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.

To my many friends in the oil industry, I am increasingly repelled ...

Former Senator from Louisiana and long-time US Senate Finance Committee Chair Russell B. Long had a saying to summarize the positions often taken by lobbyists on tax policy: "Don't tax you, don't tax me, tax that fellow behind the tree."

I am reminded of that saying often when reading or listening to something from one of Alaska's Top 20% (of income) about Alaska's current fiscal situation. Their plea (especially when writing or speaking in one of their media or trade association echo chambers) tends to be, "Don't tax you (the oil industry, the source of much of the Top 20%'s income), don't tax me (with an income tax), tax the other 80% of Alaskans behind the tree with PFD cuts."

That saying came to mind again when reading rumored R gubernatorial candidate Scott Hawkins' latest piece in Top 20% mouthpiece Must Read Alaska. "Worst negotiators in modern Alaska history?," https://goo.gl/rwQSxx. It is largely yet another screed about why we need to save "the state" (but in reality, mostly the Top 20% whose businesses, like Hawkins, are tied to the oil industry) from the evils of changes in oil taxes (some of which were recommended a couple of years ago by an R led task force).

Imagine the even greater outrage Hawkins and others in the Top 20% would be voicing if someone was actually proposing to increase government take on the oil industry or, perish the thought, their income, by 30%, 16%, 9% or heck, even 5%. We already have heard the screams of outrage at the House's proposal to convert to government, on average for a family of four, 4.5% of the Top 20%'s income through a combination income tax/PFD cut.

Yet, that is exactly what the Top 20% proposes to do to middle and lower income Alaskans. As we have discussed previously (and is reflected in the attached chart), again for an average family of four, the Top 20%'s preferred Senate alternative proposes to take over 30% -- nearly a third!! -- of the income of the lowest 20% of Alaskans, nearly 16% from the next tier (lower middle), nearly 9% from the next tier (middle income), over 5% from the next tier (upper middle), but only 1.9% -- not even 1/15th of what they propose to take from the lowest 20% -- from themselves.

Personally, I am increasingly repelled by such seemingly non-stop, self-righteous pleas by some in the Top 20% on behalf of themselves and the oil industry. I remain firmly convinced we need to approach changes to oil taxes with extreme caution in order not to undermine the gains made in investment and production levels through SB 21. But I have to admit I increasingly understand the motivations of those pushing for larger changes when reading articles from Hawkins and others in the Top 20% defending the current structure while at the same time supporting massive increases in government take (through PFD cuts) from lowest, lower middle, middle and even upper middle income Alaska families.

To my many friends in the oil industry I would say that those who are defending the industry in that way aren't doing the industry any favors.

Instead, at least in my mind, they increasingly are tying the industry in many minds with the worst of the elitist, self-serving, Scrooge-like and anti-economic -- remember, cutting the PFD has the "largest adverse effect" of all of the so-called "new revenue" options on the overall Alaska economy -- rhetoric coming these days from the Top 20%.

That seems the surest way to lose the looming oil tax battle, not win it.

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.

We also believe going down that road best serves the interests of those -- like us -- focused on maintaining and expanding productive oil investment in the state. In our view, the road outlined by Hawkins and others -- which preserves their and the industry's position but at the increasing expense of average Alaskans -- ultimately leads to a whiplash in oil policy and a return to the policies of 2007-13. -- Brad Keithley, Managing Director, Alaskans for Sustainable Budgets

Why the oil industry -- and even the Alaska Journal of Commerce -- should support maintaining the PFD as is ...

While he likely doesn't realize it, Alaska Journal of Commerce editor Andrew Jensen's latest editorial makes a compelling case for keeping the PFD as it currently is structured. "AJOC EDITORIAL: 75 million reasons SB 21 is working," https://goo.gl/EG2rrS.

As we have explained at the beginning of every presentation we have done over the past two years on Alaska's fiscal situation we believe the Administration's dismal revenue forecasts (which in turn have driven the discussion about the "need" for "new revenues") are off significantly because they lowball both oil price and production. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo at 3-8.

While Jensen uses the data for another purpose, the editorial does an excellent job outlining the case for why the Administration's production forecasts are off (way off). Correct those for the reasons Jensen outlines and the price numbers to reflect the non-politically driven forecasts from the federal Energy Information Administration, International Energy Agency and others, and Alaska's fiscal situation becomes much less bleak and the resulting "need" to cut the PFD or reach for any other so-called "new revenue" measure much less credible.

