Thomas Stratmann is a Distinguished University Professor of economics and law at George Mason University, a senior research fellow at the Mercatus Institute, and the creator of the Reservation Economic Freedom Index.

Today, we talk about reservations in America and the economic wellbeing of Native Americans. He explains to us how he got interested in reservation economics and the barriers to increased economic wellbeing for Native Americans, also explaining why economic wellbeing is an important metric to focus on. He has great stories about trade and property rights in Native American history, too!



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Juliette Sellgren 

Science is the great antidote to the poison of enthusiasm and superstition. Hi, I'm Juliet Sellgren and this is my podcast, the Great Antidote- named for Adam Smith, brought to you by Liberty Fund. To learn more, visit www Adam Smith works.org.

Welcome back. It's January 16th, 2024, and for the past few months, all anyone seems to have been talking about is Killers of the Flower Moon and its recent movie. Today we're not quite going to be talking about that specifically, just something I was thinking about, but it's somewhat related. We're going to be talking about the economics and the economic freedom of reservations. I'm excited to be welcoming Thomas Stratmann to the podcast to talk about this topic and his Reservation Economic Freedom Index. He is a distinguished university professor of economics and law at George Mason University and he's, I already mentioned that he's the one who created it. He's also affiliated with the Mercatus Center. Welcome.

Thank you. Thanks so much for having me. It's great to be here.

First, what is the most important thing that people my age or in my generation should know that we don't?

Well, I would say you should know things will get much better than they are right now for you. So I would say heads up onwards and upwards moving forward. And I'm saying that because I didn't even quite realize it when I was in my teens or in my twenties. It's really tough to figure out what the social norms are, what is acceptable or what your expectations can be upon others or should be upon yourself, what society kind of expects, so to speak, and all these things create a bit of confusion for younger people. At least they did for me, even though I didn't quite realize it. And so as time goes on, I feel more and more comfortable in my skin, skin, and that's why I'm saying it. So things will get better, you'll feel more comfortable, you'll get even happier the future than you are right now.

Something I've been thinking a lot about and talking with some of my friends about is how uncertainty plays such a big role in economics and economic analysis and how we analyze the behavior of people and the economy and any level of analysis. And I think this is kind of along the lines of what you're saying, where to kind of figure out to become clear in this groups of people, it takes time. And so I don't know, would you agree with that? 

I think that's a, sorry, go ahead.

Is it just knowing it that you think would make it easier to figure it out or what are some practical things that help out with that maybe?

So I think that's a great way of framing. It reduces you over life. Uncertainty is reduced along with many dimensions in particular. I think in terms of human interactions, again, what I said before in terms of what you can expect people, what you think other people expect of you, and just knowing what it is, you can still go a different way and say, well, I'm going to reject the norm. I'm not following it. But it's good to know what the norm is. And I think the way to do this is just interacting with a lot of humans, interacting with a lot of people. And that will give you a sense because you learn this really by doing, you don't learn these kind of skills in terms of interacting with others by reading a book. You really have to be out there, and even if you are sort of extrovert introvertive, try to push yourself to do this because especially for introverts, it's tough to figure out exactly how to interact with others.

And I was just thinking about this with respect to language learning. You can learn language in a classroom and there are plenty of professors and teachers who are great at this, but what's really difficult is actually learning it in a classroom. It's not necessarily the most fast learning environment. I didn't say that very well, but this advice works with almost everything, right? If we're talking about free speech and learning the truth, right? If we're talking about research, if we're just figuring out any sort of reality, I think that this is a universal piece of advice, which is so fantastic. So thank you.

You're welcome. No, I totally agree with what you're saying.

So we haven't quite talked about reservations on this podcast at all except for maybe a mention here or there with respect to maybe environmental economics or the history of the land or stuff like that. Can you start by answering this basic question of what reservations are and how they came to be?

