The-Role-of-Metal-Mining-in-the-Alaska-Economy

The Role of Metal Mining in the Alaskan Economy a report prepared for the Southeast Alaska Conservation Council Northern Alaska Environmental Center by THOMAS MICHAEL POWER Professor of Economics Economics Department University of Montana Missoula, Montana 59812 406 243 4586 tom.power@mso.umt.edu February 2002 Note: The affiliation of the author is provided only for identification This is not an official publication of the University of Montana This report was prepared by the author as an independent economic consultant The conclusions reached are solely the responsibility of the author and not necessarily reflect the position of the University of Montana, its Economics Department, or either the Southeast Alaska Conservation Council or the Northern Alaska Environmental Center Introduction and Summary This report explores the role that metal mining currently plays in the Alaskan economy and the economies of the Fairbanks and Juneau areas Metal mining played a very important part in the original European settlement of Alaska, and, more recently, revenues from North Slope oil development have played a very important role in the development of the modern Alaskan economy Because of these important historical roles of mineral development, it is often assumed that the future development of the Alaskan economy will also depend on the further development of the State’s metal deposits This report investigates the factual basis of metal mining’s assumed importance in Alaska’s economic future The analysis contained in this report supports the following conclusions: Metal mining is directly responsible for only about one-half of one percent of Alaskan jobs and personal income: about 2,000 of Alaska’s 400,000 jobs and $87 million of Alaska’s $18.6 billion of personal income in the year 2000 Even after applying any reasonable “multiplier” to these numbers, metal mining would continue to provide only a small sliver of total Alaskan jobs and income In the “mining dependent” cities of Fairbanks and Juneau, metal mining is directly responsible for about one and two percent of total jobs, respectively This very modest role of metal mining is often obscured by exaggerated estimates of metal mining’s impact built around double and triple counting or counting value that is not created in Alaska Such exaggerated estimates of impacts ignore basic economic accounting rules established almost a century ago Because of its capital and land intensive nature and relatively modest use of labor, the payroll associated with Alaska metal mining represents only about percent of the $1.1 billion value of metal mine production During the 1990s, while the real value of metal production in Alaska rose 83 percent, from about $600 million to $1.1 billion, metal mine payroll rose only percent Although metal mining, because of its capital intensity, contributes significantly to local governments’ property tax bases, its contribution to total local government revenues, including all revenue sources, is much smaller The Fort Knox Mine contributes about one percent of the total revenues received by local governments in the Fairbanks-North Star Borough The Greens Creek Mine contributes about one-half of one percent of the revenues received by local governments in the City and Borough of Juneau Mine license taxes and production royalties on state owned minerals yield only a few million dollars each to total state revenues that total almost $6 billion even without counting the revenue flows into the Permanent Fund Together these two sources of revenue from metal mining contribute less than one-tenth of one percent of total Alaskan government revenues Despite the high wages paid in metal mining, that industry is not usually associated with prosperous communities across the nation because (1.) metal 10 11 commodity prices are unstable, causing instability in employment and payroll; (2.) the life of a contemporary metal mine tends to be relatively short, to 15 years; (3.) the labor needs of metal mining operations are constantly falling as technological change displaces workers; only constant expansion of mine production can offset this; and (4.) environmental damage associated with metal mining discourages people and businesses from locating near mining operations Inadequate reclamation laws and reclamation bonding requirements can leave state governments with large reclamation financial obligations and near permanent damage to the natural environment Both have negative long-term economic impacts The popular economic base approach to thinking about the Alaskan economy that focuses on the assumed special role of oil production and transportation, mining, other natural resource industries, manufacturing, and the federal government as key economic drivers is incomplete and inadequate It cannot explain the ways in which the Alaskan economy has been changing For instance, during the 1990s while employment in these key sectors declined 25 percent, employment in other sectors expanded 25 percent While real income from these sectors declined percent, income from other sectors expanded by 31 percent The Alaskan economy is more diverse and resilient than the popular economic base view suggests In Alaska, across the western United States, and in many regions of the nation, high quality natural landscapes have become an increasingly important source of local economic vitality Because people care where they live, and act on those preferences, and economic activity follows those residential choices, the attractiveness of communities and landscapes has become an increasingly important part of a local area’s economic base To the extent that metal mining activities threaten this, they can undermine rather than enhance the local economic base These conclusions about the limited role of expanded metal mining in supporting the ongoing economic development of Alaska are not new In 1969 the Institute of Social, Economic and Government Research at the University of Alaska at Fairbanks published a report on “Mining and Public Policy in Alaska: Mineral Policy, the Public Lands and Economic Development.”1 That report also concluded that mineral development had limited capacity to support economic development because the mineral industries were becoming less and less labor intensive and were playing a steadily shrinking role in the overall economy That earlier report also pointed out that mineral developments in isolated areas were unlikely to stimulate economic development in the area surrounding the mineral site because very few of the mineral development expenditures would flow through the local economy Finally, that report emphasized that while the role of mineral production in the overall economy was shrinking, natural amenities such as clear water and air, open space, wildlife, and outdoor recreation opportunities were playing an increasingly important role in the determination of economic well-being The relative economic values associated with the natural landscape were shifting from extractive Mining and Public Policy in Alaska: Mineral Policy, Public Lands and Economic Development, Arlon R Tussing and Gregg K Erickson, SEG Report No 21, June 1969 toward non-consumptive natural resource values Over thirty years later, all of these points remain very important when it comes to the crafting of rational natural resource policy in Alaska The Relative Importance of Alaska Metal