Economists struggle to calculate impacts of cuts to budget vs. PFD

While economics is so far from perfect science it’s often referred to as an art, lawmakers are still asking leading state economists to quantify the economic effects of Gov. Michael J. Dunleavy’s budget proposal.

One thing is clear: Filling Alaska’s $1.6 billion budget deficit without new taxes and at the same time paying each Alaskan a Permanent Fund dividend of roughly $3,000 adds up to a net negative for the state’s economy.

University of Alaska Anchorage Institute of Social and Economic Research Economist Mouhcine Guettabi said in testimony to the Senate Finance Committee that the administration’s plan to cut approximately $1.2 billion of state agency and program spending and divert another $440 million in historically local tax revenue to state coffers would extend the current recession and result in a net loss of more than 7,100 jobs statewide.

According to Guettabi’s calculations, the spending reductions would cost Alaska approximately 16,900 jobs. Those losses, equating to about 5 percent of Alaska’s current workforce, would be partially offset by a temporary employment boost of nearly 9,800 jobs stemming from a larger 2019 PFD and the eventual payback of forgone PFD amounts over several years.

“How communities respond to these cuts will determine the actual size of the job losses,” he said, adding that if local governments raise taxes to offset the loss of current revenue the impacts to the workforce could be mitigated somewhat.

He also noted that the North Slope Borough, for example, would have to impose taxes in excess of $30,000 per resident per year to fully recoup the gap left by shifting about $370 million in annual borough oil and gas property tax revenue to the state.

Longtime Alaska economist Jonathan King said in February he believes the combined state and federal funding cut of approximately $750 million proposed for the state’s Medicaid program would result in 8,000 jobs lost across the state.

Guettabi and other economists have said they believe the current recession — three years and running — is likely to end late this year absent complicating factors such as significant government spending cuts.

Overall, Alaska has lost about 12,300 jobs since 2015, according to the state Labor Department.

Office of Management and Budget Chief Economist Ed King testified the budget proposal would likely result in about a 5,000-job reduction statewide, but he emphasized that Alaska’s economy is more resilient than at any time in the state’s history and any solution to the state’s budget troubles is going to be felt at some level.

“There’s going to be a negative impact regardless of how you solve this problem. That impact is either going to be an impact on the current economy or it’s going to be a negative impact on future generations, but there’s going to be an impact,” King told the senators March 7. “At some point we need to pay the piper and the economy needs to adjust to the new normal.”

He suggested that private sector entities could backfill some of the direct cuts to state and local government positions. The administration’s budget would directly eliminate 714 State of Alaska positions, according Office of Management and Budget.

Finance Committee members from both parties contended King, who downplayed Guettabi’s job loss projections, tried to avoid their questions about specific impacts of the governor’s proposals.

He said the best way to analyze the health of the state’s economy is not to focus on job numbers but rather to track the money circulating through it.

Many politicians in recent years have lamented the fact that Alaska’s unemployment rate has been the highest in the nation — largely due to a highly seasonal workforce — while the Lower 48 economy has been booming.

At the same time, according to Labor Department figures, Alaskans’ personal income has generally increased despite the job losses throughout the recession, with the exception of 2016. Alaskans earned or received a total of $42.3 billion in 2017, the latest full-year data available.

“The whole picture that somehow we’re on the precipice of economic calamity is just not consistent with the demographics of the state,” King insisted.

Sen. Peter Micciche, R-Soldotna, insisted the administration’s stance that the private sector will step in to fill the void left by a major reduction in government spending is largely a myth because there is no corresponding benefit, such as a tax cuts for private industry or individuals.

The structure of Alaska’s economy generally prohibits the benefits of the traditional conservative “trickle down” economy theory, Micciche said.

Guettabi said in an interview that because the budget cuts would not be accompanied by a corresponding cut to state corporate or personal taxes — the latter of which does not exist — there is no “counteracting effect” that would be likely in other states where government spending is tied to taxes.

“If you’re saying the money has to come from somewhere and I’m taking it from person A and giving to government then obviously the impact is going to be smaller, because that person potentially would have spent it better or at least spent some of it,” Guettabi said to describe the typical relationship between taxes and government spending in other states.

“The Alaska economy is fairly diversified; its revenue sources are not,” he said to the committee.

As is often the case, regardless of the issue, Alaska is different. According to the Fall 2018 Revenue Sources Book published by the Department of Revenue, just $867 million, or 14 percent, of the more than $6 billion in spendable revenue the state is expected to collect in fiscal year 2019 will come from non-petroleum or investment sources, mostly in the form of various industry-specific taxes.

