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Here’s the true economic cost of the uncertainty created by the Alaska Legislature

  • Author: Charles Wohlforth
    | Opinion
  • Updated: February 18
  • Published February 18

Posturing and rigidity by members of the Alaska Legislature has cost the private economy perhaps half a billion dollars a year in investment that could have sped recovery from the recession, according to a new report.

Business people have said for two years that political uncertainty is holding back the state economy by discouraging investment. Without knowing what to expect in taxes, spending cuts or other economic shocks, businesses held back on capital expenditures for expansion or new ventures.

But that concern always seemed vague and unmeasurable, allowing legislators to behave as if delay had no cost.

In a November opinion piece in the ADN, Senate President Pete Kelly portrayed inaction as a virtue and hotel stays during special sessions as a form of heroism. He claimed an uptick in oil revenues had vindicated his side's decision to dig in its heels and resist moves for additional revenues.

"In the last two years, senators have spent more than a year living in Juneau hotels and sleeping in rented beds, but we will not be more easily leveraged just because we are tired," Kelly wrote.

But the hotel bills were the least of the cost.

New national research cleverly measures the economic harm of uncertainty in state politics, creating a yardstick to estimate the cost of Alaska's indecision, according to a report released last week by Mouhcine Guettabi of the Institute of Social and Economic Research at the University of Alaska Anchorage.

"The perception has been that doing nothing is potentially costless, or at least I have heard that said," Guettabi said. "This says that is probably wrong."

It's difficult to measure something that didn't happen — in this case, investments that businesses didn't make — but economists found several ways to do it at the national and state level, finding patterns in the relationship of political uncertainty and investment.

A study applicable to Alaska's situation, Guettabi said, looked at business capital investment around the U.S. in the quarter before gubernatorial elections, compared to investment in similar periods without elections.

In a paper published last April, Candace Jens of Tulane University reported that investment declined 5 to 15 percent, on average, in the months before states chose new governors, and that lag continued after the election if the winner was not an incumbent, when uncertainty about policy choices remained.

Jens had found the invisible tax caused by political uncertainty. Using her percentages, Guettabi calculated Alaska's private economy has lost capital spending worth $200 million to $600 million a year during the period of the unsolved deficit.

But Alaska's uncertainty tax is probably larger, because our uncertainty is much more severe.

"The uncertainty that is ongoing right now is far more than anything an average state in an average election goes through," Guettabi said.

These are a big numbers for our small economy, equating to many jobs. But they only begin to capture the full economic impact of uncertainty. When capital expenditures don't happen, the business ventures they would support don't happen. Guettabi's report doesn't count those losses.

To put this in context, it appears the economic damage done by legislative procrastination exceeds the potential impact of the broad-based taxes Kelly's majority spent that time killing. (This is my conclusion, not Guettabi's.)

Alaska's current total tax burden on citizens is zero.

According to numbers Guettabi provided, Alaska taxation, state and local combined, all-in, averaged only $1,049 per person in 2015, an amount more than offset by our Permanent Fund dividends. We were lowest taxed of all states. The national average was $3,062.

The senseless cost of inaction goes beyond resistance to taxes.

Gov. Bill Walker pointed out late in 2015 that only Alaska Permanent Fund earnings could cover most of the deficit.

The math made it inevitable. No other potential source of revenue was large enough to do the job.

In 2016, the Senate passed a bill that would have used fund earnings to bridge much of the budget gap, but the House Finance Committee, then controlled by Republicans, turned it down.

In 2017, both the House and Senate passed bills to use the fund, but disagreement on taxes to cover the rest of the gap blocked a deal.

Observers expect the Legislature to pass a similar Permanent Fund measure this session. Really, there will be no choice, as other savings are almost gone.

Many business leaders and economists say a Permanent Fund-based solution will largely calm political uncertainty in the private sector. As could have happened in 2016.

The wait was for nothing.

I wish I could say a Permanent Fund-only solution would will calm my own uncertainty. But too many questions will remain.

First, the Permanent Fund alone won't be able to sustainably spin off the money the state needs. Unless the Legislature shows more restraint than has been evident up to now, Alaska could risk a calamity with a drained Permanent Fund Earnings Reserve, according to studies by a fund consultant and by Guettabi.

Second, even after taking earnings from the fund, a smaller but still sizable deficit will remain, and that acknowledged deficit leaves aside the hidden deficits in deferred maintenance, growing pension payments, escalating health care costs, and shell-game budgeting.

Without a tax plan to truly close the gap and raise more money to cover increasing needs, Alaska will be unable invest in its people and future growth.

Alaska's economy is still declining. Businesses are closing. People are leaving. When that stops, the recession will be over, possibly next year.

But what then? Lack of decline isn't the same as growth. State austerity, with no end in sight, is a plan for permanent mediocrity.

Third, uncertainty may become a permanent feature of Alaska politics unless voters stand by leaders willing to make tough decisions.

As I wrote earlier this month, Walker has paid a high price for his honesty and courage in addressing the fiscal gap. His main opponents have not. Mike Dunleavy and Mark Begich have each offered unrealistic, unbalanced or incomplete fiscal plans.

We get what we vote for. Ultimately, this all comes back to Alaskans.

The views expressed here are the writer's and are not necessarily endorsed by the Anchorage Daily News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)adn.com. Send submissions shorter than 200 words to letters@adn.com or click here to submit via any web browser.

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