Sunday, July 30, 2017

The thing that's missing from the public discussion of our economy

To us, part of the reason why the importance of the PFD cuts is not well understood (and thus, being trivialized by some) is because the public discussion of the state's economy continues significantly to overweight the importance of jobs data and underweight the importance of income.  "How bad is Alaska’s recession? Economists call it ‘moderate’ so far",  http://bit.ly/2vcdVKJ.

From a macroeconomic perspective, jobs -- on which this ADN story and much of the public debate focuses -- are important largely because they help to generate income, the amount of money being injected into the economy, which in turn, drives the level of money circulating in the economy.

But in Alaska "jobs" are not the only thing that drives income.  The PFD also is a significant contributor.  In fact, at least one study suggests on per dollar basis the PFD is an even larger contributor to income -- and thus, the overall Alaska economy -- than jobs. According to the March 2016 ISER analysis of various state fiscal options, taking into account the multiplier effect a dollar spent preserving a state job generates roughly $1.30 in overall Alaska income.

A dollar distributed as a PFD, however, generates roughly $1.40 in overall Alaska income, roughly 7.5% more than if spent preserving a state job. "SHORT-RUN ECONOMIC IMPACTS OF ALASKA FISCAL OPTIONS," http://bit.ly/2vVJOoC at III-9.

The continued reduction in Alaska income (adjusted for inflation) is a significant part of what is really driving the storyline for Partycraft -- the centerpiece of the ADN's piece -- and other parts of the state's retail sector. There is less overall income in the economy, individuals have less and thus, are spending less.

 And a significant contributor to the decline in income over the past two years has been the PFD cuts. Counting the multiplier effect, the cuts have pulled nearly $1 billion (roughly 2.5%) of overall income annually out of the state's $40 billion income economy now, two years running.

Especially in an economy already in a recession, cutting income by an additional 2.5% is hugely counterproductive. For those that do better thinking about things in the context of jobs, using the ISER data the PFD cuts are the equivalent of laying off roughly 7,500 state workers (which, counting the multiplier effect would result in 12,000 total job losses statewide).

Just think of the headlines that would generate -- "Walker to lay off 7,500 state employees".  Yet, that is exactly the macroeconomic equivalent of what Governor Walker last year, and the state legislature this year has done with the PFD cuts.  Resulting headlines about the macroeconomic effect on the economy?  None.

Job declines are important, but it's the overall loss in income -- which is being supercharged by the PFD cuts -- that is the real story.  But that is a story not being told well, and thus, not affecting policy the way that it should.