Well, when basically Europeans came over to what is nowadays the United States, they were certainly lots of Native Americans here. And what happened over time is the Europeans displaced, the natives in many areas and a bunch of wars happened, and lots of other things we potentially can talk about. But in the end, the federal government designated certain areas which are called reservations. So they're geographical areas. These reservations or geographical areas are deemed to be sort of the homeland of a tribe, and the tribe is considered a sovereign nation. So while these are well-defined areas, which can be very small or can be very large, as big as for example, Maine, there are some like that in Montana, while there are, or they can be, what should I say, that while they can be either large or small, it doesn't mean necessarily that the land on the reservation is owned by a tribe or owned by only Native Americans. Land is typically owned by both the tribe. Sometimes it is owned by Native Americans, sometimes land are held in federal trust and sometimes non-natives own the land. And that also happens quite often. It's just a geographic area over which the tribal government has some degree of jurisdiction.

It's always fascinating to me how many different areas of study are possible within a lifetime and how specific they can get and that people can even have many that are not necessarily connected and how each individual ends up studying the things they do and being interested in these things. So can you give us some background personal, if you're willing, about how you ended up on this topic? What led you to it initially?

Well, I don't necessarily think it started with my childhood, but I was born in West Germany and there is this famous German writer called Karl Mai who wrote lots of stories about American Indians and it's all very romanticized. The romanticized in terms of the good Indians and the bad Europeans and the American Indians living a very harmonious life and in total sync with nature, so and so forth. And when I started studying economics and with all the emphasis on rationality and the need of corporation to prosper, so I was starting to question some of these assumptions about the lives of Native Americans. And then when I started my first job at Montana State University in Bozeman, Montana, I got much closer to these issues because there are a bunch of reservations in Montana, and I was interested in studying the constitutions of tribes and learning how they interacted, how the American Indians interacted with each other, what governed their social lives and economic lives. But that was kind of tough at the time. I mean, it was 20, 30 years ago when things were not really digitized. So I put it away, and I picked this topic back up later about back about 10 years ago when I found some suitable data and had a better framework in mind to analyze the social or socioeconomic life of Native Americans.

What is, so I guess the thing that really invites complications into this, and something that you mentioned in your paper is that the paper introducing the index and talking about it is that it mentions at the beginning that the US government recognizes reservations as sovereign nations. But as you said before, it's not necessarily that the ownership of the land is of the Native Americans. And recognition doesn't necessarily mean that they're not influenced by the US or the US policy. And we spend so much time thinking and talking about US policy and the people of America, but what is the economic relationship between the US and the reservations within? And when we talk about the wellbeing of the American economy, does that include reservations or not? Are they completely held separately in terms of how we measure them?

Well, in terms of when we compute per capita income, the United States, the income of Native Americans goes, comes into this calculation regardless of whether they reside on reservations or whether they do not reside on reservations. And the relationship between state governments, county governments, the federal governments and the tribes on the reservations are let's say multifaceted or maybe I don't like the word, but it's complicated in the sense of there's a lot of uncertainty who necessarily, who has jurisdiction over something? Like if a non-Indian commits a crime on the reservation, whose jurisdiction, who can charge the American, who can charge the non-native? And until recently, for example, tribes did not have the opportunity to charge that non-native for crimes. So they had to rely on the state coming in. And that's an issue in itself because often reservations are very remote and so the state trooper or whatever state police, they may have to drive two hours to the crime, to the crime scene, and by the time they arrive or much of the evidence is gone.

But the problem runs actually even deeper in that the Supreme Court in I think it was 1931, they declared Native Americans to be the wards of the federal government. And the federal government had the role of taking care of American Indians until, and I quote here, “until they become competent and capable.” And this is still part of the legacy today where as you mentioned, there are different types of ownerships on land. And one of the lands in there is American Indians own trust land, or sorry, their own land that is held in federal trust. Then it means that the American Indian is the beneficial owner, but the legal owner is the United States. And so American Indians cannot use the land for collateral, for bank loans. They cannot use it. They cannot sell it. For example, whenever they want to do anything on the land, they have to ask the federal government, and specifically it is the Bureau of Indian Affairs or the BIA for permission to do any economic activity. So sort of the legacy of dependency is still baked into, or the legacy of making American Indians dependent, that's a better way of saying is still baked into the institutions that we are having today.

