Saturday, April 25, 2015

The Other Two Dakotas Speech 4/25/2015 Center for Western Studies Dakota Conference Luncheon Keynote

Little Business on the Prairie: Entrepreneurship in South Dakota, 10,000 BC to Present or, the Other Two Dakotas

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana College SD

Even school kids know that there are two Dakotas -- North and South – but a surprising number of adults who live outside of the upper Midwest readily conflate the two. North Dakota, not South Dakota, is the emerging energy giant. According to the Minneapolis Fed, which reigns over both states as well as Montana, Minnesota, and parts of Wisconsin and Michigan, South Dakota receives no direct benefit from the Bakken formation’s energy riches, a fact that no South Dakotan had to learn from a bean counter in the Twin Cities. Most of South Dakota’s population resides in the south and east part of the state, far from the energy action in northwestern North Dakota. South Dakota’s largest city, Sioux Falls, is 656 miles from boomtown Williston, North Dakota by interstate highway. That is slightly longer than the distance between Boston, Massachusetts and Cleveland, Ohio. South Dakota’s second largest city, Rapid City, is 333 miles from Williston, a five and a half hour drive on non-Interstate roads, or the equivalent of driving from Washington, DC to Cleveland on back roads.
South Dakota does possess ample energy resources but they are all renewable -- hydro, solar, and wind – and the latter two are almost completely undeveloped. It also has a little low grade lignite but that stuff has never found anything but a local market, and a desultory one at that.
I make this point immediately so that nobody in the audience remains under the misapprehension that South Dakota’s economic prosperity is in any way built on fossil fuels. South currently lags North: at the end of February, South Dakota’s unemployment rate was 3.4 percent compared to North Dakota’s 2.9 percent, which was second in the nation behind Nebraska, and North Dakota’s $55,000 per capita income in 2012 was third in the nation and well ahead of South Dakota’s $43,000 per head. But South Dakota is no laggard as its unemployment rate is third best in the nation and its per capita income is 20th and a few hundred dollars above the national average. Moreover, North Dakota’s economy faces much greater risks than does South Dakota’s. You may have noticed that energy prices are way down; North Dakotans certainly have as the price of North Dakota sweet crude recently dropped below $50 a barrel and half the state’s rigs shut down. South Dakotans, by contrast, love cheap oil.
South of the quartzite border separating North from South, another “two Dakotas” loom large, the East and West River sections of South Dakota. Few doubt the importance of the distinction, though some think the James River superior to the Missouri River as the actual dividing line between the two sections. The James, or Big Jim as some affectionately call it, flows well east of the Missouri River until the big river turns east to meet it near Yankton. Like the Missouri River Valley, the 50 to 75 mile wide James River Valley bisects the state but it is perhaps best seen as a transition zone. To its east, agriculturalists expect adequate precipitation and usually get it. To its west, agriculturalists don’t expect enough rain and typically are not disappointed. In the Big Jim Valley proper, nobody knows what to expect. One year can be dry as a bone and the next farmers wish that they had planted catfish instead of corn as their fields flood. During flood years, crossing the James is quite a harrowing experience but during droughts the river becomes little more than a 710 mile long “crick.” That is why the Big Mo, the Big Muddy, the now tamed Missouri River, is probably the best dividing line between East and West.
Wherever one draws the line, West River is more about ranching than farming, mule deer and turkeys than whitetails and pheasants, cowboys and rodeos than dairymaids and county fairs. West River is home to the Badlands, vast Indian Reservations, Mount Rushmore and the Black Hills, the Sturgis motorcycle rally, and the Passion Play. Libertarians roam as freely West River as liberals do in downtown Sioux Falls and the hallways of East River state universities. One could go on and on about the differences between the two sections as many South Dakotans do, ignorant, perhaps, of what Sigmund Freud called the narcissism of minor differences. Outsiders can no more easily distinguish between an East River Dakotan and a West River Dakotan than the median American can tell the difference between a Swede and a forest Finn, a Fleming and a Walloon, or a Hmong and a Karen. Partly that’s because so many South Dakotans, whether they hail from east or west of the Mighty Mo’, make their living the same way, via entrepreneurship.
