Studies: Mining no panacea for Ely economy

ELY— For supporters of the proposed Twin Metals copper-nickel mine near Ely, the argument in favor of the new mine is a simple one— jobs and economic growth as a result of new sources of community income.

Many here point to life a half century ago, when the Pioneer Mine still operated, and imagine a return to that golden era of the post-World War II economy, when rural communities and small town Main Streets still thrived all across America.

It’s a compelling vision for many. But is it an illusion that fails to recognize fundamental changes in the U.S. economy?

What if a new mine failed to bring the growth in population and local incomes that supporters envision because it derailed the economic drivers currently powering the Ely area economy?

What if alternative development paths, based on quality of life, actually generated more local income, more employment, and a more stable and diversified local economy?

A new analysis by a pair of Harvard economists adds further heft to the arguments of those who believe Ely is already on the right path economically, and that the push to bring a dangerous form of mining to the area is actually hampering the community’s push for sustainable economic growth.

The two economists are James H. Stock, a professor of political economy at Harvard and his PhD student Jacob T. Bradt. Neither were paid for their work, and both undertook the analysis as private citizens.

“Our analysis focuses on three effects: employment and income generated by mining; employment and income generated in the recreation industry; and income associated with in-migration into the area because of its amenity value,” write the economists in their analysis, which they submitted last month to the U.S. Forest Service. The Forest Service is currently examining the case for a mineral withdrawal affecting 234,000 acres of the Superior National Forest.

The study, which examines dozens of different scenarios using a standard economic model, concludes that the community’s current development path, based on outdoor recreation and a perception of high quality of life, would generate more local income and job growth than a new mine when considered over a five-to-20-year time horizon in 69 of the 72 scenarios examined.

Perhaps not surprisingly, the study did find a temporary boost in employment and local income from the opening of a mine, but that gain was quickly “outweighed by the negative impact on the recreational industry and on net in-migration,” conclude the authors.

Transitioning Ely back to a mining economy “leads to a boom-bust cycle in all the scenarios we examine, in which the region is in the end left worse off economically,” the economists determined.

According to the study, the economic downsides of a new mine include lost growth in the region’s outdoor recreation industry and lost income from current residents and potential future residents who may choose to leave or never consider the Ely area due to the presence of major industrial development and its environmental impacts. The loss of current residents and the slowing of future in-migration eliminates household incomes that would otherwise contribute to the area economy.

While their conclusions may seem paradoxical to some, they are consistent with a considerable body of economic literature on the negative effects of boom-bust cycles and poor economic performance in regions with significant natural resources.

Resource curse

The economic principle, often dubbed “the resource curse,” is well-known, if not entirely understood, by many economists. At its heart is the well-documented fact that regions with a wealth of natural resources, such as oil and gas or minerals, tend to underperform economically compared to regions without significant resource wealth.

An influential study from the mid-1990s, by economist Dr. Jeffrey Sachs of Columbia University, noted that many resource-poor nations, like Japan, China, the Netherlands, and South Korea, tend to do very well economically while resource-rich countries like Russia, Venezuela, and Nigeria, have done poorly.

Sachs could just as well have cited Minnesota’s Iron Range as evidence, given the region’s history of economic struggles. Despite being home to some of the greatest mineral wealth in the United States, the economy of the Iron Range has, historically, been the most depressed in Minnesota.

In his seminal study, Sachs cites several reasons that economists have offered for the poor economic performance of resource-rich regions but concludes that the dominance of a single high-paying industrial sector, makes economic diversification difficult.

“Our reasoning is as follows,” writes Sachs in his 1997 study. “Resource abundance squeezes the manufacturing sector,” he said.

That’s a phenomenon that has bedeviled economic development agencies, like the Iron Range Resources and Rehabilitation Board, for decades. “We’ve spent millions of dollars chasing smokestack companies and it just hasn’t worked out,” said IRRRB Commissioner Mark Phillips during a recent interview with the Timberjay.