And when you're saying this, you're saying that these institutions still exist, that these things still happen, the bureau still exists and everything, right?

The bureau still exists. And the tribes, if they want to engage in economic activity, like to have their own police force or regulate maybe some of the electricity system themselves, they have to ask the BIA for permission. If they want to use lands, lease the land. For example, if you want to lease an allotted land that is in federal trust, again, you have to go to the Bureau of Indian Affairs and has to get their consent. And the Bureau of Indian Affairs is known for being not one of the most responsive agencies all out there have been waiting times for several years until someone gets a response from them.

Wow. It's the sort of thing you hear and you can barely even believe it because we live in America and we spend so much time talking amongst ourselves about freedom here or there or welfare here or there, and yet we're kind of babying this entire group of people in a way. And it's not babying in a nice way. I don't know. It's really hard to believe, but I believe it. It's just shocking. So before we get into the realities, what does theory and what would just general economic thinking, tell us about what that sort of relationship does to a person and what that means for an individual or for a community's economic standing?

Well, I can think, I guess about this relationship broadly in the framework of institutions. Institutions are the rules of the game curated by humans. And if institutions are structured well, people will engage in productive behavior and unlock economic wealth. Now, the institutions right now on reservations are not structured on that. And it's because the tribes essentially, they're not really sovereign nations, they're not independent because the federal government makes them basically still essentially be award. So there on the reservations, they're not well-defined property rights because of lots of uncertainty that exists regarding the ownership of land. And also of course there's also uncertainty about their regulations. And some of these of course are also the tribes own undoing in terms of if there's not sufficient transparency of the tribe's do not publish regulations, or I have regulations that generate barriers to entry so that people cannot participate in the market.

Some of these things certainly can be also of the tribes’ doing. So what we want is we want to have, just in terms of general economics, we want to have clearly defined property rights because they increase the certainty about economic activity. And by improving the certainty, we're going to have lower transaction costs, transactions costs or the cost of running the economic system like the cost of negotiating and enforcing contracts. And these actions costs are so high on reservations that economic activity doesn't happen. One example of that is the land in federal trust. So that is the land I mentioned where the native is and is the beneficial owner, but the federal government is the legal owner. This means that, first of all, we already said the American Indian, they cannot will have control of the land. They cannot exclude other people really from using the land because they don't have legal title.

They cannot sell it. But even worse, over time, what happened due to the way these lands came into being, it is nowadays that the ownership of these lands is very fractionated. Meaning that there are maybe 50 or 30 owners of an 80 acre plot of land, 50 or 80 American Indian owners which have joint ownership, which means that everybody has to agree what to do with the land in order to employ the land. And this of course is subject to collective action problems. It's impossible for 80 people to agree on something. So as a result, the land lays fellow, nothing maybe happens with it. And that is one example of institutions that resulted in a legal system that resulted it in unproductive use of resources.

What are the actual statistics? How does it differ between people of reservations and Americans and properly American territory? How are the incomes different? What are maybe the major industries and so on? What does this look like? In reality?

The per capita income, the average per capita income on reservations of American Indians residing on reservations is [lower]than the lowest per capita income of any state, even Mississippi. Mississippi has the lowest per capita income in the United States, so reservations have even a lower per capita income. So Native Americans residing outside of reservations are doing much better. It's tough to get exact statistics on that as ethnicity is self-reported, but we know that Native Americans residing outside of reservations to much better. So there must be something on the reservation. There must be some institutions on the reservations either internally or externally imposed that prevent prosperity. Did that answer your question? 

