After hearing from the Dunleavy administration that the budget’s economic impacts are essentially unknowable, an economist told Senate Finance the budget will cost over 7,000 jobs and extend the recession.
Mouhcine Guettabi of the University of Alaska Anchorage (UAA) Institute of Social and Economic Research (ISER) is one of three authors of a 2016 analysis that projected short-term economic impacts of a variety of solutions, from budget cuts to taxes.
ISER compiled that report during debate over the FY 2017 budget. When it was introduced by then-Gov. Bill Walker, that budget included a structured draw from the Permanent Fund, as well as seven tax increases, prompting legislators to question the economic impacts.
Guettabi’s presentation Thursday, March 7, reminded Senate Finance how ISER reached its findings. Using Alaska-specific data, ISER considered the direct, indirect, and induced short-term effects of deficit closure.
“We’re basically looking at how does giving people money or taking money away from them influence the number of jobs and the amount of income that is in the economy,” Guettabi said in the hearing.
“We’re talking immediate effects,” he continued. “But we’re not just concerned about the initial shock. We’re concerned, for example, about how laying off a teacher or cutting $100 million from K-12 affect both the teacher and potentially the vendors to the school, whether it’s cafeteria workers or janitorial services. And then we’re also concerned about the potential spending from the money that teacher used to make. We’re basically following the money throughout.”
ISER concluded that cutting State government jobs is the most harmful thing the State can do to close the deficit. General cuts to the State budget are the second-most harmful action.
“If you eliminate a job… through a government cut, you lose that initial job and then you lose the spending associated with that job,” Guettabi said.
Cutting the Permanent Fund dividend [PFD] is more harmful than raising taxes.
When the PFD is cut, Guettabi explained, “The burden is borne by residents. In all of the other options, we have non-residents essentially paying some of the tax.”
“A decrease in the government spending per $100 million has a bigger detrimental impact on jobs than a decrease in the Permanent Fund [dividend],” Senate Finance Co-chair Natasha von Imhof (R-Anchorage) synthesized. “So if we have comparable choices, we would have less of an impact on the overall economy if we reduced the amount of the dividend by a few hundred million and instead invested that few hundred million into the State, into State jobs.”
“Yes,” Guettabi responded.
Just as cutting the PFD would cost jobs, increasing the PFD to $3,000, as Dunleavy has proposed, would generate jobs.
After applying the 2016 analysis to Gov. Mike Dunleavy’s proposal, Guettabi concluded, “On aggregate, the state would lose more than 7,000 jobs, even after accounting for the stimulative affects of the PFD and accounting for the job losses that will come from cutting agency operations, loss in federal dollars, and potential loss of jobs from the loss of local government.”
The job losses would equal roughly two percent of the 330,000 jobs in Alaska. For comparison, job loss during the current recession has totaled 13,000.
The recession in the 1980s, Alaska’s worst, lasted two years and cost 18,000 jobs.
Senators Weigh Dueling Economic Analyses
Sen. Peter Micciche (R-Soldotna) noted that Guettabi’s employer, the University of Alaska, is facing a $134 million cut in the budget.
“How do you separate your research from perhaps your love for the University, and can you?” he asked.
“Thankfully, the analysis was done in 2016,” Guettabi quipped, adding seriously that ISER prides itself on being objective.
Guettabi’s foil, Office of Management and Budget (OMB) Chief Economist Ed King, gave a presentation Wednesday to the finance committees in both chambers. Legislators were disappointed by the lack of analysis of Dunleavy’s budget proposal.
“After yesterday’s presentation by the administration, it was like listening to a used car salesman trying to sell me what they were trying to get done,” Sen. Donny Olson (D-Golovin) said Thursday.
King’s presentation includes a graph of unrestricted general fund (UGF) spending plotted against jobs to make the argument that “There is no statistically significant relationship between State spending and jobs in Alaska’s history, once controlling for inflation and population growth.”
“I’m trying to figure out who I should believe,” Sen. Bill Wielechowski (D-Anchorage) told Guettabi. “Why should I agree with your interpretation as opposed to theirs?”
Guettabi responded that a proper economic analysis must consider what employment would have been had government spending stayed the same, not just run a statistical regression like King’s.
“It’s a very simplified version of the world to simply say, ‘I’m going to look at the correlation between employment, not controlling for a lot of other factors, not controlling or accounting for macroeconomic indicators,’ and saying that, ‘Budgetary spending is not a determining factor in employment levels.’ I would resist reaching conclusions based on a simplification or an oversimplification of that relationship,” Guettabi advised.