Mining A Metal Mining in the State Economy Because the discovery of gold and the “gold rush” that followed is so important in explaining the European settlement of Alaska, it is natural to see metal mining as a vital part of Alaska’s economic base As the Fairbanks’ University Park Elementary students put it on their website: “If it weren’t for gold, we wouldn’t even be here.” The resources and economic activities that supported Alaska’s economic development in centuries and decades past are important in understanding the state’s history, but they are unlikely to be a very good guide to the current and future economy of Alaska Successful economies change and develop Those that stay stuck in their early developmental history are likely to stagnate and fail “More of the same” is rarely a prescription for the development and/or maintenance of a prosperous economy That is the reason that mining, timber, and agricultural towns are rarely vital, prosperous economies For the last two decades, it has been rural counties that are mining and farming dependent whose economies have lagged the most For example, the timberdependent counties of northern Maine, the mining counties of Appalachia and copper towns of the West, and the farm counties of the Great Plains have all seen ongoing economic depression and population loss If we look at just from where Alaskan residents receive their money income and where they are employed, the role of metal mining appears to be relatively minor, a small sliver in comparison to the overall economy In 1999 (the last year with complete data) only about in 200 jobs and dollars of personal income flowed directly from metal mining activities in Alaska See Figures and The Revised ERS County Typology: An Overview, Peggy J Cook and Karen L Mizer, Rural Development Research Report No 89, Economic Research Service, USDA, December, 1994, pp 8-9; “Economic Geography of the Heartland,” Alan D Barkema, Center for the Study of Rural America, Federal Reserve Bank of Kansas City, presentation to the Beyond Agriculture: New Policies for Rural America National Conference Westin Crown Center Hotel Kansas City April 27- 28, 2000, p 15 Figures and are primarily based on the Regional Economic Information System data of the Bureau of Economic Analysis, US Department of Commerce The estimate of tourism employment and income is based on “Visitor Industry Economic Impact Study, “ May 1999, McDowell Group, Prepared under Alaska Visitor Statistics Program for State of Alaska Division of Tourism Also see Alaska Visitor Arrivals Summer 1999 McDowell Group, 2000 http://www.dced.state.ak.us/cbd/toubus/pub/impact99.pdf “Other mineral production” is primarily oil and gas production (96 percent), but coal, gravel, and other mineral extraction are also included Fig 1: The Sources of Alaskan Personal Income, 1999 Metal Mining 0.5% Other mineral production 4.1% Investment, Retirement,& Income Support 27.9% Trade, Services & Finance 25.4% Manufactuing and Other 4.2% Construction, Transportation & Public Utilities 12.7% Fed Govt 11.0% Tourism 1.8% St.&Loc Govt 12.4% Figure 2: Sources of Alaksan Jobs, 1999 Manufacturing & Other 8.4% St.&Loc Govt 13.8% Tourism 4.4% Fed Govt 10.0% Other Mineral Production 2.2% Metal Mining 0.5% Construction, Transportation & Public Utilities 13.2% Trade, Services & Finance 47.5% Although there was some growth over the last two decades in the relative importance of metal mining as a source of jobs and income, it has remained a very small part of the overall Alaskan economy See Figure Figure 3: Metal Mining and Other Jobs in Alaska 400,000 Number of Jobs 350,000 300,000 250,000 Jobs outside of Metal Mining 200,000 150,000 100,000 50,000 82 83 84 85 86 87 88 89 90 Metal Mining Jobs 91 Year 92 93 94 95 96 97 98 99 B Metal Mining and Local Economies In some Alaska communities, metal mining has been more important than in others Because Alaska is such a huge state, it is possible that averaging metal mining payrolls and jobs over the whole state has the impact of hiding the local economic impacts of metal mining In general this is not the case Table shows the estimated metal mining employment in various Alaskan communities Even focusing on individual regional economies within Alaska, metal mining provides only one to two percent of total jobs The obvious exception shown in Table1 is the Northwest Arctic Borough where metal mining represents 15 percent of total employment This high percentage of employment is tied to two factors First, the mine is located in one of the more remote and lightly settled areas of Alaska Second, a significant part of the population is not in the Table is based on the Alaskan Labor Market Reports and includes only employment covered by the unemployment insurance program The self-employed and those working for very small firms are not included The federal government’s Regional Economic Information System estimates total employment including those not counted in the “covered” employment The different employment data sources can provide slightly different estimates of the relative importance of various industries commercial labor force and therefore is not counted when the percentage of total employment is calculated Almost 90 percent of the population is Alaska Native and most continue to engage in traditional subsistence activities Only 55 percent of those over 16 seek paid employment For the state as a whole 72 percent of this group seek paid employment In addition, of those who seek paid employment about 16 percent not find it The unemployment rate in the NW Arctic Borough is regularly twice that in the state as a whole, and it often has the highest unemployment rate in the state The combination of those who not seek paid employment and those who but cannot find it total over half of the potential adult workforce That is, there are more working age adults who not work for pay than those who hold paid jobs As a result, the percentage of the potential workforce employed by the Red Dog mine is exaggerated by as much as a factor of two In any case, the Red Dog mine, as Table indicates, is a dramatic exception to the pattern found elsewhere in Alaska Table The Number and Location of Metal Mining Jobs in Alaska, 1999 Location Employment Metal Mining Total Metal Mine as % Total Anchorage 71 128,295 0.1% Bethel 5,821 0.2% Fairbanks North Star 373 32,538 1.1% Juneau Borough 277 16,660 1.7% Nome CA 3,484 0.2% NW Arctic Borough 413 2,696 15.3% SE Fairbanks CA 1,660 0.1% Yukon-Koyukuk 21 1,998 1.1% Undertemined Location 14 2,947 0.5% Total 1,185 196,099 0.6% State Total Metal Mining 1,185 274,570 0.4% Source: The Alaskan Labor Market Report It should be clear that whatever the historical importance of metal mining was, it is not now playing a dominant or significant role in the state or the larger urban areas’ economies “Northwest Arctic Borough,” Neal Fried and Brigitta Windisch-Cole, Alaska Economic Trends, 19(1):39, January 1999, Alaska Department of Labor Table Percentage of Alaska Metal Mine Employees Who Were Non-Residents Company 1999 Jobs Cominco Alaska Inc FBKS Gold Mining Inc Greens Creek Mining Co Nana/Dynatec JV Subtotal: Larger Metal Mines Subtotal: Smaller Metal Mines Alaska Metal Mining Total 527 315 313 88 1243 322 1565 Percentage of Employees Who Were Non-Residents 1999 1998 1997 Average 1997-99 16.9% 18.5% 21.2% 18.9% 4.1% 4.6% 5.1% 4.6% 14.1% 16.3% 18.5% 16.3% 52.3% 54.7% 44.2% 50.4% 15.4% 17.0% 18.0% 16.8% 30.4% 