Was Alaska a Good Buy?

by on February 16, 2010 at 7:38 am in Economics, History | Permalink

The U.S. bought Alaska from the Russian Empire in 1867 for $7.2 million.  At the time the purchase was derided as “Seward’s Folly,” but today it’s common to compare the purchase price with Alaska’s gross state product of $45 billion and claim it a resounding success.  But is that the right comparison?

CruiseAlaskaMost obviously one should correct for discounting, risk etc.  Less obviously, but more importantly, one should start by thinking about total world product: Was total world product increased by the U.S. purchase? To the extent that the Russians would have held on to Alaska and would not have been able to fully exploit Alaska’s resources in the 20th century then perhaps the answer is yes.  But if the U.S. had not purchased Alaska it’s plausible that Great Britain would have.  So if the counter-factual was British purchase, then US purchase simply resulted in a redistribution of resources from British/Canadians to Americans with no increase in net wealth.

Moreover, given the ease of immigration at the time, economist David Barker argues that it’s closer to the truth to think that the redistribution was nominal only, i.e. from Alaskans calling themselves Canadians to more or less the same Alaskans of the same wealth calling themselves Americans.  But why should other Americans be willing to pay for this nominal redistribution?  Taking into account these considerations, Barker concludes:

Using a variety of assumptions and techniques for
valuing the net cash flows from Alaska, it is clear that the financial returns have not
been positive. The economic benefits that have been received from Alaska over the
years could have been obtained without purchasing the territory. In financial terms,
Alaska has clearly been a negative net present value project for the United States….[A] close analysis of non-economic factors also
casts doubt on the wisdom of the purchase….

True, the wisdom of purchasing Alaska is now moot, but the analysis raises questions of more than historical interest:

The results of this paper suggest new lines
of inquiry in the history of the West, such as: Has westward expansion been worth the
price? What have been the costs and benefits? Should expansion have been less or
greater than it was? Should United States expansion continue? Should the United States shrink by cutting ties with its remaining possessions? All of these questions
seem worthy of future research.

Hat tip: Ben Muse.

Matt February 16, 2010 at 7:48 am

I’ve long believed that if Russia had retained Alaska, it would have become the “White Taiwan”, to coin a phrase, at the end of the Russian revolution. I suspect that this would not have been a good thing, all things considered.

Craig Bardo February 16, 2010 at 8:30 am

Much of those purchases remain public land but to what end? Theoretically, at least some of it is kept for non-essential purposes. Could another valid counter-factual analysis begin with the sale of public lands to retire the national debt, in part accumulated for these acquisitions?

Zamfir February 16, 2010 at 8:44 am

Barandarian, in the particular of case of Alaska it might make more sense. After all, when people say that Alaska was a good purchase, they don;t mean that in the abstract having Alaska in the union is good thing worth paying for.

They usually mean that it contained oil and other valuables, and selling/ “taxing” those generates indeed a significant flow towards the federal coffins.

So as an initial assumption, it’s not that weird to expect that Alaska had indeed a consistent net flow towards the feds, more then enough to pay for its purchase.

Now that that doesn’t appear to be the case,you can go into more complicated reasons why it was or was not a good decision. But in the case of Alaska, it could been simply the case that it was profitable using any calculus, and knowing that that isn’t the case is indeed knowledge.

YC February 16, 2010 at 9:10 am

@dearleme, you could count me as someone who’s not favorable to Sarah Palin, but the US never buying Alaska doesn’t mean we Sarah Palin would be the premier of the Canadian province of Alaska, since she is a native of the contiguous 48.

T. Shaw February 16, 2010 at 9:19 am

If you earn 6% on $7.2 million compounded annually for 144 years you’d (your posterity) have today $31.7 billion. If you earn 6% on that it’s $1.9 billion a year. Let’s say you adjust the yield for inflation. Say, you use 3%. The answer would be $508 million in approximate 1867 dollars; at 6% that earns $30.5 million annually.

How much financial return will the fed guvmint realize for $4 billion it will give this year to 969 (just a guess) ACORN affiliates? Do you think any of them has audited financial statements?

And, let’s calculate the greater economic good FNM/FRE/HUD wrought since A. Cuomo decided to “grease the skids” for $2.5 trillion in subprime/low-to-moderate-income/affordable housing loans . . . and then they want to sue Wall Street!