But as good a job as it does on that point, Jensen's analysis completely misses the mark on another key component in the ongoing debate about oil taxes.

Jensen's piece focuses mostly on trying to make out a case for retaining SB 21. We agree with his argument as far as it goes.

But SB 21 did not survive the 2014 referendum (and will not survive the current and future attacks) solely because it may be "successful" in maintaining production.

Instead, SB 21 survived the 2014 referendum because Alaskans saw a direct connection between that goal and their well being. Yes, Alaskans engaged in or related to the oil industry supported it because of the prospect of increased jobs, and some of those tied to the government may have done the same because of the prospect of increased state government revenues (and thus, job security).

But that wasn't the reason large numbers voted to sustain it. The reason for that? Because ordinary Alaskans also saw a direct benefit to themselves from incentivizing increased investment and production.

Oil industry types like to tell themselves in their echo chamber that is because Alaskans accept the generalized notion that the economic benefits of increased oil industry activity somehow trickle down to ordinary Alaskans.

But, in fact, the closest tie to the oil industry for the vast bulk of Alaskans is the PFD. Alaskans intuitively understand that increased production means more contributions to the Permanent Fund, and ultimately from that, a higher PFD. Many support the oil industry, and thus, supported SB 21 because, as Alaska shareholders, they see it as leading directly to increased money in their own pocket even if they aren't directly involved in the industry.

The Alaska Senate Majority and Alaska House Majority Coalition proposals to cut and cap the PFD undermine that link. Rather than providing a tangible and significant link between the oil industry and average Alaskans, a reduced, capped and largely stagnant PFD will dramatically change the dynamic.

Instead of viewing the oil industry as a source of ongoing income directly to them (no "trickle down" required), average Alaskans increasingly will come to view the industry as an alternative source for funding government. Upper middle, middle and lower income Alaskans will view the PFD cut as taking money from their pocket, which instead could (and increasingly will in their view, should) come from those better positioned to pay, i.e., the oil companies.

Rather than viewing the oil industry as a means of growing the pie to the benefit of all, Alaskans will view their share as stagnant to declining with the only hope for improvement (or avoiding further decline) dependent on shifting some additional share of the responsibility for funding government to the oil industry.

Yes, SB 21 is working and retaining it is good for the oil industry, their employees and others tied to it. But for it to retain broad public support it has to mean something significant as well to average Alaskans. The PFD is the way that occurs and maintaining the PFD as currently structured is as -- if not more -- important to retaining broad public support for SB 21 as anything else.

In short, working as intended isn't enough; working successfully has to mean something -- and something more than trickle down -- to ordinary Alaskans.

So, if Jensen's purpose in writing the editorial was to lay out the case for retaining SB 21 long term he missed an important step. He missed the connection to average Alaskans. In our view that requires retaining the PFD as currently structured as well.

If ordinary Alaskans believe they stand to realized a significant benefit in a successful outcome, they will continue to support it. If they start to view the industry merely as an alternative means of relieving an increasing burden of funding government, they won't.

My conversation with Mark Colavecchio ...

Yesterday I joined Mark Colavecchio on his morning talk radio show on KFQD to discuss Tuesday's hugely disappointing HFIN vote to move more than $4B (more than half the current total realized amount) out of the Permanent Fund Earnings Reserve Account into the general fund, as well as the adverse effect of two leading fiscal restructuring bills (HB 115 and SB 70) on both Alaskans and the overall Alaska economy.

My written comments on Tuesday's HFIN action are here:  Alaska's fiscal and economic doomsday clock moved significantly closer to midnight," https://goo.gl/pT51xr.  My comments on HB 115 and SB 70 are here ("We don't always agree with Gregg Erickson, but we certainly do on this piece," https://goo.gl/pdvEyb) and here ("Comparing the impact of SB 70 v. HB 115 on the overall Alaska economy," https://goo.gl/WpmOCl).

Mark and I expanded on both during the conversation.

The conversation is available here, or at the link below:

This morning's discussion with Paul Jenkins ...

This morning I joined Paul Jenkins on air for a bit to discuss the Alaska budget.  Paul is the editor of the on-line newspaper Anchorage Daily Planet and is sitting in this week as the guest host of the Rick Rydell Show.  Paul is someone I have joined on air a number of times over the years when asked.

Paul and I started with my take of the Governor's proposed budget and went from there.  My point, as it has been consistently, is that the Governor and his proposed budget are focusing only on the government economy and, in the process, hurting the private and more importantly, overall Alaska economy.