26.5% 26.9% 27.9% 18.5% 19.8% 20.9% 19.7% Source: Residency Analysis of Alaskan Workers by Firm, 1999 Alaska Dept of Labor and Worker Development,Research and Analysis, February, 2001 In judging the impact of metal mining on Alaskan residents, it is also important to determine whether the mining jobs that are created go to residents or whether they are filled by in-migrants Because of concern about whether the higher paid jobs that are created in Alaska are being filled by current Alaska residents, the state government collects data on the residency of employees For metal mining that data indicates that for the larger established metal mines that are in active production, about one in six employees are non-residents As time passes, the percentage of miners that are nonresidents declines For metal mining operations that are in the exploration and development stages, between a quarter and a third of the employees are non-residents See Table When mining jobs are filled by outsiders migrating in, the positive economic impact of the mine on the existing local economy is reduced In addition the pressure on the community to expand infrastructure and services to serve the new workers and their families increases Mis-Measuring Local Economic Impacts A Sales Value, Value Added, and Local Income The economic impacts that matter most to local residents are impacts on jobs and incomes Yet local economic impacts are often measured in quite different terms that produce a bigger number but tell us little about how that economic activity contributed to the well being of Alaskans For instance, local economic impacts are often measured in terms of changes in the total dollar volume of business or by the overall level of local spending Because all local businesses import from outside the local economy substantial amounts of what they sell, much of the dollar volume of sales does not flow to local residents but, instead, quickly leaves the local economy to support incomes and jobs in distant manufacturing and trade centers The volume of that spending tells us nothing about local jobs and incomes That is why we not describe the national economy in these terms Similarly, depending on how sophisticated the local economy is, dollars spent in one business move to other local businesses that supply goods and services to local businesses Counting all of those transactions can lead to double or triple counting of the value that is actually being produced locally and the income that residents earn That too is why specific economic accounting rules were adopted for evaluating the overall performance of the national economy that prohibits such misleading double counting Measuring economic activity in terms of the total value added by economic activity within the local economy (gross state product or gross domestic product) avoids both of these problems But even with that measure the impact on residents can be exaggerated because often a significant part of that value added, for instance the value of petroleum produced on the North Slope, does not stay in Alaska but flows to the stockholders of the oil companies, most of whom live outside of Alaska There are appropriate uses for data on gross state product, but measuring local economic impacts is not one of them Use of total volume of sales is also an inappropriate measure of local impacts Local impacts should be measured in terms of direct benefits to Alaskans That is the reason for using the jobs filled by Alaskan residents, the dollar earnings of Alaskan residents, and net government revenues that exceed the costs of necessary mine-related government services Consider one economic consulting firm’s description of the economic impact of the Fort Knox Mine outside of Fairbanks The McDowell Group concluded that: “All told, mine spending has a $107 million impact on the Fairbanks economy, including direct and indirect payroll and local spending on goods and services Over 1,200 Fairbanks residents are either directly or indirectly dependent on the mine.” In 1999 the Fairbanks Borough had about 40,000 wage and salary jobs receiving aggregate pay of about $1.3 billion Interpreted literally, the described “impact” of the Fort Knox Mine on this economy was clearly significant But the mine directly employed an average of 260 workers and had a payroll of $13.3 million These direct, factual, impacts are only a tiny fraction, one-fifth for jobs and one-eighth for payroll, of the impacts estimated by the McDowell Group McDowell gets the larger numbers by doing two things First, it applies a “multiplier” to the direct impact to account for the spending associated with the mine and its workers The payroll was multiplied by 1.5 and employment by 2.2 This brings the “direct and indirect” payroll and employment to $20 million and 570 jobs Still well below the McDowell impact estimates To that payroll is added $87 million in “local spending” to bring the total to the $107 million in claimed total impacts But the impact of that local spending on payroll and employment had already been accounted for by using the multipliers The $87 million does not represent new income earned by Fairbanks residents It is a measure of gross dollar flows through the economy whose impact has already been accounted for As a result, the $107 million “local impact” figure is actually over five times larger than any reasonable estimate of local impact Finally, the 1,200 Economic Impact of the Fort Knox Mine on the Fairbanks North Star Borough, McDowell Group, February 1, 1999, p 1; True North Mining Project Economic Impact Study, prepared for Fairbanks Gold Mining Company, January 2001, by McDowell Group, Inc., Juneau, Alaska, p If one is going to use multipliers, these multipliers are within the reasonable range for a relatively small and isolated city Montana is currently proposing a $52 million reclamation plan that would leave the people of the state with a $30 million bill and $150 million in un-repaired damage 32 An Alaskan example is provided by the Illinois Creek Mine USMX Alaska, a wholly owned subsidiary of Dakota Mining Corporation, began construction of the mine in mid1996 and began production in early 1997 With gold prices at about $400 per ounce the mine was expected to have a to year life But when gold prices fell to $300, the mining company was not able to cover its operating costs and shut down during the summer of 1997 after only a few months of operation The mine soon returned to production under a court-appointed receiver with USMX continuing as operator In May of 1998 USMX Alaska declared bankruptcy The State of Alaska seized the $1.6 million reclamation bond that had been required, but the reclamation costs were estimated by the state to be $2.65 million The State of Alaska also seized the mine and contracted with a new operator to continue with the mining in hopes that it will generate enough profit to cover the shortfall between reclamation costs and the reclamation bond Reclamation is supposed to take place simultaneously with the continued mining To cover the reclamation costs of a bankrupt mining company, the State of Alaska has had to go into the mining business itself, increasing the disturbed area and the potential size of the reclamation problems The alternative would have been for taxpayers to shoulder the reclamation bond short fall themselves 33 The size and character of the metal mine reclamation problems that will be faced in Alaska could be