Thursday, November 10, 2016

Diversifying the Wyoming Economy

With Donald Trump elected as our next president, hopes are rising for a rebound in coal production. Trump, who has vowed to end the war on coal as soon as he takes office, is certainly going to make life easier for the coal industry in Wyoming. That is good news of course; every private business should have the chance to compete on its own terms rather than having to jump through government hoops or run through a labyrinth of regulations (especially if that labyrinth ends with a brick wall).

However, as I have said before, even if President Trump will repeal all Obama's regulations on his first day in office, and even if the repeal is not met with court challenges by the environmental movement, it is feeble to bet our state government's budget on a new coal rally. In the past few years natural gas has to a large degree replaced coal in electricity production, and the demand for coal for other purposes has not made up for that decline. 

That is not to say Trump's regulatory repeal will be inconsequential to Wyoming. Obviously it will have some positive effects - ideally the repeal will give coal a new chance to compete on free-market terms. But it is important to remember that the decline in coal production started long before the War on Coal. Therefore, it is a good idea for our legislators to develop an offensive strategy for industrial diversification. 

Let me offer an example of what the could look like, and what effects it would have on the Wyoming economy. 

To start with, let us get a picture of just how dependent our state is on the minerals industry. Figure 1 reports real growth rates for the Wyoming GDP (green function), the minerals industry (blue) and private non-minerals industries (dashed black): 

Figure 1

It is clear from Figure 1 that our state's GDP fluctuates closely with the minerals industry. 

However, at the same time it is important to note that it is not necessarily coal that drives the correlation between GDP and the minerals industry. Figure 2 explains:

Figure 2

When the mining share of the Wyoming GDP is low (blue function) apparently the non-oil-and-gas share of the mining industry is high (orange). Allowing this share to proxy the coal industry, we can draw the following conclusion from Figures 1 and 2: Our state's GDP had a growth spurt in 2006-2008, a period during which the coal share of minerals production fell below 30 percent. This means, in plain English, that coal, while not at all unimportant, plays less of a role in our economy than is often alluded to.

In other words, other minerals sectors have a stronger impact on our state's economy than coal. 

The immediate policy implication from this is that while we await with anticipation the rolling-back of Obama's War on Coal, we should not forget the regulatory hurdles that are in the way of other minerals industries as well. Behind the War on Coal there are efforts to stifle the growth of oil-drilling platforms by, e.g., putting in place zoning regulations that put vast distances between people's homes and oil drilling sites. But this is just one example of a slew of regulatory efforts that go beyond the coal industry. A systematic repeal of regulations throughout the minerals industry is therefore highly recommended.

Beyond the minerals industry, Wyoming could, again, benefit significantly from industrial diversification. As an example, let us compare our state to South Dakota, which has managed to become home to a large financial industry. 

In the past 15 years the financial industry has represented 25 percent of South Dakota's GDP. In other words, one in four dollars made by South Dakotan companies and private individuals has been delivered by the financial industry. During the same period of time, the minerals industry has been responsible for 29 percent of the Wyoming economy, which means that the financial industry is basically as important to South Dakota as minerals are to Wyoming. 

South Dakota's success in attracting financial businesses did not happen by itself. It was the result of a deliberate policy strategy. I am not going to go into detail about the similarities and differences between Wyoming and South Dakota in terms of the regulatory and tax environment for the financial industry; the point here is merely to show the macroeconomic impact if we were to be as successful as the Mount Rushmore State. 

Suppose, therefore, that we were able to add another industry to Wyoming, on top of the ones we currently have. If this industry were financial, here is what would happen to our state's economy.

1. A "South Dakota" sized financial industry in Wyoming would, on average, have more than doubled the size of the actual financial industry (118 percent, on average, over the past 15 years).
2. The larger financial industry would have grown the Wyoming economy by 13.4 percent in current prices - and that is not counting the multiplier effects that a larger financial industry would have on the Wyoming economy. 
3. In 2015, an extra $4.6 billion would have been spent in Wyoming. This is, again, before multiplier effects. 

With a GDP that much larger, we could expect a considerably higher level of private consumption. A rough estimate would place the increase in the $3.2-3.4 billion bracket. This, obviously, would result in a surge in tax revenue for the state; as an example, by a very rough estimate, $105 million more in general sales taxes. 

This is, again, an experiment to illustrate the tangible effects that industrial diversification could have on the Wyoming economy. As such, though, it serves an important purpose: if we do industrial diversification right, we have a lot to gain as a state, both in terms of new jobs and more private spending, and in terms of new tax revenue for the state and local governments.

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