Editor’s note: In this series, writer Charles Wohlforth examines how Alaska’s unusual state fiscal system came into existence. In this part, Wohlforth looks at how the Alaska’s experiment has influenced others outside the state, and the lessons we need to learn now.
Some of the founders of the Alaska Permanent Fund dividend now regret its creation. They see how cash payments crippled Alaska’s ability to govern itself, destroying the will to contribute to collective needs.
Gov. Jay Hammond thought the state could give money away but then claw it back with taxes. That never caught on. To people with higher incomes, that process sounded like wealth redistribution, since they would pay taxes while others received checks, including those who didn’t need the money.
Then, in the 2018 election, most voters chose a candidate for governor who simply denied that the state required support from citizens. Gov. Mike Dunleavy won with a simple platform of maximizing cash payments to residents while promising they would pay no taxes.
State government had become mainly a vehicle to privatize public wealth. Over a generation, it had cultivated a society of takers, with a majority voting against assuming any other role.
From outside Alaska, the situation looks different. Powerful people around the world want to copy Alaska. A former Iraqi ambassador interviewed me about using a permanent fund to handle his country’s oil wealth. An American coalition of environmentalists and business interests, including big oil, are advocating a gasoline tax to reduce carbon emissions, to be rebated as a public dividend.
Facebook founder Mark Zuckerberg visited to study the Alaska model in 2017. With other Silicon Valley billionaires, he supports Universal Basic Income, the concept of broad cash payments like Hammond’s dividend. UBI would divert a chunk of the economy to pay everyone enough money to support life, equally, regardless of need. Tests have been launched in Kenya, Finland, and Stockton, California.
Presidential candidate Andrew Yang has made UBI the cornerstone of his campaign, promising to give every adult American a “Freedom Dividend” of $1,000 a month to offset job losses due to automation. Without political experience, Yang remains a long-shot for the Democratic nomination, but his free-money idea has boosted him to the top half of the field, currently running seventh or eighth in popularity and fund-raising standings, while governors and senators have been forced to drop out. Free money is a powerful campaign promise — and that’s one of the fundamental problems with the UBI idea.
Policy analysts like UBI because the payments reduce poverty and lessen income disparities without welfare’s bureaucracy and stigma. Alaska has the least income inequality of any American state thanks, in part, to the dividend. The tech billionaires say they support UBI because they expect their products to delete millions of jobs. Cash payments would keep surplus drivers and shopkeepers alive, and keep them shopping and not rebelling against the rich or their robots.
Hammond got that right about the dividend: It does change how people behave. He pitched the dividend as an incentive for Alaskans to protect the Permanent Fund, and they do. But buying desired behavior is tricky, especially when the experiment involves the behavior of voters in a democracy who make the ultimate decisions.
In Alaska, direct cash payments built support for direct cash payments. The dividend became the purpose of the fund, as inviolate as a property right, displacing all other values. Hammond created a monster with an uncontrollable appetite. After 36 years with the dividend, Alaskans voted for a governor willing to dismantle the state university and put even more homeless people on the streets in order to divert money to cash payments.
To Zuckerberg and his allies: Think carefully before uncaging this monster. My pessimism is based on experience. Alaskans are not uniquely susceptible to selfishness. They are noticeably helpful and polite and exceptionally involved in causes and nonprofit organizations. Like all people, Alaskans feel a deep, pro-social urge.
But everyone has a darker part, too, a mode of behavior activated by the scramble for freebies, when, instead of contributing to others, we think of ourselves first as recipients, or when, rather than acting out of positive emotions of cooperation or responsibility, we sell our support in exchange for incentives. Social science research establishes these grim facts and the Alaska experience brings them to life.
The dividend became an entitlement — a regular, expected part of life that people regard as their right to receive, like air or water. For those who grew up with the dividend and received its assistance every year, giving it up does indeed feel like the loss of a right, an especially hard sacrifice for those whose incomes are small.
But wanting the money doesn’t make it a right. Residency can’t create personal ownership of the Permanent Fund. Why would living in Alaska for a year make you owner of a the investment proceeds of 40 years of oil production?
The right to the dividend comes from elsewhere. Alaskans have a right to vote. If voters say the money is theirs, then, if that will is expressed as the constitution provides, the money is theirs. And they haven’t given it up yet.
Alaska has found a critical lesson for the UBI idea. In a democracy, the main thing you buy with a UBI entitlement is stability in the status quo. Once a system of direct payments begins, voters won’t change it.
Therein, perhaps, lies a deeper motivation for Silicon Valley titans who like the UBI concept, or for oil companies supporting cash payments as a way to distribute proceeds from a carbon tax. Once the system is in place, it cannot be changed. For their vast profit-making businesses, that’s good. They don’t want change.
A carbon tax dividend payment could create an irresistible political force to continue carbon emissions — the opposite of the stated purpose of the program.
A primary purpose of the Alaska Permanent Fund, and the dividend designed to protect it, was to remove a share of oil wealth from annual budgets, both to save it for the future and to reduce the impact of too much spending at once. Too much oil money has proved to be a bad thing in other places, many times.
Oil riches have repeatedly spawned social and economic collapse, as in as Nigeria and Venezuela, or authoritarianism, as in Russia or Saudi Arabia.
The resource curse has many faces. Economists and political scientists diagnose it in a variety of ways. But, at its core, the curse perverts human relationships, turning upside down the roles that define our positive connections to one another, to government and to our own personal sense of purpose.
Oil money feels good when it first arrives, like a first hit of heroin. In the early 1980s, the mayor of Anchorage received word that the state would disgorge enough money for the city to build a convention center, a performing arts center, an expanded art and history museum and a sports arena, all at once, with just 120 days to plan the projects. Also, a regional headquarters library, which the city decided would have a wing for the study of Alaska history, with a rotunda modeled on the Library of Congress.