If that sounds incredible to you, do bear in mind several facts. First, the vast majority of entrepreneurs are not rich and famous like Steve Jobs, Elon Musk, or Thomas Edison. Most entrepreneurs are merely replicative. In other words, they extend an existing product to a new market so the economic rents, by which I mean above average profits, they earn tend to be small and/or fleeting. Most farmers and ranchers are replicative entrepreneurs, as are most retailers and other small business owners. Second, South Dakota is the most entrepreneur-friendly state in the nation according to a variety of experts who study such things. Until recently, it was the most economically free state or province in North America and imposed the lowest taxes and regulatory burdens on businesses.
Of course I don’t mean to imply that South Dakota is bereft of inventive or innovative entrepreneurs, far from it. Early patents claimed by South Dakotans included everything from mining godevils to bicycle tires suitable for riding over ice to semiautomatic shotguns, each, one imagines, the mother of necessity. A few of the state’s innovative entrepreneurs even made it big. Raven leveraged the state’s salubrious climate and the infatuation of South Dakotans with flight to create a world leading high performance balloon business, for example, while Daktronics became a leader in electronic signs that grace the Olympics and Madison Square Garden.
Note that the latter companies are manufacturers. South Dakota is not the Taiwan of the Prairie and likely never will be but it is far from being devoid of manufacturing enterprises. Entrepreneurs have created a very diverse state economy, one that is not dependent on any one sector, not even agriculture. When farmers and ranchers were having a difficult time during the 1970s and 1980s due to increased fuel costs and high nominal interest rates, entrepreneurs, including a political entrepreneur in the form of governor Bill Janklow, stimulated two clean, high paying sectors to take up the slack, finance and health care. Retailing and wholesaling remain important as well, with Sioux Falls, Aberdeen, and Rapid City serving numerous customers from adjacent states like Wyoming, North Dakota, Minnesota, Iowa, and Nebraska.
South Dakota also earns considerable foreign exchange, if you want to call it that, via its vibrant tourism industry. Two great attractions, one east of the river and the other west of it, attract masses of tourists each year and thousands of other entrepreneurs ride their wide coattails. I speak of course of Mount Rushmore and pheasant country, both of which support numerous hotels, restaurants, and smaller tourist attractions, from infamous “traps” with little to see but much to buy, usually at outrageous prices, to legends like Wall Drug. The Badlands and Black Hills have so many attractions, from the Crazy Horse monument to cavernous cave systems, that tourists can be entertained for weeks on end, even in the winter, or be lured back year after year. And events like the Sturgis Motorcycle Rally and the pheasant opener attract hundreds of thousands of people annually, many of whom spend freely thanks to the pleasant demeanor of most of the state’s tourist entrepreneurs. South Dakota is much more than the Mount Rushmore State, it is the Land of Infinite Variety.
Why is South Dakota’s business climate so good for entrepreneurs? For starters, a high density of entrepreneurship tends to replicate itself as family members and friends have plenty of role models and mentors to help them start their own businesses. So, in one sense, South Dakota is full of entrepreneurs today because it has always been well endowed with entrepreneurs, from Paleoindian mammoth hunters to the placer miners of the Black Hills gold rush to the homesteaders of the Great Plains.
Another factor is that the state has so little going for it. It needs to foster business or it could very well dry up and blow away, as it almost did during the Great Depression when the state had the dubious distinction of having a higher percentage of its population on the government dole than any other state. As previously noted, South Dakota is almost completely devoid of fossil fuels. Parts of it have good Houdek soil but much of the state is covered in gumbo, which refers to a sticky, hard to work soil, not the delicious Cajun dish. The weather is often delightful – I kid you not, the dry air and open horizon were thought to cause a euphoria called “prairie fever” and to cure all kinds of ailments – but when the weather is not delightful it is often frigging dangerous. East River is at the north end of Tornado Alley and smack in the middle of Hail Hallway, a phrase I just made up. During the winter, wind chills often rival those of Canada. West River’s climate is highly variable. Blizzards can strike in September while January temperatures can rise into the 70s. Nearly 100 degree swings in temperature over the course of a day have been recorded, which is pretty easy when you start the day at negative fiddy. Beauty abounds: from waterfalls to sunsets to prairie and badland vistas to Harney Peak, but that is more of a reason to visit a place than to live there. South Dakota is in the middle of the country by various measures but it isn’t really close to anything of importance. Its population is currently about 850,000, but if it wasn’t for the state’s liberal business laws the population would probably be closer to Wyoming’s, which is under 600,000.
