Friday, September 30, 2016

Alaska is now formally in a recession and Bill Walker singlehandedly is making it much worse ...

Generally speaking, an economic recession is defined as "a significant decline in activity across the economy, lasting longer than a few months."

According to Investopedia, "[t]he technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP)." Because it is a state, Alaska's equivalent measure is Gross State Product (GSP).  Estimates of Alaska's GSP are published quarterly by the federal Bureau of Economic Analysis (BEA).

Applying the classic definition, Alaska is in a recession, and has been since the 4th Quarter of last year (2015), when Alaska GSP declined for the second quarter in a row.  Starting at the 1st Quarter of 2015, Alaska's GSP (current dollars, seasonably adjusted) has measured ($mil) $53,209 (1Q 2015), $54,203 (2Q 2015), $52,244 (3Q 2015), $51,560 (4Q 2015) and $50,592 (1Q 2016). 

Even measured in "real" (i.e., inflation adjusted) dollars (2009 chained), the trend -- and thus, the conclusion -- remains the same: $49,593 (1Q 2015), $49,969 (2Q 2015), $49,018 (3Q 2015), $48,855 (4Q 2015), $48,729 (1Q 2016).  Alaska is in a recession.

According to a typical macroeconomic text,
Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble.   
Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. 
Well, except in Alaska it seems.  At a time when the Alaska economy already is showing signs of significant wear and tear, Governor Walker's recent decision to veto and retain more than half the PFD in a government savings account -- rather than distribute it into Alaska's weakening economy --is the exact reverse of the normal response.

By depriving the economy of the statutorily contemplated influx of PFD-related activity, the result is to make Alaska's economic situation worse.  The Governor's unilateral decision is moving Alaska deeper into an economic recession, not making it better.

And not by a trivial amount.  The BEA also measures "Personal Income" at a state level.  "Personal Income" equals the "[i]ncome received by persons from all sources. It includes income received from participation in production as well as from government and business transfer payments."

As of 2Q 2016, the BEA estimates Alaska's current total annual "Personal Income" level at around $41.7 billion.

Applying the adjustment factors included in ISER's report last year to measure the total effect of PFD cuts on the overall economy, the effect of Walker's initial $670 million PFD cut translates into a adverse impact on total Alaska income of between $870 million (1.3x) and $998 million (1.49x). (The adjustment factors are at "ISER, SHORT-RUN ECONOMIC IMPACTS OF ALASKA FISCAL OPTIONS," at III-9.)

That reduction amounts to between 2.1 and 2.4% of current Alaska "Personal Income". 

Put in perspective, at the very time Alaska already has entered a recession, those reductions alone have wiped out all gains in personal income otherwise achieved since the first half of 2014.

If the cause of a recession in the first place is "a widespread drop in spending," Walker's PFD cut singlehandedly is making Alaska's already tenuous situation even worse, reversing nearly two years of income growth in one fell swoop.  

Why would he do that?  Because in all honesty, the Governor doesn't seem to care about Alaska's overall economy.  Since the start of his Administration his focus has been almost entirely on taking steps to preserve Alaska's government economy even, as now, at the expense of Alaska's private and overall economies.

Government -- and Governors -- should care about their state's overall economy, for the very reason demonstrated here.  They can do a lot of damage when they don't.

Hopefully, others will realize and work to reverse that effect in the coming session.

Wednesday, September 28, 2016

How the PFD makes the Alaska economy operate more like Texas and less like ... Angola

Sometimes in the course of talking about things, Alaskans become so insular that they lose sight of the larger world.  The PFD is one of the things that tend to trigger that.

Having worked in and around the oil and gas industry my entire career I have never found the PFD to be all that remarkable.  It is, in essence, simply Alaska's version of the royalty payments made by producers to royalty owners throughout the L48.

In the Lower 48 producing states, private landowners own the minerals under their lands and thus, receive royalties when they lease those lands to producers and the producers, in turn, start production.  Under the statehood act, individual Alaskans largely are prohibited from owning what lawyers refer to as the "mineral estate" -- the minerals underlying the state's surface.  Instead, those interests -- at least those under the lands owned by the state -- are held by the state government.

Absent any further action, that essentially would have made the Alaska economy more like Angola than Texas. The state would have received the royalties and those (few) who run the government would have decided where it was spent.

