A Prosperity Formula for Oregon
Continued population growth is essential to growing our stocks of physical, human, and social capital-aspects of the Prosperity Formula.
Jeff Gudman served on the Lake Oswego City Council from 2011 to 2018. He ran as the Republican candidate for Treasurer in 2016 and 2020.
There is a time-tested formula for prosperity that applies to all nations and states. It is called the “Prosperity Formula,” and it works when physical, human, and social capital are boosted by the use of financial technology and innovation to maximize returns. I did not create the formula, but I do know the key to its success is the application of its principles on a consistent basis over time. As the old saying goes, “When you are up to your neck in alligators, it is difficult to remember the original objective was to drain the swamp.”
So what is the Prosperity Formula, and what does it mean for Oregon? And, how does Oregon measure up in terms of using financial technology to multiply the effect of the three kinds of capital?
First, let’s define some terms:
Physical capital is what is generally referred to as the infrastructure of the state: roads, water, surface water and sewer systems, transportation systems, etc.—the “physical assets” a community or state brings to bear in its day-to-day living. A first-rate quality of life is not possible without a first-rate physical infrastructure;
Human capital is the collective talent, training, and experience of people who— and this is most important—acknowledge the reality of trade-offs and the importance of deferred gratification; and
Social capital includes, among other things, the rule of law, property rights, education, public health, and transparent markets. It also includes all the volunteer organizations that often develop spontaneously to meet a particular need.
The Prosperity Formula applies financial thinking/innovation to these three types of capital. This involves processes and elements such as public stock issuances, liability limited to corporations, convertible bonds, securitized obligations, derivatives, options, the prudent use of non-investment grade debt, gain sharing for students depending on the type of degree they receive and the job they take, and all the other financial tools that have developed though the decades to facilitate getting capital to where it can earn the highest returns. These tools, developed over time and all the time are applied to the funding of physical, human, and social capital.
While the formula remains the same over time, the inputs should change as we learn about new ways to unleash more capital more effectively. For example, the growing flexibility of the capital markets—think Special Purpose Acquisition Companies (SPAC’s)—permits companies not only access to capital but the ability to recapitalize. Capital and capital markets matter, as do their breadth and depth.
This Prosperity Formula has stood the test of time, but the availability of its core inputs has wavered. It is important to note that stable and continued economic growth most often occurs where a growing population has access to education and health care, can participate freely in the political process, and can aspire to property ownership.
One essential input: population growth. When population growth slows, of course, all forecasts of public and private revenue sour. That means less money for the kinds of services required to achieve prosperity. Imagine the impact on the Prosperity Formula of a fixed-cost base spread over a smaller number of people.
This essential input is increasingly in short support in Oregon—jeopardizing our ability to apply the Prosperity Formula. Over time, Oregon’s population has grown faster than most states. But the net gain of births over deaths has been declining in recent years, and in 2020—sadly due to the COVID-19 pandemic—the number of deaths exceeded the number of births in the state. Demographic trends are very difficult to change, which means that, without an increase in the number of births or a decrease in the number of deaths, and without a sustained migration of people into the state, Oregon’s population will decrease in the future.
The good news is that Oregon continues to see a strong in-migration, primarily of people in their 20s and 30s – younger, mostly skilled labor that allows local business to hire and expand at faster rates (you could think of this as businesses having greater access to human capital). The challenge, therefore, is make sure Oregon remains a draw for these folks so that the Prosperity Formula can be fully implemented.
For the State of Oregon, that means setting demanding goals based on a three-part strategy of fiscal control/management/oversight, spending on infrastructure, and investing in education—the three kinds of capital, and tireless efforts to attract private investment to build on what the state has to offer, not what it might want to offer.
Do that, and we will all prosper.
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