A new study shows that Alaska's economy will crash on the scale of the 1980s recession, regardless of how the Legislature handles the state's deficit. What is being decided in Juneau is whether the calamity will be much worse.
Gunnar Knapp, director of the University of Alaska Anchorage's Institute of Social and Economic Research, downplays the severity of the coming crash if the Legislature picks the best options outlined in the report he presented last month. But the numbers speak for themselves.
The percent of Alaska's job losses from state budget cuts, taxes and reduction of Alaska Permanent Fund dividends — and all three appear necessary — will be as much or greater than the 7 percent job loss when the economy tanked between 1986 and '88.
"That would be what our numbers say," Knapp agreed.
And that's the best-case scenario.
If the Legislature mishandles the situation, as it appears poised to do, judging by some legislators' hard-line attitudes, then an economic crash could come with an impoverished long-term future.
After looking at the numbers in the report, I realized we have focused too much on the differences between the current situation and the '80s crash, when 14 banks and other financial institutions failed and the population shrank by more than a tenth.
The differences are real. In the '80s, excessive state spending created a bubble in the construction and real estate industries, devastating the economy when the bubble burst. This time we don't have a bubble. That means the crash will hit slower, hurting industries other than real estate.
But a downturn of similar scale for jobs and income is unavoidable because reduced oil prices and production have stopped the flow of billions of dollars into Alaska, most of which reached our economy through government spending.
"We've lost billions of dollars that aren't coming back," Knapp told Commonwealth North on Thursday. "We have to adjust to this."
The report, "Economic Impacts of Alaska Fiscal Options," doesn't consider the option of higher oil taxes, which is a gaping and inexcusable hole. But that's not ISER's fault. Knapp wasn't given time or money to adequately look at all aspects of the problem.
Gov. Bill Walker's administration funded the study for $60,000. The Legislature hasn't done even that much.
When we're done with the current crisis, we should fire legislative leaders who waited until the brink of the precipice to start asking serious questions. Decisions they make now will affect the economic life of every Alaskan, and they are making them in a rush, groping in ignorance, because they didn't do their homework.
Knapp's shocking conclusion is that even if the Legislature makes the best choices, closing the current $3.8 billion deficit would cost up to 30,000 jobs in direct and indirect losses. And barring unexpected good news, the real numbers could certainly be worse.
Here's how those worse numbers add up:
The report looks only at the economic impacts of future changes to state spending and taxation. But the state has already made heavy cuts that have yet to hit the economy, including a reduction in construction spending that will bite in 2017. That billion dollars in reduced capital spending alone will cost around 9,000 jobs, using the factors in the report.
Also, the report doesn't cover job losses in other basic industries. The oil industry lost about 9 percent of its employment in 2015 and will lose more. Mineral and fish prices are down and the strong dollar could discourage overseas visitors. The U.S. Department of Defense is still considering force reductions in Anchorage. Those other industries aren't in a free fall like oil, but they're not in a position to pick up slack, either.
The study also doesn't capture how job losses could compound themselves if business people lose confidence and fundamentally change course.
This is the impact GCI president and CEO Ron Duncan emphasized as he mobilized business and labor leaders to push the Legislature for a solution. Duncan said that if the Legislature doesn't balance the budget this year — or set itself on a clear path to do so — businesses including his own will halt investment, cancel plans, lay off skilled staff and send money outside the state to pay down debt or invest elsewhere.
Knapp's report tracks how money flows through businesses, but not how they might change their basic behavior.
"He is looking at only the portion of the economy that is driven by government. He isn't looking at the private-sector reaction, and the private-sector reaction will be uncontrollable," Duncan said. "We're looking at an absolute economic cataclysm."
That alone explains his activism with the Legislature to get action this year, Duncan said.
"We won't have any choice but to start dismantling this company, and so will any other private sector company," he said. "I do not want to spend the next three years dismantling what it took me 40 years to build. That thought makes me sick to my stomach. But I won't have any choice."
Duncan and others hope that a balanced fiscal plan, like the one proposed by Gov. Bill Walker, would get the pain over with and provide certainty in the economic outlook. Knapp recommends spreading cuts and tax increases over two years to reduce the shock, but others would prefer to pull off the Band-Aid quickly to hasten the day when growth can return.
Either way, having no plan at all is unacceptable, creating the prospect of greater pain later and the possibility of a cascading "uncontained failure," as Duncan puts it.
That danger may be hard to believe because the recession hasn't shown up yet. We're in a moment like crossing a mountain snow cornice that is cracking, before the inevitable avalanche has started. Maybe some quick thinking now can keep us whole when we hit the bottom. But we are going down, one way or the other.
"Alaska's situation today is a fundamental loss of the way we earn our way in the world," said economist Gregg Erickson. "I don't think there is any doubt that we are headed for the deepest recession in Alaska's history as a state."
Scared yet? I am. But I'm not leaving, so I'm digging deeper into Knapp's report to learn how we can soften the fall and protect those most vulnerable. I'll cover that in my next column.
Charles Wohlforth's column appears three times weekly.
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