But the biggest reason that South Dakota remains business-friendly is state and local government. South Dakotans have made sure that their governments are efficient, at least as governments go. The state’s politicians are accountable to the people and they know it. Citizens hail even governors and U.S. Senators by their first names and don’t hesitate to get into their faces when necessary. Republicans have long ruled the roost but politics is still competitive because of rivalries among various Republican factions and wings. South Dakotans are all for big government in Washington if it means a positive net flow of resources into the state but at home they keep government as small and simple as possible.
For example, South Dakotans pay more in user fees than most Americans elsewhere do but that is a good thing: user fees ensure that one part of the community does not subsidize another’s hobby. School funding is traditionally low by national standards but until very recently the outcomes ranged from acceptable to downright good. Except for Sioux Falls in recent years, crime has been low and public amenities have been constructed cheaply compared to elsewhere. Relatively low taxes combined with decent public services attracted many businesses to the state, especially from relatively high tax Minnesota and especially along the I-29 corridor.
None of this means that South Dakota will always prosper economically. Some believe that it has been chronically under-investing in education and that the piper will soon have to be paid in the currency of higher crime rates and more unemployment. The large health care sector is vulnerable to shocks emanating from the controversial Affordable Healthcare Act. Pheasant populations are trending downward as more and more farmers destroy key habitat by plowing from ditch to ditch, ripping up shelterbelts, and draining wetlands, rendering South Dakota a veritable Iowa. A return to high fuel prices could cut into tourism along the I-90 corridor, which includes fishing on the Missouri’s manmade lakes as well as the more famous Badlands and Black Hills attractions.
My biggest fear at present is that South Dakotans will blow off their own feet by passing ballot initiatives that limit economic freedom and hence entrepreneurship. Last year, a ballot initiative raising the minimum wage and indexing it to inflation passed, as did a health insurance regulation. There is talk now of re-imposing a usury cap of 24 percent. The frightening thing is that even ardent proponents of the minimum wage law admitted that the economic effects of the measure were uncertain but took that to mean that the matter should be pressed forward even though it meant diminishing the liberty of both employers and employees. A repeat regarding the usury cap appears likely. In and of themselves, these measures are unlikely to destroy the state’s prosperity but the precedent that a bare majority of voters, not of eligible voters or the entire population but of people who show up at the polls, can meddle in such intimate affairs could have a chilling effect on business, especially startups and other entrepreneurs vulnerable to populist policy changes such as these.
We have to be careful on the policy front because while South Dakota is obviously capable of creating great prosperity it is also capable of generating great poverty. In fact, the state has the dubious distinction of being home to five of the poorest seven counties in the nation. All five are coterminous with, or associated with, Indian reservations such as Rosebud and Pine Ridge. This brings us to the third and most important of the “two Dakotas,” the Euroamerican and the Native American one.
Many people don’t consider this final “two Dakotas” because they hold racist or ethnocentric views of the matter. For them, Indians are poor because they are Indians plain and simple or because Indians hold native cultural values. By contrast, I proceed from the assumption that Indians are human beings and that their cultures, like Euroamerican cultures, are on net causes of neither poverty nor prosperity. Because I was impoverished as a youth, I know that driving an old car, drinking alcohol on a daily basis, and being generous to family, friends, and neighbors isn’t an Indian-thing, it is a poor-thing. What allowed me out of the culture of poverty was access to the Euroamerican system of political economy that credibly promised to protect my life, liberty, and property and thus gave me incentives to build my human capital or know-how. What keeps Reservation Indians impoverished is a political economy of poverty imposed upon them from Washington and, to a lesser extent, Pierre, South Dakota’s quaint capital.
One myth that I try to dispel in Little Business on the Prairie is the notion that Native Americans are naturally environmentalist-communists who want to remain impoverished. The environmentalist claim is easily disproven by showing evidence that Indians sometimes did not use all of the bison. Sometimes, they just ate the tongue or the fetus and moved on, while capitalist and presumably anti-environment meat processors literally use all parts of every single head of cattle, hog, and chicken.
The latter myth, that Indians were communist or a-economic or otherwise disinterested in material gain, I try to dispel by pointing to Indian entrepreneurs both now and in the past. Augustana College anthropologist Adrien Hannus, for example, thinks that the Mitchell site along the James River might prove that Indians processed bison into pemmican en masse and floated it down the James and Missouri Rivers to Cahokia, near present day St. Louis, where they exchanged the preserved meat for pottery and religious services. The Crow Creek massacre site near present day Chamberlain shows that Indians in South Dakota circa 1325 AD engaged in exploitative entrepreneurship but probably also replicative entrepreneurship when “trading” was more lucrative than “raiding.”