Anchorage did build all that, and much more — a 30-mile aqueduct, police and fire stations, a landfill that would last a lifetime — all without borrowing any money. Anywhere else, a mayor could earn a legacy with just one of the projects, in any normal American town of 250,000. In Anchorage, generations of residents enjoyed the legacy, but no one earned it.
The unearned part of the economy — the ‘rent’ from the oil wealth, as economists call it—gave Alaska, and especially Anchorage, luxuries beyond the dreams of similar provincial towns. There were professional theater companies, many choices for creative fine dining, professional hockey, high-end clothing stores, and art galleries to buy oil paintings by a variety of local artists. An exceptional newspaper, too, in the Anchorage Daily News, twice winner of the Pulitzer Prize for public service (and which employed me a couple of times).
Alaska built the most expensive medical system in the world, as well, but with mediocre health outcomes. In the 1990s, Alaska outlawed health care cost controls that limited price increases elsewhere in the U.S. By 2016, specialist procedures cost as much as 10 times more in Anchorage compared to Seattle. An orthopedic surgeon in small-town Alaska could earn $2.5 million a year while working three days a week. Alaskans began leaving the state because of health care costs. But the state kept barring cost controls.
Why didn’t politicians respond when health care costs strangled the economy? It’s easy to suspect corruption, but I don’t think that’ right. Research on the resource curse shows that political corruption increases when oil money arrives, in nations and in U.S. states. It happened in Alaska. But doctors didn’t need to corrupt politicians to support overcompensation.
But doctors didn’t need to corrupt politicians to support overcompensation. A political system can fail without illegal corruption. In Alaska, the work of politics changed. Governing became spending. Problems that required hard choices didn’t get solved. The Alaska Compromise, wrote ADN columnist Mike Doogan, means, “everyone gets everything,” with the biggest shares going to the powerful. Alaska doctors and construction contractors pocketed oil rent like the elites in Arab countries.
Yet amid the waste, the oil era became a time of lack. The squeeze came in stages, almost unnoticeably. Oil production declined. The oil industry bought control of state government, mostly legally, but not always, which kept its taxes low. New residents took additional slices of the shrinking oil economy.
Through decades of cut upon cut, the big library that oil built for Anchorage lost branches, books and staff. Finally, it closed the Alaska history wing. The staff of seven there had dwindled to one, and that person, all alone in the rotunda, felt unsafe in the giant space. By then the entire library only had five professional librarians. It was weaker than libraries in comparable cities on every measure; its materials budget was half the size.
The story repeated many times. It was a personal story, too. After big oil, incomes declined relative to other similar states, according to research by Alexander James of the University of Alaska Anchorage. The early flood of money drew new residents north, but as oil production tailed off, the economy no longer could support the oversized population. Incomes stagnated.
An oil price drop in 2015 cut the size of Alaska’s economy by 17 percent. High-end businesses closed in the recession that followed. No more oil paintings would be sold at the Artique or silk dresses at Nordstrom in downtown Anchorage. The Alaska Aces hockey team moved to Portland, Maine. The newspaper and professional theater both failed, to be revived on leaner terms. Each ending came with its own subplot, but all shared a theme, that Alaska had shrunk too small to support such amenities at the same level.
Hammond, who died in 2005, had thought to prepare for the end of the oil era, saving enough oil revenue to replace its flow with investment earnings. He believed the Permanent Fund could transform finite oil money into a never-ending stream of funds.
To a large degree, it worked. The fund grew to gigantic size, large enough to manage the post-oil transition while maintaining low taxes. But in the meantime, people had changed. They had the means, but not the desire to save the state.
In 2018, Gov. Mike Dunleavy was elected on a platform that elevated the dividend above all else. His execution of that policy was clumsy and thoughtless, but remained true to his core message that giving away money was the state’s most important function.
To keep his promise, Dunleavy proposed reducing public school funding by a fourth, cutting University of Alaska funding by half, slashing the state ferry system by 75 percent, and taking away 100 percent of funding from arts, culture and public broadcasting—and at the same time he advanced a set of constitutional amendments to assure that dividends could never be reduced and taxes would be almost impossible to levy. When the legislature balked, he tried to carry through much of his plan with his veto pen.
The backlash against the vetoes forced Dunleavy to back down partly, seeking to save his political life from a recall. But even if the recall succeeds, Alaska leaders still won’t know how to steer the state into the future. At that point, voters will have rejected each option at a different time—budget cuts, dividend reductions, or broad-based taxes—by ejecting the politicians who advocated for them. In 2014, voters also rejected an oil tax increase.
The voice of the people seems to be saying we want everything the way it was: free services, a thriving economy, and ever-growing cash dividends in our personal bank accounts every fall. Reality is saying something else. The money is gone and what we want is not possible.
Before the era of big oil, Alaskans did accept reality. Personal income taxes brought in about 40 percent of state revenues before oil was discovered at Prudhoe Bay.
The inflection point between Alaska’s past and present came when that tax was repealed. It happened in another generation, in the early 1980s. At the time, the wisest leaders foresaw the issues we face now. But they’re gone and almost no one under 60 years old has ever paid Alaska income taxes.
With hindsight, looking back to when the oil money was in the future, that moment stands high above us, like the top of a waterfall we’ve been falling down ever since. The story of that moment, at the brink, is the history I will recount in the final part of this series.
Next: The Money Dam Bursts, 1981-82. Wohlforth tells the story of a coup in the state House and the scramble to spend money and cut taxes that completed Alaska’s fiscal system.
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