Imagine if ‘they’ gave higher priority to the economic well-being of 300,000,000 Americans over 1,569 caribou and 63 wolves; or 11,776 millionaires who might have their views of the sunrises/sets marred by oil platforms. What a wonderful world this would be!

It’s not April 1. I just had to check.

khc February 16, 2010 at 9:40 am

I’m confused by Alex’s comment about the total world product – has anyone ever made a purchase with this in mind? A buyer makes decisions based on whether a purchase creates value for them alone. What am I missing?

@Zamfir, et al – Is the value of federal tax dollars compared to other states that were acquired by other, more violent, means? How do we compare the cost of Alaskan death-free tax dollars to New York paid-by-Revolutionary-war-deaths? This analysis starts to get complicated.

David February 16, 2010 at 9:54 am

I’m with Marcus on this one: the cost of having Soviet troops sharing a land border with–not us, to be sure; but Canada, even so–is literally incalculable.

You may as well apply the same calculus to the former Indian Territory, which acceded to the Union in 1908 as Oklahoma: if it had remained independent, it would likely have become a hotbed of Soviet subversion–a Cuba in the heart of the US.

What would have been the total cost of that, do you suppose?

tgrass February 16, 2010 at 10:31 am

Between 1908 and 1938, the Kennecott Mine produced $200 Million of copper ore (with about a $30 Million investment). Deflation started in 1864, so that by 1938 the CPI (as evaluated now) was unchanged.

It was the USGS which mapped the area, and made the primary discoveries of copper and gold in the region, which ultimately led the Guggenheims and Morgans to invest.

I would argue that one episode alone justifies the purchase, and it was a unique coincidence of strictly American activity and historical timing (deflation with rising copper prices) that allowed it to occur.

anonymous February 16, 2010 at 10:54 am

Certainly modern Alaskans would be better off today if they were part of Canada than the US.

B.B. February 16, 2010 at 10:59 am

Let’s follow this reasoning.

We spend tens of billions of dollar now to prevent “global warming.”

In a hundred years, will economic bloggers be writing about how lousy an investment that was, that the world of 2100 would be better off warmer?

Could economic bloggers in a hundred years, seeing how overpoulated the world has gotten, conclude that the smallpox vaccine was the worst innovation in human history?

r.d. February 16, 2010 at 11:15 am

Awesome blog, guys. I’ve started my own recently. Enjoy: http://redonkulusblog.blogspot.com/

Bubble Meter Blog February 16, 2010 at 11:45 am

It’s important that SOMEONE bought it from Russia, or else it could have become a staging ground for Soviet nukes during the Cold War, much like Cuba almost was.

mulp February 16, 2010 at 12:57 pm

The problem with Alaska is it wasn’t cleared of its landowners and then given away to the corporations and powerful as everything wast of the Alleghenies were once a real populist became president and used the power of government to promote his personal interests of transferring land from “them” to himself and promising the same opportunities to the others who had the right to vote.

All those liberals corrupted American greatness by claiming the native peoples in Alaska had a right to exist in Alaska and shouldn’t be sent back to Russia and China where they came from.

Look at the wealth created as the land was taken from native Americans and given to the railroads – how else could the railroad barrons and Wall Street gotten so powerful that Republicans could win the hearts and minds by their populist bashing of capitalism and their trust busting and eventually of railroads in general?

Just think if in the 20s, the Republicans had taken a page from Lincoln and paid a square mile of land plus a few hundred thousand to anyone who laid a mile of track in Alaska! Alaska would be crisscrossed with old abandoned tracks going into clear cut forests and abandoned mines like a lot of the US West.

anonymous February 16, 2010 at 2:20 pm

It’s very unlikely that Britain would have purchased Alaska. For one thing, 1867 was Canada’s year of Confederation, marking an end to Britain’s direct involvement in North American territorial issues (and Canada was too small, financially or population-wise, to contemplate such a purchase in its own right). In any case, Britain was not in the habit of purchasing territory while the US certainly was (Louisiana Purchase, Gadsden Purchase). Finally, Alaska had no “great game” geopolitical significance for Britain; it strains belief, for instance, that it could be used as a staging ground for an invasion of Siberia (to what purpose?). Whereas, the purchase certainly did fit in with American Manifest Destiny expansionism.

Lord February 16, 2010 at 2:40 pm

Certainly modern Americans would be better off today if Alaska were part of Canada than the US. It’s a better fit. Not moot at all. Let’s sell it.

