In 1993, the U.S. government signed the General Agreement of Trades and Tariffs (GATT) with 123 foreign nations eliminating import taxes on foreign goods. The North American Free Trade Agreement (NAFTA) had been signed previously in 1991, which had eliminated trade barriers between the U.S., Canada, and Mexico.
The 1991 fall of the Soviet Union was considered the collapse of socialist-communist doctrine and a victory for capitalism. The Cold War was over and capitalism had won.
NAFTA and GATT were tariff policies that were enacted to encourage capitalism and help Third World countries transition from socialism to a competitive economic system. Unfortunately, economists failed to predict the unintended consequences of the enactment of NAFTA and GATT.
U.S. businesses took advantage of the removal of import taxes and moved their entire manufacturing infrastructures to the Third World countries to take advantage of the cheap labor.
A new economic term was created called “outsourcing” to define businesses that left the high corporate and labor costs of the U.S. Outsourcing started a major shift in competitive economics. Businesses look for corporate, ad valorem and income tax breaks plus environmental incentives to attract them back to the country or to set up shop in different states.
Outsourcing has now spread to states that must use these corporate and income tax incentives to attract new business, and to keep existing business from departing to other states.
Inverse Competition is an economic term used to explain the competition between states for business. Tax credits are used by states to attract business.
States are also being forced to use Public Domain (Eminent Domain) to provide land for new businesses or to provide additional area for the expansion of existing businesses. If the space isn’t provided, the business and jobs move to another state that will agree to their terms.
Most economists acknowledge that states must either play this new competitive game or face an inevitable loss of business and jobs.
“How Money Walks” is a research program that provides graphs to the legislatures of the economic factors and trends that should allow them to compete within their region and nation for businesses. What wasn’t anticipated by economists was the collapse of the oil and gas business. Just a few years ago “scarcity” was applied to the world’s oil supply. Peak oil was another term that illustrated that geologists had determined the world’s oil supply was on a rapid decline and never again would there be oil on the market below $100 per barrel. New horizontal drilling techniques proved the geologists wrong and the historic volatility of oil and gas prices has crippled the Oklahoma economy.
Once again, attempting to manipulate a free market economy has proven a disaster to Oklahoma’s policymakers. The unforeseen collapse of the oil and gas business has created a dilemma for the state’s budget.
Policymakers at all levels of government have historically struggled with budgeting for the future. Even with the best of intentions, something always happens unexpectedly.
The Soviet Union collapsed in 1991 when its central planners couldn’t control all the unknowns. U.S. business leaders failed to comprehend that outsourcing their factories to Third World countries would backfire. Technology would replace assembly line labor and their workers would require special STEM (Science, Technology, Engineering, and Math) skills. These businesses are now searching the world for countries that can best provide those skilled workers.
The collapse of the oil and gas industry has foiled Oklahoma policymakers’ recent economic plans.
Ironically, voters want politicians, when seeking political office, to share their plans of how to fix the economy and create jobs for their state or nation. But I want to point out that only by luck do a lot of those plans come to fruition and work flawlessly.
Oklahoma is in crisis mode facing a historic revenue shortfall that could be as high as $1 billion. Federal funds are being reduced, our main source of revenue has declined rapidly and other unforeseen economic issues have arisen in the last year. Any economic plans made up to this point must be reevaluated and restructured to address this new financial environment our state is facing.
The bill request deadline is less than a month away and it’ll be interesting to see legislators’ ideas on how to address that tremendous budget gap.