Focus on Alaska budget misses the point

First of two parts

Most of the pundits and would-be experts writing about Alaska's fiscal crisis spectacularly miss the point. They, along with most politicians, citizens and even some economists seem unable to contemplate that Alaska is losing the principal element of its economic base. How we pay for state and local government isn't a trivial issue, but it pales in significance beside the existential economic crisis we face. Alaska's fundamental problem is that value of the petroleum we have been selling to earn our way in the world has collapsed, even as production continues to decline.

There are just two ways to address an unbalanced budget — "balance down," by cutting spending, or "balance up," by adding revenue. The big fight is how much of each, and who among us is going to provide the additional revenue.

How much state and local government in Alaska should downsize is an important issue, but regardless of how Alaskans answer that question, petroleum alone is not going to continue picking up the tab for state and local government. That's obvious, but what's not obvious and usually overlooked is the much bigger "tab" we pay for everything we import from the rest of the world. According to Scott Goldsmith, petroleum has been picking up 50 to 60 percent of that tab. Now, and in the years ahead, we will be lucky if petroleum covers even 20 percent.

[Economists say recession will last three more years, followed by a smaller, poorer Alaska]

Two years ago I wrote that Alaska was in the initial stages of its worst recession in its history as a state. The recession unfolded more slowly than I expected, but nothing we've learned since suggests I was wrong about the fundamentals. All the accumulating evidence suggests I was right. And it's not just declining oil prices. Over the last two years the strengthening U.S. dollar has cut the value of Alaska's fish, wood and hard rock mineral exports by 20 percent.

Spending state reserves has slowed the loss of jobs and population, but the Great Alaska Recession is truly upon us and continues to deepen. Extracting a piece of the Permanent Fund dividend from household income has accelerated the recession in the worst possible way. As a University of Alaska Anchorage Institute of Social and Economic Research analysis explained last year, extracting the money in any alternative would have produced less drag on the economy, and less human misery.

Absent some totally unexpected event, Alaska's population and employment will shrink and eventually stabilize at a level much below what it is today. There is almost no public discussion about, or planning for, this smaller Alaska. Perhaps a shrinking Alaska population and economy is just too awful to contemplate.

[Legislative indecision has extended and worsened Alaska's recession]

Consumer and business confidence in Alaska has sustained itself with the belief that the recession will be brief and survivable, like the one in 1986-87. Only in May 2016 did residential real estate prices start to decline. If anything shakes that confidence, new business and household investment could throttle off in an instant. The decline in real estate prices would then likely accelerate as owners scramble to unload and deleverage before the retreat becomes a rout. Once that happens the economic and demographic unraveling will feed on itself. There is no telling where or when it will end.

But eventually the recession will end, and eventually the economy will stabilize. If the value of your house goes underwater, keep that in mind. And keep in mind as well that there are things governments and institutions can do today to plan for this, and help speed Alaska's eventual return to growth. Those things won't happen if we don't start talking about it.

Next week: Can the Permanent Fund save the Alaska economy?

Gregg Erickson is an economic consultant with offices in Juneau and Bend, Oregon, and a former editor of the Alaska Budget Report. 

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