“We’ve been trying to diversify, and we have the resources to help do it,” noted Phillips, but he said it’s difficult in a region where a single high-paying industry, like taconite mining, tends to attract the available pool of qualified workers interested in heavy industrial employment. He said even relatively high-paying companies in the wood products sector in the region struggle to hang on to workers given the availability of higher-paying jobs in the taconite industry— and that’s made it difficult for the IRRRB to lure other manufacturers to the region.

That’s one reason that Phillips has turned away from the agency’s traditional focus on manufacturing recruitment, to one that puts more resources toward improving quality of life in Iron Range communities. He’s directed money into cultural amenities, like the Lake Vermilion Cultural Center in Tower, into renovations of a historic fountain in Virginia’s Olcott Park ,and put millions of dollars into the development of recreational amenities, like mountain biking trails in the region.

“I’ve been in economic development for 35 years,” said Phillips. “When I took on this job, I said to myself ‘am I going to keep doing the same thing, chasing companies even though it hasn’t worked?’”

The IRRRB’s new approach is consistent with economic studies that have demonstrated that a focus on community amenities, such as cultural activities or, particularly, outdoor recreational activities, can help rural regions of the country attract members of what economists describe as the “creative class,” which include entrepreneurs and educated professionals, like attorneys, architects, writers, photographers, artists, or software designers.

One such study, “The rural growth trifecta: outdoor amenities, creative class and entrepreneurial context,” notes the increasing loss of rural jobs in primary industries and the difficulty of recruiting large, new employers.

The study is one of several written by economist David A. McGranahan, who has found that while many rural regions in the U.S. have lost job opportunities and residents to urban centers in recent decades, those with significant amenities have managed to avoid population loss, and even grow in many cases. “The key insight from the urban creative class literature is that workers in occupations specializing increative tasks demonstrate strong preferences for various amenities and these preferences affect the location of talent,” writes McGranahan and his fellow researchers Timothy R. Wojan and Dayton M. Lambert. “Our rural variant of the creative class construct re-emphasizes outdoor amenities as an attractor of talent. We posit that some creative workers may choose to forego higher urban earnings in exchange for the quality of life found in places endowed with natural amenities and that where this occurs, it may lead to business formation and economic growth, facilitated in part by the attraction of more creative class members.”

In fact, communities near the Boundary Waters have already demonstrated an impressive ability to attract members of the creative class. According to research on rural economies conducted by the Federal Reserve Bank of Kansas City, St. Louis, Lake, and Cook counties are near the top (85th percentile) among Minnesota counties in terms of the percentage of residents engaged in professional, creative class occupations.

What is it that attracts such people to the region? Kris Hallberg, a now retired World Bank economist who lives near Ely, and her husband, a former water quality specialist with the EPA, speaks for many. “We’re stereotypical cases of why people come up here,” she said in an interview earlier this year. “We came here for the clean water, clean air and rocks and woods and wildlife,” Hallberg added, noting that she’s aware of many other relative newcomers who’ve moved to the Ely area for similar reasons. She said she believes the attraction of the Ely lifestyle, which is centered around proximity to the Boundary Waters and the Superior National Forest, will only increase over time.

Her view is consistent with the findings of a 2014 University of Minnesota survey of attitudes in four townships surrounding Ely, including Morse, Fall Lake, Eagles Nest, and Stony River.

The survey asked, among other things, what qualities attracted township residents to the area. The vast majority cited their proximity to nature, outdoor recreational opportunities, solitude, and peace and quiet as the primary factors that keep them in the region.

Small town appeal

While much has been written about population loss in small towns and rural America, another University of Minnesota researcher offers data to suggest that rural communities can be successful if they understand what factors tend to attract new residents.

In his 2014 study, “Rewriting the Rural Narrative,” Benjamin Winchester, a senior research fellow with Minnesota Extension, acknowledges the movement of people from rural areas to urban centers, but notes that the trend is far from a one-way street. While young people tend to leave their small towns and rural homes, mostly to pursue education and initial employment, Winchester notes that demographic data show smany of those young people return to their home towns or communities later in life, particularly to raise children.

