Are Natural Resources the Road to Economic Prosperity?

The always insightful Jim Hamilton has an interesting post at Econbrowser in which he asserts that “a vision of what American economic growth over the next decade could look like might also help us address our immediate economic problems", and thus suggests that “taking maximal advantage of our natural resources” ought to be “a top priority for U.S. policy”. Harking back to U.S. history, he observes that “our abundant natural resources have always been an important advantage for America, and are still an important advantage today”, but bemoans the fact that U.S. regulation has led oil rigs to leave the Gulf and rare earth elements to be produced in China rather than in the United States, among other deleterious consequences.

I’m all for getting U.S. resource policy right, but some perspective is in order. U.S. mining activities collectively account for a mere 1.9 percent of U.S. value added (up from 0.9% in 1999). Doubling that contribution once again over the coming decade – a huge undertaking unless oil prices go through the roof – would add only 0.2% to annual GDP growth. Drilling down on a sector that Hamilton highlights, take a look at REEs. Current global production of 140,000 Mt per year is worth about ten billion dollars (gross) at current prices. Even if the United States took over all production, this would be a trivial fraction of domestic output.

What about a broader definition of natural resources? Hamilton writes that “the U.S. today is the world’s leading producer of items such as lumber, corn and poultry, number 2 in coal, oranges, soybeans, and gypsum, and third in cotton and lead”. So let’s add agriculture, forestry, fishing, and hunting – 1.1% of value added in 2010. Once again, double that over the coming decade. You get an extra 0.1% of annual growth.

This is not a vision for American economic growth, and there is a simple reason why: the United States might be a leader in all sorts of natural resource sectors, but natural resource extraction simply isn’t a big part of the economy.

Does this mean that U.S. natural resource policy is inconsequential to U.S. growth? Not necessarily. Natural resource production may only be a small part of the economy, but natural resource use  is important much more broadly. Rare earths, for example, matter as inputs for high-tech products, while oil and gas are critical inputs for a host of activities. The caveat here, of course, is that the United States doesn’t determine the availability of these inputs alone – that’s the job of global commodities markets. If, for example, rare earths are a problem, it’s because China is limiting exports, not because the United States isn’t a big producer per se. Conversely, there’s only so much economic advantage the United States can gain by boosting commodities production, unless it itself limits exports of those products.

Ultimately, commodities still matter to the U.S. economy, but not nearly as much – nor in the same way – that Hamilton suggests. The search for a way out of the economic doldrums continues.