I’m not quite sure. Yes, yes, yes. And so you've created this reservation economic freedom index. Before we get into more depth with it, what are the main findings and what does it kind of tell us about the difference?

So I created this index for about 90 reservations in the lower 48. And this index, well are, lemme just say there are a total probably of 250 or so reservations in the lower 48. Overall, there are about 570 reservations, federally recognized reservations out there, which includes also Alaska and Hawaii, but they're running under different rules, Hawaii and Alaska reservations. The reason I focused only on a subset like these 90 reservations is because for the other ones I found very hard to collect data. So the sample selection is based on the number of authorization selected is based on essentially data availability. But they cover, I forget exactly exact number, but they cover about half of all the population of Native Americans residing on reservations.

So this index has various categories, and the main finding is that reservations that move up by 10% of the index. So let's say the index goes from zero to 10 and you have a one point increase, so 10% increase, then those reservations have about $2,500, higher income, higher media, median household income or some other income measure. And that's about also roughly about 10% higher income relative to the mean of the American Indian income. So again, it's an association, basically it says better institutions, reservations of better institutions have higher incomes. And if you can put a number on it saying if you have a 10% increase in improvement, then it's measured by this index, then your income is likely to be about 1000, 2005 point dollars higher.

So I guess something that is striking to me is that a lot of what you said leading up to this was about how it's kind of difficult to measure certain things, especially depending on the conditions within the reservation. So even though you picked reservations to look at and to measure based on availability of data, how do you, I don't know, trust or know given that even some of the institutions that are at play here are part of the reason why data may or may not be as available as you would like?

Yeah, I mean, I didn't write that in the paper, but I think what you're alluding to is that, well, tribes or reservations that have particularly bad institutions don't have any data, do not publish any data. That's a reasonable conjecture. I think this might be the case. I don't have any data to support that. But if you look around the world, usually the data quality declines with lower per capita income of countries. So maybe I'm looking at reservations that are in relatively decent shape, but it's not also I'm focusing on reservations. Well, it turns out these reservations I'm looking at, they're also some of the largest reservations in the United States. So I'm capturing a good chunk of the population, the American Indian population.

And so it may be, even if your research is findings related to the better off of reservations, it's still worse than Mississippi. And so even using that as a comparison is a way to kind of gauge what the differences are and what is to be done, not me accidentally referring to that old Russian lit question slash political question. So I guess what are the implications of this? What can we do? I think it's difficult for first Americans. Maybe the only thing to be done is to ask our government to kind of back off, but what is even the way forward with something like this? And what are the implications of the index then?

So there are several ways to think about it in terms of very broadly, there was this act, the IRA [Indian Removal Act] have to look at exact 1935 Congress that established basically that lands should be held in permanent federal trust. And so basically giving the legal title to Indians so that it's basically essentially going to be fee simple land or that the American Indians can decide how to use the land or what to do with it. That might be a possibility in a bigger picture. The other thing in terms of practical things is lots of the federal government has created a system of subsidies to try for maybe for schools, for health, for lots of different areas, also for climate policy. And there's a lot of rent seeking by tribal governments from the federal government. So if the federal government wants to spend money, I think they would be better off giving the tribe some block rents, just some lump sum amount to spend their best to their own judgment instead of making them go through sort of nonproductive rent seeking activities, which includes such as lobbying, but also writing all the applications and so forth. But there are also things on the reservation itself that tribes can do. For example, one component of the index is whether the tribe adopted the So-called Uniform Commercial Code, which is basically a set of laws that govern commercial transactions. So once a tribe has adopted this uniform code, commercial code uncertainty in terms of conducting business or starting a business, it's going to be much lower.

