Sunday, August 4, 2013

Short Takes| Facts, not conjecture ...

Gregg Erickson is an excellent state budget economist with a long Alaska history, who is retiring and moving out of state.  As he approaches retirement he appeared on a panel during the United States Association of Energy Economists convention, held this past week in Anchorage.

Some of his remarks were made into a story in Friday's Alaska Dispatch ("An Alaska-sized conundrum -- filthy-rich but a state falling into a fiscal hole").  The story then was the subject of various tweets Saturday by, among others, Sen. Hollis French.  Sen. French's tweet reads, "Long time AK economist expects SB 21 will grow state budget deficits: bit.ly/13b1pmE #akleg@alaskadispatch".

Senator French's interpretation of the Erickson's comments comes from the following portion of the Dispatch story:
That downturn [in revenues] may come faster now that the Legislature cut oil-production taxes by hundreds of millions of dollars a year, said Erickson. 
Politicians and the oil industry have promulgated the myth that lower taxes will reverse the oil-production decline, Erickson said. But he believes oil production that has fallen for more than 20 years as the state's monster fields -- Prudhoe Bay and Kuparuk – are tapped will continue falling. 
"It's a collective hallucination to believe that reducing the state's oil revenue by 10 percent would somehow reduce decline," he said. 
"I believe in incentives, and taxes do make a difference," but examples around the world show the benefits to Alaska will be very small, he said.
With all due respect, Mr. Erickson's reputation has been built on his analysis of Alaska's budget and fiscal structure.  I have not read, because I have found none, any extended analyses by him of oil economics.

On the other hand, such analyses were introduced during the recent legislative session by economists who do have extensive backgrounds in oil economics.

As I have written previously on these pages, in the latter stages of the consideration of SB 21 before House Finance, EconOne, the oil economists retained by the Administration, provided a series of comparisons (at p. 13-19) of future revenue streams under ACES and SB 21.  These analyses demonstrated that at all long term price levels between $90 and $120/bbl ($2012), SB 21 produced a greater net present value for the state than ACES, even if SB 21 only resulted in a 2% change in the decline curve and all of the incremental production was treated as "new" production, and thus, taxed at a lower rate.

SB 21 still outdistanced ACES even at higher (and unrealistic) long-term price levels, if the change in the decline curve was only an additional 1% higher.

As Mr. Erickson's quote recognizes, "taxes do make a difference," and the empirical evidence demonstrates that even if the resulting change in production levels is "very small," forecasts of the most likely outcomes show that Alaska is better off under SB 21, than under ACES.  Thus, rather than what he did write, to be accurate Senator French should have tweeted, "Under most likely outcomes, SB 21 will reduce state budget deficits."

Of course, as I have written elsewhere, there will still be deficits under SB 21 nonetheless because of the current Governor's ongoing and disastrous spending plans.  See "Alaska Oil Policy| Missing the Point" (Alaska Business Monthly, July 2013) ("The Governor's proposed solution isn't much better").  But, when analyzed in detail and not off the cuff, the economic outcomes under SB 21 are better than under ACES.