The Role of Metal Mining in the Alaskan 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 do 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.
1. 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:
1. 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.
2. In the “mining dependent” cities of Fairbanks and Juneau, metal mining is directly responsible for about one and two percent of total jobs, respectively.
3. 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.
4. Because of its capital and land intensive nature and relatively modest use of labor, the payroll associated with Alaska metal mining represents only about 8 percent of the $1.1 billion value of metal mine production.
5. 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 5 percent.
6. 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.
7. 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.
8. Despite the high wages paid in metal mining, that industry is not usually associated with prosperous communities across the nation because (1.) metal commodity prices are unstable, causing instability in employment and payroll; (2.) the life of a contemporary metal mine tends to be relatively short, 5 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.
9. 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.
10. 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 7 percent, income from other sectors expanded by 31 percent. The Alaskan economy is more diverse and resilient than the popular economic base view suggests.
11. 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 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.
2. 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.[2] For example, the timber-dependent 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 1 in 200 jobs and dollars of personal income flowed directly from metal mining activities in Alaska. See Figures 1 and 2. [3]
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 3.
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 1 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.[4]
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 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 do 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 do not seek paid employment and those who do but cannot find it total over half of the potential adult workforce.[5] That is, there are more working age adults who do 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 1 indicates, is a dramatic exception to the pattern found elsewhere in Alaska.
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.
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 non-residents 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 2. 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.
3. 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 do 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.” [6]
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.[7] 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 Fairbanks residents are not all workers; they are the workers and members of their families who are likely to “depend” on other economic activities in addition to the Fort Knox mine.
B. The Payroll Associated with Alaska Metal Mine Production
The difference between the gross value of metal mine production and the part of that value that actually becomes pay for Alaskan residents is huge. In 1999 only 8 percent of the total value of metal mine production in Alaska was actually paid out to workers in Alaska.[8] Forty-four percent of the gross value of metal mine production was not value created in Alaska at all but value associated with machinery, material, managerial supervision etc. imported into Alaska. The remaining 48 percent of the gross value of the metal mine products may or may not have flowed to Alaskans depending on who owned the mineral rights, loaned the capital, or invested in the mining company stocks. If those were non-residents, that portion of the value created (almost half) did not stay in Alaska either. See Figure 4. Finally, about a fifth of the employees of metal mining companies in Alaska are non-residents. Depending on where these workers families are located, this may reduce the small fraction of total sales value that is paid as wages that circulate within the Alaskan economy. Even before exaggerations associated with estimated multiplier impacts, the impact analysis could be off by 12 fold ($8 in payroll out of each $100 in mineral value produced).
Between 1992 and 1999 the real value of metal mine production in Alaska increased by 83 percent but metal mining payroll hardly increased at all (+5 percent). The expansion in metal mining was not significantly expanding the benefits to Alaska workers. Clearly one cannot use the gross value of metal mine production to describe the impact of mining on the Alaskan economy. See Figure 5.
In Figures 4 and 5 the question mark in the label “AK Non-Payroll Value” refers to the fact that the value of the metals created in Alaskan metal mines that does not flow to workers as payroll is likely to flow out of the state as profits, interest, depreciation, and other returns associated with the capital invested in the mine. It is value created by economic activity in Alaska but a substantial portion of it does not flow to Alaskan residents.
The data for individual mines show the same pattern. Only a small part of the total dollar value produced by the mine is paid out as payroll. For the Red Dog Mine, the world’s largest operating lead-zinc mine, for instance, in 1999 about 7 percent of total mine revenues of almost $400 million, or $27 million, was paid out to Alaskan employees. In addition to the local payroll, Red Dog also makes royalty payments to NANA Regional Corporation. Between 1988 and 1998 those averaged $3 million per year. At the same time about $163 million was returned to investors as depreciation, interest, or profit. Red Dog is operated by Teck Cominco Ltd., a Canadian company with operations and stockholders worldwide.
The Fort Knox Mine near Fairbanks is operated by Kinross Gold Corporation, another Canadian company with operations on five continents. About 14 percent of the dollar value of its production in 1999 was paid out in payrolls.