That means the vast majority of the State of Alaska’s funding, whether from resource extraction or Permanent Fund investment returns, is additive to the economy as opposed to recycled tax revenue.

“On the state level we are an ownership state and the resources that we partner with industry to develop through the lease structures that we have in place, the royalty share that we take and then the taxes that we take are in effect new money injected into our economy,” Anchorage Economic Development Corp. CEO Bill Popp said in an interview.

For that reason and others, the large AEDC board of directors, comprised mostly of the city’s business leaders, does not support Dunleavy’s budget plan, according to Popp.

As has been the case for several years, the AEDC board is advocating for “a balance of measured, targeted cuts, identifying new income streams to fund government and to include the Permanent Fund as part of the solution,” he said.

“We’re focusing on the Legislature as being where a balance of different aspects of a long-term fiscal plan can be developed that will not take our state backwards.”

In addition to the state budget reductions, the administration’s proposal would forgo approximately $730 million in federal revenue, much of which would be cut from the Department of Health and Social Services Medicaid program budget.

King in a follow-up interview agreed with the premise that government spending in Alaska has been an economic stimulant — at least since the income tax was repealed in 1980 — but going forward, “the revenue’s not there,” he said.

The alternatives to cutting the budget, such as taxes or PFD reductions, would have the negative corresponding economic impacts Alaska has avoided for nearly four decades, King noted. He added that spending Permanent Fund investment revenue could alleviate the budget problem without immediate negative consequences, but those consequences are then put on future Alaskans in the form of reduced dividends.

“The governor is very focused on that balancing act between supporting the current economy and protecting future Alaskans and the proposal he put forward best solves that problem,” King said.

ISER economists have said a broad-based tax would have a less negative impact on the economy than direct budget cuts because, whether a sales or income tax, it would capture revenue from nonresident workers or visitors.

‘PFD jobs’

Senators also questioned the economists on how they believe the PFD impacts the economy and how changes to it compare to other budget-solving options.

Guettabi said his estimate that the large PFD payments would induce nearly 9,800 jobs is based on an impact analysis done in 2016 when the debate about how to solve the state’s budget problems ramped up.

He acknowledged it is a fairly “generic” analysis given no firm solutions have been implemented. At the time, he suggested Alaska would give up 558 to 892 jobs for every $100 million in cumulative PFD reductions. The range indicates an open question as to how much of each Alaskan’s PFD is spent in the state economy, how much is saved, and how much is spent elsewhere.

For comparison, Guettabi forecasts broad-based state spending cuts would result in losses of 980 to 1,260 jobs for every $100 million reduction.

Economists have generally said determining how Alaskans use their PFDs is an extremely challenging exercise.

He said in an interview that a recent causal analysis he and other ISER economists did regarding PFD spending found that about 2,700 temporary jobs are generated for every $1,000 in per person PFD payments in the three months immediately following the distribution.

“The way I think about the jobs that are created is that they are ‘demand induced’ jobs, meaning retailers or people that are in businesses that depend on household spending basically make short-term hires in order to deal with the rush or increase in demand,” Guettabi explained.

The months immediately following the early October PFD distribution are also the prime holiday shopping period, which is a boon for retailers Outside as well.

While King attempted to rebut Guettabi’s estimates in regards to job losses, he asserted in his presentation that injecting money into the economy would spur more spending and create additional labor demand to the tune of 14,272 jobs — a figure based on the high-end of Guettabi’s PFD jobs projection.

However, Micciche — while emphasizing that it is appropriate to advocate for the PFD as a policy matter —noted that King discounted the impacts the dividend has on Alaska’s economy when he was a private economist.

King wrote in an article published on the website for his firm King Economics Group last September that his study of the issue concluded that up to 90 percent of PFD income bypasses Alaska’s economy.

“I was surprised to find that there is no statistically significant relationship between PFD payments and changes in jobs,” King wrote. “Not even if I try to find one by lagging the time periods.”

Most PFD money goes towards college savings accounts, vacations, federal taxes and other non-stimulating sources, according to King.

Micciche acknowledged that King is now in the very different role of advocating for Dunleavy’s policy priorities.

For his part, King told the Finance Committee that while the PFD may not have a big influence on Alaska’s economy as a whole, it is a big deal to many individuals in the state.

“When you look at what the PFD does, it doesn’t just create jobs, it also creates value to people. It allows them to improve the quality of their life. It allows people to buy fuel for the winter, or food for their kids, or send their kids to college or take a vacation or whatever it is they want to do,” he said. “Those PFDs have a much bigger impact on people’s individual lives than the job numbers indicate.”

Elwood Brehmer can be reached at [email protected].