different depending on the type of mining (e.g underground versus open pit), the location of the mine, and the specific local geological features that determine the extent of the water pollution problems It is unlikely, however, that the cost of effective reclamation will be lower in Alaska than in the lower forty-eight states Isolation, rugged geography, cold temperatures, small population, etc are likely to raise the cost of reclamation just as they have raised the cost of mining These are not isolated problems Here is how mining and reclamation engineer Jim Kuipers described the size of the problem: American taxpayers are faced with significant liability for mines left un-reclaimed, shifting the economic burden from the companies that profited from the mines and leaving environmental disasters behind for the public to clean up The number of bankrupt or abandoned mines has increased significantly, with state and/or federal agencies presently potentially responsible for at least some portion of the cleanup costs of 13 mines in Nevada, five in Montana, and additional mines in South Dakota, Alaska, Idaho, Colorado and New Mexico Given the 32 The $204 million is the estimated cost of the reclamation environmental groups insist is required (“Defining Reclamation,” Down to Earth, Nov 2001, p 10, Montana Environmental Information Center) Pegasus forfeited its $30 million reclamation bond when it went bankrupt; the $52 million is the preferred alternative of the Montana Department of Environmental Quality in its “Draft Supplemental Environmental Impact Statement for Reclamation of Zortman and Landusky Mines,” May 7, 2001 33 Hardrock Reclamation Bonding Practices in the Western United States, James R Kuipers, PE, Center for Science in Public Participation, Bozeman, Montana, for the National Wildlife Federation, February 2000, p 30 26 potential for a major collapse within the gold and copper mining industry (as demonstrated by recent metals prices at 20-year lows), the potential for public liability of an even greater magnitude certainly exists The relatively obscure regulatory principal of reclamation bonding has recently become more important and warrants both public and regulatory scrutiny 34 Mining engineer Kuipers had specific concerns about Alaska’s reclamation laws His general conclusions after evaluating various aspects of those laws were the following: In its present form, Alaska’s Reclamation Act fails to protect the public from paying the potential costs associated with reclamation of the mines currently active in the state Issues with respect to surface and groundwater contamination are not being currently addressed Also, existing bond amounts not reflect the state’s cost to conduct reclamation and closure in the event a mining company fails to fulfill its obligations Urgent and significant reform of the Alaska Reclamation Act should be a priority to encourage responsible mining practices and to protect against public liability 35 Without adequate reclamation requirements and bonding, metal mining operations can leave citizens and their governments with very large financial obligations and nearpermanent environmental damage This, as will be discussed below, can have longterm negative implications for local economic development Metal Mining as a “Basic Industry” That Energizes the Alaskan Economy Despite the fact that metal mining provides only about one-half of one percent of the jobs held by Alaskans and provides a similarly tiny percentage of the total income received by residents, some believe that metal mining holds a special place within the Alaskan economy that makes it much more important than these numbers suggest This belief in the importance of metal mining is partially tied to the historical role the industry played in the European settlement of Alaska and the Fairbanks and Juneau areas But economic history is not usually a good guide to the economic present or future Trying to explain current day Pittsburgh, Chicago, Denver, or Portland in terms of steel, meat packing, ranching, or timber, respectively, would not be very useful Another reason that metal mining is assumed to play a special role in the economy, far in excess of its size, is the prevalence of metals in almost all of the goods we use, especially in the manufacturing sectors of the economy Without metals, it is hard to imagine an industrial or, even, a high-tech society But that is also true of food, air, water, energy sources, education, science, technology, vitamins, antibiotics, and innumerable other things Knowing that something is necessary for economic activity tells us nothing about how important it is to produce more of it Food and metals may be necessary, but it is quite possible to over-produce them, driving the value of additional production so low that it is not economically rational to produce more 34 35 Ibid, p Ibid, pp 322-329 27 Another reason that some believe that metal mining is special and more important that the direct employment and income numbers suggest is that metal mining, like oil production and fisheries, brings income into the Alaskan economy from the outside through its export of products to the rest of the world Industries that “inject” income into the local economy are often depicted as the engines that drive the rest of the economy They are special because, it is believed, without them, only truly subsistence economic activity could take place locally From this point of view, industries like metal mining are seen as providing the money that circulates in the local economy, allowing people to make purchases at local businesses and pay taxes to support local public services Without that money proponents of this “economic base” view believe that there would be no local businesses or local public services, only a dispersed population living off the land Because this latter view of metal mining and other natural resource industries is so prevalent in economic discussions in Alaska, it is important to look more closely and critically at the particular way in which metal mining is believed to be special A Basic Industry: Economic activities that bring income in from the outside are often called “basic” economic activities because they are seen as the source of the income that then makes possible the locally oriented economic activities Basic economic activity is seen as causing or facilitating locally oriented economic activity In that sense basic economic activity is believed to have a local economic impact that is larger than just the number of jobs or the size of the payroll associated with it There are said to be “spin-off” or “ripple” or “multiplier” impacts associated with basic economic activities that amplify their ultimate impacts on the local economy B The Failure of the Economic Base Approach to Explain Economic Changes: The more popular version of the “economic base” approach to explaining changes in the local economy focuses on certain industries that are assumed to make up the state or local area’s economic base In Alaska those basic sectors include mineral production (oil, gas, coal, and metal mining), the construction and operation of the Alyeska pipeline, the federal government, agriculture, fishing, and logging and the manufacturing associated with them It is these industries that are assumed to drive the rest of the Alaskan economy Although this popular view of the economy has intuitive appeal, it does not a very good job of