The Greens Creek Mine near Juneau is operated by a Rio Tinto subsidiary, Kennecott Minerals. Rio Tinto is the world’s largest mining company, operating on six continents. It owns about 70 percent of Greens Creek. The other 30 percent is owned by Hecla Mining Company that is headquartered in Idaho but also operates in Mexico and South America. Because of the complex ownership, revenues and payroll can only be approximated. It appears that in 1999 about 23 percent of total revenues were paid out in payroll. See Table 3.[9] For this group of three large mines about one out of every 10 dollars of metal value sold was paid out to workers.
4. Metal Mining’s Impact on Local and State Governments
A. Local Governments as Partners in Metal Mining: Impacts on Government
Revenues
Even when the contribution metal mining makes to total payroll and total jobs is quite small, state and local governments often come to a quite different conclusion about the relative “economic” importance of metal mining. This may be tied to the ways in which metal mining contributes to government revenues. Because modern metal mining is a capital-intensive industrial operation that involves large investments in site preparation and equipment, a metal mine can represent a significant part of a local government’s property tax base. The Fort Knox Mine in the Fairbanks area, for instance, involved $373 million in capital construction costs.[10] The assessed value of the mine’s property was $243 million in 2001, adding about 6 percent to the total assessed value of property in the Fairbanks North Star Borough and about 10 percent to the value of property outside of the cities.[11] Only the Alyeska pipeline was a larger property tax payer.[12] Similarly, the Greens Creek Mining Company is the largest property tax payer in the City and Borough of Juneau, four times larger than the next largest taxpayer. Its assessed value of $77 million represented almost 4 percent of the Borough’s total assessed property value.[13]
Clearly metal mines can contribute to a local government’s property tax base in a way that is more than proportional to the jobs and payroll they generate. This can make local governments almost a partner in the successful opening and operation of a metal mine.
This, however, is an incomplete way of looking at the contribution that metal mines make to local government finances. Property taxes are just one source of revenue for local government agencies. In general, those property taxes represent a relatively small portion of all local government agency revenues.
Fairbanks North Star Borough, for instance, had total revenues in fiscal year 2000/2001 of $90 million but only $57 million or 63 percent came from property taxes.[14] Within the geographic area of the Borough there are also the cities of Fairbanks and North Pole. In addition, there is the Fairbanks North Star School District. Each of these other local governments levies its own taxes, obtains other revenues, and operates within its own budget. The Borough levies local taxes in support of the school district, but the school district also receives funds from the state and federal government. The 1997 Census of Governments provides information on the revenues and expenditures of all units of local government combined within the boundaries of the Fairbanks North Star Borough. Property taxes represented 18.8 percent of total revenues received by local governments in the Fairbanks area.[15] In that setting, even the Fort Knox Mine’s six percent of the property tax base represented only about one percent of total local government revenues in the Fairbanks area (6% of 18.8% = 1.1%).
The City and Borough of Juneau, unlike the City of Fairbanks and the Fairbanks North Star Borough, operate as a unified government. In the year 2000, it had operating revenues of $152 million, only $26 million or about a sixth of which came from property taxes.[16] Local sales and excise taxes, user fees, interest, state and federal support provided the rest of the revenues. The Juneau schools are supported by local taxes levied by the City and Borough of Juneau but also receive funds from other sources. The 1997 Census of Governments indicated that only 13.5 percent of total local government revenues in the area of the City and Borough of Juneau came from property taxes. The Greens Creek Mine’s 4 percent of the local property taxes represented only about one-half of one percent of total local government revenues (4% of 13.5% = 0.54%).
In addition, the local taxes paid by metal mining companies are not “pure revenue” or “pure benefit” to local government units. Taxes are levied to cover the costs of services that local governments provide to businesses and citizens. Metal mining operations consume local government services, directly or indirectly, and therefore impose costs on local governments. Mines rely on roads as well as police, fire, and other emergency services. Their employees also require local government services including education for their children and the basic urban infrastructure that supports the local economy. Because metal mines both pay taxes to and impose costs on local government agencies, the net fiscal benefit they confer on local governments is substantially less than the total tax dollars they contribute to total local government revenues.
Looking at all units of local government in evaluating the tax contribution of metal mining is appropriate if one is trying to understand the role of that particular type of economic activity and those particular companies in supporting all local government activities. But some local government units are more dependent on property tax revenues that others. For that reason, one can expect some local government units to perceive a higher level of dependence on metal mining than the data above indicates. As the data above indicated, the Fairbanks North Star relied on property taxes for 63 percent of its revenues but the City and Borough of Juneau relied on property taxes for only about 17 percent of its because the City and Borough operate as a unified government and makes heavier use of local sales and excise taxes.
