Dutch disease

Embarrassment of riches

Early in my professional career my life was upended by a severe case of Dutch disease. I had to leave my place of employment and the city I lived in, to seek recovery in another state. Improvement came slowly. Not for a decade was I my previous self.

I wasn't alone. The disease was epidemic in Texas, which is where I contracted it. Others had it worse than I did. It was rarely fatal, but some people never recovered.

I eventually returned to Texas, and I don't worry about a relapse. Yet Dutch disease remains a problem in other parts of the world. Prophylactic measures can be taken, but often they seem unacceptably expensive and hence are neglected until too late.

At this point, dear reader, I need to level with you. I am not speaking of a disease of an individual's body physical, but of a country's body economic. Dutch disease refers to a condition that afflicts countries made suddenly wealthy, typically by the discovery of valuable natural resources. In the 1960s the Netherlands discovered deposits of natural gas under its part of the North Sea. Revenues from the sale of the gas created a bubble in the Dutch economy. Human and financial capital were drawn into gas production and ancillary activities, depriving other sectors of the economy. For a time the Dutch economy was the envy of Europe. But then the price of gas fell, sending a shock wave through the Dutch economy, producing layoffs and bankruptcies. The effect was so striking as to acquire a name: Dutch disease. The symptoms were fever, in the boom part of the cycle, followed by collapse, in the bust.

Texas contracted the disease in the 1970s and manifested symptoms in the 1980s. From the early 20th century, petroleum had been a mainstay of the Texas economy. Indeed, Texas petroleum provided a benchmark for world oil markets. Even today, the price of West Texas Intermediate, a grade of petroleum produced in the Texas Permian Basin, is regularly quoted (as WTI) on global exchanges.

The quadrupling of oil prices during the 1970s as a result of the success of the Organization of the Petroleum Exporting Countries in restraining output amid rising demand benefited Texas too. Texas, in fact, had the best of both worlds. It benefited from the rising price, but it avoided the opprobrium of being a member of the cartel. The Texas economy rode the oil boom into the 1980s. The Texas state government grew dependent on taxes derived from the oil industry. Texas real estate soared.

I was in the middle of it. I got my first PhD-level job at the University of Texas law school. It was a three-year position, but I was assured that money could be found to make it permanent. Pleased with my job and my prospects, and noting the rise in real estate prices, which appeared likely to continue, I bought a house for myself and my young family.

We had hardly moved in when the oil price plunged. With it collapsed state revenues, including the portion allotted to the University of Texas. I was informed that not only was my three-year job not going to be permanent, it wasn't even going to be three years. It would be one year at most. I had better start looking elsewhere.

I found a job but not in Texas. It was in Tennessee, at Vanderbilt University. It was only a one-year job, but it was the best on offer. We packed up and moved away from Texas.

I had no reason to think we would be moving back and would have preferred to sell the house. But the real estate market collapsed along with oil prices, and the house was suddenly worth half what I paid for it. I couldn't afford to take the loss, so I kept the house.

I won't bore the reader with the rest of the details. My career eventually brought me back to Texas. I was able to recoup my investment in the house, but not for ten years, thus incurring a substantial lost-opportunity cost.

I learned from the experience. So have lots of other people. Around the world, countries dependent on single resources for their prosperity are trying to diversify. Norway caught the Dutch disease early this century and has shown symptoms for a decade. The government there is frantically trying to btoaden the economy by investing the proceeds from petroleum in more-sustainable enterprises. Some of the oil states of the Middle East are farther down this path. Dubai has transformed itself into a center of travel and trade. Saudi Arabia is pumping oil money into sports leagues, thereby incurring allegations of “sportswashing," as well as into tourism and technology.

Yet preventing Dutch disease isn't easy. When the money is pouring in, it's hard to resist the temptation to spend it. It's hard even not to dream that the good times will last forever. As with many physical diseases, infection confers a certain period of immunity. Texas responded to its 1980s case of Dutch disease by expanding the tax base and encouraging economic diversification. It's now less susceptible to swings in oil prices.

But memories fade. The immunity isn't passed to children and grandchildren. New bubbles develop based on new resources or technologies—think lithium, crypto, GPUs—and rationalized by the mantra "This time is different.”

No, it's not. It never is.

And if you hear yourself saying it is, the disease has its hooks in you.