explaining changes that have taken place in the Alaskan economy over the last two decades Between 1988 and 1999 real income earned in these “basic sectors” declined by about seven percent or $400 million But the rest of the Alaskan economy, instead of following this downward trend, expanded significantly, adding $3 billion or 31 percent in real terms Between 1969 and 1999 these “basic sectors” added about 5,300 jobs or percent, but total employment expanded by 241,000 or 220 percent During the 1990s employment in the basic sectors declined by 15,600 jobs or 17 percent while jobs in the 28 rest of the economy moved the opposite direction, growing by 56,400 jobs or 22 percent See Figures 11 and 12 The industries in which these job losses and job gains too place are shown in Table It is important to note that the shift in employment that took place during the 1990s cannot be accurately characterized as a loss of high-paid natural resource jobs and their replacement with low paid “tourist” or “burger-flipping” jobs Among the industries with the largest gains in employment were construction, transportation, communications, finance, health services, educational and social services, engineering and management services, state and local government Tourism-related sectors did gain jobs, 3,600 in eating and drinking places, 2,600 in hotel and lodging, and 3,400 in amusement and recreation All of those job gains, of course, are not tied to tourists since these businesses also serve local residents Even so, these jobs gains represented only onesixth of the 57,000 new jobs shown in Table Part of the reason that this popular view of the economic base is not very good at predicting changes in the local economy is that the economic base is often not accurately defined For instance, although Alaskan Permanent Fund dividend payments to Alaskan residents are likely to be included in the economic base, federal Social Security and Medicare reimbursement payments are usually ignored Also, the part of Alaskan state government spending that is financed from oil royalties should be treated as part of the economic base Other property income (rent, interest, dividends, etc.) received by individuals and spent in Alaska should also be accounted for A final example of income flows that are sometimes ignored is the spending of tourists, something that is not easily measured because much of it flows into businesses that also serve residents.36 However, even when the economic base is carefully specified and includes all of these, it is often the case that the rest of the economy moves independently of the economic base for reasons that will be discussed below The “economic base,” including metal mining, does not have the predictable and reliable impact suggested by advocates of this theoretical view of the local economy 36 A 1998 estimate of the direct employment associated with tourism was 16,400 jobs and $315 million in earnings This would add about percent to basic earnings and 23 percent to basic jobs when those are crudely estimated as they were in Figures 10 and 11 The wide difference between these two percentages is due to the seasonal, part-time, and relatively low-paid nature of many tourist jobs See Visitor Industry Economic Impact Study, May 1999, McDowell Group, Prepared under Alaska Visitor Statistics Program for State of Alaska Division of Tourism Also see Alaska Visitor Arrivals Summer 1999 McDowell Group, 2000 http://www.dced.state.ak.us/cbd/toubus/pub/impact99.pdf 29 Figure 11: Alaskan Real Basic and Non-Basic Income $14,000,000 Real Income ($1,000s) $12,000,000 The Rest of the Economy +$3 billion or +31% $10,000,000 $8,000,000 $6,000,000 Basic Income -$400 million or -7% $4,000,000 $2,000,000 Basic: Mineral Production, Pipeline, Permanent Fund Dividends, Federal Government, Heavy Construction, Manufacturing, Fishing, Forestry, and Agriculture $88 89 90 91 92 93 94 95 96 97 98 99 Year C Being Cautious about Multiplier Impacts: The direct employment and payroll associated with a particular economic activity like metal mining are known and measurable quantities Those economic facts are what we reported on above Multiplier impacts are estimated impacts based on a particular economic theory that may or may not be appropriate In many ways, multiplier impacts are speculative and are easily manipulated for political purposes For that reason they should not be treated as economic facts.37 37 For a discussion of the limitations of the economic base approach to the local economy see Chapter 7, “The Economic Base: Distracting Vision, Distorting Reality,” in the author’s Environmental Protection and Economic Well-Being: The Economic Pursuit of Quality, M.E Sharpe Publishers, 1996; also Chapter 1, “Thinking About the Local Economy,” in Lost Landscapes and Failed Economies: The Search for a Value of Place, Island Press, Washington, DC, 1996 30 Figure 12: Changes in Alaskan Basic and Non-Basic Jobs ,1988-1999 1.3 The Rest of the Economy +22% or +56,400 jobs Index of Change: 1988 = 1.0 1.2 1.1 Basic Sector Jobs: -17% or -15,600 jobs 0.9 0.8 Basic Sectors: Agriculture, Fishing, Forestry,Mineral Industries, Manufacturing, Pipeline & Transportation Services, Federal Government, Heavy Construction 0.7 91 92 93 94 95 96 97 98 99 Year Job “losses” calculated through multiplier analysis often are not losses at all but just slightly slower rates of job growth Often no one actually loses a job; job creation is simply smaller than it might otherwise be projected to be For instance, between 1989 and 1999 the Fairbanks area economy added an average of 700 jobs a year for a total gain of about 7,000 jobs The True North Mine development is projected by Kinross Gold Corporation to add about 250 new jobs once “multiplier” impacts are accounted for If job creation in the future takes place at about the same rate as over the past decade and the True North Mine is not developed, the job growth might be 6,750 instead of 7,000 To most people there is a big difference between projecting that 250 jobs will be “lost” if a particular action is taken and projecting that average annual job growth in a particular area over a decade will be 675 jobs instead of 700 One description might suggest serious disruption for families and communities while the other might sound reassuring Yet job loss statements often actually mean the just such a slightly slower rate of growth rather than job losses 31 Table 4: Losses and Gains in Alaskan Employment: 1991-1999 Job Losses Oil & Gas Extraction Heavy Construction Lumber & Wood Products Pulp & Paper Food Processing Other Manufacturing Military Federal Civilian Job Gains -2,875 -895 -921 -813 -2,512 -525 -7,655 -2,126 Manufacturing, not food or forest prodt Fishing Other construction Transportation Communications Trade Eating & Drinking Places Finance Services Hotel & Lodging Amusement & Recreation Health Services Social Services Educational Services Engineering & Management Services Native American Government State Government Local Government 525 1,623 5,988 3,168 1,512 12,332 3,627 3,423 24,737 2,622 3,383 5,226 2,318 1,007 2,043 3,666 1,382 2,492 Source: REIS, BEA, USDOC, CD-ROM Moving Beyond the Economic Base View of the Local Economy: Amenity Supported Local Economic Vitality Within the context of the economic base view of the local economy, local economic health is determined by the health and profitability of those export-oriented businesses that the local community is