In calculating the impact of metal mining on local government fiscal balance, some have included the tax payments made by workers and the businesses in which those workers spend their wages. Such a calculation assumes that if a particular mine were not operating, the workers and their families would not reside in the area, would not own property there, and the commercial infrastructure would have to shrink proportionally because they would not be spending their wages locally. The value of such a calculation depends upon two questionable assumptions. First, it assumes that these workers, residents, and businesses required no public services from local government and, as a result, the taxes they paid were not made to cover the costs of those services but were entirely “gifts” they made to the local governments. Secondly, it assumes that all changes in employment lead mechanically to changes in population. The possibility, for instance, that residents act as entrepreneurs, creating jobs for themselves and their neighbors, is ignored. Residents are assumed to be passive and helpless, waiting for an outside company to come along and provide employment opportunities for them. Neither of these assumptions is economically appropriate and for that reason, extending the fiscal contribution of mining companies in this way is economically inappropriate.
B. Metal Mining’s Contribution to State Government Revenues
Metal mining operations pay a mining license tax to the State of Alaska, but that tax is reduced or offset in two ways. First, the tax does not have to be paid for three and a half years after production begins and various tax credits against this tax are allowed for various types of investments that are made in the mine. In fiscal year 2000 this mining tax generated net income (after tax credits) of $3.5 million. Over the three years 1998-2001 the net revenues from this tax averaged $2.1 million.[17] The fiscal year 2001 state budget included revenues totaling $7.3 billion. This total state revenue, however, includes revenues that flow into the Permanent Fund. If that $1.9 billion in Permanent Fund revenue is excluded, state revenues totaled $5.6 billion. The average mining tax revenues over the previous three years represented less than four hundredths of one percent (0.038 percent) of annual state government revenues.
In addition, all non-fuel mining that takes place on state-owned lands is required to pay the state a 3 percent of net income as a production royalty. In calculating the royalty owed to the state, the costs of developing the mine, the costs of operating the mine, investment in upgrading the mine, and mine company overhead costs can all be deducted from the value of the minerals produced. In addition, a “non-cost,” the fact that the value of the mine declines as minerals are removed (“percentage depletion”) can also be treated as a cost and deducted. As a result of the extensive allowed deductions from the mineral value produced, many mines pay no royalty to the state. For instance, the Fort Knox Mine, at the time it poured its millionth ounce of gold in September of 1999, had not yet had to pay any royalties to the State of Alaska because its deductions of “costs” allowed it to show no taxable “net income.” Across the state, in 1997, $13.7 million was paid under this royalty provision including $8.7 million that was paid to municipalities. This too represents a very tiny portion of the total state and local government budgets.
5. Metal Mining and Local Economic Development
Mineral production (generically referred to as “mining” in federal statistics) is the highest paid major industry in the nation as well as in Alaska. “Mining” includes oil and gas exploration and development as well as metal and coal extraction operations. The high pay is all the more impressive given that mining jobs, in general, are blue-collar jobs that do not require a college education or advanced degree. It is this high pay that makes mining jobs attractive to communities.
Historically, mining often laid the basis for the original European settlement of relatively remote areas of North America including Alaska. Often, however, that settlement was temporary, lasting only until the mineral deposit was exhausted and the miners moved on, leaving behind “ghost towns.” Where mining activities persisted over several decades, the commercial and civic infrastructure to support mining developed locally. Local fortunes were earned and many of the cultural trappings of an opulent population also developed: opera houses, theaters, art museums, and up-scale retail stores. But even in these permanent mining towns, prosperity rarely persisted. The early mining towns that did persist and prosper, including Juneau and Fairbanks, successfully diversified their economies away from primary reliance on metal mining. That is clear from the very small percentage of total income and employment in these cities that now comes from metal mining. Recall Table 1.
Despite the high pay and enormous wealth associated with metal mining, it is rare to find a modern metal mining dependent community that is prosperous. Continued specialization in metal mining rarely leads to ongoing economic development.[18] This anomaly is explained by the fact that community reliance on metal mining jobs also has significant economic drawbacks. Mining jobs and payrolls tend to be unstable; they tend to support only very limited local economic development; and they are not likely to be sources of additional economic activity. Each of these drawbacks will be discussed in turn.
