South Dakota: Not North Dakota but Waaaaay Better than California and Just About Everywhere Else!

I gave this speech yesterday morning at the Westward Ho! Country Club in Sioux Falls, SD at the first annual commercial brokers meeting.

South Dakota: Not North Dakota but Waaaaay Better than California and Just About Everywhere Else!

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana College
As you are probably aware, North Dakota is doing pretty darn well economically. In a sense, it is a much closer, slightly warmer version of Alaska. It isn’t as visually stunning as Alaska and it has many fewer bears, especially of the larger and scarier varieties, but like the Last Frontier state, North Dakota is blessed with ample energy resources. The massive Bakken Oil field, which may hold more oil than in Saudi Arabia, extends into North Dakota as well as Montana and Saskatchewan. Unfortunately, a lot of that black gold is trapped in shale but for now the bigger pockets, some two miles down, are being profitably tapped and technology improvements may help our northern neighbor surge past Alaska in terms of oil production by the end of this decade.

Thanks in part to its western oil fields, and oh yeah its 800 year supply of coal, North Dakota has the lowest unemployment rate in the country, just 3.7 percent in August of this year, the most recent month available as of Monday of this week. South Dakota’s unemployment rate was about 21 percent higher than that but was still second lowest in the country, just a hair ahead of Nebraska. At 4.5 and 4.6 percent respectively, those two states look like employment heaven compared to almost everywhere else. New Hampshire, number 4 on the list, is at 5.7 percent, followed by neighboring Vermont at 6 flat. But it is pretty much all downhill from there, with California, Michigan, and Nevada in the ditch at the bottom of the hill, at 12.4, 13.1, and 14.4 percent respectively. And remember those rates are for people still looking for work. They don’t count people who have given up trying to find work, a number that probably grows exponentially with the official unemployment rate. In other words, those places are much worse off than the government statistics suggest.

The unemployment rate is a good proxy for economic growth, or per capita increases in the output of final goods and services. North Dakota’s economy grew by a scorching 7.3 percent in 2007 and 2008, the most recent years available. Wyoming was second at 4.4 percent and South Dakota third at a respectable, if relatively plodding 3.5 percent. Those were years when the economies of numerous states, including those of Michigan, Indiana, Ohio, Georgia, Florida, Nevada, and Arizona shrank and a slew of others grew anemically at less than 1 percent.
Finally, population growth in both Dakotas from 2008 to 2009, while hardly breakneck, was a respectable 1 percent flat here and .8 percent up there, ranking South Dakota 20th in population growth rate and North Dakota 23rd. Wyoming, by the way, grew fastest of all at 2.1 percent but still remained our least populous state with only slightly over half a million souls. Yes, I do believe that most Wyomingites have souls, probably a higher percentage than many other parts of the country in fact, but the Census Bureau doesn’t track that, just bodies.
But I digress. What I am trying to say is that instead of lamenting North Dakota’s advantages, the denizens of South Dakota ought to first take pride in what they have accomplished already and then seek to make further improvements, partly by intelligently emulating successful policies in North Dakota and elsewhere but also partly by striking off on its own, unique projects.

For example, North Dakota has a government-owned bank that is attracting considerable interest. Even the Minnesota Fed has looked at it. It acts as a correspondent bank that strengthens North Dakota’s network of community banks and it actually contributes to the government’s coffers. Colonial Massachusetts, New York, Pennsylvania, and some others had a similar institution. South Dakota should look into it, than if for no other reason we’ll have a bank capable of issuing fiat paper money when the dollar collapses. I think we should call that money SOTAs and the symbol will be a bison -- with two lines running through it because all the best currency symbols have two lines running through them. [When will I learn to never, ever make monetary policy jokes? -OR- I’m happy to see some of you share my bitterly cynical and sarcastic sense of humor.]

What does South Dakota have going for it? As the title of this talk suggests, its economy is really quite vibrant compared to that of every other state except those of some its immediate neighbors, especially the one to the north. The explanation for South Dakota’s relative success is relatively straightforward. Rob Oliver, Augustana College’s president, likens South Dakota to the tortoise in the famous tortoise and hare Aesop fable. That’s the one where the tortoise wins the race because the rabbit is busy showing off and napping while the tortoise plods steadily along. In slightly more sophisticated parlance, some places take big risks and take seemingly insurmountable economic leads until they inevitably collapse from some malady or misfortune or another brought on by their hubris. Other places, like the Ota states, play it safe and steady and hence don’t suffer when economic calamities strike.

