has Balanced Budget legislation, and while this is all well and good, it really has a terrible impact if the recession occurs immediately after the legislature meets, as any overrun during the subsequent nearly 2 years has to be corrected with a surplus as soon as the legislature meets again two years later. That is the situation that we now find ourselves in. Here, in my opinion, Texas should really learn from Europe. The one part of the Stability and Growth pact that is, in my opinion, very sensible, is the part relating to budgetary measures during periods of recessions. The pact states that member states are exempt from abiding by the 3% of GDP limit on budget deficits in severe recessions. Of course that means that Texas would have to be able to issue bonds to cover the deficit, and that could lead to a build up of state debt that was unsustainable. I would argue that there are other options – one would be to have a temporary increase in tax (what might be called a “solidarity tax”) – another would be to build up an even bigger fund than the current “rainy day fund” ( - perhaps calling it a “recession fund”) which could be spent to offset a decline in state revenues during bad times.  Another approach would be to calculate a cyclically adjusted budget  metric that would automatically yield a surplus in the expansionary phase of the business cycle and a deficit in

the contractionary phase.

Of course the type of taxation we have in Texas is also, in my view, a problem. What Texas really needs is an income tax, and democrats have long recognized that this is also the fairest way of taxing the population given the extremely wide distribution of income in the state. But of course Democrats these days never get a majority so have never been able to enact such a change, and many Republicans don’t like the idea as it would mean greater taxes for their constituency – the rich. But apart from the politics, this tax system is a problem, as it means that the extreme poor still get taxed when they spend, even if they hardly have any income. With an income tax you could exempt all the extreme poor from paying the tax and at the same time get rid of the sales tax completely like New Hampshire has done.  I think most Texans are afraid that introducing an income tax would leave 2 taxes in place ( - that is, they don't trust their State government to repeal the sales tax), so doing this would have to be entirely contingent on removing the sales tax. 

So these are my proposals for Texas. First, set up a revenue commission at the state level to explore the implications of changing the tax system in Texas and then present this to the State politicians to start a debate on moving to a fairer tax structure. Second, get rid of the “tax free” weekend as it is a ridiculous gesture ( - why should I not pay tax just because of when I’m available to shop?). Third readjust the budget every year with a short session of the legislature. Lastly, establish a “recession fund” into which the state has to put a certain percentage of revenues during good times so as to offset any drop in revenues.