Dazed and Confused: How the Drilling Moratorium Exacerbates Louisiana’s Economic Challenges

June 15, 2010

By Naomi Lopez Bauman – Pelican Institute

Louisianians have a special appreciation for Ronald Reagan’s statement that “the ten most dangerous words in the English language are ‘Hi, I’m from the government, and I’m here to help.’” And as the damage from the catastrophic BP oil spill continues to wreak economic and environmental havoc on our state, it seems that Washington is poised to further exacerbate Louisiana’s economic problems.

The federal government’s anemic response to the spill is evidenced by both its slow response to approve sand barriers along the coast and its complete failure, so far, to exempt the clean-up effort from the Jones Act, which prevents foreign vessels (with superior cleanup technology) to immediately aid in the cleanup efforts.

To make matters worse, the Administration announced a misguided policy placing a six-month moratorium on all deepwater drilling operations. A May 27th report from the U.S. Department of Interior recommends an immediate halt to drilling operations on 33 permitted deepwater wells for six-months, in addition to implementing several new testing, monitoring and safety rules. The report states that its recommendations were peer-reviewed by seven experts. But it turns out that five of those experts, all members of the National Academy of Engineering, as well as three additional experts, have publicly and vehemently denied recommending or supporting the moratorium.

In fact, these experts state that, “the scope of the moratorium on drilling which is in the executive summary differs in important ways from the recommendations in the draft which we reviewed. We believe the report does not justify the moratorium as written and that the moratorium as changed will not contribute measurably to increased safety and will have immediate and long term economic effects. Indeed an argument can be made that the changes made in the wording are counterproductive to long term safety.” They continue, “The Secretary [Ken Salazar] should be free to recommend whatever he thinks is correct, but he should not be free to use our names to justify his political decisions.”

Undoubtedly, the economic effects of the spill will be devastating. That leaves one to wonder why the Administration would impose a moratorium its own experts oppose and that will cause further economic damage without providing additional environmental safety. It should be noted that U.S. taxpayers, not BP, foots the bill for the costs associated with this moratorium since this is a political decision and not the direct result of the spill.

What will this mean for Louisiana’s economy? While the state’s economy had been somewhat insulated from the national recession, our fiscal condition was far from strong before the spill. As of April, Louisiana’s unemployment rate was 6.7 percent – well below the national rate of 9.9 percent.

But a more thorough analysis reveals that personal incomes in Louisiana are increasingly bolstered by government transfer payments. Louisianians are now receiving one-fifth of their income from government programs. This is the same level as in 2005 – the year of Hurricanes Katrina and Rita. (See Figure.) Since payments from government programs are not taxed, state coffers will continue to shrink and deficits will expand.

Figure. Percent of Louisiana Personal Income from Government Programs

Source: U.S. Bureau of Economic Analysis and Bureau of the Census.

According to a recent analysis by the Louisiana Mid-Continent Oil and Gas Association, the moratorium could directly cost the Gulf region between roughly 26,000 and 46,000 jobs. If we assume that one-quarter of these job-holders reside in Louisiana, we can expect the state’s unemployment rate to immediately spike to between 7.1 and 7.4 percent from the moratorium alone.

Economist and author Thomas Sowell has pointed out that “It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.” Perhaps we should be thankful that the federal government has not done more in this crisis.

While there is no doubt that Louisiana is going to face immense economic hardship due to the BP oil spill and the unfortunate federal response, Louisiana lawmakers do have the opportunity to create a more-robust, business-friendly environment. The hurdles placed in the way of would-be entrepreneurs and small businesses by taxation may not seem obvious to the casual observer, but mounting evidence shows that taxes unleash immense harm on small business formation and expansion, which is the cornerstone of the state’s economy. These taxes also undermine much-needed economic activity.

When taxes are increased, government revenues initially increase. This is referred to as the static effect of taxation. However, tax increases can also dampen future economic activity. These dynamic effects, such as lost jobs and declining tax revenues from income, sales, and profits, somewhat offset the initial increases in tax revenue. Private resources for starting a business, or undertaking other capital creation activities, are diminished when this money is directed to government and away from private enterprise. That is why, rather than attempt to increase revenues to cover rising program costs, lawmakers should first attempt to eliminate or scale-back state programs and spending.

Louisiana has already taken important steps to make tax policy and spending more transparent. And Gov. Jindal has resisted the temptation to raise taxes to meet budget shortfalls. State lawmakers now need to enthusiastically and aggressively pursue policies that will spur new job creation and attract new business. There is plenty of room for improvement when it comes to the state’s business tax environment.

According to the Tax Foundation, Louisiana’s corporate income tax system is 16th highest in the nation. Meanwhile, our neighboring state and competitor Texas collects no personal or corporate income tax. Overall Louisiana has the 35th worst business tax climate. By reducing corporate income tax rates and eliminating certain business-to-business taxes, state lawmakers can make the state more hospitable to businesses seeking to expand their current operations or relocate to Louisiana. By making the state more economically robust, lawmakers can lay a solid foundation for the state’s future growth and eventual economic turnaround. Inaction in this area will only serve to delay Louisiana’s recovery from the oil spill and drilling moratorium.

President Obama recently stated that one of his biggest challenges will be to “make sure that we draw the right lessons from this disaster.” It is unfortunate that the president does not yet understand how his Administration is undermining our region’s ability to respond and recover more quickly. This makes it all the more important for Louisiana lawmakers to focus on economic growth and private employment. While President Reagan’s witticism may contain an important truth, Louisiana lawmakers can play a productive role in our state’s future by creating a climate conducive to economic growth.

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