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Railbelt legislators' cutting would hurt their own region's economy most

The coming economic downturn will likely hit Alaska's Railbelt hardest. Ironically, legislators from the area most at risk are pushing policies that economic research says will make the impact worse.

The Alaska Legislature needs a mix of options to fill the enormous budget deficit caused by low oil prices. The nature of that mix will help determine the degree of damage to the economy, according to a study led by Gunnar Knapp, of the University of Alaska Anchorage Institute of Social and Economic Research.

A major part of Knapp's analysis looks at the loss of jobs and income with each option — budget cuts, taxes or reductions to the Permanent Fund dividend. (Only the option of saving less costs no jobs).

Laying off state workers hurts the economy the most, eliminating 1,677 jobs for every $100 million saved. Broad-based taxes hurt the economy much less, at around 780 jobs for every $100 million raised by a sales or income tax.

In terms of income, rather than jobs, the options look closer. The costliest option for Alaskans' income is reducing the Permanent Fund dividend.

Many factors influence the results, including state taxes paid by nonresidents and differences in the effect of federal taxes. But most important is how money passes through the economy. A computer model predicted how state cuts or taxes would hurt private business.

State workers spend their paychecks on checks on goods and services from businesses. Those businesses pay workers who spend their paychecks somewhere else. And so on.

The process is called the multiplier effect. It turns a $100 million cut in dividends into $149 million in reduced personal income. A broad state spending cut of $100 million axes 504 state workers, but also costs 754 Alaska jobs at private businesses.

The details are complicated, but it makes sense that the best way to boost income in the economy is to give away money. It also makes sense that the best way to create jobs is to hire people.

Knapp didn't study the regional impact of budget or dividend cuts, but I talked to several Alaska economists and went through job data to create a picture.

Again, the multiplier effect is key. More of those passed-around dollars are spent in the state's trade center, Anchorage, and in the other Railbelt hubs, than in communities supported by basic industries such as fishing, tourism or federal spending.

Comparing two communities makes this point.

In Anchorage, 72 percent of jobs are based on services such as retail, transportation, finance and health. The city is the trade hub for Alaska.

On Kodiak Island, on the other hand, only 45 percent of jobs come from services, which are mostly for local employees in the fishing industry and at the U.S. Coast Guard base.

Kodiak residents may spend money in Anchorage, but not many Anchorage residents spend their money in Kodiak. Economic ups and downs across Alaska flow through Anchorage, but Kodiak's daily bread is its own.

This regional difference played out powerfully in the last big economic downturn.

From 1985 to 1988, Anchorage lost 11 percent of all jobs. All trade hubs on the road system took big hits, with 9 percent job losses on the Kenai Peninsula, 11 percent in the Mat-Su and 12 percent in Fairbanks.

But coastal and rural communities were relatively unscathed. Kodiak gained 3 percent more jobs during those years. Even Juneau, with big state layoffs, lost only 6 percent of jobs in the '80s recession.

State government caused that recession with a spree of capital projects that suddenly ended when oil prices went down. Railbelt cities suffered most, but they had also gained the most on the way up as they provided services to the rest of the state.

Economist Gregg Erickson studied 1980s capital spending and found that rural communities received the most money, on a per-person basis. But the economic benefit quickly leaked back to Anchorage.

"The school went to Bethel, but the contractor came from Anchorage and he spent his money in Anchorage," he said.

Anchorage has been this way from the start. The federal government built the city in 1915 to be a hub of transportation and trade. Jobs always depended on government money being passed from hand to hand. Goods-producing employment, including the oil and gas industry, today accounts for only 9 percent of jobs in Anchorage.

That's why state budget cuts will hurt here. Service industries will lose more jobs than government, and those service jobs are in Anchorage and on the Railbelt. Taxes would hurt, too, but the money keeps circulating and fewer jobs are lost.

And, of course, government workers with jobs also teach children, plow roads and arrest bad guys.

With all this in mind, it's ironic that the legislative leadership is focused on cutting the budget before looking at revenue options that would hurt the economy less. Senate President Kevin Meyer and the four co-chairs of the Senate and House finance committees all represent Railbelt communities most vulnerable to budget cuts. The Kenai, home of House Speaker Mike Chenault, is almost as much at risk.

Why do they like the option that will cost their constituents the greatest number of jobs?

"They don't buy it," said Erickson, a legislative watcher for decades. "There is tremendous groupthink going on."

He said Knapp's study faced simple disbelief among legislators.

I wonder if the Republican leadership has served up anti-tax slogans for too long to accept reality. Not me. I instead believe the brilliant economist with reams of data who analyzed the situation and found that taxes are better than cuts right now.

As I wrote earlier, a deep economic downturn is unavoidable unless some unexpected and unlikely event improves state finances.

The worst case scenario is that legislators fail to adopt a credible solution and uncertainty creates a spiral of panic and disinvestment.

Second worst is their plan cuts us into a recession that hurts many more people than necessary.

Charles Wohlforth's column appears three times weekly.

The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com.

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