Resource Development Council
 
 

From the President - Phil Cochrane

It’s the economy, stupid

Bill Clinton was one of the most successful American politicians during the late 1990s. One of the secrets to his success was that he was able to connect with Americans about the things that mattered to them most. Of course, in the heat of an election campaign there were occasions that he strayed, and that’s when political strategist James Carville reminded him with three simple words: “The economy, stupid.”

The evidence suggests President Clinton understood what Carville meant by “The economy, stupid.” During his Presidency he oversaw a period of considerable economic growth and expansion. According to the U.S. Department of Labor, America’s real GDP grew from about $38,000 per capita in 1994 to about $45,000 in 2001 (in real 2011 dollars). During the same period, the U.S. national debt as a percent of GDP also declined from about 65 percent to about 55 percent.

Regardless of your politics, we would all do well to heed Carville’s advice as we look to Alaska’s future.

But, what is “the economy?”

Economy is one of those words that we use a lot, but one that we often don’t think deeply about what it is. Simply put, the economy is the sum of the wealth and resources of a region as reflected in how much we produce and how much we consume.

Unless we deeply know what the economy is, there is no way for us to really know what a healthy economy looks like. Most economists would agree that a healthy economy is one where we are not consuming more than we produce over the long-term. Our ability to consume is constrained only on the availability of capital. Our ability to produce is constrained by available natural resources, the labor pool, and availability of capital.

The first element is pretty straight forward – either you have resources or you don’t. That’s something the good Lord took care of a long time ago. But, the size of the underlying natural resource base alone does not guarantee a healthy economy. To extract those resources you still need to compete for labor and for capital – which are mobile and will go to the best opportunities. Don’t know what that competition for labor and capital looks like? Go to Bismarck, North Dakota or Fort McMurray, Alberta.

It’s no secret, Alaska is a resource state. We are blessed with abundant oil and gas, mineral, fisheries, forest and tourism resources. In fact, according to the Bureau of Economic Analysis, the direct contribution of Alaska’s resource industries to the state’s GDP in 2012 was about 70 percent. Don’t forget that over 90 percent of the state’s non-designated budget revenue comes from the oil and gas industry alone.

With due respect, a healthy economy cannot be measured by the size of the government treasury, the Permanent Fund, or the size of our capital budget. The reality is government has to get its money from somewhere – in Alaska’s case it is from the businesses that are investing in the economy, creating jobs and generating wealth. There is no question that the long-term supply of government funding requires a healthy economy.

Lest you have any doubt, look what happened to the city of Detroit which recently declared bankruptcy – the largest municipal bankruptcy in American history. The reasons are complex, but at its heart Detroit saw a decline in revenue because there was less and less there to tax. It did not take too long before Detroit’s costs became significantly greater than its revenues. Mismanagement issues aside, I think it is safe to say that Detroit’s situation would be much different if it had a healthy economy.

This is not meant to be a dig on government. In fact, I fully support the legitimate role of government in ensuring life, liberty and the pursuit of happiness. I also support the role of government in ensuring the responsible development of resources in a way that maximizes the benefits to all involved. To me, that means the role of government is to create an environment where Alaska will attract the capital and utilize the labor pool necessary to develop its natural resources.

The truth is a healthy economy requires the right government policy.

John F. Kennedy subscribed to that view on the role of government when he said, “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital... the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.”

James Carville may not have been around at that time, but even President Kennedy got it – It’s the economy, stupid!

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