A. Instability in Metal Mining and Smelting
As Alaska and many of its communities have experienced first hand over the last several decades, metal mining jobs and payroll are quite unstable. The metals produced are sold on international markets in competition with other metal producers worldwide. That competition, as with other commodities like wheat, oil, and seafood, can lead to over-production. Reliance on the world economy also makes those prices vulnerable to economic downturns elsewhere in the world such as the “Asian Flu” of the 1990s. The profitability of any particular metal mining, processing, and refining operation depends upon the international price of the commodity as well as the local costs of production. International commodity prices can fluctuate widely, leading metal mines, mills, and smelting facilities to shut down when prices are low and bringing new producers and competitors online when prices are high. Figure 6 shows the dramatic declines in inflation-adjusted (“real”) gold, silver, and copper prices over the last decade. Even when falling prices do not disrupt mining operations, the active life of modern gold mines is relatively short, 5 to 10 years.[19] Figure 6 shows the change in metal prices over time by setting the prices in 1988 at 1.0 and then tracking how they fell relative to that reference point. The declines to 0.4 represent a 60 percent decline in the price.
The result is wide cyclical fluctuations in the industry with regular layoffs. The Greens Creek silver and gold mine outside of Juneau, for instance, opened in 1989 but shut down after a little more than four years of operation in 1993 because of low metal prices, laying off 250 workers. It returned to operation in 1996. The Illinois Creek gold mine near Galena began operation in 1997 but suspended operations just two years later when falling metal prices forced the mining company into bankruptcy.[20] The Nixon Fork gold mine near McGrath began operation in 1996 but also declared bankruptcy in 1999 due to low metal prices.
This is not a situation that is unique to Alaska. This same instability and decline are found throughout the western states and the nation as a whole. In 1999 metal mining employment in the Mountain West region was down 70 percent from its level in 1980 and down 50 percent nationwide. That is a loss of 22,000 and 50,000 metal mining jobs, respectively.[21] If metal smelting employment were included in the total, the decline would be larger and steeper. Problems have not only plagued gold mining, they have also curtailed silver and copper mining and smelting operations.
The history of metal mining and metal ore processing over the last twenty years in the western states and the nation is one of instability and decline. There is no evidence that that pattern will be reversed. That pattern of economic disruption has a very negative impact on the economic development of the communities that come to depend upon these industries.
B. The Economic Cost of Dependency on Metal Mining and Processing
When the income associated with an economic activity is not stable and reliable, economic actors respond in ways that seek to protect themselves against that instability. In particular, if a community is quite dependent on an industry that has proved to be unstable in the past, investors will be very hesitant to risk their capital there. Existing business owners will hesitate before investing in the upgrade or expansion of their businesses. Workers will be hesitant to invest their limited savings in a home whose value may be threatened by a mine or smelter closing. Even local government agencies such as school boards will be hesitant to invest in new infrastructure for fear that a downturn will make it impossible to pay off the bonds that financed the public investments.
When the economic activity on which the community depends also significantly damages the natural environment, there is likely to be additional hesitancy to invest. Ongoing degradation of air and water quality and damage to the surrounding natural landscape makes an area a less attractive place to live, work, and do business. As a result, property values decline. Study after study has documented the negative impact that pollution has on property values.[22] People care where they live and are very careful about where they make what for most is the largest investment of their lives, the investment in their homes.
Economic instability and environmental degradation discourages local investments in communities that are overly dependent upon mining and mineral processing. As a result economic development is retarded in mining and processing towns despite the high wages paid. That is why it is hard to find prosperous mining towns. Often the opposite is true; mining has come to be synonymous with under-development, economic failure, and poverty as in Appalachia and the Ozarks and the mining “ghost towns” that are found throughout the West including Alaska and the Yukon.[23]
C. The Limited Long Term Economic Potential of Metal Mining
The employment and income potential of metal mining in Alaska can be broken down into several different pieces: 1. the physical potential for new mining, 2. the economic potential for new mining, and 3. the long term potential associated with existing and new mines.
