Economic Boom Ahead! Proceed with Public Caution

A note for our readers: the views reflected by the authors do not reflect the views of ASPA.

By Kenyatta Lovett

Privatizing profits and socializing losses seems to be an all-but-faded argument in the news media, but still a big problem in our nation. A recent article in the Wall Street Journal noted the enormous public cost associated with resolving Detroit’s debt and infrastructure problem. It is estimated the cost to remedy thousands of abandoned and blighted buildings will total close to $2 billion. This is one part of a string of public problems Detroit is facing in the aftermath of a declining local economy.

If you head west a few states, you will find a much different predicament in North Dakota. The discovery of large quantities of petroleum within the Williston Basin has created an economic surge in the region, defying national trends for income, unemployment and other indicators. Hydraulic fracturing – fracking – is the primary means for extracting this petroleum, which is a growing policy concern for environmentalist. Placing the environmental concerns aside, what other public concerns exist for North Dakota, and other local economies suddenly flooded with investment and growth? Also, what is the proper method to responsively grow and shrink the public side of the economic equation to sync the resources with current and future public needs?

To place the boom in North Dakota in context, I will share a few economic and demographic indicators from 2007 to 2012 that show how strong the region’s economy has been prior to and after the Great Recession. According to the Bureau of Economic Analysis, North Dakota has seen a 61 percent increase in gross state product from 2007 to 2012, with a 15 percent bump between 2011 and 2012. The population has increased a meager 7 percent, while per capita personal income has risen more than 50 percent. The latest unemployment report from the Bureau of Labor and Statistics shows a rate of 2.6 percent for North Dakota, with 4.1 percent being the highest yearly rate since 2007, significantly lower than the national average.

Governing.com recently covered a story highlighting Williams County, North Dakota topping the national charts for the largest five-year increase in per capita personal income. However, recent articles have also cited problems in the region for properly maintaining roads in affluent Wells County North Dakota. While it appears the state and its residents have done personally well economically over the past five to seven years, how has this impacted the state’s public finances?

According the U.S. Census on state government finances, North Dakota’s state revenue has grown more than 90 percent from 2007 to 2012, with 67 percent increase in state expenditures. However, the annual debt incurred at the end of each year has held steady at $2 billion, increasing 16 percent over these five years. Overall, it appears the state has remained on the good side of the input/output equation for state finances.

What is visible from this brief review of North Dakota’s economic and public finance numbers is state spending has kept a very modest pace with the influx of new tax revenue. Again keeping the environmental argument removed from this conversation, it appears North Dakota is handling the growth fairly well. To go along with modest public spending, the state has used caution on spending increases, which has been informed by previous economic busts across the country as well as a similar problem the state faced decades earlier.

According to Prairie Business Magazine, North Dakota has relied on the use of one-time expenditures to mitigate the risk of future fiscal burdens caused by growing recurring expenditures. We see in the city of Detroit, along with other boom-bust economy stories, a back-end public cost too complex to understand, much less remedy with existing policy instruments. For now, North Dakota has taken a controlled approach to growth including the ability to say ‘no’ in a time of abundance.

Granted, the infrastructure needs to develop the nation’s major car-producing region – at the time – compared to the investment requirements to extract and distribute energy resources are two different issues. Many may argue that Detroit may fair better in the recovery circumstance, as public infrastructure can leave the opportunity for reinvestment in the marketplace, as well as repurposing to more efficiently deal with certain public problems. An article was recently posted on the Detroit Free Press website contemplating options to make use of the city’s road capacity from decreases in traffic activity to invest in more efficient public transit solutions. In many ways, Detroit has the potential to become the R&D hub in America for new public products in urban areas and a prelude to the relationship between public, private, and nonprofit organizations to stabilize public problems created by economic instability.

For now, however, North Dakota’s conservative approach appears to offer some promise to controlling the public side of economic booms. What will determine if North Dakota’s methodical approach to public spending is the proper strategy to economic booms will be, in my opinion, witnessed in the measurable improvements to public and social outcomes. For instance, the Prairie Business Magazine reports a significant increase in per capita public spending, but the outcomes of this spending, such as school performance U.S. News and World Report have yet to show results in comparison to other states across the nation. If we find it difficult to determine the impact of public spending, it may possibly be just as difficult to examine the impact of public cost, as Detroit’s artifacts of economic misfortune may prove to be the very tools necessary to realize a healthy recovery. Or in the case of North Dakota, the modest investments realized from new sources of public revenue produce gains in education and health outcomes beyond the era of this current economic boom.

I would argue there is no way to avoid a public downside from the phenomenon of an economic bust, no matter how cautious public officials approach the challenging feat of designing the proper method to scale public resources with present and future problems. Hardships will no doubt be experienced by most, and the revenues necessary to deal with these problems will more than likely not be available at the time they are truly needed. The only thing that is certain is a local economy will experience either circumstance in a society where capitalism and society struggle to find their priority.

What to expect and can we fix it? 

For my first question, there are many public concerns present for the situation in North Dakota. The residents and businesses have seen significant improvements in their income situation, while the public side of the equation is reluctant to say yes to all things concerning growth, and for good reason. This methodical approach to increasing spending appears to be designed to address the public problems of present, with modest approaches to dealing with future public problems. Time will tell if their current priorities for public spending will apply to the mitigation of future risks.

As for my second question, North Dakota appears to have developed a sound framework to match priorities to resources with the courage to say no in a time of abundance. There is a fine line between building better public resources for the future and being realistic about what can actually be sustained if economic circumstances change. In some way, I think North Dakota’s approach has the promise to building a more equitable equation for dealing with economic gains and losses, but only time will tell.

 

Author: Kenyatta Lovett is recent doctoral graduate of Tennessee State University’s College of Public-Service and Urban Affairs. He can be reached at [email protected].

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