But the PFD changed that.  It essentially took a portion of the royalties and distributed them equally to individual Alaskans.  It treats individual Alaskans as, what lawyers would call, "tenants in common" of a portion of the mineral interests and distributes the payments to them in exactly the same fashion as occurs when multiple landowners own equal interests in a producing property in the L48 states.

The result has been to make the Alaska economy operate much more like Texas than Angola.  It puts a portion of the royalties in the hands of individuals, who then decide individually where to spend the money.  It makes the Alaska economy operate much more as a free-market, than a state-controlled economy.  It has helped create and support a private Alaskan economy free from state domination.

The Governor's veto action this year, and longer-term SB 128, the Senate-passed version of the permanent PFD cut, does much to reverse that effect and begins again to make the Alaska economy look much more like the state-controlled economy of Angola than that of free-market Texas.  The irony is that SB 128 was supported by a number of Republican legislators who otherwise talk a good game about being free-market oriented, but failed to walk the talk when the rubber met the road.

All this came back to mind yesterday during a Facebook conversation.  For those interested, the relevant part follows:

Darren Hull What people aren't talking about is the simple fact that this is a tax on the poor... the state needs money. Period. If an income tax or sales was implamented it would have cost the more affluent Alaskan way more than one 1000 dollars a year. Meanwhile, the dividend hits the poorest the hardest. I haven't heard much talk about that.
Myranda Walso Where have you been? I have heard that almost nonstop on fb and even in coffee shops and at the grocery store!
Darren Hull Haha well not that angle.
Craig Medred Darren: i've heard that argument often, and it's bull. yes, the cut in dividends is a harder blow to the poor than to the rich. what isn't? but when government refuses to give you money you've done nothing to earn, that is simply not a "tax.'' a tax is when the government takes money you've sweated to earn. i've only been here since 1973, but what i've seen in the years since then is that just giving people money is not really a good thing. it is better for them to earn it even if you have to establish make-work programs. handouts are corrosive. rich or poor, handouts, be they from government or old family wealth, almost always bring out the worst in people.
LikeReply619 hrs
Brad Keithley Craig ... Uhhhhhhhhhhhhh, I (hugely) beg to differ. (And, Akis, I am surprised.)
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Lee Baxter Context matters. As far as the income tax argument goes, this isn't income people earned from working in a coal mine. It's a check from the government from breathing. I feel a lot less guilty reducing free money than earned money.
LikeReply217 hrs
Craig Medred Brad Keithley i don't disagree the consequences here weigh more heavily on poor Alaskans than rich Alaskans, but i'm a word guy. this is not a tax, which in any and all definitions is a "requirement to pay.'' nobody is required to pay anything here. people are simply getting less of a government gift. the tax argument is, to me, a phony argument. the better argument is that the PFD is one of the state's major economic drivers, and that the economic whole stands to gain more by cutting the budget to retain the dividend than cutting the dividend to retain the budget.
LikeReply217 hrs
Brad Keithley Craig (and Vasilios) ... And we go back to the age old debate of whether the PFD is a "right" or a "privilege."

My perspective comes from having continually dealt over the decades with royalty payments received by private landow
ners and their progeny in the L48, all of whom at least initially also did "nothing" to earn the payment other than to happen to own the surface under which oil was found at some point. At first blush, individual Alaskans were prevented from enjoying the same benefit because, under the statehood act, individuals largely are not otherwise permitted to own mineral interests.

But through the PFD Hammond -- I think ingeniously -- came up with a way to put Alaskans, and the Alaska economy, on an even playing field with their L48 counterparts. He indirectly did what the statehood act prevented happening directly; he -- like in the L48 -- gave individual Alaskans a direct share in the wealth produced from the lands that they own collectively (what lawyers might call "tenants in common"). Like royalty payments do in the L48, he put a portion of the region's mineral wealth in the hands of the private sector, rather than concentrating all (or most) of it in the hands of the select few that control a government economy.

