Economies change. The citizens of Wyoming have come to a fork in the economic road and reasonable minds can, and do, disagree on the best way forward.
Which path better navigates the social-economic consequences of the ongoing and real transition away from coal in the 21st century? Examined through the lens of theory, the experiences of other communities, in other times, offer valuable insight into our economic predicament, but not an infallible map.
There are, however, a few certainties. Wyoming faces an economic transition. By some estimates, the global response to climate change will reduce the demand for coal by nearly 75% within the next decade. And we know that transitions in resource-dependent economies are real, painful and disruptive. People around the nation and globe live through these transitions every year. Market conditions change and once-profitable industries become uncompetitive. Change, and the associated pain, is inevitable.
The question is whether to rip off the Band-Aid, or take the time to gently trim away the tape from the skin.
This is more than an academic question for me. I was part of the Great Flush (as I call it) in Northern Minnesota of the 1970s and 80s. I grew up in the shadow of the Iron Range, which supported the dominant industry of the region. As the iron ore was all mined out, the mines started to shut down and the decline reverberated through the entire Arrowhead region. The population of the Duluth metro region declined by 17,000 in five years, from 222,000 in 1980 to 205,000 in 1985.
Like many young people, my plan was never to move from my home, but I was flushed out of the region. While that transition was a challenge, I ended up in Wyoming and earned my PhD in economics. Was I better off in the long run? I think so in that my investment in human capital paid off, but there is always a question of missing your hometown.
As an environmental economist who has experienced such transitions, I have mixed emotions about how Wyoming can deal with the Great Coal Transition. As a rational economist, messing with the free market for political reasons to suit your friends and neighbors is wasteful policy; as a humanist, ripping off the Band-Aid on friends and families and asking them to bear the costs privately is cold-hearted. I can see the promise and the pitfalls of both roads before us.
The hard-headed rational economist’s view on this is to rip off the tape, sooner rather than later. This is Schumpeter’s classic notion of the power of “creative destruction.”
Promoting a public policy to bail out your neighbor in a declining industry slows down the transition to greater economic efficiency. It also avoids the “free markets for you, socialism for me” hypocrisy. Poor economic consequences emerge from well-intentioned policies when resources are moved from high-valued uses to lower-valued uses. Listen to the free market. This is the classical neoliberal approach — end all subsidies and provide tax credits for new technologies. Let the market reveal the “best technology,” which can provide the most energy at the lowest cost.
This hard-headed approach is exemplified by the United Kingdom’s former Prime Minister Margaret Thatcher’s decision to stop subsidizing her country’s inefficient coal industry with tax-payer dollars. Back then, UK coal was financially non-viable relative to much cheaper coal from around the globe, and she could find no private buyers. No coal mine closed during the Thatcher era reopened once the Labour government took over.
The dissolution of the former Soviet Union is another example of an economic transition that used what we call neoliberal shock therapy. Neoliberal shock therapy employs “sudden and dramatic” economic policies designed to induce rapid changes in prices and jobs. The goal is to quickly set clear expectations for consumers and producers operating within the economy. But shock therapy has its mixed success. It led, for example, to the concentration of wealth in the hands of a few Russian oligarchs.
Is anyone proposing such shock therapy to Wyoming today? Perhaps the Libertarian Party does. In general, the party does not support any subsidies for any energy source. And in an example of “strange bedfellows” some progressive environmental groups, driven by climate change concerns, also appear to support the idea that the sooner we listen to the market and get off coal, the better.
In contrast, the warm-hearted economics requires policy that slow down the transition — less pain, slower gains, more helping-hands by providing more resources to those affected.
Wyoming has its rainy-day fund. We could use some of these resources to fund the retraining, relocation, re-education, refinancing and so on of the friends and families that have been dependent on wages from coal mining, and aid the communities that grew up around them. We could add a carbon tax on all energy sources to secure more resources to be dedicated to easing this transition.
But it takes a long-term commitment to planning and investment to buffer such a transition. Making energy consumers pay more for energy is just a hidden tax, not a long-term solution. These retraining programs have to work, and they have to be funded with more than just lip service. As an example of such a glide path strategy, Headwater Economics recently offered up a transition plan that focuses on building coalitions, improving industrial diversity, stronger community bonds, financial strategies to spread the risk and increasing wealth to help coal communities navigate the transition.
Examples of the mixed success in managing this rupture-style transition can be found in a recent report by the Resources Legacy Fund, which considered case studies in Delta County, Colorado, San Juan County, New Mexico and Campbell and Sheridan Counties in Wyoming. They conclude that while such economic transitions take time and are context-specific, rewards do arise to the early movers. Early wins in diversification attract others, and can build momentum.
Stretching out economic reform prolongs what is widely recognized — free markets are not supporting the coal industry due to more cost-effective substitutes today and into the future, and coal is on the decline. How should Wyoming respond?
Economists have found that shock therapy has worked, look at the jump-start to Poland’s post-communism economy. But gradual change can work too in this economic transition, as evidenced by China’s fast growth strategy through centralizing the slow transition to more access to markets from command-and-control.
Wyoming’s citizen’s face a difficult choice today — free market shock therapy in which the transition costs fall on our coal-dependent friends, or centralized gradual change that we all support with higher energy prices. Both will take visionary ideas and real economic commitment.
This is one of six pieces in WyoFile’s “Re-regulation” special edition. Click the links below to read more:
This story has been updated to correct the name of the organization that conducted a study on energy transition communities. That organization’s name is Resources Legacy Fund. —ED