There’s a lot of common sense in taking the slow road. South Dakota was not a hotbed of subprime mortgages or mortgage defaults and most of our banks and other financial institutions held firm. But it might make even more sense to try to develop what I’ll call – extending Rob Oliver’s animal analogy -- a raccoon economy. Yes, I know that dead raccoons litter South Dakota’s highways and byways but that carnage, believe it or not, is an integral part of a successful raccoon economy. Follow me here: the companies that are slow afoot and/or slow upstairs [point to head] need to get run over so as to free up resources for the more nimble and quicker raccoons. Due to that selection process, raccoons as a species are amazingly successful, managing to thrive in a wide range of environments, from forests to prairies to cities. The mischievous critters get into closed garbage cans and chow down, then sneak undetected into heated attics or crawl spaces in winter. In other words, I’m talking about developing an economy that is adaptable and clever, though not nearly as crafty as a Wall Street fox, about emulating a critter that isn’t as fast as a rabbit but works hard and smart and is much faster than a damn turtle and a lot nicer than a Wisconsin badger. We just have to be careful not to turn the economy into a skunk in the process. We have more than enough of those back East, out West, and down South. And in Michigan, the stinkiest of them all.

Fiscal policy is a good place to start. South Dakotans have to keep the state government not “lean and mean” but “nice and lean.” Not having a state income tax is a great feature but only if taxpayers don’t instead get pecked to death by a thousand little duck taxes. It’s not that bad here – yet – but eternal vigilance is the price of liberty as somebody famous – not Thomas Jefferson – once wrote. I have some other suggestions about taxation too but I am not going to make them as I don’t feel like getting shot at today. [Pause] Seriously, tax policy is very important but it’s a political minefield and a very complex area because of what’s called tax incidence. Just because somebody doesn’t get handed a tax bill doesn’t mean that they aren’t ultimately paying the tax. The so-called employer contribution to Social Security, for example, is pretty much pure bunk as most economists agree that workers almost always foot the full bill, half from their explicit contribution and half from a lower wage. Similarly, taxes on large businesses often fall largely on employees and consumers rather than on the owners. So you sometimes find people supporting taxes that will gore their own ox or fighting taxes that will actually be paid mostly by others.

Oliver Wendell Holmes was right when he said that taxes are the price we pay for civilization but most Americans, and almost every South Dakotan I’ve met to date, thinks we’re quite civilized enough already, thank you very much. If so, what we might all be able to agree on is the desirability of government making a credible commitment to limit the size of the state or, better yet, the state and municipal governments, to some percentage of state GDP. That would essentially force South Dakota governments to 1) not pass stupid, growth negative laws and 2) to concentrate their efforts on core areas, like law and order, and outsource the rest to the market.

South Dakota is ahead of the country here but could move even further ahead. I was pleasantly surprised to learn, for example, that private companies can pick up garbage in Sioux Falls. Believe it or not, in some parts of this great nation of ours municipal governments monopolize household garbage collection. It’s totally absurd but so well-entrenched that when I suggested privatizing the system at a public meeting when resident in one of those places many of my neighbors retorted with claims like “that couldn’t possibly work,” or “it would be chaos,” or “Duh, look at me, I’m a dumb ass Socialist.” Okay, I made the last one up but the rest of the story is true.

I broach it because there is a movement afoot to privatize roads in the U.S.A. For more on that, check out Clifford Winston’s new book, Last Exit, published by the Brookings Institution, a Washington-based think tank. Yes, occasionally a good idea comes out of that place, mostly from think tanks. In any event, when people first encounter the notion of road privatization, what most hear is “they want to charge me tolls to drive anywhere” and while that is true what folks tend not to grasp is that the tolls would be lower and fairer than the taxes they currently pay at the pump and elsewhere. Private companies would have incentives to make much better, longer-lasting and less congested roads than the government does so in-kind taxes like construction delays and traffic jams would be much lower too. The first state to privatize its road system – or I should say re-privatize its road system in the case of the eastern seaboard states, which were first crisscrossed by private toll roads -- would of course spawn the creation of start ups that would be eager to expand operations into other states once they too jump onto the privatization band wagon.

Schools are also ripe for privatization. The process here is on-going and taking baby steps with charter schools and vouchers. If South Dakota were to go whole hog and privatize its entire system, K through graduate school, it would foster start ups and also entry by existing for-profits. But again, such proposals must be pitched so that they can be heard by voters as “increased efficiency” rather than “those som’ beeches wanna take away our free schools.” Let’s face it, public schools are not free, they are very costly, especially for what some of them produce, which are people who know little and can’t do much. Others of course do a superb job but they could do an even better job with the same personnel provided with a more robust set of incentives. Among other things, I discuss the rationale and possibilities of privatizing higher education in more detail in my recent book, Fubarnomics.

