After the boom/bust cycle cometh the Ghost Town

Co-authors Michael Farren, Amanda Weinstein and Professor Mark Partridge, chair of OSU’s C William Swank Program in Rural-urban Policy, warn against Ohio’s slipping into the boom/bust trap other states have encountered when exploiting their natural resources.

Co-author of the brief, Michael Farren says, “Future growth might stagnate because the natural capital and public capital, like infrastructure and amenities, will be degraded by the boom, by the rush to economic Windfall.  It’s counterintuitive that having higher resources would lead to lower long-term growth, but it happens so often that it has become its own area of academic study.”

In their brief, ”Making Shale Development Work in Ohio,” the authors use the Appalachian coal boom of the 1970s to demonstrate the “Vicious Cycle of the Resource Bust:”

A boom in one sector of the economy, such as extracting coal, shale gas or oil, leads to a sudden growth in low-skill, high-paying jobs in that sector.

The availability of these jobs leads young workers away from advanced education or other high-skill training programs.

Other industries avoid the region because of both the reduced job skills available in the workforce and the higher wages in the area.

As the availability of natural resources decreases due to extraction or due to a decrease in the resource’s value because of economic influences, employment in the sector drops as suddenly as it grew.

With no other employment options, the economic decline causes workers to migrate out of the area to search for new work opportunities.

As the availability of the natural resources decreases due to extraction or due to a decrease in its value because of economic forces, employment in the sector drops as suddenly as it grew.

Weinsten warns that unless Ohio Democrat and Republican legislators modify the policies both are pushing for, it won’t be different in Ohio.  We’ll have the same outcome.

Currently, Ohio’s severance taxes on the oil and gas industry are $.03 per thousand cubic feet of natural gas and $.20 per barrel of oil—among the lowest in the US.  The funds pay for costs to regulate the industry by the Ohio Department of Natural Resources.

“That in itself is not a bad thing,” Farren said.  “You want to make sure the regulatory costs of the industry are compensated.  But over the course of the boom, there are going to be a lot more economic effects than just the cost of regulation.

“We think it’s important that Ohio not give a handout to out-of-state energy companies, and that it sets its severance taxes so that the total cost of extraction of the resource from Ohio is compensated for.”

Partridge believes the state must assure that all relevant costs are paid for by the industries benefiting from the resource and not paid for my Ohio taxpayers.  She added, “The economic literature suggests that you should improve infrastructure and education, and then find a way to share revenues with the affected communities.”

Weinstein urges policy-makers to strive for balance:  “For example, the boom might increase the benefit of not pursuing higher education, but you could counteract that effect by decreasing the costs of going to school.”

As an example of a community successfully avoiding the boom/bust cycle, the authors point to Calgary, Alberta, Canada.  Their oil boom began in the late 1940s and peaked out in 1981.  At that time, Calgary worked to diversify its economy by offering tax credits and capital to small businesses and new industries.

In contrast, the authors offer the example of Williston, ND, where the area experienced an oil boom in the early 1970s and a subsequent bust in the early 1980s, followed by a period of over 20 years without economic growth.

In recent years, Williston finds itself in another oil boom, resulting in low unemployment and high growth—accompanied by overcrowded schools, higher housing costs and crime rates, and strains on roads, bridges, sewers, water and the energy grid.

“Just as you wouldn’t want a government policy overly distorting the economy, you don’t want an economic boom to distort the economy in a way that is going to lead to long-term economic problems,” Farren said.

The analysts say proposals by both Governor John Kasich and by Democrats in the legislature to increase taxes on Ohio’s oil and gas industry lack important elements that would help Ohio avoid the boom/bust curse.

Kasich’s proposal would use extra tax revenues to reduce the state’s income tax, which, the authors say, “may not be the most effective method to avoid the adverse effects of the resource curse.”

The Democrats’ proposal would use the funds to generate increased employment in schools and public service positions.  While it’s a step in the right direction, it wouldn’t be as effective as applying the funds to specific degree programs that would contribute to both economic growth and to diversity.

Specifically, the authors urge the state to take action in two areas:

First, to apply an appropriate level of severance taxes on companies that extract shale gas, oil and other resources.

Second, to use the revenue to pay for both the immediate costs of the industrial activity, including the upgrade and maintenance of roads, bridges, water supplies and other public amenities, as well as for long-term costs, particularly to help boost education and economic diversification.

In conclusion, Farren said, “We have this wealth that is literally a part of the land.  That natural wealth is leaving, and because we can never get it back, we want to make sure we do something to retain some of the value lost.”

from The Ohio State University College of Food, Agricultural, and Environmental Sciences, press release June 7, 2012 


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