blessed with In that context, any government regulations that might reduce that profitability can be depicted as threatening local economic health That way of looking at the economy is the source of the claim that environmental regulation damages the economy From this perspective, enforcing water quality standards or imposing reclamation requirements on metal mines can be depicted as threatening local jobs and income This dichotomy between environmental protection and economic well-being, however, is a false one, largely created by the incomplete nature of the way the economic base approach encourages us to think about the local economy Discussions of the Alaskan economy are almost exclusively carried out in the context of the economic base view of the state and local economies In that view business firms are assumed to locate in a particular area because of certain site-specific resources such as oil and natural gas fields, gold ore, fisheries, timber, etc These business firms create jobs to which the workforce responds Workers and their families move to where the jobs happen to be located The distribution of these export oriented natural resource 32 firms explains why people live where they Or so this incomplete view of the local economy assumes To many this is just hard-nosed economic realism “That’s the way the economy is.” But this approach implicitly makes two assumptions that, when stated, appear very questionable The first is that people not care where they live They simply move to where the economy demands The second is that business firms not care either about where workers live or would like to live or where the markets for those business firms’ products are located The location of the population determines both of these, but firms are assumed to ignore both and choose their location on some other basis Neither of these assumptions can be defended on either theoretical or factual grounds Abandoning them introduces residential location choice as an important economic force in determining the location of economic activity and seriously undermines the economic base approach During the second half of the twentieth century, changes in the economy have made residential location choices increasingly important in the determination of the location of economic activity These changes have made both people and businesses more “footloose.” Those changes include the following: (i.) Improvements in transportation and communications that have drastically reduced the costs associated with geographic distance from economic centers These changes include improved highway systems, the extension of regular airline service to small cities, the development of modern telecommunications networks and technology, the development of national and international television networks that reach the most isolated locations, and the emergence of competing next-day courier service These changes significantly reduce the sense of isolation from the national economy and culture associated with locations far removed from the nation’s largest metropolitan areas Alaska is no longer an isolated state cut off from the rest of the nation (ii.) Changes in what it is the economy produces have also had an important impact on the location of economic activity With the shift from the dominance of extractive and heavy industry to light manufacturing and services, the relative importance of transportation costs has declined as the value to weight ratio has risen dramatically Transportation costs no longer tie economic activity as tightly to particular locations.38 These two changes explain why retail trade and services that used to be provided by Seattle and other west coast cities are now successfully provided by Alaska’s own trade centers During the 1990s, almost 40,000 jobs were added in trade and services In addition, 3,200 transportation, 1,500 communication, and 3,400 finance jobs were 38 Mills, Edwin S., and Gary Chodes 1988 "Non Extractive Employment Outside Metropolitan Areas" in National Rural Studies Committee: A Proceedings Hood River, Oregon May 24-25, 1988 Corvallis, OR: Western Rural Development Center, Oregon State University Edited by Emery Castle and Barbara Baldwin, pp 29-36 Mills, Edwin S 1987 The Determinants of Small Area Growth Lecture Series Corvallis, OR: Oregon State University, Graduate Faculty of Economics 33 added The ongoing growth in the commercial infrastructure (as well as modest population growth) also supported 6,000 construction jobs outside of heavy construction As a result of these changes and the relative mobility of economic activity, it is less costly for citizens to act on their preferences for certain types of living environments Similarly, it has made it more feasible for economic activity to follow the population as it makes residential location decisions The result is that economic activity increasingly follows people rather than people passively following businesses Consider the shift from center cities to suburbs: First people fled those centers of employment and commercial activity and commuted back for work and shopping Later the manufacturing base followed the population to the suburbs, as did the shopping centers Similar things can be said about the move to the Sunbelt or the current resettlement of the Mountain West Since the mid-1950s economists have emphasized the importance of residential location decisions as a powerful economic force They focused on the role of local environmental “amenities” such as climate and natural landscapes in the settlement of the desert southwest (including Southern California and Arizona), Florida, and the Pacific Northwest.39 Tiebout (1955) underlined the fact that people “shop around” for the social amenities produced by different levels of local government taxation and different public spending patterns.40 Borts and Stein (1964) argued that in a mobile, open economy, it would be an area’s ability to attract and hold a labor force without bidding labor costs up that would determine the geographic distribution of economic activity 41 These economic forces tied to local amenities continue to operate in important ways today, helping to explain the above average economic performances of the Pacific Northwest and Mountain West states over the last decade 42 Conventional regional economic analysis now regularly takes into account the role of social and natural amenities in explaining migration patterns and regional development patterns The US Department of Agriculture, for instance, which long has used farm, manufacturing, and mining to classify the major economic characteristic of nonmetropolitan counties in harmony with the simple economic-base approach, has expanded its economic classification to include “amenity” counties This became necessary in the 1980s when a group of nonmetropolitan counties showed ongoing growth despite the economic difficulties most nonmetropolitan counties were having The common denominator in these counties was their attractive landscape and climatic 39 Ullman, Edward, 1954, “Amenities As a Factor in Regional Growth, Geographic Review, 44(1): 119-132 40 Tiebout, Charles, 1956, “A Pure Theory of Local Expenditures, Journal of Political Economy, 64(2): 160-164 41 Borts, G.H., and J.L Stein, 1964, Economic Growth in a Free Market, New York: Columbia University Press 42 Thomas M Power and Richard Barrett, Post Cowboy Economics: Pay and Prosperity in the New American West, Island