Sometimes I wonder what those who argue so vehemently in Alaska that the PFD is a "handout," "free money," "welfare" or "socialism" say when they go home to visit their Texas, or Oklahoma, or Louisiana -- or Montana -- cousins, all of whom either directly through receiving royalties or indirectly through being the beneficiaries of a stronger private and overall economy, have benefited from treating royalties there as a "right." Do they call them handout recipients for having taken or benefited from their royalties, or argue for higher tax rates (or just outright government confiscation) of their royalties because they didn't have to "sweat" to earn the money? I strongly doubt it. I suspect, instead, they congratulate them on being beneficiaries of the private enterprise system.

What Hammond, Tillion and others have created through the PFD in Alaska is the functional equivalent. And having defended royalty owners (and the private economies of those states) against claims by others that they don't deserve the money anyway because they didn't make the investments (or incur the sweat) necessary to produce it, I take the same position with the PFD.
LikeReplyRemove Preview416 hrsEdited
Craig Medred Brad: you should be a lawyer!
LikeReply216 hrs
Lee Baxter When I visit my friends in Montana, they pay income taxes. Oklahomans pay state sales and income tax. Texans pay sales tax. Louisanans pay state sales tax and income tax.
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Brad Keithley Lee ... To be precise, your Montana friends receive royalty money for their mineral interests. Alaskans similarly receive money for the mineral interests they own as tenants in common. 

Alaskans may or may not choose to pay income taxes and if they 
do, just like your Montana, Oklahoma and Louisiana friends, the calculation will include income from their mineral interests. None of your Montana, Oklahoma, Texas or Louisiana friends pay a separate, head tax on their royalty income; neither should your Alaska friends.
LikeReply115 hrsEdited
Craig Medred Lee Baxter yeah, sales taxes seem to be everywhere these days. they nail you for 12 percent in Vancouver, B.C.
LikeReply15 hrs
Lee Baxter But I want to not have to pay anything! I don't want to pay for state services at all. Not a sales tax, or an income tax, and I want a check each year for breathing.
LikeReply15 hrs
Lee Baxter Brad's a Hammond man. I'm a Hickel man.
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Brad Keithley Lee ... Just like your Montana friends receive royalty money each year for breathing. To use Craig's words, they don't sweat for it, they don't work for it, they just get it ... yet, no one there proposes a head tax on just that portion of their income. 

Hahahaha; this is much, much more than Hammond/Hickel. This is about the overall Alaska economy v. those who just focus on the government economy.
LikeReply114 hrsEdited
Lee Baxter You follow Hammond's view of the permanent fund based on individual ownership of state mineral resources. I follow Hickel's view of common ownership of state mineral resources. It's a live debate without a "correct" answer.
LikeReply14 hrs
Brad Keithley Interesting you should say that. Here is what Hickel's son said his father meant: "Balancing the state budget by capping the PFD is a huge step in the wrong direction. ... My father, the former Gov. Walter Hickel, stressed that the people of Alaska own our natural resources in common. ... The Permanent Fund dividend belongs to each individual Alaskan and it should be used by each individual as he or she determines best. It should not be used to pay for government. Once we start raiding the fund and the dividend, we most likely will never get them back. It could easily become a slippery slope leading to the ultimate demise of the fund and the dividend."
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Lee Baxter The Courts will tell us soon enough. And then it will be the law of the land.
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Lee Baxter Dr. Hickel remembers his father's opinion on this subject differently than the others that have written about Hickel. Instead of playing who's got better hearsay, we can just wait for Judge Walker to let us know the law.
LikeReply14 hrs
Brad Keithley I am always fascinated by this debate. 

Basically, those who argue that the level and existence of the PFD exists at the whim of the state are arguing that the Alaska economy should be structured more like China, Angola, Equatorial Guinea and countle
ss other nations (where mineral royalties/revenues are treated as the property of and to be disposed at the discretion of the state) than Texas, Louisiana, Oklahoma, Montana, North Dakota, where by leaving them in private hands such revenues have been used to create substantial and significant private and overall economies. 

Hammond (and according to his son, Hickel) worked to find a way to strengthen Alaska's private economy by, as in other states, ensuring that a significant portion of the revenues are distributed through individual decisions. We will see if we can preserve that vision.
LikeReply14 hrs
Lee Baxter How many years of PFDs before we have this significant private economy?
LikeReply14 hrs
Brad Keithley Lee ... We already have it. Converting the PFD from the private to government economy will undermine it.
LikeReply2 hrs