King was given the opportunity for rebuttal in Senate Finance Thursday afternoon. That rebuttal was not well received.
More on that later.
Guettabi said that closing even a portion of the deficit is going to have negative short-term consequences.
“In order to close the budget gap, we have to take money from somebody,” he said.
Guettabi relied on the Legislative Finance Division’s analysis of the Dunleavy budget, which shows $650 million in cuts to State spending and $450 million in lost local government spending due to repeal of petroleum property taxes and fisheries taxes. The tax revenue would be transferred to the State.
“In thinking about the economic effects, it’s really important to think beyond the State cuts. It’s important to think about, for example, the loss in local government revenues. It’s important to think about the loss in federal dollars,” he said.
Considering those factors, Guettabi estimates that Dunleavy’s budget will cost 17,000 jobs.
He acknowledged that the estimate is likely off because he factored in a loss of $500 million in federal funds. Legislative Finance calculates $540 million, while Guettabi said health care experts are telling him to expect more.
Also, Guettabi’s calculation doesn’t include debt service, capital budget reductions, or the elimination of school bond debt reimbursement.
“These three items, are they an economic stimulus or a suppressant?” asked Senate Finance Co-chair Bert Stedman (R-Sitka).
Guettabi answered that his job loss calculation would be larger if they were included, but he didn’t know how to model school bond debt reimbursement.
“It’s not a stimulus. I can assure you of that,” Stedman said of the repeal.
von Imhof critiqued that the job losses from the tax shifts assume local governments spend all the money they receive.
“How communities respond to these cuts will determine the size of the actual job losses,” Guettabi admitted. “There is a tremendous amount of uncertainty how all of this will play out.”
If local governments close their own deficits with taxes, job losses will be lower, he said.
“Do they have the capacity to do so? My back of the envelope says probably not because the North Slope [Borough] would have to impose a tax of about $36,000 per person,” Guettabi concluded.
Guettabi also underestimates the number of jobs a $3,000 PFD would generate because he uses a $1,800 PFD as a baseline, not the $1,600 PFD paid last year.
The 2019 PFD would create 5,000 jobs, according to Guettabi, while Dunleavy’s plan to pay the balance of the 2016 vetoed PFD would add another 4,700.
“What kind of jobs are these?” Stedman asked.
“Our more recent analysis tells me conclusively that these jobs are, basically, jobs that last about three months,” Guettabi told him. “We find that there’s an October-November-December effect, essentially.”
“Are these long-term jobs or short-term jobs?” Sen. Click Bishop (R-Fairbanks) followed up.
Guettabi clarified, “These are short-term jobs.”
Guettabi warned the net job loss of 7,000 changes his previous forecast of slow job growth over the next six years.
“I was expecting the recession to end in 2019. Now, as a result of these changes, I don’t know when that will happen, but it appears that the recession will go on longer because of this negative pressure on employment in the short run,” he told committee members.
The recession would not only become the longest in state history; it would be the worst measured by total job loss.
“I have some consternation when a presenter makes extreme statements like that,” von Imhof said. “To land on this extremist view, on camera, recorded, is just disconcerting.”
“You can’t really control human behavior oftentimes, and that’s kind of what drives this,” she added.
Guettabi reiterated that there is uncertainty in the projections.
“I’m appreciative of the caution that you’re raising,” he told von Imhof. “I’m certainly not trying to be alarmist.”
“The Alaska economy is in a fragile state,” Guettabi insisted. “Adding these cuts to a fragile recession means, at a minimum, extending the recession.”
Potential Solutions and the Impact of POMV
Oil prices triggered the recession that began in 2015. The condition of the economy when the 2016 report was released prompted ISER to recommend a combination of solutions to address the deficit, spread out over several years.
“We felt at that point that the economy was weak, fragile, and therefore the potential consequences from, for example, imposing a tax that would raise $3 billion, which we can’t do, or cutting $3 billion out of government, was just going to have too big of a negative effect on the economy,” Guettabi said.
“The administration is trying to resolve this equation in one year,” Sen. Lyman Hoffman (D-Bethel) noted. “What effects will this have in one year, and would it better be able to be addressed over two or three years?”
Guettabi doesn’t see the situation as having changed much since 2016.
