1. The Role of Energy Production in Montana’s Economy Thomas Michael Power Research Professor and Professor Emeritus Economics Department, University of Montana Power Consulting Climate Change and Energy The Policy Institute Lubrecht Conference Center April 1-2, 2011

2. The Economic Role of Energy in the Montana Economy: The Punch Lines Not a major source of employment, earnings, or economic vitality for the overall economy. Energy’s Primary Role: Exporting and Hiding Taxes and Funding Public Services

9. Initial Conclusion Montana’s energy industries are a relatively minor source of employment They are a slightly more important source of labor earnings They can be unstable sources of jobs and income They have not been of our primary sources of economic vitality

10. Then Why Are We So Focused on Energy Development? Folk Economics Exporting and Hiding Taxes –Less Politically Painful Way of Funding Services

11. Folk Economics a “brief” diversion Widely Shared Cultural/Political Beliefs about the sources of our livelihoods and well-being Contrast with analytical economics that critically studies the sources of our well- being

12. “All Wealth Spring from the Earth” “If you cannot grow it, you have to mine it” “Those things necessary for survival are of central economic value” –The “Vitamin C Theory of Value”

13. Visually Determining the “Economic Base” What is plentiful and ubiquitous in the landscape are the resources on which the local economy has to be based –Land used for agriculture purposes –Natural forests –Coal and other mineral deposits

14. “Only Exports Matter”: They Determine the Location of Economic Activity and the Level of Local Income People follow jobs Locally-oriented economic activity is secondary, derivative, parasitic on export activities

15. The Decline in Average Pay Is Due to the Loss of High Paid Jobs in Manufacturing and Natural Resources Prosperity requires the rebuilding of those industries Reduced taxes and regulations and increased subsidies for these industries is an effective path to prosperity

16. The Political Message Some economic activities and economic actors are more important than others. The vast majority of the economic activity of households and small businesses is of secondary or no economic concern. Only commercially valuable things contribute to our economic well-being

17. Good Analytical Economics Does Not Support Any of These Folk Economic Principles …but they are difficult to dispute because they are part of our culture and the stories of livelihoods we have learned since we were children.

18. Exporting and Hiding Taxes Less politically painful way of funding public services

21. Evaluation of this Taxation Policy Pluses: –Exporting taxes is probably appropriate given the impacts of energy development and its tendency to boom and bust –“Hiding Taxes” may be another name for having a diverse tax base, a good thing. Serious Negatives: –State and Local Governments become Partners in Energy and Natural Resource Development Serious Conflict of Interest: Regulating Your Business Partners

22. Thank You! thomas.power@umontana.edu

23. The Dark Side of the New Economy? An Increasing Pay Gap Relative to the Rest of the Nation

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25. Maybe We Just Need to Be More Like the Nation Have the Identical Job Mix the Nation Has

27. Another Wild Possibility: Keep our existing mix of jobs as it has evolved over time. But earn the same pay in those jobs as is earned in those jobs elsewhere in the nation!

29. Conclusion: The Problem Is Not Our Mix of Jobs. It is the low pay level in almost all our jobs!