1. Because of its huge size, remote location, and highly mineralized landscape, Alaska is often portrayed as a virtual “treasure trove” of commercial mineral potential.[24] Physical presence of minerals, however, does not by itself represent feasible economic opportunity. Many other regions of the United States and the world also have high mineral potential that either has not been developed, was developed and abandoned, or was developed but poverty, not prosperity, followed. Most states in the US have energy, metal, and other mineral potential, but, despite this “potential,” mining production has not become a significant part of the actual economy.
2. It is not just the physical presence of minerals that matters but the economic characteristics of the deposits and the international markets into which they would be sold. If a deposit has higher exploration, development, extraction, processing, and delivery costs than other deposits around the nation and the world, it is likely to remain undeveloped. Only the most economically attractive mineral sites get developed, not all sites. In addition, as already discussed, commodity prices determine whether a deposit gets developed and, if developed, whether it continues to be mined. For almost two decades mineral prices have been low and mineral development discouraged. This is no clear evidence that this economic situation will soon change.
3. Even when mines are operating, the employment and income potential associated with them is likely to be either relatively short term and/or shrinking. This is tied to two factors. First, many modern metal mines operate for only five to ten years before exhausting the deposit. For instance, counting not only the “proven” but also the “probable” gold ore reserves and including the reserves associate with the recently permitted True North Mine as well as the Fort Knox Mine, at Kinross Gold Corporation’s planned rate of production, those reserves will last about 8 years.[25] The Greens Creek Mine estimates current reserves can support 12 more years of mining. This is in dramatic contrast with some historic mines that have operated for a century or more such as those in Butte, MT, Kellogg, ID, Silver City, NM, and Lead, SD. Of course, if metal prices are high enough and/or technological developments allow cost to be cut enough and/or additional reserves are discovered, these contemporary mining operations could last significantly longer. On the other hand, if metal prices fall further or remain low, the mines could shut down sooner as several Alaskan metal mining operations did during the 1990s.
Second, metal and other mineral extraction is a mature industry in which technological developments are constantly displacing workers. Worker productivity has been rising more rapidly in metal mining and processing than in almost any other major industry. Put the other way around, the number of workers needed to produce a given quantity of metal from metal ores has fallen rapidly. Just over the last ten years the labor requirements in gold and silver mining have fallen by 40 percent. Longer term statistics on labor productivity in this sector are not available but the statistics on other types of mining tell the long term story: In copper mining in the late 1990s, labor requirements per unit output were only a fifth of what they were in 1955; in coal mining they are only a quarter of what they were in 1955. There is no reason to believe that this decline in labor requirements is at an end in mining. See Figures 7 and 8.
As a result of these improvements in labor productivity, much larger quantities of minerals can be extracted while the mining workforce continues to decline. The point is that even if markets supported a significant increase in gold production that does not necessarily mean a significant increase in employment or payroll. Both could actually decline over time despite increased output. See Figure 9. The same pattern is seen in Alaska. Between 1992 and 1999 the real value of metal mine production in Alaska increased by 83 percent but metal mining payroll hardly increased at all (+5 percent). See Figure 10a. The dramatic expansion in metal mining was not significantly expanding the benefits to Alaska workers.
Gold mining in Nevada provides dramatic evidence of how mining jobs can disappear even as mine production expands. Between 1990 and 2000, gold production in Nevada expanded by 50 percent, but metal mining jobs shrank by 3,700, a decline of 27 percent.[26] See Figure 10b.
The coal industry in Utah provides another dramatic example of how significant expansions in mineral production can take place while mining jobs disappear. Between 1981 and 1997 coal production in Utah more than doubled from 13.8 to 28.6 million short tons. The number of employees in the coal industry, however, was almost cut in half, from 4,200 to 2,200 workers.[27] The net result was that the labor requirements to produce a ton of coal were cut to a quarter of what they had been in less than two decades. A similar pattern can be found in Wyoming coal operations.
D. The Environmental and Financial Risks of Metal Mining to Taxpayers
Because metal mining involves major disturbances of the natural landscape, both federal and state laws require that after mining activity ceases the disturbed land be restored or “reclaimed” and that threats to water and air quality be eliminated. Given the massive size of many open pit operations and their related waste piles and tailings impoundments, reclamation can be very expensive. When exposure of previously buried rock to air and water leads to acid mine drainage a serious, very long-term, environmental problem can be created. In addition, and usually accelerated by the acidic water, heavy metals can leach out of the rock, creating an additional serious environmental problem. It is often very difficult and expensive to stop or reverse these mining-related water pollution problems once they are created.
