Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, October 12, 2005

Sharing Alberta's Oil Wealth

Ralph Klein [Premier of Alberta] should hire The Emirates Economist as a consultant. Here is why:

If the price of oil stays close to $60/bbl or goes even higher [note that futures prices for 2010 and 2011 were under $60 as I wrote this], the oil royalties earned by the Province of Alberta will create some interesting but well-known problems. Everyone will want a piece of the royalties, and rent-seeking could easily become a well-rewarded activity [Thanks to Scoop for getting me to think about this question.

The problems Alberta will face are not new, though. The oil-rich countries of the Middle East have had varying degrees of success dealing with them over the past 50 - 60 years.

Here are some of the problems they have faced and that Alberta must be prepared to deal with:

a. bloated bureaucracy. Deciding what to do with all the wealth causes an increase in the bureaucracy. What are appropriate tax policies? What should or should not be subsidized and how? What investments are appropriate for a gubmnt? How can the wealth effectively and efficiently be distributed among the residents or citizens? These are not easy questions, and initial answers sometimes create unintended entitlements or the belief by many that the programmes are entitlements.

b. creating sloth and unrealistic expectations on the part of the residents. When residents feel entitled to a continued subsidy that is large, the marginal benefits of working are often quite small. Inducing continued productivity requires very careful consideration of the incentive structure.

c. inducing ne'er-do-wells to relocate to the jurisdiction. What if Albera were to implement no-fee health care of the highest quality for all its residents by building the best facilities and paying top salaries to attract the best physicians at all levels? As Ms. Eclectic said, "At our age, we'd move there in a flash."

What if Alberta instituted a monthly guaranteed income for all its residents? I know some folks who would be happy to move there for such a programme, even if (or especially if) it entailed a 100% marginal tax rate [meaning the subsidy would be reduced by the amount a person earned].

These two examples show how the province would/will/might want to have rigid, restrictive, well-defined residency and citizenship requirements. These will necessitate a sizeable bureaucracy; and there will be incentives to reward the bureaucrats privately for favourable treatment.

d. getting good public finance policy will be important. It is easy to think that the gubmnt could get rid of all provincial income taxes. It is easy to think that the gubmnt could eliminate all property taxes. But what about municipalities? Would they have to maintain property taxes to fund themselves, or would they instead be expected to lobby the provincial gubmnt for funding?

e. creating a large body of second-class citizens who go there to work but do not receive the spoils. When people have increased wealth, they often want to purchase more services, and that often promotes allowing non-residents to work there but not share in the gubmntally provided benefit programmes.

If Ralph Klein, Premier of Alberta, has any sense, he will hire this man, an economist with considerable knowledge about oil-rich economies, as a consultant.

Failing that, I'm available. And I'll be in Edmonton late next week.
Who Links Here