Francesco Caselli and Guy Michaels research the use by municipal governments in Brazil of money they receive from oil royalties. It's a nice experiment of the "resource curse" that is part of the development economics literature, since most of that is cross-national data that has so many competing explanations for why resource-rich countries appear corrupt that you cannot make your case that convincingly. Caselli and Michaels find that the money appears to be squandered.

Our finding that oil windfalls translate into little improvement in the provision of public goods or the population�s living standards raises a key question � where are the oil revenues going? As a way of addressing this question, we put together a few pieces of tentative evidence:

• First, oil revenues increase the size of municipal workers� houses (but not the size of other residents� houses).
• Second, Brazil�s news agency is more likely to carry news items mentioning corruption and the mayor in municipalities with very high levels of oil output (on an absolute, though not per capita, basis).
• Third, federal police operations are more likely to occur in municipalities with very high levels of oil output (again in absolute terms).
• And finally, we document anecdotal evidence of scandals involving mayors in several of the largest oil-producing municipalities, some of which involve large sums of money.

More locally, consider a place that has a large power plant, say, Becker or Monticello.) Those plants generate a good deal of revenue to the municipality and in good times the property tax revenues permit cities to add lots of services, and hold down property taxes for residents. But they also become very dependent on that money and when times get bad it creates a lot of stress. (The city administrator in Becker blogs and here's what he's written about taxes from the coal plant there, called Sherco.)

But the taxes are the result of intense lobbying between the power or oil companies and the state. The state forces different property tax rules on the localities here in Minnesota and then the cities have to lobby back (from the rest of us) to get the money taken away (to make energy firms richer.) This story replays not just in Minnesota but in resource-rich states like Alaska, where dependence on oil firms colors the politics that gave us Ted Stevens and Sarah Palin.

I'm very happy to join my friends in talking about nuclear power, but explain to me why that conversation between state and corporation should produce a deal any better for the taxpayer than having the government talk to Zygi Wilf?

What is needed, as always, is competition. The resource curse happens in a world where the resources are monopolized by the government (I struggle to think of a place where this isn't so. Can anyone name one for me?)

Labels: economics, Energy, Minnesota, rentseeking, sports