The size of these reclamation and environmental restoration costs can be seen in various public and private efforts to assure the financial capacity to cover them. In the year 2001 the New Mexico Mining and Minerals Division estimated that $759 million in financial assurance would be required to cover Phelps Dodge’s Chino copper mine closeout plan, including its reclamation and environmental stabilization plan, outside of Silver City, New Mexico. The Silver City environmental group, Gila Resources Information Project hired a mining engineer to provide an independent estimate of what it could cost to close this one mine. He estimated that a financial assurance of $987 million was required. Phelps Dodge estimated the required bond to be only about $100 million. In addition Phelps Dodge also has to fund a close out plan for the adjacent and equally large Tyrone copper mine.[28]
The reclamation costs being discussed for the Chino mine are not unusually large when compared to the provisions that other mining companies have made for reclamation and environmental protection. Rio Tinto, for instance, the parent company of Kennecott Minerals Company, the operator of the Greens Creek Mine, has estimated that its “close down and restoration and other environmental obligations” for all of its operations will total $2.6 billion. It lists as a liability on its balance sheet $1.4 billion, its estimate of the discounted present value of that cost.[29] This reclamation liability has increased almost a billion dollars since 1996 when it was $484 million.[30]
The Atlantic Richfield Company (Arco) before it merged with BP Amoco carried $870 million in reserves for environmental remediation of its operations and another $1.1 billion for reclamation and restoration of the old Anaconda Copper Company mining and smelting sites in Montana and elsewhere. It warned investors that its analysis indicated that the environmental remediation costs might be as much as $500 million higher than the $870 million reserved for these purposes. That would put its total environmental liability between $2 and $2.5 billion. These Arco environmental remediation costs were largely associated with discontinued mining operations in New Mexico, Utah, and Montana.[31]
These reclamation and restoration costs are as huge as they are because they are associated with mining and smelting operations that have stretched over most of the twentieth century or longer and continued into the present when they became subject to contemporary environmental regulation and mine cleanup and reclamation requirements.
But mining operations of shorter duration can also create environmental problems that are very costly to clean up. That is why states have increasingly required that metal mining operations provide substantial financial guarantees in the form of bonds or insurance policies or other financial assurances to make sure that when the mine ceases operation, there are substantial funds available for reclamation and restoration.
Such bonding is extremely important because mining companies increasingly are legally structured so that they hold almost no assets beyond the mine itself. When the mine ceases to be economically feasible to operate, the local mining company is left with almost no remaining assets. Profits from past operations are regularly transferred to a parent company or stockholders so that there are no reserves left within the local mining company itself. In this situation, a local mining company can declare bankruptcy when market conditions and/or mine depletion render the operation no longer profitable. If the company has not been required to provide a sufficient bond ahead of time, there may not be resources available to support reclamation and restoration. In that setting citizens either have to accept the ongoing environmental damage associated with the un-reclaimed mine site or fund the reclamation and restoration themselves using general taxpayers’ funds.
This is not an empty fear. For example, in 1998 the Pegasus Gold Corporation declared bankruptcy, abandoning its adjacent Zortman and Landusky mines and two other mines in Montana. The State of Montana had required a bond of $22 million for the Zortman and Landusky mines, but the reclamation costs are estimated to run as high as $204 million. The state government will have to pick up the part of the reclamation bill not covered by Pegasus’ inadequate bond, forcing Montana to tradeoff strains on the state budget against leaving much of the environmental damage un-repaired. The State of 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 mid-1996 and began production in early 1997. With gold prices at about $400 per ounce the mine was expected to have a 6 to 8 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 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 do 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 near- permanent environmental damage. This, as will be discussed below, can have long- term negative implications for local economic development.
6. 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.
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 do 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 8 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 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 4. 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 one-sixth of the 57,000 new jobs shown in Table 4.
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.
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]
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.
7. 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 firms explains why people live where they do. 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 do not care where they live. They simply move to where the economy demands. The second is that business firms do 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 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 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 do 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 do not matter as much to these communities any 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 do 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.
8. 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 21st 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 sustainable level of prosperity to Alaska, the development of other, smaller mineral deposits, is unlikely to do so either.