And so there's going to be more interest both by native and non-native and entrepreneurs to start a business. Or for example, on the judiciary, there is some tribes don't have necessarily due process in place. Some tribes may not have juries. And so on the judiciary side, there's lots of skepticism. Both natives and non-natives often don't trust tribal courts, which I learned in part from my interviews with American Indians and non-native and natives. And so this is some internal things that could, at least from a viewpoint of an economist who wants lower transactions costs and thereby increasing certainty or legal certainty for economic activities, that would be a beneficial thing to do.

And I guess, what are some of the biggest misconceptions in learning about this that you have seen on regular Americans? Just, I don't want to say regular Americans, that sounds kind of wrong. Well, native, but non-Native American, native Americans. Yeah, there's no great way to say it, I think, but hopefully you understand what I mean. 

Yeah, I know what you mean.

If there is a better way to say it, let me know.

Well, people say non-natives, but then I've heard other people protest that…

Native American, non-Native American, native American, yeah. Are there any misconceptions that we hold about reservations and about Native Americans that might be making things more difficult? Obviously this is in no way the biggest problem, right? Yeah. Or the biggest barrier, but even rectifying those could potentially lower transaction costs. 

I think mean one of the misconceptions, which also I think drives a lot of government policies is that Indian, American Indians are not, they're not business oriented. They don't trade. They're just in love with nature somehow or another way. And there's this romanticized view of American Indians. And this romanticized view, I think also has been attributed to some government policies that have resulted in a culture of dependency on reservations. And I'm saying this isn't correct. If you go back to there in about 1500 or so years ago in the Mississippi area, there were some towns in just about half a square mile where it was housed over 10,000 people. So people lived together in a big city. And to do that, you have to cooperate to build the infrastructure and so forth by someone who is wandering through the world, admiring the beauty of the world.

I mean, they cannot by themselves create something like this. Or another example is there are these trading centers like Charco Canyon in Mexico, in New Mexico, and evidence is found there that it was a trading hub through which goods from North and South America were traded back and forth. Or another example more recent that when Lewis and Clark, they did the exhibition going west, and in the winter of 18 0 4, 18 0 5, they were in North Dakota, it was freezing. They didn't have anything to eat. So they traded with the local tribe and basically they had some axes, they sold 'em an ax, and the tribe, the tribes gave them food so they could survive. And then Lewis and Clark moved on, and then in the summer of 2000 1805, so half a year later, they arrived in the Rocky Mountains near Idaho and they saw the ax, the ax they had traded in North Dakota had traveled 1000 miles west showing that American Indians, they were trading goods. So American Indians have a history of being entrepreneurs and being very shrew traders, and there's lots of documentation on this.

That's so interesting. And also, I mean such an important story and narrative to share because I do not think at all that it is the one that is going around.

Yeah, exactly. What sort of, just have one more thing. I mean, just in terms of it's come to my mind also, after the European survived and the natives received horses, they changed their buffalo hunting technique using horses before they also, again, to get the buffalo, they killed buffalo before they had horses by chasing them over a cliff. And you can imagine that this takes a lot of cooperation of tribal members to get a wild buffalo, her to run over a cliff. And that's the way they got the meat, because of course the buffalo died once they ran over the cliff, but once they had horses, they shot the buffalo with bone arrow. And so of course there's the issue who made the killing shot? So what the system they device, if they had markings on the arrows, which told them who owned the arrow, and that person who when buffalo is dead, you see, oh, this is the arrow that killed the shot, and Julie Sellgren was the one, and she's getting the first cut of meat.

Oh, nice. So there was a level of competition.

Yeah. I mean there is also property rights in terms of basically by marking the arrows, you basically say, well, yeah, well, in some sense to show you are the one who did the killing shot.

Wow, that is so interesting. So a lot of your findings, best way to say this, a lot of your findings follow with what economic theory would tell you. Is there anything that you found that was surprising with your results or any outliers or even any other stories of surprising or amusing anecdotes that you wouldn't necessarily have expected?