Press, forthcoming, Spring 2000; Power, Thomas M., 1995, editor, “Economic Well-Being and Environmental Protection in the Pacific Northwest: A Consensus Report by Pacific Northwest Economists, Department of Economics, University of Montana, Missoula, MT, December 34 features that attracted recreationists, retirees, and other new residents This impact of amenities has accelerated in the 1990s.43 Similarly, most migration modeling now takes into account the role of local amenities along with employment and income opportunities and cost of living.44 Of course, most areas are not “amenity” magnets that draw national attention That, however, does not mean that the attractiveness of a particular area to current and potential residents is unimportant Most small towns and rural areas in the West have gained population and the new economic activity that supports it during the 1990s 45 The characteristics of a local area that allow it to attract and hold people are an important part of the area’s economic base If this is not recognized, that part of the economic base may be irreversibly damaged When we recognize the importance of social and natural amenities to local economic vitality, a quite different picture of the forces driving the local economy emerge The ability of an area to attract and hold residents is central to its economic vitality In that context, those locally specific qualities that make a particular area an attractive place to live, work, and business are not just of aesthetic interest, they are part of the local area’s economic base High quality living environments attract and hold people and businesses That in turn triggers a series of dynamic changes that support ongoing local economic vitality The quality of the social and natural environments have profound economic implications The local economic development case for protecting natural landscapes can be summarized very directly: People care where they live They care about the qualities of the natural and social environments that make up their living environment, and they act on those preferences They are willing to make sacrifices to obtain access to these natural amenities High quality natural environments draw people and businesses to areas even when economic opportunities are otherwise quite limited As a result, economic activity shifts towards those preferred living environments Because this aspect of community economic development shifts the emphasis away from exclusive focus upon natural resource industries, it might be interpreted as suggesting that natural resources not matter as much to these communities any 43 U.S Department of Agriculture (USDA), 1996, Economic Research Service, Rural Conditions and Trends, 7(3):40-44, p See also Deavers, K., 1989, The Reversal of the Rural Renaissance, Entrepreneurial Economy Review, 3-5; Beale, C.L and G.V Fuguitt, 1990, Decade of Pessimistic Nonmetro Population Trends Ends on Optimistic Note, Rural Development Perspectives, 6(3): 14-18; Peggy J Cook and Karen L Mizer, The Revised ERS County Typology: An Overview, Rural Development Research Report Number 89, Economic Research Service, USDA, 1994; Johnson, Kenneth M., and Calvin L Beale, Nonmetropolitan Recreational Counties: Identification and Fiscal Concerns, Demographic Change and Fiscal Stress Project, Loyola University, Chicago, January, 1995 44 Greenwood, Michael J., G.L Hunt, D.S Rickman, and G.I Treyz, 1991,”Migration, Regional Equilibrium, and the Estimation of Compensating Differentials,” Journal of Regional Science, 26(2):223234 Berger, M.C and G C Blomquist, 1992, “Mobility and Destination in Migration Decisions: The Roles of Earnings, Quality of Life, and Housing Prices,” Journal of Housing Economics 2: 37-59 45 See the special issue of Rural Development Perspectives on the rural West, 14(2), August 1999, USDA, Economic Research Service 35 longer But the primary message is quite different It is that the role of natural resources in the local economic is not diminishing but changing from extraction and export to non-consumptive and environmental Communities' economic health continues to depend on the surrounding natural landscapes, but in a fundamentally different way Our natural landscapes are no longer primarily warehouses from which to extract commercially valuable resources nor a playground where commercial companies can entertain temporary visitors They are now the source of flows of increasingly valuable environmental services: clear water and air, cultural and historical preservation, recreational opportunities, wildlife, scenic beauty, biodiversity, environmental stabilization, etc Those environmental services provided by protected landscapes make the communities embedded in them attractive places to live, work, and business This supports and enhances local economic vitality and well-being Extractive industry, including metal mining, by itself has generated ghost towns in the past When it was only the employment opportunities in mining or logging or agriculture that drew people to an area, the ultimate decline in employment opportunities in those sectors meant there was nothing else to hold people in the area As a result, those communities lost population or were abandoned Alaska and the Yukon and a good deal of the Mountain West have their mining ghost towns The northern tier of the nation has many examples of logging ghost towns The Great Plains has hundreds of agricultural ghost towns High quality living environments, on the other hand, prevent ghost towns by holding and attracting economic activity Because of this, it is vitally important to check just where it is that public land management policy is focused and insist that that focus shift away from the rear-view mirror and the emphasis on the economic base of the past as we seek to steer our communities towards a safe and prosperous future Looking Towards Alaska’s Economic Future Over the last three decades, Alaska has primarily based its economic development strategy on the extraction of mineral wealth, especially North Slope oil This generated enormous wealth, providing thousands of high paid jobs, massive flows of revenue to state, local, and Alaska Native governments, and significant flows of income to all Alaskan residents At the beginning of the 21 st century, however, the sustainability of this economic base is questionable The flow of oil and oil revenues is declining as is the employment associated with oil production, transmission, and shipping The declining oil revenues have forced the state into a fiscal crisis Also, during the 1990s employment growth slowed, average real pay declined, and average income fell relative to the national average, declining from about 20 percent above the national level to about equal to the national level Some believe that only the expanded development of other Alaskan mineral resources can get the state economy back on track Clearly mineral development can and will continue to make important contributions to the Alaskan economy But if the development and exhaustion of North America’s largest oil field did not bring a 36 sustainable level of prosperity to Alaska, the development of other, smaller mineral deposits, is unlikely to so either In general, sustainable economies not rely on the export of just one or a few products Nor is economic development built around “more of the same.” Over-specialization on the export of unprocessed natural resources is largely the characteristic of an