Meredith Whitney redraws 'map of prosperity'

Tim Mullaney | USA TODAY

Show Caption Hide Caption Meredith Whitney of Meredith Advisory Group Wall Street analyst and investment advisor Meredith Whitney CEO of Meredith Whitney Advisory Group. She also has a book coming out called "Fate of the States."

Wall Street analyst Meredith Whitney examines state economies in new book

High praise for Texas%2C doubts about California

Some economists challenge Whitney%27s outlook

NEW YORK — Where Meredith Whitney goes, controversy follows — whether she likes it or not.

The 43-year old analyst who rocked Wall Street in 2007 by predicting the mortgage-bond bust is out with a new book — and an argument that the housing bust exposed years of shoddy fiscal policy in states such as California, where the boom and bust were especially sharp, that will leave them as economic laggards for years to come.

In Fate of the States, Whitney argues that a "new map of prosperity'' is emerging in the wake of the bust, with jobs moving away from the coasts and toward 17 ''central corridor'' states in the Midwest and Mountain West.

Using statistics mostly covering years from 2007 to 2011, she argues these states are outperforming the U.S. because leaders elsewhere are hamstrung by public-employee pensions and other commitments that housing-boom states made in flush times.

Chatting easily about taxes, jobs and her New Jersey roots in her Manhattan office, Whitney is funnier and less pugnacious than her book, or her public persona. The book warns that "the coasts and especially the Sun Belt won't be aging gracefully,'' and argues that it's nearly irrational to move someplace such as California when states such as Texas offer better growth, more affordable housing and lower taxes.

In person, she praises governors of both parties whom she considers pro-business, and says excessive pensions crowd out both liberal goals such as education spending and tax cuts that conservatives want.

"All roads lead back to this issue,'' Whitney said. "I want regular people to understand what's going on and what are the consequences of not doing anything.''

The shifts favor states such as North and South Dakota in the West, along with Colorado and Utah; and Ohio and Wisconsin in the Midwest, Whitney said. Both in person and in the book, she is especially complimentary of Texas and Indiana.

Corporate leaders are moving jobs out of Illinois, California and other higher-tax states to go there, and regular consumers and job hunters should follow the "smart money,'' she argues.

With the book's publication Tuesday, Whitney steps back into a role as provocateur — a persona she insists is unintentional.

In 2007, she was attacked by defenders of Wall Street, who didn't believe her view that cracks in the mortgage-bond market heralded disaster. In 2010, when she predicted a wave of municipal-bond defaults, the research director of the National League of Cities attacked her "stunning lack of understanding.''

"The book was not written to be provocative,'' Whitney says. "If you had told me in high school I'd write a book about municipal finance, I'd have said, 'That's so lame.' ''

This time, it won't be clear for years whether Whitney is as right as she was about the banks, she said. But some economists say her book ignores data from 2012 and this year that suggest the bust in the housing-boom states was simply a product of a bad recession, rather than signs of a long-term shift in jobs or economic power away from the coasts.

"It's wonderful to be impervious to facts,'' said Stephen Levy, director of the Center for Continuing Study of the California Economy.

California has a greater share of U.S. jobs related to the Internet, software and research and development than it had before the recession, Levy says. That is at odds with Whitney's argument that rich bosses and well-off workers are leaving California, he said.

Three of the four the states that Whitney's book singled out for especially bad housing busts that she argues will remain a long-term drag on growth — California, Nevada and Arizona — were in the top nine states in job gains for the 12 months ending in April, according to the U.S. Labor Department.The other, Florida, was 16th.

By contrast, 10 of the 17 states Whitney names as emerging leaders had job growth in the lower half of the 50 states in percentage terms.

Economists said the book ignores factors more important than taxes to regional job creation — especially the mix of industries a state already has and demographics that make the Midwest's population much older than coastal states.

The best reason North Dakota and Texas are top job creators is innovation that let companies exploit oil and gas embedded in shale, said Steve Cochrane, head of state and local economics at Moody's Analytics. Shale drilling also accounts for strong performance by Whitney favorites such as Oklahoma and Louisiana, he said.

Data on migration out of California also undermine Whitney's thesis that rich executives are pulling out of the state because of fiscal problems and home prices, taking jobs with them, said Jed Kolko, chief economist of real-estate site Trulia. People with annual incomes above $200,000 are actually moving into the state at a slightly higher rate than they move out, he said.

"Higher-income people come to California, and lower-income people leave,'' Kolko said.

But even those numbers are tiny, Kolko said. The net migration from California to Texas last year was less than a tenth of 1% of the Golden State's population, he said.

The criticism leaves Whitney unfazed.

"Flows start subtly," she said. Places such as Phoenix and inland California "may show strong job growth from a weak base, but they still have some of the highest unemployment rates in the country."