Return of the Resource Curse: The Trouble That Comes from Too Much Money
Imagine painting yourself into a corner—as someone of limited means who is subject to wacky increases in the cost of something as basic as renting an apartment. I do mean wacky, with this big component in the cost of living not just doubling, but going up no fewer than eight times over the course of a single year.
That happened to me in 1975 as the sole breadwinner in a family of three. I offer this small bit of personal history as something to think about in pondering today’s news.
In the beginning of that long-ago year, I quit my job as a newspaper reporter at the St. Louis Globe-Democrat and moved to Beirut as a self-deployed freelance writer. This was shortly after the OPEC oil embargo and the quadrupling of oil prices in 1974. Thinking the Middle East would experience one of the greatest transfers of wealth in the history of the world, I wanted to be there as an observer.
My wife and I left a three-bedroom, two-bath apartment St. Louis’s Central West End. Our rent was $165 a month. With one young child, the cheapest, somewhat comparable place we could find in Beirut cost $700 a month.
The civil war in Lebanon erupted in early April, shortly after our arrival. By the end of the year, fighting in the streets of Beirut became so fierce it led to a mass evacuation of most of the city’s large expatriate business population. As a result, the Lebanese capital was suddenly “halas” —the Arabic word for finished—as the regional center for business in the Middle East. But the spending spree in Saudi Arabia, Iran, and other countries was just beginning. We resettled in Bahrain, where more sticker shock awaited. We moved into a three-bedroom, two-bath bungalow that cost more than $1,400 a month.
Why would it cost more than eight times as much money to find a place to live in the Middle East as it would in St. Louis?
The Middle East had been bitten by a strange curse—known in economic literature as the “resource curse,” or the paradox of plenty. Resource-rich countries are all too likely to squander the windfall wealth that comes from possession of precious metals or vital resources such as oil. Bubbles develop as people who have benefited the most from a sudden influx of money bid up the price of real estate and other assets that then become increasingly unaffordable for many other people.
I got lucky. I landed a full-time position with Mideast Markets, a high-priced publication that had sprung up to provide ongoing coverage of the fast-changing business scene in the Middle East. My new employer paid the full cost of our move and our housing as well. Bahrain became my jumping-off point for traveling throughout the region over the next three years.
With my own eyes, I saw the inevitability of prodigious waste in places where money was no object. I also saw how the resource curse exacerbates the divide between haves and have-nots. In Bahrain we lived across the street from a Persian family where eight sons—all in their twenties and thirties—were still living with their parents. Though they all had jobs, they had been priced out of the housing market—and this at time when others we knew were making fortunes in speculating in real estate.
Today our own government in Washington, D.C., is acting in much the same way as the governments in the newly oil-rich countries of yesteryear. Since the onset of the pandemic, our government has been passing out “free” money all kinds of reasons—from paying the unemployed to stay unemployed (knowing they would lose money by going back to work) to $3,000-a-child tax credits and $2,800 handouts to households with annual incomes of up to $140,000. And now we are seeing some of the same (if not quite so wild) distortions in housing prices and other asset values I saw in the Middle East.
I am not arguing against a safety net for the truly needy. Nor am I saying that there should be no compensation from governmental entities for government-ordered lockdowns that have forced thousands businesses to close their doors and deprived millions of workers of their livelihoods.
But where is all the money to come from to pay for what looks like a massive and ill-considered increase in the size of the welfare state? Not from current tax revenues or any gain in productive capacity. It is coming from funny money—trillions of dollars of borrowed or newly created money used to grease the wheels of an already strong recovery. If not repudiated through inflation, these financial obligations will have to repaid by American taxpayers in future years.
Good luck with that. How can making people less reliant on doing things for themselves and more dependent on getting checks from the government be a recipe for sound money and future success?