Indians in what became South Dakota were certainly eager to trade with the new Euroamerican arrivals, first the French, then the British, and finally the Americans. When the U.S. government forced them onto reservations, they eventually gave up their nomadic economy and became successful farmers and, especially, ranchers. By all accounts they would have thrived had not the federal government’s policies stripped them of all incentive to work. Foremost, the federal government never respected Indian property rights, regularly reneging on treaties and cutting into tribal reservation lands. Loss of land continued throughout the twentieth century with the Pick Sloan dam projects – watch the documentary Waterbuster to learn what this did to the incentives of an entire generation of Native Americans -- and up to the present with calls for bison reserves to be carved out of the Pine Ridge Reservation.
Allotment, the division of tribal lands into privately-owned parcels, was supposed to provide Indians with incentives to work hard but in the end it led to checker boarding and fractionation. The former means that most reservations are not distinct jurisdictions but rather geographically fragmented political entities that are difficult to discern much less to effectively govern. The latter means that most lands in the hands of individual Indians are, due to the effects of intestate probate laws over generations, owned by too many people, from scores to thousands, to be used to collateralize loans. As a result, most Indians in South Dakota have minimal access to the formal financial system and hence remain unable to finance expansion of their businesses, most of which remain nano-sized.
Native Americans eventually became U.S. citizens but a completely separate and unequal system of political economy applied, and continues to apply, to them. Indians have their own health care and education systems, for example, and even in certain confusing circumstances their own criminal laws and business regulations. If Apartheid is too strong a term it is only because the system appears geared toward keeping Indians economically idle rather than cultivating a source of cheap labor as was the case in South Africa. Moreover, some tribes in urban areas were able to turn the separate system of political economy to their advantage by establishing casinos that became quite lucrative. The tribes of South Dakota did likewise, except for the lucrative part. In addition to being located many, many hours of travel from the urban gambling masses, South Dakota’s Indian casinos faced increasingly stiff competition from Deadwood casinos and the ubiquitous electronic gaming casinos that suffuse the state.
I see South Dakota, then, as a natural experiment akin to those offered by China, Germany, and Korea in the twentieth century. The experience of those places shows that when people are provided with ample economic freedom, they thrive even in a difficult environment. Squelch that freedom, however, and they wilt from a lack of incentives. Why work hard or smart if you can’t get a loan to grow your business? If you think the government might take what you have built, offering little or nothing in compensation?
China spontaneously divided itself into three parts -- mainland, Hong Kong, and Taiwan – limited freedom on the mainland and allowed it to run amok on the two islands, which combined produced more than the much larger, much more populous, and much more resource rich mainland. Only when the mainland increased economic freedom with Deng Xiaoping’s reforms did it show signs of an economic pulse. Ditto Korea, where the autocratic North is a famine-ridden economic wasteland while the free South is one of the world’s most successful economies. And let’s not forget about Germany, which the victorious Allies arbitrarily divided into East and West following World War II. The communist East foundered economically while the free West surged even though the East was better endowed with factories and natural resources. The exact same outcome in Berlin, located in the economically backward East, showed beyond all doubt that political economy was the key driver of the different economic outcomes, not culture or latitude or anything other than incentives, incentives, incentives.
Going forward, therefore, what I would like to see is more, much more, economic freedom for Indians in South Dakota and indeed the entire country. I’d also like to see South Dakota maintain a high level of economic freedom even if that means placing some restrictions on initiated ballot measures. One way would be to limit passage to half of all registered voters, not half of those who turn out to vote. This means that those who want change will have to convince people to turn out and can’t rely, as they have in the past, on apathy. Or, we could restrict initiated ballots only to those laws that increase, rather than decrease, liberty. So legalizing marijuana would be a legitimate use of ballot initiative but banning alcohol consumption would not.
Thus concludes my quick romp through South Dakota’s economic history. Little Business on the Prairie contains many more details, especially regarding the development of Rapid City, the metropolis of the West, and Sioux Falls, the metropolis of the East, as well as specific industries including agriculture and agricultural goods processing, construction, mining, transportation, wholesaling, and the like. I hope you pick up a copy, and enjoy it, and remember the other two Dakotas.