Speaking of education, I attended a conference called the Innovation Expo last week at the Ramkota Hotel where there was much discussion of leveraging the state’s higher education assets for economic development. North Dakota has a great student-run venture capital outfit called Dakota Venture Group that has already helped to launch at least six new businesses: three software companies, a medical technology company, a furniture manufacturer, and a night club on wheels. And that last one is no joke!

Augustana College is starting something similar. I mean a student-run venture capital fund not a mobile Sodom and Gomorrah. The fund will help in the short term by funding start ups and in the longer term by increasing South Dakota’s human capital venture network. We hope our graduates will stick around and start their own funds in other words.

Many of us are also trying to fire up students about entrepreneurship. I taught a class in the history of entrepreneurship at Augie last spring, for example, and at the Innovation Expo last week many students from USD and SDSU were in attendance and the Enterprise Institute announced the winners of a student idea competition. Encouraging young entrepreneurs is really promising because entrepreneurship suffuses the air and water out here. What it tends to lack is direction. Some explanation may be necessary here. Entrepreneurship is generally great for economic growth but it’s not a monolithic thing. There are bad varieties of entrepreneurship where firms, or “families” or gangs, engage in rent-seeking or illegal activities. You know, the sort of stuff that thrives in Tony Soprano’s part of New Jersey. And Washington DC. Except for the drug trafficking, which apparently mostly takes the form of drug traffic, we don’t have too much of that out here and of course don’t want any more.

Another variety of entrepreneurship, called common or replicative entrepreneurship by some, is the type that thrives in South Dakota and other tortoise-esque economies. You know, micro to small businesses and franchises of regional or national chains. It’s good and it’s important but a raccoon-quality economy requires more, it requires some innovative entrepreneurship that leads to new goods and services, things that South Dakotans can export to other states, regions, countries, or continents.

As I learned at the Expo, we have some of those. There is an outfit selling wine made from South Dakota grapes – that’s not an oxymoron it turns out – South Dakota grapes into a nice business by stressing the marketing rather than the quality of the wine per se, which most people find less than extraordinary until third or fourth glass. Anyway, each bottle sold by this homegrown winery comes with a removable charm around its neck and sports some interesting looking labels, some of which were designed by Augie students I should add. There’s another startup out in Mitchell making fishing rod holders that can be installed without wrecking your nice fiberglass boat. Another dude figured out how to test beef cattle for certain genes that affect the marbling and texture of their muscles within a few minutes, right in the field, so that the ungulates can be sorted and fed accordingly.
That’s all great, even freaking great, but South Dakota could use more. We don’t want a rabbit economy so we don’t need entire warrens of innovators, especially schemers contemplating projects of dubious social merit. Rather, we need a nice steady stream, a Big Sioux rather than a Missouri River of innovators, or at least a Skunk Creek the way it looked after the rains last month. [What, nobody here from the West Siiiide? -OR- I’m happy to see there are others from the West Siiiide here.]

Increasing innovative entrepreneurship is no easy task and I think it a major mistake to try to plan it in any specific way. The economy is just too complex, the connections between industries and individuals too multifarious, for any one person or group to fully grasp it enough to implement a plan likely to succeed for reasons other than pure luck. For example, who in 1820 could have predicted that my hometown, Rochester, the one in New York, would have developed into an optics center, the home of companies like Kodak, which used to make cameras, Xerox, which used to make copy machines, and Bausch & Lomb, which used to make contact lenses? But it did, because it had water driven mills designed for grinding grains and millers and engineers smart enough to figure out how to change up and begin to grind glass. You’re probably all familiar with how Silicon Valley became Internet Valley and how Wall Street stole the nation’s financial center away from Philadelphia’s Chestnut Street back in the 1830s. Oh no? Well I have a book about it you can read sometime called The First Wall Street.

My point here is that even as one industry loses strength it can spawn others in a process that economist Joseph Schumpeter famously called “creative destruction.” When and where creative destruction exists, where slow and dull-witted raccoon companies are allowed to get run over by the Mack truck that is a competitive market, economies experience ups and downs but communities live on because the people within them find new things to do. Pittsburgh is a good example. It used to be all about steel, then stealing, but now it has a nicely diversified post-industrial economy similar to ours: healthcare, education, tourism, finance, and even some ag and some military, at least before their King of Pork, John Murtha, perished. Where creativity is lacking, we’re left with just the destruction and ghost towns -- like Youngstown or Detroit. Unlike those dismal places, South Dakota isn’t reliant on just one industry, just like the raccoon isn’t reliant on just one food source.

