Economists tell us that long-term economic growth has some major ingredients: labor, capital (factories, machinery, equipment, computers, etc.), institutions (properly setting the rules of the game) and technology. They define technology to be nothing more than the recipes and/or the know-how that produce the most output from a given amount of labor and capital. How is this “know-how” or “recipe” produced? Some primary explanations are investment in human capital and in basic research and innovation. Human capital, a fancy term for education and training, is one of the most important factors in technological progress, and therefore in long-term economic growth.
Oil-producing states such as Louisiana, Wyoming and Alaska tend to cut funding at both K-12 and higher education levels due to declining oil prices. On Feb. 13, Gov. Mike Dunleavy decided to cut state funding for the university at an unprecedented rate, by almost 41 percent. One natural consequence of these cuts is less economic activity in the short- to medium-run. However, education cuts also foreshadow economic dysfunction later on down the road. This article does not intend to justify the number of Alaska higher education institutions or the current allocation of resources. While budget cuts can potentially harness efficiency and productivity gains, Alaskans should also be aware that funding education fuels economic growth and prosperity.
The provision of quality and affordable higher education can play a particularly important role in isolated communities like Alaska. Beyond increased labor productivity and higher wages, the University of Alaska gives young, bright Alaskans a reason and the opportunity to live in Alaska. Based on existing studies, increasing tuition by 5 percent at a typical four-year university induces a 0.5 percent drop in enrollment (for UAA, this is about 100 students, roughly equivalent to all of the economics majors). In response to higher prices, some Alaskans will decide to forgo a college education altogether, while others will attend college in another state. Based on a national sample of data, attending college Outside reduces the chances of living in one’s home state after graduation by 54 percent. Future students also care about the quality of education they receive. We live in a capitalist economy; the most effective and productive teachers and researchers demand the highest salaries, and they will receive them in Alaska or another state. In response to an economic downturn, it is ironic to cut funding for education. A university should be thought of as an economic powerhouse, a magnet that maintains and attracts the brightest minds that will fuel economic prosperity into the future.
One cannot ignore the possibility that what is happening to places like Alaska is a natural course in the history of why nations and regions tend to rise and fall. History is full of these stories. About three centuries ago, the city of Ouro Preto in Brazil was twice as big as New York City and five times as big as Rio de Janeiro. Once rich in precious stones and minerals, especially gold, its current population of about 70,000 is half of what it was then. A UNESCO World Heritage site with its beautiful architecture, the city now earns its living mainly from tourism!
During the past decade, the economies of many resource-rich countries/regions had been in good shape. It is uncertain, however, if their policy makers were aware of the so-called paradox of plenty or the resource curse. Countries/regions with plenty of especially non-renewable resources paradoxically tend to experience slower economic growth than those that do not have them. We will not list all the reasons why this can happen but volatility in resource (oil) prices, rent-seeking, mis-allocation of resources especially during the boom years are some of the explanations given. Cushioning oil price shocks by drawing down a wealth fund when oil prices are low (and building it back up when oil prices are high) can stabilize public spending and will promote long-run economic growth. However, for such fiscal strategy to succeed, countries/states must have effective as well as efficient institutional structures in place.
Robert Solow fittingly stated that, “Over the long term, places with strong, distinctive identities are more likely to prosper than places without them. Every place must identify its strongest, most distinctive features and develop them or run the risk of being all things to all persons and nothing special to any. ...” What has happened to oil is not only the result of enhanced production everywhere in the world. At least for the U.S., technological advancements that made unconventional oil and gas recovery economically feasible in the Lower 48 also played a role. Also worth mentioning are the demand shocks (slower global growth) and innovations/regulations in fuel efficiency. Averaged over the last half-century, the real price of oil is just $50. All of this is to say that it would be surprising for oil prices to rise to the levels seen in the last decade. In the face of this long-term challenge, we should focus on developing our “strongest, most distinctive features:” Our land, geography and, most of all, our people.
Addressing an issue that seems structural in Alaska’s case may require a more seasoned approach and stronger consensus. As we have seen in the experiences of smaller European nations during the last economic meltdown, certain cuts may will likely hurt the least fortunate in our society. Perhaps Alaskans could entertain different arrangements to the Permanent Fund dividend payment structure in the form of “means-testing," and a combination of taxes as well as incentives, or even different ways to structure higher education and its funding. If not, doing what is currently proposed will likely lead to more pain and open the door to yet another economic slowdown and/or recession. At the end of the day, it remains to be seen whether the potential efficiency and productivity gains due to streamlined public spending will be overwhelmed by the long-run deleterious effects on economic growth of lack of effective and wise spending on public education.
Policymakers should continue to encourage diversification and provide incentives to attract outside businesses. However, that by itself will not suffice.
Gokhan Karahan is an associate professor of accounting at the University of Alaska Anchorage.
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