There are two state fiscal issues that matter this election cycle and many candidates are getting one badly wrong …

fiscal-cliff-pulling-backAs we close in on the end of the first round of this election cycle — the primary is this coming Tuesday, August 16 — it is important to remember that there are two state fiscal issues that matter this year.

The first is how the candidate stands on state spending levels.  The second — injected into this cycle by the Governor and the Senate — is how the candidate stands on cutting the PFD.

Some try to minimize the second, arguing to one degree or another that the state’s financial condition is too far gone to be salvaged without permanently cutting the PFD and converting the difference to support state spending.

But that attempt to minimize the importance of maintaining the PFD is wrong and overlooks the fundamental reason both issues are important.

From an economic perspective, reducing state spending is not important in and of itself.  It is important only because of what it means for both the present and future overall Alaska economy.

As we and others have been warning since 2011 when state spending first started to outstrip long-run sustainable levels, excessive state spending is harmful because it drains the state’s fiscal reserves necessary to help maintain future state spending at a consistent level.  In economic terms, it overheats the state’s current economy and undermines the state’s future economy.

It creates expectations the future economy can’t keep up with.

In short, state spending levels are important because of the effect they have on the state’s long-term economy — and thus on the economic well being of those living here.

Maintaining the PFD is important for exactly the same reason.

Not all options for dealing with the state’s current fiscal condition have the same effect on the overall Alaska economy.  Some have a small effect relative to others, while others have a significant effect.

Cutting the PFD has the most significant effect.  According to an analysis published earlier this year by the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER), of all the various fiscal options available to the state cutting the PFD has the “largest adverse impact” — the worst impact — on the overall economy.  (“The impact of the PFD cut falls almost exclusively on residents, and it is highly regressive, so it has the largest adverse impact on the economy per dollar of revenues raised.”  Short-Run Economic Impacts of Alaska Fiscal Options at A-15.)

In short, from an economics perspective — which is how policy makers should measure the various fiscal options — cutting the PFD in response to the state’s economic situation has precisely the same effect going forward that state government overspending has looking back — the option hugely undermines the state’s overall economy.

Consequently, those who support permanently cutting the PFD are as dangerous to the overall Alaska economy going forward as those who, in the past, have voted for excessive state spending.  They are just undermining the overall Alaska economy in a different way.

Why do they advocate it, then?  Frankly, because the PFD represents a big, and relatively easily accessible pot of money, and unfortunately despite their rhetoric, some care more about maintaining ongoing state spending levels than the health of the state’s overall economy.

From an implementation perspective, all that it takes to access the PFD is a majority vote in each legislative body and approval by the Governor.  And, unlike taxes (which would have less of an impact on the overall economy), it doesn’t require citizens to write checks to the government — which would make the impact more noticeable.  All that it involves is for the government to withhold money from the distributions it otherwise is making to citizens.

As a result, as described by some, cutting the PFD is more “stealthy.”

As significantly, it also benefits most those who have the loudest voices in Juneau, or conversely stated, hits those hardest who have the smallest voice in Juneau.

On a percentage of income basis, cutting the PFD affects higher income Alaskans much, much less than lower and middle income Alaskans.  As a result, on a personal level they favor it much, much more than imposing taxes, which would affect them more.  Because legislators hear more in Juneau from higher income Alaskans — who also are more likely to be significant campaign donors — than those in the middle and lower income segments, it is easier politically for legislators to cut the PFD than pursue tax-based alternatives.

That, however, does nothing to reduce the harm to the overall economy that is done by cutting the PFD.  While some may benefit — largely, those who realize increased incomes from the resulting rise in government spending and higher income Alaskans that avoid paying proportionately for the cost of that higher spending — Alaska’s overall economy suffers, the same as results from overspending.

In essence, then, there is a not insignificant hypocrisy that surrounds those who are campaigning on “spending issues” — i.e., opposing incumbents who have been part of the spending problem — but at the same time advocating permanent PFD cuts.

The theme is almost, “I was for the economy before I was against it.”

Put another way, in campaigning against the “old bad days,” they simply are setting up the “new bad days.”

And the two don’t offset.  As I said last week when endorsing Craig Johnson in the Republican Primary for Senate District L:

But [the position of the candidates on] the PFD issue overrides all of that. Spending is a year-to-year decision and I have hopes that as the state faces up to its fiscal crisis, the legislature going forward will do much, much better than it has in the past in capping spending at sustainable levels.

The PFD issue, however, is a permanent one. Those who favor “restructuring” aren’t proposing to do it on a year-to-year basis in a way that restores the current approach once other fiscal issues are dealt with. Instead, they propose making a structural change which permanently will reduce the cash in Alaska’s private economy in order to support continued elevated spending in Alaska’s government economy.

As a result while those that advocate for permanent PFD cuts try to paint themselves as “fiscally conservative forward thinkers,” they are anything but.  While some — indeed, many — may not realize it, they are even more dangerous than the overspenders they seek to replace because they are proposing to cut the PFD on a permanent basis.  In may respects they are proposing to send the Alaska economy down an even deeper rathole, just in a different way.

As we have written previously on this page and others, Governor Jay Hammond had it right when writing in Diapering the Devil about what Alaska should do when the state’s fiscal situation reached this point:

Before slicing dividends to cure that skin lesion, let’s first treat that belly tumor with surgical budget cuts and, if necessary, the ‘radiation’ of user fees and less regressive taxes. Let’s leave dividends in the people’s pockets so they can both better afford and, to a degree, elect whether or not to pay coming user fees and taxes. … After all, the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax.

Moreover, the state may not yet be at the point where it needs any new revenues.

As we wrote earlier this week on another page we recently have been spending some time looking at what it would take fully to implement the second half of Governor Hammond’s original 50/50 plan for the Permanent Fund earnings stream (“I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. … [Once the money wells were pumping,] [e]ach year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.”).

In the course of that we have come to realize that the method for adjusting for inflation contained in the current methodology significantly overstates — potentially doubling at in some years — the amount required actually to keep the Permanent Fund principal whole against inflation.  Eliminating that effect and using the Hammond approach as we do in the analysis contained at the post, it becomes clear that there is additional cash available within the current Permanent Fund earnings stream to help support government without the need to cut the PFD.

Regardless of whether that is a complete solution, however, the right approach to take in this election — if indeed you are concerned about the overall Alaska economy — is to support the candidates that want to maintain the PFD.

Those that advocate cutting it are just leading the state down a different economic — but just as deep if not more so — rathole.

In our view, the only time to deviate from a candidate committed to maintaining the PFD is when there is an additional candidate in the race who also supports maintaining the PFD, and is better on the spending issue.  Then, voters end up with the best of both.


Comments are closed.