The discussion provides a good overview of the problems I see with the Governor's approach, and what I view as the better way forward.  Those interested can listen in by clicking on "start" icon below, or by going to the link here:  http://650keni.iheart.com/media/play/27568778/?timeCodeStart=3130.

The conversation starts at 52:10 into the segment.

Our first takeaways on the FY 2018 #AKbudget ...

Earlier last month we published and discussed on these pages a worksheet we had prepared to evaluate the Fall 2016 Revenue Sources Book, and FY 2018 Budget and related 10-year forecast.  What we will be looking for in the Revenue Sources Book and Budget ..., https://goo.gl/1kutBL.

Yesterday, the Administration simultaneously published both the Fall 2016 RSB, https://goo.gl/mCPfgH, and proposed FY 2018 budget/10-year forecast, https://goo.gl/R8GxSI.  This morning we filled in the worksheet, adding three more points of analysis -- "PFD as a Percent of Earnings," "Total 50/50 Draw on PF" and "Percent of PF Earnings Taken by Gov't."

While we will write on the budget much, much more in the days ahead, there are a few things that leap out almost immediately from the spreadsheet.

First, as we anticipated might happen projected oil revenues are being driven down by what we believe to be arbitrarily low oil price and production numbers.  While the FY 2018 oil price number is effectively the same as that forecast by EIA, the state's projections quickly depart from EIA's, falling effectively to 80'ish% of EIA's in two years. The production numbers are surprisingly lower from the outset and will deserve more attention in the days ahead.   The effect of these differences are significant, as low oil price and production numbers produce low oil revenues, which in turn produce high deficits, which then in turn drive the perceived need for so-called "new revenues" from PFD cuts and other measures.

Second, while the Administration and others attempt to continue to sell the restructured PFD as still "half" of that produced under the current statute, the spreadsheet reveals that it both starts lower than half, and quickly falls even lower, to about a third of that provided under the current statute by FY 2027.  Put another way, the level of the PFD cut proposed by the Administration will reach nearly two-thirds by FY 2027, just ten years from now.

Third, the split of Permanent Fund earnings between the PFD and government also quickly deteriorates.  Far from Governor Hammond's original vision that individual Alaskans receive 50% annually of the earnings produced by the Permanent Fund, under the proposed budget individual Alaskans start with only 23% in FY 2018, which then deteriorates further to 18% by FY 2027.

Finally, although the Administration says that they are abandoning so-called (but no longer necessary) "inflation proofing," they aren't taking maximum advantage of the Permanent Fund earnings stream.  Calculated using the rolling five year average of earnings currently used to calculate the PFD, the Administration is only utilizing 81% of the available revenue stream in FY 2018, falling to 68% by FY 2027.  Calculated using instead the annual revenue stream without averaging, the Administration is only utilizing 76% of the available revenue stream currently, falling to 66% by FY 2027.

Not utilizing the full revenue stream while at the same time cutting the PFD has largely the same effect as so-called "inflation proofing."  It continues to build up the size of the Permanent Fund at the same time as cutting the benefits from it to the current generation of Alaskans.  It also leaves untapped additional sources of available governmental revenue, while at the same time taking money out of the private economy, worsening the recessionary effect on the economy more than necessary.

At first glance we have not found any explanation for the approach, particularly in the current recessionary economy, and are unclear what it could be.

In sum, at first glance we believe both the revenue projections and the budget raise significant issues that reflect on both its reliability and fairness to Alaskans.  We will be talking about that much more in the weeks ahead.

Catching up on the blogs ...

Hmmmm, from the blog, Must Read Alaska (Dec. 5, 2016):

"Where is the business community and who might emerge as a person with the courage to lead during the toughest fiscal situation since the late 1980s? Who has the business credibility, grasp of the issues, potential for broad electoral appeal, and the political savvy to put together a strong campaign?

Some mention the name Brad Keithley, but he’s not likely to pass the opposition research test. As a career attorney, his profession can hurt him.

Others say Joe Beedle (Northrim Bank president), but Joe has landed the job of a lifetime. He has not shown political ambitions, preferring to move the needle in lower key ways.

John Sturgeon has almost folk hero status in Alaska after battling the Park Service all the way to the U.S. Supreme Court. He’d have to re-register as a Republican, but he does have broad appeal because of his David-and-Goliath taking on of the federal government."

For the complete article, go to https://goo.gl/99BvgJ.