Research Paper Final Draft
Doug Watterson
The 2007-2008 economic recession, dubbed the “Great Recession”, was the worst
economic downturn in the US since the Great Depression. US GDP declined by 4.3% with
unemployment topping at 10%. It officially lasted 18 months, from December 2007 to June
2009, but its effects can still be felt today. Although no states thrived through the recession, there
are some clear winners and losers. Texas, with its strong contributions from the energy industry,
dominated in many statistical measures of being "recession proof", while Florida's housing
market suffered dramatic setbacks.
There were numerous driving factors that led to the recession. First and foremost, the
economy was inflated by a housing bubble. The housing market was exploding due to
irresponsible lending practices. Encouraged by prolonged stability in the market and unreliable
information given by overly optimistic credit rating agencies, banks were giving out high risk
loans (lending to borrowers who were not as likely to be able to pay the loan back). When
borrowers began to default on their loans at an unexpected rate, the housing bubble burst (private
residential investments fell by 4%) (see Chart 1). Consequently, wealth being supported by the
housing bubble also declined sharply, causing GDP to fall $1 trillion. In addition to the housing
bubble, the overall market was very vulnerable. Investors increasingly pushed for high returns
without fully grasping the risks in what had previously assumed to be a stable market.
Furthermore, regulators failed to keep policy up to date with the new and complex financial
instruments and enforce the policies already in place.
Once the market started to collapse, the affect could be felt across the country. Although
no state economy thrived during the recession, one state in particular performed above the rest.
Texas placed at the top, or near the top in nearly all performance rankings (see Chart 2). The
biggest factor in state's recession resistant economy was the thriving energy industry. Texas is
located on the biggest expanse of oil and natural gas reserves in the US and boasts oil production
that outpaces any other state by more than twice as much (see Graphic 1). The state also benefits
from off shore drilling in the Gulf of Mexico which funnels considerable cash into the economy.
2007 and early 2008 was a period of high energy prices. This created a buffer that delayed the
affects of recession the rest of the country felt immediately (see Chart 3). The number of new
drilling operations put in place while energy prices were high made up for nearly half of the
losses when prices dropped. Peaking oil and natural gas prices allowed the state's economic
players to avoid relying heavily on real estate investment and other riskier financial instrument.
Another factor that helped Texas weather the housing bubble was high property taxes (see
Graphic 2). In 2007, the state had the highest property tax in the nation at 2.57%. It is theorized
that this made housing relatively less attractive which dulled the state's housing market.
Although Texas' peaking economy was better prepared to handle the downturn, other
states that relied heavily on real estate suffered the worst economic contractions. Florida's warm
climate and recreation activities make it one of the most desirable places in the country to live.
Housing prices in Florida skyrocketed from 2000 to 2006, increasing by 152%. When the
housing bubble burst, prices fell 52% (see Chart 1). As opposed to Texas, Florida's economy
lacks diversity. It is a state built to cater to retirees and those who have the disposable income to
play more than they work. This presents a significant problem because a large portion of the
population no longer contributes to the workforce. During the pre 2007 economic expansion, the
thriving construction industry in Florida built new homes for residents (namely retirees) and
attractions for tourists. Construction was fueled by the bad mortgages and eventually collapsed
when foreclosures skyrocketed. This large loss of construction jobs contributed to the state's
unemployment rate of 11.4% (1.4% higher than the national average) and the overall poor
performance of the state's economy (see Chart 2).
The 2007-2008 recession was the worst economic conditions the US has faced since the
Great Depression. Poor lending practices, overly optimistic forecasts, and little regulation of the
finance industry fueled an artificial feeling of stable economic growth. When the bottom fell out
the response from state to state varied. Texas, supported by the energy industry and its diverse
economy, was able to outperform the rest of the country. Conversely, Florida faced a decline
much worse than the national average thanks to its inflated housing costs. These major
differences in the two state's economies proved to be strong factors in their performance during
the recession.
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