While that trend is demonstrated in rural regions across Minnesota, Winchester found that urban residents move back in significantly larger numbers to rural counties that he described as “recreational,” versus those he classified as “prairie.” The data also found dramatic differences in the rate at which young people left rural areas, based on Winchester’s classification. While rural recreational counties see nearly a third of young people, ages 20-24, leave for urban centers, over 60 percent of young people in the same age range leave rural counties in agricultural parts of the state. By the time those same young people reach their 30s, however, Winchester found that the migration flow reverses, and rural areas actually gain from urban centers. And that rate of gain for every subsequent age group is stronger in recreational counties than those dominated by agriculture.

At the same time, the study finds that new residents who had no previous connection to a rural community, are adding to the return to rural regions, seeking factors like a simpler pace of life, greater safety and security, and lower costs for housing. Winchester’s research found that the people moving to rural regions or small towns from urban centers are typically well-educated and often have higher-than-average household incomes.

Indeed, Winchester cites data concluding that 68 percent of newcomers to rural areas in Minnesota have attained at least a bachelor’s degree and 67 percent have household incomes over $50,000. Just over 50 percent have children in their household. And while the move to a rural area often means lower earnings than would be possible in a city, those who make the change say that quality of life is the deciding factor in their move.

Such trends are already showing up, in some cases dramatically, in economic data in northeastern Minnesota. Citing data from Lake County, Winchester notes that the county’s economy is more diversified than in the past, in part due to a large increase in the number of people who are proprietors of their own businesses. That number has jumped from just 452 proprietors in 1969 to 2,369 as of 2014. That’s nearly a quarter of the county’s total population of just over 10,000.

A similar trend has been experienced in the Ely area over the past few decades, as significant numbers of newcomers have taken up residence in the Ely area, with most coming for quality of life factors, rather than a job. In many cases, such new residents have professional backgrounds and often continue to work in various capacities in their field of expertise, often from home or with occasional travel. Many of those new residents locate in rural townships surrounding Ely, yet their spending largely drives the Ely area economy, as the Timberjay documented last year in its story, “Ely’s golden goose: township residents power Ely-area economy.”

Other sources

of income

While employment used to be the primary source of income for most Americans, that’s not as true as it once was. Indeed, according to Winchester’s data, just 55 percent of income in Minnesota currently comes from employment. Retirement savings, pensions, and government transfer payments, like Social Security, account for much of the rest of the income that drives local economies. Communities near the Boundary Waters have been particularly successful attracting new residents with substantial non-labor income. Indeed, according to the Federal Reserve, St. Louis, Lake, and Cook counties are in the top ten-percent of Minnesota counties in terms of investment income per capita.

The arrival of a new resident with high nonlabor income to an area typically provides as much local economic impact as the creation of a high-paying job, since the incomes generated by both, which enter the local economy through their spending, are often similar. That means that providing and protecting the types of amenities that bring new residents to a community is often at least as critical to economic success as new job creation.

The IRRRB’s Phillips sees the connection. “I think you’re going to find that in order to grow, that we’ll need to focus on quality of life as an issue,” he said.

Likewise, the risks posed by a sulfide-based copper-nickel mine, like Twin Metals, are more than just environmental, and the impact to the Ely area economy comes from the individual decisions of thousands of current and potential residents who have moved to the region, or are considering doing so, for the unique amenities if offers.

“Knowing the environmental risks of copper sulfide mining, I don’t think we would have chosen to move to Ely if such a mine had been permitted or was in operation when we decided to leave D.C.” said Hallberg. “We probably would have chosen Cook County or somewhere else in the country. As I said before, we were searching for a pristine wilderness environment.”

Would Hallberg and her husband choose to leave if a copper-nickel mine opens nearby? That’s a more complicated question, notes Hallberg, since she and her husband have become active members in the community, with a large number of new friends. “There are positive things going on in Ely that bode well for the future. But we fear that this positive atmosphere could change with the introduction of mining,” she said.