A couple of months ago I was eating at Evangelo's Restaurant along the Parks Highway in the Mat-Su. The owner, a friend of mine whose name is — not surprisingly — Evangelo, stopped by my table to talk. He said: "Rick, everyone's talking about how bad things are with the economy but 2015 was our best year ever. How can that be?"
I told him it was because Alaska still had work left on capital projects from the capital budgets approved in the past few years and that money is still helping drive our economy.
But, I said: "Don't count on that to continue, because capital budgets are going way down or disappearing completely. Be ready for a coming decline in your business."
State spending drives Alaska economy
Why do state capital budgets — and operating budgets — drive Alaska's economy when that isn't true to such an extent in other states? The reason is not complicated. In every other state, money has to come out of circulation from the private sector before going back into the private sector as government spending. That's often done through sales taxes, state income taxes, state property taxes. So, in all other states, government spending creates no net gain of money in circulation and no gain in the economy — other than value of services or products provided — and in many cases a net loss.
In Alaska it's different. We've already taken more money out of the private sector — almost exclusively from the oil industry — than we've needed in past years. Thanks to forward-thinking governors and legislatures, we now have billions of dollars in two major surplus accounts. That's only enough to cover the budget gap for a few years; coverage may go longer if the Permanent Fund continues its earnings trends and those earnings go to the surplus accounts. Nevertheless, right now to fund state spending we don't have to take money out of circulation from the private sector first.
That's why the two most significant drivers of Alaska's economy since 1981 have been oil industry spending and — hold on to your seats — government spending.
In no other state does the state government have so much control over the economy. If our legislators and governor make good decisions we'll survive the next few years with no major economic downturn. Make the wrong decisions and they'll accelerate the loss of jobs we're experiencing from the oil industry slowdown.
In 1980, the right decision
In 1980, Gov. Jay Hammond realized the importance of creating jobs through the capital budget. With the support of the Legislature, he implemented a plan in his second term that gave every community in Alaska $1,000 per person to develop capital projects. That meant about $650 million a year in 1980 dollars — about $1.78 billion a year in today's dollars — for three years. This was in addition to the state's direct capital budget for roads, schools, public buildings, etc. Hammond's action was correct. It saved Alaska's economy from collapse when construction of the oil pipeline from Prudhoe Bay was completed in 1979.
In 1986, the wrong decision
Contrast that decision to 1986, when the price of oil dropped from $30 a barrel to about $9 a barrel — $19.50 in today's dollars. The governor and Legislature chose to cut government spending at the same time the oil industry did. The result was a statewide economic disaster. Anchorage alone lost 13 percent of its population and 25 percent of its assessed valuation. Banks, restaurants and stores went out of business and thousands of residents lost their homes.
In 2016, we face a similar decision. Choose right and we'll weather a modest decline. Choose wrong and we'll suffer a big recession.
I don't have all the details that our governor and lawmakers have. But as a public servant, private citizen and businessman of more than 40 years in Alaska, I do understand our economy.
My recommendations
Take both short-term and long-term action. Short term would be this year and next. Long term would be three to five years.
Short term: Use surplus funds in the Permanent Fund earnings reserve and other reserve accounts you've been saving for this purpose as the primary vehicle for closing the fiscal gap. Don't initiate taxes or make huge budget cuts this year. Taxes and budget cuts will take money out of circulation.
Trim state spending where appropriate over the next two years but don't make wholesale cuts. Wholesale spending cuts combined with oil industry cuts will cause a significant recession. Jobs will be lost. Businesses will fail. Homes will be dramatically devalued. Cut deeply and we'll repeat the crash of 1986.
Long term: Link state spending with citizens' wallets. Either create a state income tax that will go up or down based on state budgets or associate Permanent Fund dividends with the cost of government. This is the only way to keep state spending at a level acceptable to citizens, who will then have skin in the game. You will hear from people when they feel the high cost of government.
Also in the long term, find a way to make state spending on capital projects counter-cyclical to oil industry capital spending. In the past 30 years, when the oil industry has been healthy and spending big on capital projects the state government has done the same. That's when the state should save its money to spend when oil industry reduces its capital spending. The result would be more value for both state and industry for their capital dollars — and a more stable Alaska economy.
The economic lives of thousands of people depend on the decisions of our Legislature and our governor in the next few months. In the short term, use the money that governors and legislatures before you have saved for just this purpose. In the long term, create a plan to give Alaskans some financial stake in the cost of government.
Rick Mystrom served as mayor of Anchorage from 1994 to 2000, and before that was a member of the Anchorage Assembly.
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