But the South Dakotan economy could use yet more diversification. As Nevada learned to its great pain, tourism depends a lot on conditions elsewhere, the credit card business increasingly relies on regulations set in Washington, and agriculture and construction are very fickle pickles. Healthcare and higher education costs have grown year after year but that does not always translate into higher levels of growth. According to Sid Goss, a demographer at the School of Mines out West River, South Dakota’s higher education sector is going to face a serious demographic shock in a few years that could spell trouble not only for local schools and their employees but also for all businesses that cater largely to students.
On the bright side, Obama’s healthcare reform isn’t going to stop healthcare costs from rising. For more on that, see Fubarnomics or Google up some of my op eds on the matter. The gist of the story is that health care costs will continue to rise as long as health care providers are incentivized to treat patients rather than to restore them to health and as long as health care costs are hidden behind employer-provided group insurance.

The really happy news is that potential sources of innovation and growth abound here. Now one of the speakers at the Expo, a college professor and an adherent of extremist urban-philes like Richard Florida and Jane Jacobs, argued that South Dakotans are too few to have a raccoon economy. To that I have only two words: bull puckey. Or is that one word? In other words, I think the notion that you need to be in a big city to be innovative is an idea that passed through the digestive system of male cattle, if you catch my drift. In case I am not being clear here, I’m skeptical of the notion that we can’t lead in at least some areas. The professor’s argument is based on what are called spillovers. People live in cities or technology areas, like the one in North Carolina, because there are dense networks of like-minded people in those places and they cross-fertilize each other with ideas, connections, and money. That is certainly an important point but isn’t the whole story because it’s not necessarily the case that you have contact with others close by or that you can’t communicate with others who are far away. Plus the culture in cities is less open than here. People are not as nice or open – and I know because I lived in such places much of my life. For example, I barely spoke to anyone outside of a narrow circle in my decade and a half in Philadelphia but out here a guy I had never met previously took me out pheasant hunting on opening day, made sure I got my three, and then fed me afterwards. And that was made possible by the fact that my new neighbor -- a man I had just met 5 minutes before -- fixed my shotgun for me, and for free! That sort of interaction just doesn’t happen much east of the Appalachians anymore.

And let’s not forget – I know I never will – that in more densely populated areas even a few miles can be a nearly insurmountable barrier to easy face-to-face contact. I’d rather drive from Sioux Falls to Vermillion or Brookings than from one side of Philadelphia to the other. No joking there. And don’t even get me started on New York.

The egg-headed critic also failed to see that we have comparative advantages over people in more populous places that we can leverage. Besides the fishing boat guy at the Expo there was a fellow selling pickup truck bins with solar panels on them to run coolers, drills, and so forth. Now is a Bostonian going to come up with that? Or some software engineer in San Fran? No siree, says Bob.
And who else but a pheasant hunter who can’t seem to shoot straight would come up with a shotgun that uses optical recognition software to differentiate hens from roosters and that uses radar to direct number 4 steel shot only to the head and neck of the latter? Okay, that one I made up but it would be wicked kewl. In short, we can come up with stuff that we can sell to other rural folk worldwide, not to a bunch of latte-sipping, turtle-neck sweater wearing urban elitists.

Not that we should entirely give up on urban markets. Although South Dakota has little coming in the way of oil windfalls, there is a lot of wind and sunlight here just waiting to be turned into electricity. The big breakthroughs in energy storage and transmission may not come out of South Dakota universities or companies. But then again they might. A South Dakota scientist recently invented a type of paint suffused with an anti-microbial agent that will make the lives of people with compromised immune systems a lot better. But of course we don’t have to invent everything ourselves and we surely will be able to capitalize once somebody, somewhere figures out a cost effective way of transmitting the electricity created with our ample renewable sources. It would be nice if our little prairie breezes and generally sunny disposition could not only light and heat the Twin Cities, KCMO, and “““STL””” but also run the cars of the people in those places. Ours too of course. Then North Dakota can lick our boots. Just kidding, they got a lot of wind up there too.