under-developed “colonial” economy As discussed above, it exposes the economy to several serious problems that discourage sustained development: Fluctuations in international commodity prices cause fluctuations in export earnings; international competition leads to over-productions and downward pressure on prices and export earnings; ongoing technological change steadily reduces the employment opportunities associated with the mineral extraction To moderate or buffer these problems, natural resource economies have to supplement their economies with other types of economic activities Diversification of the economy both by developing new value-added exports and through import substitution is called for A new economy has to develop along side the old One difference between the new and old economies is that the old economy was based on fixed natural resources located in Alaska The new economy, to the extent it is not going to be built around natural resource extraction, will have to compete with the rest of the nation, other North American countries, and other countries around the world as the location of this new economic activity That raises the question of whether Alaska can successfully compete for economic activity that is not tied to extracting its natural resources Some of those who insist that Alaska has to continue to focus primarily on its traditional natural resource industries so because they see natural resources as a “sure thing” and any “new” economy as speculative and unlikely given Alaska’s remoteness and harsh climate However, as discussed above, advances in transportation and communications and changes in what it is that the economy produces have dramatically reduced the costs associated with geographic isolation As more economic activity has become relatively “footloose,” a different set of local characteristics, other than the presence of extractable natural resources, becomes important in determining the location of economic activity: the quality of the local labor force, the quality of the public infrastructure, including schools and research organizations, and the quality of the social and natural environments In the jargon of economics these factors can be labeled human, social, and natural capital.46 Those areas across the nation that have been successful at attracting significant amounts of new economic activity over the last decade were not those that continued to specialize in natural resource extraction In fact, as pointed out above, such areas lagged behind all other community economic categories It was 46 See, for instance, “Alaska’s Economy: Where Is It Going?,” Scott Goldsmith and Patrick Burden, Commonwealth North, www.commonwealthnorth.org/transcripts/burden2000 37 areas that were perceived to have the human, public, and environmental resources that made them attractive locations for new or expanding businesses that prospered 47 High quality natural amenities contribute in a dynamic way to the location of economic activity Areas that have been able to retain and attract a high quality labor force are attractive because of those human resources Areas that not have that labor force but have attractive characteristics that allow the recruitment of the necessary skilled workforce without paying inflated wages also have an advantage The ongoing growth in employment and real income despite the shrinkage in the traditional “basic” industries makes clear that Alaska can compete as the location of new economic activity See Table on page 32 Symbolic of Alaska’s potential to attract new economic activity has been the ongoing expansion of its tourism sectors Over the last two decades the number of jobs in tourism has steadily expanded while employment in the natural resource sectors has stagnated and then declined As a result, estimated tourist employment now exceeds employment in the natural resource sectors See Figure 13.48 The point here is not to suggest that tourism is a substitute for mineral extraction Rather, the point is that there is ongoing growth in economic activity associated with non-extractive uses of the natural landscape Tourism is only part of that natural amenity-related economic activity In the long run tourism is likely to represent only a small part of the economic activity that is supported by protected natural amenities Natural amenities not only draw temporary visitors to Alaska, but they also draw new permanent visitors and firms and the economic activity associated with them Tourism may introduce visitors to what Alaska has to offer, but the largest impact ultimately is in the relocation of new people and economic activity That has been the pattern elsewhere in the western part of the lower forty-eight states 49 Given Alaska’s impressive, world-class natural landscapes and the ongoing changes in technology and the American economy, that pattern will become more and more visible and prominent in Alaska too 47 For supporting evidence from the Western states see: “Amenities Increasingly Draw People to the Rural West,” Gundars Rudzitis, and “Jobs Follow People in the Rural Rocky Mountain West,” Alexander C Vias, Rural Development Perspectives, 14(2), August 1999 For the Great Plains see “Net Migration in the Great Plains Increasingly Linked to Natural Amenities and Suburbanization,” John B Cromartie, Rural Development Perspectives, 13(1), June 1998 For the South see “Migrants in the Rural South Choose Urban and Natural Amenities, John B Cromartie, Rural Development Perspectives, 14(4), February 2001 48 Looking only at employment is incomplete and can be seriously misleading As mentioned earlier, tourism jobs tend to be seasonal, part-time, and relatively low paid Natural resource jobs are much higher paid As a result, while employment is about equal in the two sectors, payroll in the natural resource sectors is three times as large as that in tourism 49 See footnote 46 38 Figure 13: Alaska Natural Resource and Tourism Jobs 20,000 18,000 16,000 Oil & Gas, Forest Products, & Mining Employment 14,000 12,000 10,000 8,000 6,000 Tourism 4,000 2,000 Source: ISER MAP Data Base, Table 18, U of AK, Anchorage 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 - Year The challenge represented by metal mining is that it is a landscape-intensive activity that almost always has had significant negative impacts on the natural environment That means that it has the potential to damage one part of the local economic base, environmental quality, while developing another, the mineral deposit To the extent that the environmental damage could be significant and permanent while the mineral development, in contrast, is relatively temporary, significant public economic policy issues are raised: Is there a net gain or loss to the local economic base as a result of the mineral deposit? Can the development of the mineral deposit be modified in such a way as to reduce the threat to other current and future economic values and activities? The environmental record of metal mining, including that of many relatively recently closed mines, clearly indicates that these questions have to be explored carefully and critically This is not “merely” a matter of aesthetics or the impractical preservation of “prettiness,” it goes to the heart of the future economic vitality and sustainability of the 39 Alaskan economy That is the reason that rational public regulation of metal mining should be an important part of Alaska’s economic development policy 40