In general, sustainable economies do 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 do 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 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 do 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 4 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.
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 Alaskan economy. That is the reason that rational public regulation of metal mining should be an important part of Alaska’s economic development policy.
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[1] 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.
[2]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.
[3] Figures 1 and 2 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. . “Other mineral production” is primarily oil and gas production (96 percent), but coal, gravel, and other mineral extraction are also included.
[4] Table 1 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.
[5] “Northwest Arctic Borough,” Neal Fried and Brigitta Windisch-Cole, Alaska Economic Trends, 19(1):3-9, January 1999, Alaska Department of Labor.
[6] 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. 3.
[7] If one is going to use multipliers, these multipliers are within the reasonable range for a relatively small and isolated city.
[8] US BEA Gross State Product and Personal Income Statistics for 1999. The Economic Census data for 1997 also showed that only 7.75 percent of the value added in metal mining in Alaska went to wages; EC97N21S-GS, pp 7-12, US Census Bureau, April 11, 2001.
[9] Red Dog information comes from a presentation made to the 1999 Alaskan Economic Summit on behalf of Dr. N. B. Keevil, President and CEO of Teck Corporation, operators of the Pogo Project in central Alaska near Delta Junction; and Mr. D. A. Thompson, President and CEO of Cominco Ltd., partner with NANA in the Red Dog Mine near Kotzebue, byDr. N. B. Keevil and D. A. Thompson. Feb. 9, 1999, Juneau, Alaska; Cominco 2000 Annual Report pp. 39, 50, & 51 were also used. The Fort Knox data came from the Kinross Gold Corporation 2000 Annual Report, pp. 8, 9, & 48 as well as the McDowell Group analysis of socioeconomic impacts. The Greens Creek data came from State of Alaska data on employment and earnings in metal mining in Juneau Borough and Hecla Mining Company 2000 SEC 10K Report, p. 11.
[10] McDowell Group, op. cit. p. 3.
[11] Fairbanks Community Research Quarterly, 24(2), Summer 2001, p. 18.
[12] Comprehensive Annual Financial Report for Fiscal Year Ended June 20, 2000, p. 223, Table XII.
[13] Comprehensive Annual Financial Report, Fiscal Year Ended June 30, 2000, p. 201, Table 12.
[14] Fairbanks North Star Borough, FY2001-2002 Budget, Revenue Summary, p. 23.
[15] U.S. Census website; 1997 Census of Governments, County Area Finance & Employment FastFacts.
[16] City and Borough of Juneau, FY02 Revised Budget, Summary of Operating Revenues by Source, p.30.
[17] Department of Revenue, Tax Division, FY 2000 Annual Report, p. 38 and Table 2.
[18] This is not to say that metal mining dependent communities cannot escape that dependency. Many previous “mining towns” have. Juneau and Fairbanks, Alaska, Coeur d’Alene, Idaho, Helena, Montana, Park City, Utah, and Aspen, Colorado, are just a few examples of towns whose economies now are hardly tied at all to mining. Breaking the dependency on this one industry has been crucial to these communities’ successes. Of course there are also many mining towns that did not make that transition away from mining dependence and became “ghost towns.”
[19] The Red Dog zinc and lead mine does not fit that gold mine pattern. If zinc and lead prices stay high enough, Red Dog has reserves that would allow it to operate for many decades.
[20] In July 2000 some mining resumed at Illinois Creek under the administration of American Reclamation Group LLC. That mining is part of a “mining to reclaim” operation under agreement with the State of Alaska that will finish processing ore stockpiles.
[21] US Department of Commerce, Bureau of Economic Analysis, Regional Economic Information System, SA27 files, wage and salary employment.