But that’s somewhere off in the future and conceivably may never take place. In the meantime, we need more tangible routes to further diversification. Even if credit cards go the way of the dodo bird, or rather the way of layaway, the physical infrastructure and human capital employed in the industry here could be turned to other, similar uses, like call centers for other types of financial products, maybe even ones that essentially replace credit cards with less heavily regulated alternatives. That’s one of the big lessons of financial history – regulations can and will be subverted, out maneuvered, and outflanked. With a credible promise from Pierre not to interfere too much, South Dakota could become a hotbed of financial innovation, a testing ground for new ideas. I mention several in Fubarnomics and Yale’s Bob Shiller published some great ideas about 5 years ago in a book called the New Financial Order. And of course it would be natural for any company that developed a new product in South Dakota to keep its headquarters here to take advantage of the local expertise in back office operations and such.
Now I know what you are thinking – how can Pierre promise not to interfere too much? Maybe by decreasing the frequency of its meetings? I’m thinking once every four years would about do it. And oh yeah, to meet no more than one week at a time, once each quarter or season, with a very loud bell that goes off precisely at 5 p.m. each Friday to close the session. No more putting coats over clocks. That’ll give legislators some time to think about bills before they pass them and give their constituents some time to think and chime in too.

Here’s another idea. Let’s pass a constitutional amendment that requires all regulations to be thoroughly tested before being implemented or, where that is infeasible, to have sunset clauses that will automatically repeal any new regulations unless the legislature thoroughly reviews and formally reinstates them? In most states east of the Mississippi, audience members would be laughing hysterically at this point but out here those or similar ideas could stick and become a real competitive advantage for the state.

To attract and retain the innovative entrepreneurs that we don’t grow at home in our colleges and universities, South Dakota needs to be an attractive place to live. Not much can be done about the weather, at least at present, but entrepreneurs could strive to make the place more palatable and make some scratch on the side. For example, many of us ride our bicycles on Sioux Falls’s wonderful trails all summer. But what are we supposed to do with our bikes the other 11 and a half months of the year? … Yes, that’s a joke. Besides cluttering up the garage, say half the year, what about an indoor cycling range that could be used as, I don’t know, an indoor shooting range in the summer when hunters want to zero their scopes without a 30 mile an hour crosswind? An indoor water park might be a big draw too. The sun rides low here in the winter but it’s out a lot and could be magnified to allow those interested in having that “I went to the Bahamas look” to get natural tans. Maybe a retractable glass roof over the Wild Water West? It would be a way to avoid that new tax on artificial tanning booths in the Obama healthcare bill.

Speaking of healthcare, the rise of medical tourism means that Sanford and Avera McKennan could grow to enormous proportions by providing fairly routine procedures on the cheap to people from all over the continent. Yes, even some Canadians might prefer to pay out of pocket rather than wait in a line up there, especially when the looney is strong against the greenback. Of course it would be helpful if it was cheaper to fly from New York to Sioux Falls than to fly from New York to India, which also has a thriving medical tourism industry. I’m not disrespecting the local airport, which has to play the hand it was dealt by distant policymakers. I’m just pointing out a constraint that could be overcome, albeit probably only with much lobbying effort. Or a high speed train line to Minneapolis. Or Omaha. Or maybe Southwest. I mean the airline, not the cardinal direction.

Speaking of Minneapolis, I had to drive there in early September to be on the Dylan Ratigan show for 5 minutes, 5 stinking minutes. No, I was happy to do it as it boosted sales of Fubarnomics for a week or so but c’mon, it is 2010. How will the rest of the world know that there are smart people here in South Dakota if it remains so isolated? When I say South Dakota to my friends back east their responses belie the fact that they believe the entire state remains like Deadwood as depicted in the HBO series. Or at least like Humboldt, that “small town with a big heart.”

The various chambers of commerce do a good job of asserting that all of South Dakota, and not just Ellsworth, is “da bomb” but they need all the help they can get proving that such assertions have a basis in reality. Outside of the Upper Midwest, misperceptions about South Dakota abound and are as difficult to dislodge as an impacted wisdom tooth. On a polecat.

To sum up, North Dakota is up at the ceiling. South Dakota is only here [reach up as high as possible] but California and a lot of other places are down here [point to the floor] with the ant excrement. Although relatively strong at this point, South Dakota’s economy may be under performing its long-term growth potential. It could ramp up from tortoise to raccoon status if one, the government credibly committed to staying as small and inconspicuous as possible and if two, more innovative entrepreneurs can be homegrown or imported and then induced to stay by leveraging the state’s many strengths -- its great faces and open places and its fairly consistently amenable business climate.

For folks in your business, turning our tortoise economy into a raccoon one could mean retiring comfortably at age 50 or 55 instead of at 65 or 70, which I’d hope would be enough inducement to get you interested in these important big picture issues and maybe get a little more involved in state economic policymaking in a positive and proactive fashion.

I thank you for your time and attention and will now entertain questions.