“Because the deficit is so big, anything you do potentially has very large consequences,” said Guettabi. “If we’re too aggressive, potentially that has negative consequences on the economy, as well.”
“Is the deficit big? It was in ’16, ’17, ’18, but is it now?” asked von Imhof.
The co-chair was clearly thinking of last year’s SB 26. The bill established a percent-of-market-value (POMV) draw from the Permanent Fund Earnings Reserve Account (ERA) for government spending.
“You can argue, and rightly so, that the size of the deficit has shrunk because we’re relying more on the Permanent Fund,” Guettabi agreed. “The decision to use the percent-of-market-value stabilized the economy.”
However, a $3,000 PFD consumes $1.9 billion of the $3 billion POMV.
“Can we continue to afford the larger statutory dividend of $3,000?” Hoffman asked.
“We need certainty on what that dividend is,” he continued. “Regardless of what that level is, do you believe that some certainty on the question needs to be resolved to give us an idea of what that deficit is?”
Guettabi said certainty is good for investors and the economy. The only uncertainty is the allocation of the POMV between government and PFDs, and hence, the size of the deficit.
“I still say that we solved 80 percent of the problem last year and the deficit is somewhere between $300 million and $400 million, not $1.6 billion,” Bishop declared, clearly falling on the side of reduced PFDs.
Bishop added that the State has kept capital spending flat for five years.
“We have a tremendous amount of deferred maintenance in this state,” he said. “Our liability keeps increasing year over year over year with State assets. There’s jobs in the capital budget.”
“Based on what you know about the Alaska economy, what would be your recommendation of levers we should pull to avoid the fiscal cliff?” von Imhof asked Guettabi.
“I would caution against taking too aggressive of a step in too short of a period of time,” he replied.
Like 2016, Guettabi suggested a general combination of solutions, but seemed to lean toward taxes.
“A lot of money gets generated in-state, and a significant portion of said money leaves the state, which renders economic development really difficult and renders having these conversations, about where does the private sector step up, that much more challenging,” he said.
Sen. Micciche: Nothing for Private Sector to Help Respond to Cuts
The role and response of the private sector is foundational to the Dunleavy administration’s claims that the budget won’t hurt the economy in the long term.
“The private sector does not have the duty to bail anybody out. If there’s a dollar to be made, they’re going to make it,” Olson commented.
In a real economy, as opposed to a model, King claims that people fill voids created by job loss with other forms of spending.
“How do you bring those two things together?” Micciche asked.
“I’m not sure what ‘fill the void’ means,” replied Guettabi. “Of course, the state will find a new normal. What that will be, I don’t know. Will it be fewer people, fewer government services? That’s a real possibility.”
Micciche noted the budget doesn’t pass the Reaganomics test. There are no income or corporate tax cuts. Nor is there anything else to give the private sector.
“How does the private sector rush in to fill that void when there’s not a positive effect on the private sector?” he asked.
“There is no expansionary component except for the larger dividends,” agreed Guettabi.
That causes Micciche to worry about the oil industry while the deficit persists.
“There’s a giant target on industry right now of people saying, ‘Simple. Let’s just take it out of industry,’” Micciche said. “Is there potential for it to be worse if the uncertainty continues?”
Guettabi estimates that every year of economic uncertainty translates to $200-600 million of lost investment.
“Would you say the industry uncertainty in Alaska is greater than it might be in other resource extraction countries where they have dictators who routinely confiscate assets, assassinate workers, face civil wars, raise or lower taxes at the whim of a murderous dictator?” asked Wielechowski.
“No,” Guettabi answered.
“Let’s hope not,” joked Stedman.
King’s Second Appearance in Senate Finance No Better Than First
The mood was less jovial Thursday afternoon when King returned to finish presenting his analysis.
Unlike Guettabi, King relied almost exclusively on economic theory, suggesting that reducing government spending will spur private sector growth.
“If you solve the problem, whether it’s through the governor’s proposal or some other way, that reduction in uncertainty will generate some stability, which, at least in theory, will generate some additional investment. I can’t say when. It’s probably not going to be right away. It’s probably several years in the future. But the theory supports that a stable environment that has low taxes is going to attract more investment and allow more economic growth,” King told Senate Finance.
“Government does not create jobs,” he declared.
King repeated his claim that someone who loses a job in Alaska will continue to spend money somehow, either from savings or by getting a new job.
