Monday, July 10, 2017

Alaska's recession is getting worse and government is making it even worse yet ...

The latest Alaska GDP (Gross Domestic Product) update paints a dismal picture of an already weakened Alaska economy that is growing even more bleak. https://www.adn.com/business-economy/2017/07/07/alaskas-gdp-just-saw-its-longest-decline-on-record/

What is going on here? A recession. The National Bureau of Economic Research defines an economic recession as this: "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." The Alaska economy is down on all those measures.

What causes a recession? "Recessions generally occur when there is a widespread drop in spending (an adverse demand shock)."

What cures them? "Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation."

How has Alaska government responded to the state's current situation? Bizarrely, by doing the exact opposite.

Instead of taking steps to increase the amount of money & spending (driven by income) in the Alaska economy, government has contracted it by taking money out.

How has it done that? By dramatically reducing the PFD, the economic channel that, according to a March 2016 ISER study, has the greatest income multiplier -- i.e., produces the most overall Alaska income -- of all the fiscal options available to the government.

What has it done with the PFD? There are two ways of looking at it, both bad. One is that the government has sidelined the money, leaving it in savings, reducing income (at the very time Alaska needs it most) without replacing it at all. The second way of looking at it is that government has redistributed the money as government spending. The problem with that is that the level of overall Alaska income generated when redistributed through government spending is much lower than when distributed and spent by individual Alaskans through the PFD. Indeed, when spent as capital spending the multiplier effect is even negative (as in, a large chunk of the money leaves the state's economy immediately without generating Alaska income).

Either way you look at it state government has and continues to make the overall recession worse, not better. That is a development which, if Alaska had the same type of economic press coverage as occurs at the national level, would cause public outrage and likely doom the reelection prospects of all those involved.

And even more disappointingly, state government has made the economic situation of many individual Alaska households -- and indeed, those that can handle it least -- even worse still. Rather than spread the burden of its adverse actions across the spectrum of Alaskans proportionately (by income, the best measure of how Alaska families are capable of handling the burden), by cutting the PFD government has focused the bulk of the burden on lower, lower middle, middle and even upper middle income Alaska families. Astonishingly, those allocated the smallest share of the burden -- the Top 20% of Alaska families by income -- are those who would be the best positioned to bear the most.

Even more astonishingly, Alaska Democrats/Independents, who one would normally expect to resist such massively disproportionate results, are largely as culpable as Republicans in these efforts. The Alaska House Majority Coalition's proposed blend of PFD cuts and income tax is so heavily weighted by the PFD reduction component (which caps the PFD by converting the calculation from realized earnings to a POMV, then cuts the PFD further by reducing it from 50% of the resulting "new earnings" stream to 33%) that the disproportionate impact on lower, lower middle, middle and upper middle income Alaska families is only slightly less draconian than that proposed by the R-led Alaska Senate Majority.

If you think Speaker Bryce Edgmon, Majority Leader Chris Tuck, Finance Co-Chair Paul Seaton, "Independent" House Finance Committee members Reps. Jason Grenn & Dan Ortiz, or any other member of the House Majority Coalition is looking out for the interests of the overall Alaska economy or the bulk of Alaska families any better than the Senate Republicans, you are sadly mislead. All that they are proposing to do is redirect the money they are taking out of the overall Alaska economy to a different set of recipients. That set of favored recipients will be better off, but the overall economy will still be headed to the same place.

In short, from the perspective of the overall economy and the bulk of the Alaska families -- what we focus on most -- all that the House Majority Coalition is doing is largely taking a different road to the same place.

It doesn't have to be this way. As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

If government is going to make Alaska's economic situation worse by pulling money out of the private sector and respending it less efficiently through government, at least the burden of the mistake should be spread proportionately across Alaska's families, not concentrated on any one sector.