Well, I'm not sure if that, well, one story I liked, it's the late Ush tribal chairman Uch [?] was there in Oklahoma, Ernest, they called the bureaucratic mess there, and they called it, he called it white tape as opposed to red tape. So I thought calling the bureaucracy that is governing the lives of American Indians on reservation, calling it white tape, I thought was quite ingenious. And I enjoyed that.

Yeah, that is funny.

The other thing is I looked at, sort of did a semi case study comparing the reservations of the Mountain Ute and Ute Mountain North, which are joint adjacent T. Each other saw the Southern Ute, their per capita income is about $80,000. And the Ute Mountain, their per capita income is about $25,000. So three times less than the neighboring tribe. And they both have the same cultural background, or at least roughly speaking, they come from similar areas. But what is all rich and the other one is poor. And if I looked at their institutions, I can totally see why this is the case because for example, the Southern, which are richer, they have much more fee, simple lands. So basically land where you have fuller rights of possession, control, exclusion and disposition. And they have a tribal corporation that has a bunch of checks and balances, balances built into it, and they have much more control over their own lives as opposed to the mountain nudes, which has much more trust land lands that is legal land that is legally owned by the federal government and also who don't have really very transparent procedures for both either insiders or outsiders to conduct business.

That is super interesting. I was just kind of reflecting on this, whether or not this belief is accurate. I can see someone listening to this episode or thinking on this subject and saying, well, why do we care about what their median income is? What if they just don't value our economic values? What if they're just not thinking about economic growth or anything that we economists think of in the positive and as a way to measure wellbeing? Can you kind of remind us, especially in this context of why this sort of stuff is important and how it would still apply is like a measure of wellbeing?

Well, I think that's a totally fair point, and also in the paper, I think I'm trying to make the point by stressing this is not a blueprint as to what tribes should be doing because it's of course up to the tribal members to decide what kind of institutions they have, what kind of, if they want to have a more communal life or a life that is based on private property or a life that is governed by Washington DC I think what this work shows is that if you choose certain path, it's going to have consequences. If you're not transparent or don't have well-defined property rights, then you will probably have to pay a cost. And some people might not know what the cost is in terms of less welfare or low prosperity, and it's really not that it's just income. I'm focusing on income over here.

But what you will see is that reservations with low income, they're going to have much more violence, they're going to have much more use of drugs, much higher addiction rates, and there are lots of ills that are associated with low income. So it's not just getting rich, so to speak. It's also basically it's about the quality of life. And again, going back to the history of Native Americans, they used to prosper. They in 1500, they were probably just about as well off as the Europeans pre industrialization, and they had sophisticated networks. And so the point is to give them the chance to renew their economies, renew the indigenous economies, so they reflect their original values if they choose to do so.

That is a brilliant response. Thank you so much for sharing your wisdom and your research with us on the podcast today.

Thank you.

I have one last question for you. What is one thing that you believed at one time in your life that you later changed your position on and why?

Well, as I mentioned earlier, I grew up in West Germany and in the mid-eighties there was a big discussion of whether Germans, the West Germany should install cruise missiles and Persian tools, another type of map missile system in West Germany, an action favored by Ronald Reagan and the German government. And there was huge protest movement against it, and I was kind of part of that protest movement. I helped organize some rallies in Bonn against us stationing of these missiles. So I had a sort of more pacifist streak perhaps, perhaps in me. And now I think this is something I probably, I would definitely do not do today, not do today, because it's important to, because there are bad actors out there, so to speak. There are some bad actors out there that can threaten a nation's survivability and a nation needs to be ready to defend themselves, issue credible threats or red lines. And so I think that having a credible, strong defense is the right thing to do.

Once again, I'd like to thank my guests for their time and insight. I'd also like to thank you for listening to the Great Antidote Podcast. It means a lot. The Great Antidote is sound engineered by Rich Goyette. If you have any questions, any guests or topic recommendations, please feel free to reach out to me at great antidote@libertyfund.org. Thank you.