Education Policy and Dutch Disease

So, as I tell my students, Dutch disease is not carried by windmills and wooden shoes…

In related news, Anchorage is, by at least one (admittedly pretty strange) measure of intelligence, one of the most intelligent cities in the country.  See here and also here.

Leaving aside for a moment the weird measure of "braininess," which troubled me less once I read that it correlates well with levels of education and other, similar, more typical measures, this brings me some hope for Alaska.

Although I am no economist, I believe there are strong reasons to believe that Alaska faces what is called "Dutch disease."  This is an economic phenomenon by which economies with valuable resources experience a gradual economic decline in their non-resource extraction sectors.  The reason is that, as they export oil (could also be gold, diamonds, cocaine… whatever…) all of this money flows into the local economy.  Some money flowing in is good, but if you get too much coming in, the inflow of currency tends to drive up prices for other economic inputs, including raw materials and labor.  This inflation makes it difficult for non-oil industry firms (for example) to stay in business.

Take, for example, Alaska's tech industry.  There is no Alaskan tech industry, you say?  Well, of course, that's correct!  Why is that?  Alaska has much to offer tech firms, including a stunning outdoor environment (smart people love the outdoors), a location which is, paradoxically, very close by air to most Northern cities, and beautiful summer days with endless sunlight.

Also, we have icefog.  But forget that for a minute…

Because there is so much cash in the Alaskan economy (because of cash inflows from oil), prices for everything are very high up here.  This makes it hard for tech firms located in Alaska to attract talented people (they have to pay them more to keep them, because the cost of living is so high), and when they do attract them, they're so expensive that whatever goods or services the firm is producing get sold for higher than their competitors.

Ultimately, they leave the state, or they go out of business.

This idea is counterintuitive, because it seems like, if you've got oil, your economy should be doing better, not worse.  But Dutch disease has been documented in a number of economies around the world, including in the Netherlands, after the Dutch discovered oil in the North Sea in the 1970s.

If I'm right (and I'm no economist, so I certainly could be wrong), what do we do about it?

Well, I think the answer is, "for the moment, not much."

Because we're so far away from so many places, most conventional industries (manufacturing, etc.) are probably not what we can do well.  Nor is agriculture, and there probably isn't enough non-oil resources to keep our economy humming once our oil starts to run low.  So the options that are left to us are high value-added industries.  Banking, technology, engineering, etc.  Stuff that requires really smart, educated people.  But even these industries aren't going to take off until the oil is gone, and that won't be for a while, probably.  Ten years at a minimum, probably much longer.

Fortunately, we've done some smart things with our money--we've got all this money squirreled away in the Alaska Permanent Fund and the Constitutional Budget Reserve, and if we're smart about it, that should help us have a soft landing when our oil gets cut off.

In the meantime, the best thing we can be doing is investing in things that will help us develop and attract a smart, educated workforce once the oil slows down and the symptoms of Dutch Disease start to go away.  As an individual with a vested interest in sinking more money into the Alaska higher education system (so take this with a grain of salt, perhaps), we should be spending more on the University system, and we should be seeking to reform our secondary and primary schools so that we're no longer middle of the pack (compared to other US states) when it comes to math, reading, and science testing scores.  We want to be at the top.  This may mean more spending, but as a former high school and middle school teacher, it doubtless also means introducing stronger incentives for teachers to do a good job.  Things like vouchers, merit bonuses, and greater supervision by administrators.  And if those things are too controversial, any other evidence-based reforms that have been shown to improve student achievement!