Keeping the Money Flowing after the Oil Stops
St. Thomas Academy
Mendota Heights, Minn.
The oil production in Mountrail County, North Dakota has skyrocketed in the last eight years, from under 750,000 barrels monthly in 2005 to over 6.5 million in early 2013. Unemployment is at an all-time low, and the county has seen its small towns transformed into bustling industrial centers. However, Mountrail has fallen into disrepair. As county commissioner Dave Hynek said, "A few years ago our board set a goal that Mountrail County would be a better place to live and work as this oil play works itself out over the next 30 years. Right now, I would be hard-pressed to find people who agree."1 The oil boom in North Dakota is sacrificing the well being of many residents for economic growth, and in the process has created man negative externalities. In order to ensure North Dakota is actually a better place to live and work in the long run, the state must find a way to invest in the residents themselves. The most efficient ways to achieve this goal are through a transfer of power from state to local government, a laissez-faire approach to the boom itself, and a significant increase in higher education spending. This approach will both boost resident happiness and allow North Dakota to grow even after all the oil is gone.
Decentralization is the first step in spurring a higher standard of well-being for residents and thus creating a positive externality. A major problem in North Dakota is that too much tax revenue currently goes to the state government, which has difficulty meeting the unique challenges the oil boom poses to small communities. For example, though Mountrail County collected nearly $313 million in oil taxes last year, equaling about 40% of North Dakota's total oil tax revenue, only $16 million in revenue was allocated directly back to the county, its cities, its schools and a special infrastructure fund.2 From understaffed law enforcement to depleted country roads to overcrowded schools, the boom is pressuring counties to spend more money despite the fact that they still are forced to operate on basically the same budget as ten years ago. State government allocations to counties have also been extremely insufficient.3 It is in the best interest of North Dakota and its residents to give more autonomy to counties in spending their tax revenue. This will allow more efficient decision-making about spending on public goods, which will benefit the residents the most.4 It will also provide more direct assistance to small businesses, farmers, and ranchers.5 By aiding markets other than oil, North Dakota can continue to grow after the boorn.6 Finally, more money in county budgets rather than the state budget will produce a positive externality by keeping residents, many of whom are fed up with the strains of the oil boom, relatively.7
The pace of growth in North Dakota is unsustainable, and those making the state's spending decisions must recognize the need for long-term sustainability.8 Therefore, it is important that North Dakota invest in capital for sustainable growth rather than making investments to bolster the oil industry. For example, in North Dakota's oil boom and subsequent bust of the 1980s, many cities eagerly built housing for the workers flocking to the city. However, after a steep drop in oil prices, cities were left with thousands of abandoned housing developments and millions of dollars in debt.9 A similar phenomenon occurred when small towns began to invest in oil pipelines, with companies eventually leaving the communities in debt and economic disarray.10 The lesson is simple: since North Dakota's oil boom will not last forever, government attempts to aid the bonanza can backfire in the long run. A quick drop in oil prices or an oil discovery somewhere else could lead to a mass exodus of workers and companies, leaving North Dakota with too much "oil infrastructure" and housing designed specifically for companies no longer present.11
Estimates vary, but it is believed that only between 1% and 20% of new workers will stay in North Dakota when oil companies have drilled all available oil wells. The workers are not permanent, so it does not make sense for the state to invest in permanent housing.12 Instead, a laissez-faire economic approach is the most efficient way to deal with the oil boom. Rather than repeat its mistakes of the past by paying for petroleum pipelines and worker housing, North Dakota should let oil companies, flush with cash, provide most of their own infrastructure and labor housing.13 This gives the state greater opportunity to focus on aiding its residents and consequently its long-term economic growth. Because private companies have so much economic incentive in North Dakota, it is logical to presume that they can provide human and physical capital for drilling without government help. Another benefit of a laissez-faire approach stems from the fact that without government intervention the growth from the boom will be slower, allowing more jobs to remain in North Dakota for a longer amount of time.14 By allowing the oil boom to grow without government expenditure, North Dakota can avoid the economic decay that doomed the state in the 1980s and invest its money in more sustainable options to ensure long-term economic success.
While it is important for counties to have control over tax revenue spending, it is also crucial for the state to invest in higher education in order to spur long-term growth and increase resident happiness. Though most states have been forced to cut spending on higher education because of the economic downturn, leading to roughly a 25% national decline in per-student funding between 2006-07 and 2011-12, North Dakota has a multibillion-dollar budget surplus to spend on merely 700,000 people.15 Furthermore, North Dakota is statistically below average in per capita higher education spending (ranking 35th in the nation), so the state would likely enjoy the benefits of the catch-up effect due to increasing marginal returns, meaning it will not require an excessive amount of money to drastically improve the higher education system.16 North Dakota needs to make higher education more affordable for its residents. This would produce a positive externality by increasing the happiness of many residents angered by the negative externalities of oil drilling, and it would represent an investment in the future of North Dakota.17
The money invested in human capital would give the state valuable building blocks for future economic prosperity after the oil boom is over.18 Making higher education more affordable would also provide more incentive for younger residents to choose college or trade school over the unstable jobs of the oil industry. This would likely allow North Dakota not to be as reliant on the oil industry for jobs. There will be no shortage of oil labor during the boom (outsiders flock to North Dakota because of the vast number of job openings), but, when the boom is over, residents could face employment challenges if North Dakota is too reliant on the oil industry for jobs.19 This occurred during the state's previous oil bust, as unemployment rates rocketed up from about 4% (essentially full employment) in 1980 to nearly 7% in 1983.20 By focusing on making higher education affordable for residents (an easily attainable goal), North Dakota could avoid a similar problem because the opportunity cost of working in the oil industry would be an affordable education and possibly a permanent and lucrative career.
North Dakota has a significant responsibility and challenge promoting long-term economic growth. The best way to accomplish this goal is for the state to invest its money in its residents, which represent the future of the state, rather than the oil industry, which represents its temporary present. This strategy will allow the state to remain prosperous even after its oil wells run dry.