Ak Mike February 16, 2010 at 3:18 pm

Lord – if Alaska were to pay for its independence itself, would that work for you?

Ak Mike February 16, 2010 at 5:11 pm

Fair enough. I’m not sure the Canadians would want Alaska anyhow – it’s full of Americans.

Chris D February 16, 2010 at 8:06 pm

1. Why does an investment have to grow the gross world product, as opposed to simply benefiting the investor?

2. In examining the westward expansion, it’s worth keeping the judgement of economic analysis within the cultural context of manifest destiny.

ohwilleke February 16, 2010 at 11:25 pm

I agree that the military considerations are at least as big as the economic ones. It also isn’t clear that the British would have been the buyer.

Britain was taking a loss by spinning off Canada at the time and might not have been ready to buy it a going away gift. While Canadian ownership (or British ownership) might have been workable, or even good, that was hardly the only plausible scenario.

A different likely scenario is the one that took place in Texas, California and Hawaii, in which Anglo settlers from the U.S. moved in, became the dominant local population, and insisted upon being annexed to the U.S. If this had happened while Russia was still the nominal owner, it could have led to a pre-mature first world war or a long running low grade international war. India, China and Pakistan are still waging costly wars with each other over far less economically valuable land in the Himalayas on their borders.

Alternately, if it hadn’t been granted statehood when it was, it might have been declared a U.N. Trust Territory and ultimately spun off to be an independent microstate that didn’t share taxes with the U.S. but did require U.S. military protection.

It is also worth considering that while we acquired Alaska in 1867, that it was insignficant to everyone for a very long time. More than two decades after we bought it, it still had fewer than 40,000 residents. It didn’t break the 100,000 population mark until after 1940, then probably as a result of World War II basing decisions. Until the 1990 census, it was the least populous state. Even now, it has roughly the same number of people as Denver’s central city, sprawled out over an immense expanse of territory. More than 70 U.S. metropolitan areas and dozens of U.S. counties have more people. The state also has substantial known untapped oil reserves. In other words, Alaska hasn’t come anywhere close to depreciating to zero value yet.

4gb gaming card February 17, 2010 at 4:10 am

There’s an interesting Harry Turtledove novel about what might have happened if Alaska stayed Russian.I’ve often wondered the same thing about Hawaii. If it hadn’t been a US territory and been attacked by the Japanese in 1941, would we have gotten involved in that war? If it hadn’t been attacked, would it ever have achieved statehood?f the marxists would allow us to obtain some of its natural resources, i.e. Anwar, this story would be different. Palin is dumb. Bush was dumb. Reagan was dumb. 0Ford was dumb. Nixon was dumb. Carter was smart. Clinton was smart. Obama is smart.

ohwilleke February 17, 2010 at 5:00 pm

“ACORN affiliates? Do you think any of them has audited financial statements? ”

Actually, it is very likely that they do. I learned this serving on the board of a medium sized non-profit (limited to one small metropolitian area), where we had to get them. Non-profits usually have to have audited financial statements at a much smaller scale than comparable for-profit businesses because audited financial statements are necessary to almost all decent sized private and public sector grant money.

Criticism of ACORN flows from its political advocacy and from its alleged zealousness in furtherance of its goals to help neighborhoods beyond what some people see as bounds of propriety. ACORN has not faced significant scandals involving diversion of its funds to non-ACORN purposes which is what an audited financial statement of a non-profit is designed to reveal.

anonymous February 19, 2010 at 3:38 pm

Barkley Rosser,

The overwhelming majority of the Canadian population lives within about 100 km of the US border. This is in large part due to the fact that that’s as far south as you can go and still remain in Canada.

If, through some accident of history, the present US-Canadian border ran a couple of hundred miles further south instead, then it’s likely that Canada’s current big cities would be somewhat smaller, and perhaps Rochester would have several million people.

The same principle applies to Alaska and its population center of Anchorage. Northern and central British Columbia play the same role here as upstate New York.

The populations of Yukon, Northwest Territories and Nunavut barely crack 100,000 — combined — and it’s hard to think of a compelling reason why a Canadian Alaska would be much different. Instead, in our real world, Alaska’s population is seven times higher than the total population of those vast Canadian territories at similar latitudes.

دردشة March 5, 2011 at 3:08 am

Thank you for the article featured

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