“We are not on the precipice of a depression. There is not economic calamity that will result from a change in the budget. It will have impacts. It will not destroy the economy,” he said.
“I take your last comment with a grain of salt,” Stedman told King. “I think some of our communities might disagree with that when they look at their impact at the local level, some of the homeowners that have to make their property tax payment and/or pay their mortgage.”
“Those impacts are real,” acknowledged King.
He said the difference is considering microeconomic impact versus macroeconomic impact. For the State, King called it “a wash.”
“I would respectfully disagree,” Bishop told him.
“Don’t you see an impact, I guess, from a cut to education, for example? Cuts of $300 million. That is going to affect our future workforce. That is going to affect the likelihood that young families stay in Alaska. The cuts to the University are going to affect the decisions that young people make. Do you agree with those?” asked Wielechowski.
King said a job vacated by someone who leaves the state will simply be filled by someone else.
“That doesn’t mean that my job just goes away; that just means that someone who has different motivations will fill it,” he responded. “The labor market still has the demand for that labor.”
While King’s presentation reflects the Dunleavy administration’s claim that PFDs will cause job growth, King’s writings for his private firm, King Economics Group suggest otherwise.
“The PFD has a large impact on the participants within the economy. But it doesn’t actually impact the economy all that much. As best I can tell, more than 90% of PFD distributions don’t enter Alaska’s economy at all. Most of that money gets put in college savings accounts, leaves on airplanes, goes to Amazon, or pays federal taxes. As a result, the PFD doesn’t impact as many jobs as you might think,” King wrote last year. (emphasis in original)
Micciche pointed to the inconsistency.
“Mr. King, I know this is a little uncomfortable, and you’re a good guy. I’m going to smile while I say it. But I’m trying to think about which Mr. King we should ask this question to.”
King proceeded to discount the job growth numbers in his own presentation.
“It doesn’t just create jobs,” he said of the PFD. “It also creates value to people. It allows them to improve the quality of their life. It allows people to buy fuel for the winter or food for their kids or send kids to college or take a vacation or whatever it is that they want to do. Those PFDs have a much bigger impact on people’s individual lives than the job numbers indicate.”
King said job growth is the worst way of gauging an economy.
“I’m stunned on that one,” Bishop responded, adding, “What else does an industry look at? They look at the health and quality of your schools. Are there 40 kids or 30 kids or 50 kids in the classroom? They look at the university system. They look at crime. They look at the roads. They look at the services. Those are all tangibles that a business looks at.”
“I look at this whole thing as a bid proposal. You gave us a rough draft bid proposal. Now we’re going to tear it apart and tell you where we think it’s wrong,” Bishop told King.
King and Tangeman Go Silent
Though he downplayed the impact of jobs, King did estimate Dunleavy’s budget will cost about 5,000 jobs. However, he argued that the economic impact is essentially unknowable and job loss is “unclear.”
Wielechowski highlighted Medicaid, set for $250 million in State cuts and $450 million in lost federal funds.
Last year, King wrote a paper warning of cuts to Medicaid due to its ties to federal funding.
“This is a complex issue with huge ramifications on the economy, the general population, and the budget,” King wrote.
Do you still support that position, Wielechowski asked.
King and Department of Revenue Commissioner Bruce Tangeman started to clam up at that point.
“I’m in a tricky position right now as I’m wearing a hat for the administration, and I would like to not answer that question,” King said.
“I don’t know that you get a pass on that,” Wielechowski told him. “My takeaway from this is your position is it really doesn’t matter what we do. We could increase the budget. We could decrease the budget by a couple billion. It just won’t really have a statistical impact on the economy. And the same for PFDs. Is that a fair statement?”
“I think I’d like to wrap this up,” Tangeman said without answering the question.
Micciche expressed disappointment that King didn’t at least have fiscal options ranked in order of economic impact, like Guettabi.
“I think you demonstrated that cutting the budget by $1.6 billion wasn’t possible, so you also took a shift of local taxes into the State coffers,” Micciche said.
“I love this budget because it really does demonstrate the enormity of the issue for the public. It gives them a couple of choices. Is this the Alaska that you envision, or is there something else in between?” Micciche asked King and Tangeman. “Certainly, you understand that there’s something in between that gets us there in a more reasonable amount of time?”
Once again, Tangeman declined to answer, telling Micciche that was a question best directed to OMB.
Unlike Wednesday, OMB Director Donna Arduin was not present to respond.
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