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.