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Business/Economy

Online economic model allows Alaskans to play the fiscal-future game

  • Author: Dermot Cole
  • Updated: September 28, 2016
  • Published January 14, 2015

FAIRBANKS -- The "ISER Interactive Fiscal Policy Model V1" worksheet and game allows Alaskans to try to overcome -- or at least understand -- the state's fiscal challenges by plugging in changing assumptions and charting the course of future finances.

The Institute of Social and Economic Research released the Excel spreadsheet Wednesday along with an update of the Maximum Sustainable Yield calculation by economist Scott Goldsmith, a University of Alaska Anchorage professor emeritus. An ISER statement said Alaskans can use the worksheet and game to "investigate for themselves the implications of different assumptions about state revenues and fiscal policies."

Goldsmith's game allows budget nerds to pick their own oil price forecasts, make production predictions and prognosticate about state spending and growth. The moving parts can be charted to see what it would take to make the Alaska fiscal challenge fade into the background for a while longer or get worse than it has over the past six months, with oil prices now below $50.

Goldsmith wrote that, viewed over the long term, the best evidence today says Alaska can afford to spend about $4.5 billion per year. He estimates that the major state assets -- petroleum in the ground and financial reserves -- are now worth about $135 billion. A $4.5 billion draw would be about 4 percent of the total "nest egg" as defined by Goldsmith.

"This level of spending -- growing with inflation and population -- could be sustained far into the future without depleting the value of the nest egg," he wrote.

Goldsmith's model does not treat oil income and the earnings of financial assets as something to be tallied and spent each year. Rather, he looks at it with an eye on estimating how enough of the nonrenewable revenue might be saved so that it could produce renewable revenue for generations. This differs from the typical approach to creating the state budget, which is based on how much is available, plus whatever is politically palatable to withdraw from reserves.

Under that approach, the state is running a deficit of $3.5 billion and climbing for this fiscal year. Under the Goldsmith model, however, the state is overspending by about $1.5 billion, with no way to cover the gap. The current approach of using savings eats away billions of dollars that should be saved, with their resulting earnings potential, for the future, he has written in numerous publications over the years.

"Transitioning to a sustainable spending level by reducing spending (or imposing new taxes) will have negative effects on the economy, so it should not be done precipitously. Furthermore, as market conditions continue to evolve the value of the nest egg will change. So the sustainable spending level should be a general guide to spending rather than an ironclad rule," he wrote.

"But postponing the move to sustainability will also have negative economic consequences that outweigh the short-run costs. First, the longer the delay, the larger the adjustment -- and the larger the adjustment, the more likely it will have more severe effects. For example, a small adjustment might reduce the growth rate of housing prices, but a large adjustment might cause the floor to drop out of the housing market altogether. Second, the longer the delay, the less new investment in economic development there will be. The risk of higher taxes and economic decline will shut off the flow of investment dollars into the state."

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