[22] “Stigma of Environmental Damage on Residential Property Values,” Gordon C. Rausser, University of California at Berkeley, EPA Grant Number: R825995, August, 1998, final report available at . Also see “Property Values, Stigma, and Superfund,” Working Paper prepared for US EPA, OERR, by Environmental Management Support Inc., July, 1999. Also see: Been, V. 1994. "Locally Undesirable Land Uses in Minority Neighborhoods: Disproportionate Siting or Market Dynamics?" Yale Law Journal 103:1383; Clark, D.E. 1992. "Do Noxious Facilities Influence Migration Rates? Evidence from a Countywide Model." Paper presented at the Annual Meeting of the Regional Science Association Int'l. Marquette University. Chicago, IL; Meyer, S.M. 1992. "Environmentalism and Economic Prosperity: Testing the Environmental Impact Hypothesis." Project on Environmental Politics and Policy. Massachusetts Institute of Technology; Blomquist, G.C. et al., 1988. "New Estimates of Quality of Life in Urban Areas." American Economic Review 78(1):89-108; Hoch, I. 1978. "Variations in the Quality of Urban Life Among Cities and Regions." In L. Wingo and A. Evans, Public Economics and the Quality of Life. Johns Hopkins; Ullman, E. 1954. "Amenities as a Factor in Regional Growth." Geographical Review 44:119-132; Harrison, David, Jr., and Daniel L. Rubinfeld. 1978. ``Hedonic Housing Prices and the Demand for Clean Air.'' Journal of Environmental Economics 5: 81-102; Mendelsohn, Robert, and Guy Orcutt. 1979. ``An Empirical Analysis of Air Pollution.'' Journal of Environmental Economics and Management 6: 85-106.
[23]For instance, Dawson City had a population of over 30,000 people at the peak of the Klondike Gold Rush at the end of the 19th century. It now has a permanent population of about 2,000 and is mostly focused on seasonal tourism and placer mining. Alaska’s McCarthy and Kennecott originally serviced the Kennecott Copper Company’s mining operations. The area had a peak population of about 1,500 but now has only 35 permanent residents and is surrounded by the Wrangell-St. Elias National Park.
[24] The Fraser Institute of British Columbia, for instance, annually polls mining companies operating in North and South America on the geological potential for mining in 35 political jurisdictions (Western states, Canadian provinces and Territories, and Central and South American nations). Using top ranked Nevada as a reference point scored at 100, other jurisdictions were rated for their mineral potential. Alaska was tied for third with Quebec at a score of 94 just below Chile that scored 97. “Annual Survey of Mining Companies 1999/2000,” Vancouver, BC.
[25] Kinross Gold Corporation, Annual Report, pp. 6, 8 and 9.
[26] In addition to gold mining, there is also silver and copper production in Nevada. Most of the silver production is related to the gold production. The copper production is relatively small and was at the same level at the end of the 1990s as it was at the beginning although there was a brief expansion in 1997-1999 as the BHP operation started up and then shut down.
[27] State of Utah, Natural Resources Department, Office of Energy and Resource Planning.
[28] See High County News, Vol. 33, No. 23, December 3, 2001, p. 1.
[29] 2000 Annual Report and Financial Statements, Note 17, footnote c, p. 87.
[30] Use of Financial Surety for Environmental Purposes, A paper prepared for the International Council on Metals and the Environment. George Miller, 1998, p. 33.
[31] BP Amoco PLC and Atlantic Richfield Company merger financial documents: Note 15, p. 114, Other Commitments and Contingencies and Part VII, Section 7, p. 215, “Environmental Protection and Remediation Costs.” downloads/79/BP_Listing.pdf
[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
[34]Ibid, p. 3.
[35] Ibid, pp. 322-329.
[36] A 1998 estimate of the direct employment associated with tourism was 16,400 jobs and $315 million in earnings. This would add about 8 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. .
[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.
[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 1. Corvallis, OR: Oregon State University, Graduate Faculty of Economics.
[39] Ullman, Edward, 1954, “Amenities As a Factor in Regional Growth, Geographic Review, 44(1): 119-132.
Tiebout, Charles, 1956, “A Pure Theory of Local Expenditures, Journal of Political Economy, 64(2): 160-164.
[40] Borts, G.H., and J.L. Stein, 1964, Economic Growth in a Free Market, New York: Columbia University Press
[41]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.
[42] U.S. Department of Agriculture (USDA), 1996, Economic Research Service, Rural Conditions and Trends, 7(3):40-44, p. 9. 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.
[43] 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):223-234. 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.
[44] See the special issue of Rural Development Perspectives on the rural West, 14(2), August 1999, USDA, Economic Research Service.
[45] See, for instance, “Alaska’s Economy: Where Is It Going?,” Scott Goldsmith and Patrick Burden, Commonwealth North, transcripts/burden2000 .
[46] 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.
[47] 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.
[48] See footnote 46.
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